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) | (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, 2,097,694May 5, 2023, there were 28,858,446 shares of the registrant’s Class T common stock, 16,75049,988,280 shares of the registrant’s Class S common stock, 2,519,5827,276,706 shares of the registrant’s Class D common stock, 33,977,25268,800,867 shares of the registrant’s Class I common stock and 95,661,03551,613,024 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 | ||||
(in thousands, except per share data) | | March 31, 2023 |
| December 31, 2022 | ||
| | (Unaudited) | | | | |
ASSETS | | |
| | |
|
Net investment in real estate properties | | $ | 3,585,078 | | $ | 3,605,578 |
Investments in unconsolidated joint venture partnerships | |
| 125,166 | |
| 120,372 |
Debt-related investments, net | |
| 254,201 | |
| 260,439 |
Investment in available-for-sale securities, at fair value | | | 14,979 | | | 14,896 |
Cash and cash equivalents | |
| 36,894 | |
| 13,336 |
Restricted cash | |
| 3,859 | |
| 3,850 |
DST Program Loans | |
| 95,909 | |
| 81,897 |
Other assets | | | 72,217 | | | 74,356 |
Total assets | | $ | 4,188,303 | | $ | 4,174,724 |
LIABILITIES AND EQUITY | |
| | |
|
|
Liabilities | |
| | |
|
|
Accounts payable and accrued expenses | | $ | 54,627 | | $ | 58,097 |
Debt, net | |
| 1,589,120 | |
| 1,616,475 |
Intangible lease liabilities, net | |
| 40,233 | |
| 42,444 |
Financing obligations, net | |
| 1,232,129 | |
| 1,130,810 |
Other liabilities | | | 92,660 | | | 114,901 |
Total liabilities | |
| 3,008,769 | |
| 2,962,727 |
Commitments and contingencies (Note 14) | |
| | |
|
|
Redeemable noncontrolling interest | |
| 17,791 | |
| 18,130 |
Equity | |
| | |
| |
Stockholders’ equity: | |
| | |
| |
Preferred stock, $0.01 par value—200,000 shares authorized, none issued and outstanding | |
| — | |
| — |
Class T common stock, $0.01 par value—500,000 shares authorized, 28,173 shares and 26,884 shares issued and outstanding, respectively | |
| 282 | |
| 269 |
Class S common stock, $0.01 par value—500,000 shares authorized, 49,899 shares and 49,237 shares issued and outstanding, respectively | |
| 499 | |
| 492 |
Class D common stock, $0.01 par value—500,000 shares authorized, 7,439 shares and 7,871 shares issued and outstanding, respectively | |
| 74 | |
| 79 |
Class I common stock, $0.01 par value—500,000 shares authorized, 69,387 shares and 69,142 shares issued and outstanding, respectively | |
| 694 | |
| 691 |
Class E common stock, $0.01 par value—500,000 shares authorized, 52,550 shares and 52,974 shares issued and outstanding, respectively | |
| 526 | |
| 530 |
Additional paid-in capital | |
| 1,751,993 | |
| 1,744,022 |
Distributions in excess of earnings | |
| (993,320) | |
| (973,395) |
Accumulated other comprehensive income | |
| 7,897 | |
| 13,148 |
Total stockholders’ equity | |
| 768,645 | |
| 785,836 |
Noncontrolling interests | |
| 393,098 | |
| 408,031 |
Total equity | | | 1,161,743 | | | 1,193,867 |
Total liabilities and equity | | $ | 4,188,303 | | $ | 4,174,724 |
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 | | ||||
| | March 31, | | ||||
(in thousands, except per share data) |
| 2023 |
| 2022 | | ||
Revenues: | | |
| | |
| |
Rental revenues | | $ | 77,960 | | $ | 62,505 | |
Debt-related income | |
| 5,761 | |
| 3,468 | |
Total revenues | |
| 83,721 | |
| 65,973 | |
Operating expenses: | |
| | |
| | |
Rental expenses | |
| 28,300 | |
| 21,314 | |
Real estate-related depreciation and amortization | |
| 33,197 | |
| 27,451 | |
General and administrative expenses | |
| 3,044 | |
| 2,037 | |
Advisory fees | |
| 9,538 | |
| 7,144 | |
Performance participation allocation | |
| — | |
| 12,192 | |
Acquisition costs and reimbursements | |
| 1,169 | |
| 1,629 | |
Impairment loss on debt-related investment held for sale | |
| 2,520 | |
| — | |
Total operating expenses | |
| 77,768 | |
| 71,767 | |
Other expenses (income): | |
| | |
| | |
Equity in loss from unconsolidated joint venture partnerships | |
| 2,446 | |
| 1,010 | |
Interest expense | |
| 37,545 | |
| 24,410 | |
Gain on sale of real estate property | |
| (36,884) | |
| (53,881) | |
Loss on extinguishment of debt and financing commitments, net | |
| 700 | |
| — | |
Loss (gain) on derivative instruments | | | 103 | | | (1,550) | |
Provision for current expected credit losses | | | 5,630 | | | — | |
Other income | |
| (1,016) | |
| (577) | |
Total other expenses (income) | |
| 8,524 | |
| (30,588) | |
Net (loss) income | |
| (2,571) | |
| 24,794 | |
Net loss (income) attributable to redeemable noncontrolling interests | | | 18 | | | (246) | |
Net loss (income) attributable to noncontrolling interests | |
| 549 | |
| (3,537) | |
Net (loss) income attributable to common stockholders | | $ | (2,004) | | $ | 21,011 | |
Weighted-average shares outstanding—basic | |
| 206,774 | |
| 178,528 | |
Weighted-average shares outstanding—diluted | |
| 263,026 | |
| 210,676 | |
Net (loss) income attributable to common stockholders per common share—basic and diluted | | $ | (0.01) | | $ | 0.12 | |
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 | | ||||
| | March 31, | | ||||
(in thousands) |
| 2023 |
| 2022 | | ||
Net (loss) income | | $ | (2,571) | | $ | 24,794 | |
Change from cash flow hedging activities | |
| (7,056) | |
| 11,994 | |
Change from activities related to available-for-sale securities | |
| 77 | |
| — | |
Comprehensive (loss) income | |
| (9,550) | |
| 36,788 | |
Comprehensive loss (income) attributable to redeemable noncontrolling interests | | | 73 | | | (365) | |
Comprehensive loss (income) attributable to noncontrolling interests | |
| 2,222 | |
| (5,260) | |
Comprehensive (loss) income attributable to common stockholders | | $ | (7,255) | | $ | 31,163 | |
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 MARCH 31, 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 $246 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | 21,011 | | | — | | | 3,537 | | | 24,548 |
Change from cash flow hedging activities (excluding $119 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | — | | | 10,152 | | | 1,723 | | | 11,875 |
Issuance of common stock |
| 14,165 | | | 142 | | | 116,368 | | | — | | | — | | | — | |
| 116,510 |
Share-based compensation |
| — | | | — | | | 50 | | | — | | | — | | | — | |
| 50 |
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs | | — | |
| — | |
| (1,580) | |
| — | |
| — | |
| — | | | (1,580) |
Trailing distribution fees | | — | |
| — | |
| (5,037) | |
| 1,030 | |
| — | |
| (3,824) | | | (7,831) |
Redemptions of common stock |
| (1,788) | | | (18) | | | (14,537) | | | — | | | — | | | — | |
| (14,555) |
Issuances of OP Units for DST Interests |
| — | | | — | | | — | | | — | | | — | | | 39,441 | |
| 39,441 |
Other noncontrolling interests net contributions | | — | | | — | | | — | |
| — | |
| — | |
| 17 | | | 17 |
Distributions declared on common stock and noncontrolling interests (excludes $160 attributable to redeemable noncontrolling interest) |
| — | | | — | | | — | | | (16,743) | | | — | | | (2,858) | |
| (19,601) |
Redemption value allocation adjustment to redeemable noncontrolling interest | | — | | | — | | | (482) | | | — | | | — | | | — | | | (482) |
Redemptions of noncontrolling interests |
| — | | | — | | | (264) | | | — | | | — | | | (2,041) | |
| (2,305) |
Balance as of March 31, 2022 |
| 182,042 | | $ | 1,820 | | $ | 1,551,814 | | $ | (860,546) | | $ | (3,266) | | $ | 232,691 | | $ | 922,513 |
FOR THE THREE MONTHS ENDED MARCH 31, 2023 | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2022 | | 206,108 | | $ | 2,061 | | $ | 1,744,022 | | $ | (973,395) | | $ | 13,148 | | $ | 408,031 | | $ | 1,193,867 |
Net loss (excluding $18 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | (2,004) | | | — | | | (549) | | | (2,553) |
Change from securities and cash flow hedging activities (excluding $55 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | — | | | (5,251) | | | (1,673) | | | (6,924) |
Issuance of common stock |
| 5,366 | | | 54 | | | 47,637 | | | — | | | — | | | — | |
| 47,691 |
Share-based compensation |
| — | | | — | | | 75 | | | — | | | — | | | — | |
| 75 |
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs | | — | |
| — | |
| (1,437) | |
| — | |
| — | |
| — | | | (1,437) |
Trailing distribution fees | | — | |
| — | |
| (793) | |
| 1,461 | |
| — | |
| 1,132 | | | 1,800 |
Redemptions of common stock |
| (4,026) | | | (40) | | | (35,415) | | | — | | | — | | | — | |
| (35,455) |
Issuances of OP Units for DST Interests |
| — | | | — | | | — | | | — | | | — | | | — | |
| — |
Other noncontrolling interests net distributions | | — | | | — | | | — | |
| — | |
| — | |
| (4) | | | (4) |
Distributions declared on common stock and noncontrolling interests (excludes $192 attributable to redeemable noncontrolling interest) |
| — | | | — | | | — | | | (19,382) | | | — | | | (5,079) | |
| (24,461) |
Redemption value allocation adjustment to redeemable noncontrolling interest | | — | | | — | | | 74 | | | — | | | — | | | — | | | 74 |
Redemptions of noncontrolling interests |
| — | | | — | | | (2,170) | | | — | | | — | | | (8,760) | |
| (10,930) |
Balance as of March 31, 2023 |
| 207,448 | | $ | 2,075 | | $ | 1,751,993 | | $ | (993,320) | | $ | 7,897 | | $ | 393,098 | | $ | 1,161,743 |
See accompanying Notes to Condensed Consolidated Financial Statements.
6
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | |
|
| For the Three Months Ended March 31, | ||||
(in thousands) |
| 2023 |
| 2022 | ||
Operating activities: | | |
| | |
|
Net income (loss) | | $ | (2,571) | | $ | 24,794 |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
| |
Real estate-related depreciation and amortization | |
| 33,197 | |
| 27,451 |
Straight-line rent and amortization of above- and below-market leases | |
| (1,896) | |
| (1,753) |
Gain on sale of real estate property | |
| (36,884) | |
| (53,881) |
Performance participation allocation | | | — | | | 12,192 |
Impairment loss on debt-related investment held for sale | | | 2,520 | | | — |
Equity in income of unconsolidated joint venture partnership | | | 2,446 | | | 1,010 |
Loss on extinguishment of debt and financing commitments, net | |
| 700 | |
| — |
Provision for current expected credit losses | | | 5,630 | | | — |
Amortization of deferred financing costs | | | 1,960 | | | 1,780 |
Financing obligation liability appreciation | | | 2,862 | | | 4,007 |
Other | |
| 1,659 | |
| (646) |
Changes in operating assets and liabilities | | | | | | |
Other assets, accounts payable and accrued expenses and other liabilities | | | (1,649) | | | 9,449 |
Cash settlement of accrued performance participation allocation | |
| (23,747) | |
| — |
Net cash (used in) provided by operating activities | |
| (15,773) | |
| 24,403 |
Investing activities: | |
| | |
|
|
Real estate acquisitions | |
| (14,697) | |
| (368,234) |
Capital expenditures | |
| (12,837) | |
| (6,488) |
Proceeds from disposition of real estate property | |
| 53,735 | |
| 169,421 |
Investments in debt-related investments | |
| (615) | |
| (840) |
Investments in unconsolidated joint venture partnerships | | | (7,673) | | | (35,058) |
Other | |
| 1,257 | |
| 33 |
Net cash provided by (used) in investing activities | |
| 19,170 | |
| (241,166) |
Financing activities: | |
| | |
|
|
Repayments of mortgage notes | |
| (70,932) | |
| (413) |
Net proceeds from (repayments of) line of credit | |
| 42,000 | |
| (94,000) |
Redemptions of common stock | |
| (35,455) | |
| (14,555) |
Distributions paid to common stockholders, redeemable noncontrolling interest holders and noncontrolling interest holders | |
| (14,505) | |
| (11,251) |
Proceeds from issuance of common stock | |
| 39,700 | |
| 109,767 |
Proceeds from financing obligations, net | |
| 83,834 | |
| 253,093 |
Offering costs for issuance of common stock and private placements | |
| (4,157) | |
| (3,462) |
Redemption of noncontrolling interests | |
| (10,930) | |
| (2,305) |
Redemption of redeemable noncontrolling interests | | | — | | | (7,724) |
Deferred financing costs paid | | | (45) | | | (92) |
Interest rate cap premium | |
| (9,340) | |
| — |
Net cash provided by financing activities | |
| 20,170 | |
| 229,058 |
Net increase in cash, cash equivalents and restricted cash | |
| 23,567 | |
| 12,295 |
Cash, cash equivalents and restricted cash, at beginning of period | |
| 17,186 | |
| 14,352 |
Cash, cash equivalents and restricted cash, at end of period | | $ | 40,753 | | $ | 26,647 |
See accompanying Notes to Condensed Consolidated Financial Statements.
7
| 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.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Global macroeconomic conditions, including heightened inflation, changes to fiscal and monetary policy, higher interest rates and challenges in the supply chain, coupled with the war in Ukraine and the ongoing effects of the novel coronavirus pandemic, have the potential to negatively impact us. These current macroeconomic conditions may continue or aggravate and could cause the United States to experience an economic slowdown or recession. We anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments and eliminations, consisting only of normal recurring adjustments necessary for a fair presentation in conformity with GAAP.
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 months ended March 31, 2022 have been no significant changesreclassified to conform to the Company’s significant accounting policies during2023 presentation.
8
2. INVESTMENTS IN REAL ESTATE PROPERTIES
The following table summarizes our consolidated investments in real estate properties.
| | | | | | |
|
| As of | ||||
(in thousands) |
| March 31, 2023 |
| December 31, 2022 | ||
Land | | $ | 689,142 | | $ | 694,998 |
Buildings and improvements | |
| 3,166,233 | |
| 3,152,553 |
Intangible lease assets | |
| 313,324 | |
| 317,141 |
Right of use asset | |
| 13,637 | |
| 13,637 |
Investment in real estate properties | |
| 4,182,336 | |
| 4,178,329 |
Accumulated depreciation and amortization | |
| (597,258) | |
| (572,751) |
Net investment in real estate properties | | $ | 3,585,078 | | $ | 3,605,578 |
Acquisitions
During the ninethree months ended September 30, 2017 other thanMarch 31, 2023, we acquired 100% of the updates described below.following properties through asset acquisitions:
| | | | | | | |
($ in thousands) |
| Property Type |
| Acquisition Date |
| Total Purchase Price (1) | |
2023 Acquisitions: | | | | | | | |
VM8 Logistics Center | | Industrial | | 1/19/2023 | | $ | 17,511 |
Total 2023 acquisitions |
|
|
|
| | $ | 17,511 |
| (1) | Total purchase price is equal to the total consideration paid plus any debt assumed at fair value. There was no debt assumed in connection with the 2023 acquisitions. |
During the three months ended March 31, 2023, we allocated the purchase price of our acquisitions to land and building and improvements as follows:
| | | |
| | For the Three Months Ended | |
($ in thousands) |
| March 31, 2023 | |
Land | | $ | 2,166 |
Building and improvements | |
| 15,345 |
Total purchase price (1) | | $ | 17,511 |
| (1) | Total purchase price is equal to the total consideration paid plus any debt assumed at fair value. There was no debt assumed in connection with the 2023 acquisitions. There were no intangible lease assets or liabilities acquired in connection with our acquisition during the three months ended March 31, 2023. |
Dispositions
During the three months ended March 31, 2023, we sold one partial retail property for net proceeds of approximately $53.7 million. We recorded a net gain on sale of approximately $36.9 million.
During the three months ended March 31, 2022, we sold two retail properties, one office property and one retail land parcel for net proceeds of approximately $169.4 million. We recorded a net gain on sale of approximately $53.9 million.
9
Intangible Lease Assets and Liabilities
Intangible lease assets and liabilities as of March 31, 2023 and December 31, 2022 include the FASB issued following:
| | | | | | | | | | | | | | | | | | |
|
| As of March 31, 2023 |
| As of December 31, 2022 | ||||||||||||||
|
| | |
| Accumulated |
| | |
| | |
| Accumulated |
| | | ||
(in thousands) |
| Gross |
| Amortization |
| Net |
| Gross | | Amortization |
| Net | ||||||
Intangible lease assets (1) | | $ | 290,391 | | $ | (217,141) | | $ | 73,250 | | $ | 294,208 | | $ | (214,201) | | $ | 80,007 |
Above-market lease assets (1) | |
| 22,933 | |
| (19,892) | |
| 3,041 | |
| 22,933 | |
| (19,707) | |
| 3,226 |
Below-market lease liabilities | |
| (73,331) | |
| 33,098 | |
| (40,233) | |
| (76,033) | |
| 33,589 | |
| (42,444) |
| (1) | Included in net investment in real estate properties on the condensed consolidated balance sheets. |
Rental Revenue Adjustments and Depreciation and Amortization Expense
The following table summarizes straight-line rent adjustments, amortization recognized as an increase (decrease) to rental revenues from above- and below-market lease assets and liabilities and real estate-related depreciation and amortization expense:
| | | | | | | |
| | For the Three Months Ended March 31, | | ||||
(in thousands) |
| 2023 |
| 2022 | | ||
Increase (decrease) to rental revenue: | | |
| | |
| |
Straight-line rent adjustments | | $ | 1,068 | | $ | 726 | |
Above-market lease amortization | |
| (186) | |
| (169) | |
Below-market lease amortization | |
| 1,014 | |
| 1,196 | |
Real estate-related depreciation and amortization: | |
|
| |
|
| |
Depreciation expense | | $ | 26,417 | | $ | 20,198 | |
Intangible lease asset amortization | |
| 6,780 | |
| 7,253 | |
3. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURE PARTNERSHIPS
We have acquired interests in joint venture partnerships for purposes of investing in properties across the U.S. We record our investments in AREIT-McDowell Vue Parent LLC (“Vue 1400 JV”), Pathfinder Core AREIT JV NNN Holdings, LLC (“Net Lease JV I”), Pathfinder Core AREIT Net Lease Aggregator LLC (“Net Lease JV II”) and Pathfinder Core AREIT Net Lease TRS Aggregator LLC (“Net Lease JV III”) under the equity method on our condensed consolidated balance sheets as we have the ability to exercise significant influence in each partnership but do not have control of the entities. Other partners in Net Lease JV I, Net Lease JV II and Net Lease JV III are affiliates of our Advisor.
The following table summarizes our investments in unconsolidated joint venture partnerships as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | |
| | | | As of March 31, 2023 | | As of December 31, 2022 | | Investments in Unconsolidated | ||||||||
| | Property | | Ownership | | Number of | | Ownership | | Number of | | Joint Venture Partnerships as of | ||||
($ in thousands) |
| Type |
| Percentage | | Properties | | Percentage | | Properties | | As of March 31, 2023 |
| As of December 31, 2022 | ||
Vue 1400 JV | | Residential | | 85% | | 1 | | 85% | | 1 | | $ | 25,574 | | $ | 25,984 |
Net Lease JV I | | Net Lease | | 50% | | 15 | | 50% | | 15 | | | 16,371 | | | 16,393 |
Net Lease JV II | | Net Lease | | 50% | | 120 | | 50% | | 117 | | | 66,314 | | | 65,763 |
Net Lease JV III | | Net Lease | | 50% | | 23 | | 50% | | 23 | | | 16,907 | | | 12,232 |
Total investments in unconsolidated joint venture partnerships | | 159 | |
| | 156 | | $ | 125,166 | | $ | 120,372 | ||||
10
4. REAL ESTATE DEBT INVESTMENTS
Debt-Related Investments
The following table summarizes our debt-related investments as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | |
| | | | | | Weighted-Average | | Weighted-Average | ||||
($ in thousands) | | Carrying Amount (1) | | Outstanding Principal (1) | | Interest Rate | | Remaining Life (Years) | ||||
As of March 31, 2023 | | | | | | | | | | | | |
Senior loans (2) | | $ | 147,795 | | $ | 155,555 | | | 8.9 | % | | 1.8 |
Mezzanine loans | | | 106,406 | | | 108,500 | | | 10.9 | | | 1.6 |
Total debt-related investments (2) | | $ | 254,201 | | $ | 264,055 | | | 9.9 | % | | 1.7 |
As of December 31, 2022 | | | | | | | | | | | | |
Senior loans (2) | | $ | 151,645 | | $ | 154,622 | | | 8.5 | % | | 2.1 |
Mezzanine loans | | | 108,794 | | | 108,500 | | | 10.4 | | | 1.9 |
Total debt-related investments (2) | | $ | 260,439 | | $ | 263,122 | | | 9.5 | % | | 2.0 |
| (1) | The difference between the carrying amount and the outstanding principal amount of the debt-related investments consists of unamortized purchase discount, deferred financing costs, loan origination costs, and any recorded credit loss reserves, if applicable. |
| (2) | As of March 31, 2023 and December 31, 2022, carrying amounts include $39.5 million and $42.0 million, respectively, related to one senior loan debt-related investment that was in default and on non-accrual status. Outstanding principal includes $43.8 million related to this senior loan as of March 31, 2023 and December 31, 2022. We recorded an impairment loss of $2.5 million related to this senior loan during the three months ended March 31, 2023 and included the impairment loss in impairment loss on debt-related investment held for sale on the condensed consolidated statements of operations. This senior loan is held-for-sale and therefore the carrying amount has been reduced to its fair value as of both March 31, 2023 and December 31, 2022. Weighted-average interest rate and weighted-average remaining life excludes this senior loan from its calculations. |
Current Expected Credit Losses
Accounting Standards Update 2014-09, Revenue from Contracts with Customers(“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 606)326): Measurement of Credit Losses on Financial Instruments, requires us to reflect current expected credit losses (“ASU 2014-09”CECL”), which provides new guidance outlining a single comprehensive model on both the outstanding balances and unfunded commitments on loans held for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance in Topic 605, "Revenue Recognition". This guidanceinvestment and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance specifically excludes revenue associated with lease contracts. Additionally, this guidance expands related disclosure requirements regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 will be effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. We plan to adopt the standard when it becomes effective for us beginning January 1, 2018. Rental revenues and certain recoveries earned from leasing our operating properties will be evaluated with the adoption of the lease accounting standard (discussed below). The revised lease accounting standard includes a package of practical expedients that allows an entity to avoid reassessing the accounting for lease components, including the allocations between lease and nonlease components in contracts under ASU 2014-09. We expect to elect this package of practical expedients, and accordingly will not reallocate contract consideration to lease components within the scope of the existing lease guidance when the Company adopts ASU 2014-09. Additionally, we do not expect ASU 2014-09 to significantly impact the accounting for sales of our properties. Our initial analysis of our non-lease related revenue contracts indicates that the adoption of ASU 2014-09 will not have a material effect on our consolidated financial statements; however, we are still in the process of evaluating ASU 2014-09.
We estimate our CECL Reserve primarily using a probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan. Calculation of the CECL Reserve requires loan specific data, which clarifiesincludes capital senior to us when we are the definitionsubordinate lender, changes in net operating income, debt service coverage ratio, loan-to-value, occupancy, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of a business inloan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of our floating rate loan portfolio and (iv) our current and future view of the macroeconomic environment. We may consider loan-specific qualitative factors on certain loans to estimate our CECL Reserve. In order to provide additional guidanceestimate the future expected loan losses relevant to assist entitiesour portfolio, we utilize historical market loan loss data licensed from a third-party data service. For periods beyond the reasonable and supportable forecast period, we revert back to historical loss data.
Loan balances that are deemed to be uncollectible are written off as a realized loss and are deducted from our CECL Reserve. The write-offs are recorded in the period in which the loan balance is deemed uncollectible based on management’s judgment.
11
As of March 31, 2023, our CECL Reserve for our debt-related investment portfolio is $5.6 million or 1.6% of our debt- related investment commitment balance of $358.3 million recognized as an increase in provision for loan loss during the three months ended March 31, 2023. The debt-related investment commitment balance is comprised of $220.4 million of funded commitments and $137.9 million of unfunded commitments with evaluating whether transactions should be accountedassociated CECL Reserves of $3.5 million and $2.1 million, respectively. The CECL Reserve for unfunded commitments is based on the unfunded portion of the loan commitment over the full contractual period over which we are exposed to credit risk through a current obligation to extend credit and is recorded as acquisitions (or disposals)an other liability on the condensed consolidated balance sheets. The calculation of the CECL Reserve excludes one debt-related investment that is currently held for sale. There have been no write-offs or recoveries related to any of our existing debt-related investments. CECL Reserves were immaterial in prior periods.
Available-for-Sale Debt Securities
We acquire debt securities that are primarily collateralized by mortgages on commercial real estate properties primarily for cash management and investment purposes. On the acquisition date, we designate investments in commercial real estate debt securities as available-for-sale. Investments in debt securities that are classified as available-for-sale are carried at fair value. These assets or businesses. This guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlier adoption is permitted. The guidance in ASU 2017-01 should be adoptedare valued on a prospective basis. We adopted ASU 2017-01recurring basis and any unrealized holding gains and losses other than those associated with a credit loss are recorded each period in other comprehensive income. There were no credit losses associated with our available-for-sale debt securities as of January 1, 2017 and anticipate that future acquisitions of real property will likely be accounted for as asset acquisitions rather than business combinations. Among other things, accounting for an asset acquisition requires capitalization of acquisition costs as a component of the acquired assets whereas accounting for business combinations requires acquisition costs to be expensed. period ended March 31 2023.
As of September 30, 2017, we capitalized approximately $231,000 of acquisition costs related to our acquisition of real property during the nine months ended September 30, 2017. Additionally, goodwill is not recognized and contingent consideration is recorded when probable and reasonably estimable under accounting for asset acquisitions.
| 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 | |||||||||||
| | | | | | | | | | | | | | | |
($ in thousands) | | Face Amount | | Amortized Cost | | Unamortized Discount | | Unrealized Gain, Net (1) | | Fair Value | |||||
As of March 31, 2023 | | | | | | | | | | | | | | | |
Available-for-sale debt securities | | $ | 14,979 | | $ | 14,876 | | $ | 103 | | $ | 103 | | $ | 14,979 |
As of December 31, 2022 | | | | | | | | | | | | | | | |
Available-for-sale debt securities | | $ | 14,979 | | $ | 14,870 | | $ | 109 | | $ | 26 | | $ | 14,896 |
| 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 | |||||||||||||
| (1) |
12
5. DEBT
A summary of our consolidated debt is as follows:
| | | | | | | | | | | | |
| | Weighted-Average | | | | | | | | | ||
| | Effective Interest Rate as of | | | | Balance as of | ||||||
| | March 31, | | December 31, | | | | March 31, | | December 31, | ||
($ in thousands) |
| 2023 |
| 2022 |
| Current Maturity Date |
| 2023 |
| 2022 | ||
Line of credit (1) | | 6.17 | % | 5.72 | % | November 2025 | | $ | 277,000 | | $ | 235,000 |
Term loan (2) |
| 3.31 | | 3.90 | | November 2026 | | | 400,000 |
| | 400,000 |
Term loan (3) |
| 4.26 | | 4.56 | | January 2027 | |
| 400,000 |
|
| 400,000 |
Fixed-rate mortgage notes |
| 3.40 | | 3.48 | | January 2027 - May 2031 | |
| 310,084 |
|
| 380,316 |
Floating-rate mortgage notes (4) |
| 4.52 | | 4.52 | | October 2024 - October 2026 | |
| 207,600 |
|
| 207,600 |
Total principal amount / weighted-average (5) |
| 4.22 | % | 4.31 | % |
| | $ | 1,594,684 |
| $ | 1,622,916 |
Less: unamortized debt issuance costs |
|
|
|
|
|
| | $ | (13,711) |
| $ | (14,849) |
Add: unamortized mark-to-market adjustment on assumed debt |
|
|
|
|
|
| |
| 8,147 |
|
| 8,408 |
Total debt, net |
|
|
|
|
|
| | $ | 1,589,120 |
| $ | 1,616,475 |
Gross book value of properties encumbered by debt | | | | | | | | $ | 907,741 | | $ | 970,310 |
| (1) | The effective interest rate is calculated based on the Term Secured Overnight Financing Rate plus an 11.448 basis point adjustment (“Adjusted Term SOFR”), plus a margin ranging from 1.25% to 2.00% depending on our consolidated leverage ratio. As of March 31, 2023, the unused and available portions under the line of credit were approximately $623.0 million and $565.6 million, respectively. The line of credit is available for general business purposes including, but not limited to, refinancing of existing indebtedness and financing the acquisition of permitted investments, including commercial properties. |
| (2) |
| 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 | |||||||
| 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 | % | ||||||||||
| (3) | |
| 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 | |||||||||||||||||
| (4) | |
| (5) | The weighted-average remaining term of our consolidated borrowings was approximately 3.7 years as of March 31, 2023, excluding the impact of certain extension options. |
For the three months ended March 31, 2023 and 2022, the amount of interest incurred related to our consolidated indebtedness, excluding amortization of debt issuance costs, was $19.6 million and $9.7 million, respectively. See “Note 6” for the amount of interest incurred related to the DST Program (as defined below).
13
As of March 31, 2023, 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 | ||||
2023 | | | — | | | — | | | 1,205 | | | 1,205 |
2024 | |
| — | |
| — | |
| 129,265 | |
| 129,265 |
2025 | |
| 277,000 | |
| — | |
| 2,360 | |
| 279,360 |
2026 | |
| — | |
| 400,000 | |
| 84,214 | |
| 484,214 |
2027 | |
| — | |
| 400,000 | |
| 175,787 | |
| 575,787 |
Thereafter | |
| — | |
| — | |
| 124,853 | |
| 124,853 |
Total principal payments | | $ | 277,000 | | $ | 800,000 | | $ | 517,684 | | $ | 1,594,684 |
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 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 September 30, 2017, six mortgage notes were interest-only and four mortgage notes were fully amortizing with outstanding principal balances of approximately $456.1 million and $25.9 million, respectively. NoneMarch 31, 2023, certain 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 June 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 as we subsequently fundimpact of the Outstanding Leasing Costs. Other than this limited guarantee, the assets and creditdiscontinuation of each of our consolidated properties pledged as collateral for our mortgage notes are not available 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 | % | |||||||||||||
| 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$13.2 million will be reclassified as an increasea decrease to interest expense related to active effective hedges of existing floating-rate debt, anddebt.
14
As of March 31, 2023, we estimate that approximately $1.9 million will be reclassified as an increase to interest expense related to effectivehave two interest rate swaps where the hedging instrument has been terminated. The ineffective portion of the changecap derivative instruments that are not designated as cash flow hedges and therefore, changes in fair value ofare recognized through income. As a result, in periods with high interest rate volatility, we may experience significant fluctuations in our net income (loss).
The following table summarizes the derivatives is recognized directly in earnings.
| | | | | | | | | | | |
|
| Number of |
| | | | Fair Value | ||||
($ in thousands) |
| Contracts |
| Notional Amount |
| | Other Assets |
| Other Liabilities | ||
As of March 31, 2023 | | | | | | | | | | | |
Interest rate swaps designated as cash flow hedges |
| 12 | | $ | 650,000 | | $ | 14,339 | | $ | — |
Interest rate caps designated as cash flow hedges | | 1 | | | 150,000 | | | 7,806 | | | |
Interest rate caps not designated as cash flow hedges | | 2 | | | 207,600 | | | 2,889 | | | — |
Total derivative instruments |
| 15 | | $ | 1,007,600 | | $ | 25,034 | | $ | — |
As of December 31, 2022 | | | | | | | | | | | |
Interest rate swaps designated as cash flow hedges |
| 12 | | $ | 650,000 | | $ | 20,279 | | $ | — |
Interest rate caps not designated as cash flow hedges |
| 2 | |
| 207,600 | |
| 4,169 | |
| — |
Total derivative instruments |
| 14 | | $ | 857,600 | | $ | 24,448 | | $ | — |
The following table presents the effective portioneffect of our cash flow hedges as presentedconsolidated derivative instruments on our condensed consolidated financial statements, as well as amounts related to our available-for-sale securities (amounts in thousands):
| | | | | | | |
|
| For the Three Months Ended | | ||||
| | March 31, | | ||||
(in thousands) |
| 2023 |
| 2022 | | ||
Derivative instruments designated as cash flow hedges: | | |
| | |
| |
(Loss) gain recognized in AOCI | | $ | (4,000) | | $ | 10,075 | |
Amount reclassified from AOCI (out of) into interest expense | |
| (3,056) | |
| 1,919 | |
Total interest expense presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded | |
| 37,545 | |
| 24,410 | |
Derivative instruments not designated as cash flow hedges: | |
| | |
|
| |
Unrealized (loss) gain on derivative instruments recognized in other income (expenses) (1) | | $ | (1,224) | | $ | 1,550 | |
Realized gain on derivative instruments recognized in other income (expenses) (2) | | | 1,121 | | | — | |
| (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) | Unrealized (loss) gain on changes in fair value of derivative instruments relates to mark-to-market changes on our derivatives not designated as cash flow hedges. |
| (2) | Realized gain on derivative instruments relates to interim cash settlements for our derivatives not designated as cash flow hedges. |
6. DST PROGRAM
We have a program to raise capital through private placement offerings by selling beneficial interests (“DST Interests”) in specific Delaware statutory trusts holding real properties (the “DST Program”). Under the DST Program, each private placement offers interests in one or more real properties placed into one or more Delaware statutory trusts by the Operating Partnership or its affiliates (“DST Properties”).
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 in the trusts holding DST Properties to potential investors. As of March 31, 2023 and December 31, 2022, there were approximately $95.9 million and $81.9 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 condensed consolidated statements of operations.
15
The following table presents our DST Program activity for the three months ended March 31, 2023 and 2022:
| | | | | | |
| | | For the Three Months Ended | |||
| | | March 31, | |||
(in thousands) | | | 2023 | | | 2022 |
DST Interests sold | | $ | 101,795 | | $ | 280,802 |
DST Interests financed by DST Program Loans | | | 14,015 | | | 14,827 |
Income earned from DST Program Loans (1) | | | 1,017 | | | 669 |
Financing obligation liability appreciation (2) | | | 2,862 | | | 4,007 |
Rent obligation incurred under master lease agreements (2) | | | 13,583 | | | 9,253 |
| (1) | Included in other income and expenses on the condensed consolidated statements of operations. |
| (2) | Included in interest expense on the condensed consolidated statements of operations. |
Additionally, during the three months ended March 31, 2022, 4.8 million partnership units (“OP Units”) in our operating partnership, AREIT Operating Partnership LP (the “Operating Partnership”) were issued in exchange for DST Interests, for a net investment of $39.4 million in accordance with our Umbrella Partnership Real Estate Investment Trust (“UPREIT”) structure. There have been no OP Units issued in accordance with our UPREIT structure during the three months ended March 31, 2023.
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 of our financial instruments.
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 March 31, 2023 | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Derivative instruments | | $ | — | | $ | 25,034 | | $ | — | | $ | 25,034 |
Available-for-sale debt securities | | | — | | | 14,979 | | | — | | | 14,979 |
Total assets measured at fair value | | $ | — | | $ | 40,013 | | $ | — | | $ | 40,013 |
As of December 31, 2022 | |
|
| |
|
| |
|
| |
|
|
Assets: | |
|
| |
|
| |
|
| |
|
|
Derivative instruments | | $ | — | | $ | 24,448 | | $ | — | | $ | 24,448 |
Available-for-sale debt securities | | | — | | | 14,896 | | | — | | | 14,896 |
Total assets measured at fair value | | $ | — | | $ | 39,344 | | $ | — | | $ | 39,344 |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative Instruments
16
Available-for-Sale Debt Securities. The available-for-sale debt securities are debt securities primarily collateralized by mortgages on commercial real estate properties whose fair value is estimated using third-party broker quotes, which provide valuation estimates based upon contractual cash flows, observable inputs comprising credit spreads and market liquidity. We incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjustingmeasurements, which we have concluded are not material to the valuation. Due to the available-for-sale debt securities being unique and not actively traded, the fair value of our derivative for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, suchis classified as collateral postings, thresholds, mutual puts and guarantees.
Nonrecurring Fair Value Measurements
As of September 30, 2017, we had assessed the significance of the impact of the credit valuation adjustments and had determined that it was not significant to the overall valuation of our derivative instruments. As a result, we have determined that our derivative valuations are classified in Level 2 of the fair value hierarchy.
| 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 March 31, 2023 | | As of December 31, 2022 | ||||||||
|
| Carrying |
| Fair | | Carrying |
| Fair | ||||
(in thousands) | | Value (1) | | Value | | Value (1) | | Value | ||||
Assets: | | | | | | | | | | | | |
Debt-related investments | | $ | 264,055 | | $ | 259,305 | | $ | 263,122 | | $ | 260,841 |
DST Program Loans | |
| 95,909 | |
| 93,621 | |
| 81,897 | |
| 79,049 |
Liabilities: | |
|
| |
|
| |
|
| |
|
|
Line of credit | | $ | 277,000 | | $ | 277,000 | | $ | 235,000 | | $ | 235,000 |
Term loans | |
| 800,000 | |
| 800,000 | |
| 800,000 | |
| 800,000 |
Mortgage notes | |
| 517,684 | |
| 482,992 | |
| 587,916 | |
| 541,558 |
| (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 three months ended March 31, 2023, we raised gross proceeds of approximately $47.7 million from the sale of approximately 5.4 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.
17
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 MARCH 31, 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 |
| 2,555 |
| 4,661 | | 1,104 | | 5,019 | | — |
| 13,339 |
Distribution reinvestment plan |
| 92 |
| 193 | | 37 | | 302 | | 202 |
| 826 |
Redemptions of common stock | | (3) |
| (122) | | (228) | | (356) | | (1,079) | | (1,788) |
Conversions |
| (62) |
| — | | — | | 62 | | — |
| — |
Balance as of March 31, 2022 |
| 19,007 |
| 40,489 |
| 7,662 |
| 59,433 |
| 55,451 |
| 182,042 |
FOR THE THREE MONTHS ENDED MARCH 31, 2023 | | | | | | | | | | | | |
Balance as of December 31, 2022 |
| 26,884 |
| 49,237 |
| 7,871 |
| 69,142 |
| 52,974 |
| 206,108 |
Issuance of common stock: |
| |
| | | | | | | |
|
|
Primary shares |
| 1,325 |
| 972 |
| 45 |
| 2,117 |
| — |
| 4,459 |
Distribution reinvestment plan |
| 134 |
| 227 |
| 40 |
| 331 |
| 175 |
| 907 |
Redemptions of common stock | | (69) | | (561) | | (240) | | (2,557) | | (599) | | (4,026) |
Conversions |
| (101) |
| 24 |
| (277) |
| 354 |
| — |
| — |
Balance as of March 31, 2023 |
| 28,173 |
| 49,899 |
| 7,439 |
| 69,387 |
| 52,550 |
| 207,448 |
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) | ||||||
2023 |
| |
|
| |
|
| |
|
| |
|
| |
| | |
|
March 31 | | $ | 0.09375 | | $ | 9,912 | | $ | 5,271 | | $ | 8,009 | | $ | 1,461 | | $ | 24,653 |
Total | | $ | 0.09375 | | $ | 9,912 | | $ | 5,271 | | $ | 8,009 | | $ | 1,461 | | $ | 24,653 |
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 |
September 30 | |
| 0.09375 | |
| 9,684 | |
| 3,972 | |
| 7,732 | |
| 1,399 | |
| 22,787 |
December 31 | |
| 0.09375 | |
| 9,859 | |
| 4,559 | |
| 7,923 | |
| 1,478 | |
| 23,819 |
Total | | $ | 0.37500 | | $ | 37,679 | | $ | 14,706 | | $ | 29,893 | | $ | 5,166 | | $ | 87,444 |
| 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. |
18
Redemptions and Repurchases
Below is a summary of redemptions and repurchases pursuant to our share redemption program for the three months ended March 31, 2023 and 2022. All eligible redemption requests were fulfilled for the periods presented. Our day-to-day activities are managed byboard of directors may modify or suspend our Advisor, a related party, under the terms and conditions of an advisory agreement (as amended from time to time, the "Advisory Agreement"). Our Advisor is consideredcurrent share redemption programs if it deems such action to be a related party as certain indirect owners and employeesin the best interest of our Advisor serve as two of our directorsstockholders.
| | | | | | | | |
| | For the Three Months Ended March 31, | | | ||||
(in thousands, except for per share data) |
| 2023 |
| 2022 | | | ||
Number of shares redeemed or repurchased |
| | 4,026 |
| | 1,788 | | |
Aggregate dollar amount of shares redeemed or repurchased | | $ | 35,455 | | $ | 14,555 | | |
Average redemption or repurchase price per share | | $ | 8.81 | | $ | 8.15 | | |
9. REDEEMABLE NONCONTROLLING INTERESTS
The Operating Partnership’s net income and all of our executive officers. The responsibilities of our Advisor cover all facets of our business, and includeloss will generally be allocated to the selection and underwriting of our real property and debt-related investments, the negotiations for these investments, the asset management and financing of these investmentsgeneral partner and the oversight of real property dispositions.
The Operating Partnership issued OP Units to the Advisor and our Advisor entered into the Twelfth Amended and Restated Advisory Agreement, which among other things:
The following table summarizes the redeemable noncontrolling interests activity for the three months ended March 31, 2023 and 2022:
| | | | | | | |
| | For the Three Months Ended March 31, | | ||||
($ in thousands) | | 2023 | | 2022 |
| ||
Balance at beginning of the year | | $ | 18,130 | | $ | 8,994 | |
Settlement of prior year performance participation allocation (1) | | | — | | | 15,327 | |
Distributions to redeemable noncontrolling interests | | | (192) | | | (160) | |
Redemptions to redeemable noncontrolling interests (2) | | | — | | | (7,724) | |
Net (loss) income attributable to redeemable noncontrolling interests | | | (18) | | | 246 | |
Change from securities and cash flow hedging activities attributable to redeemable noncontrolling interests | | | (55) | | | 119 | |
Redemption value allocation adjustment to redeemable noncontrolling interests (3) | | | (74) | | | 482 | |
Ending balance | | $ | 17,791 | | $ | 17,284 | |
| (1) | There were no OP Units issued related to the 2022 performance participation allocation, as the $23.7 million payable as of December 31, 2022 was, at the election of the Advisor, settled in cash in January 2023. 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 at the time, 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. |
| (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. |
| (3) | Represents the adjustment recorded in order to mark to the redemption value, which is equivalent to fair value, at the end of the measurement period. |
19
10. NONCONTROLLING INTERESTS
OP Units
The following table summarizes the fee paidnumber of OP Units issued and outstanding to third-party investors (excludes interests held by redeemable noncontrolling interest holders):
| | | | | | |
| | For the Three Months Ended March 31, | ||||
(in thousands) |
| 2023 |
| 2022 | ||
Balance at beginning of period |
| | 55,079 | |
| 27,180 |
Issuance of units |
| | — |
|
| 4,825 |
Redemption of units |
| | (1,240) | |
| (286) |
Balance at end of period | | | 53,839 | | | 31,719 |
Subject to certain restrictions and limitations, the holders of OP Units may redeem all or a portion of their OP Units for either: shares of the equivalent class of common stock, cash or a combination of both. If we elect to redeem OP Units for shares of our common stock, we will generally deliver one share of our common stock for each such OP Unit redeemed (subject to any redemption fees withheld), and such shares may, subsequently, only be redeemed for cash in accordance with the terms of our share redemption program. If we elect to redeem OP Units for cash, the cash delivered per unit will equal the then-current NAV per unit of the applicable class of OP Units (subject to any redemption fees withheld), which will equal the then-current NAV per share of our corresponding class of shares. During the three months ended March 31, 2023 and 2022, the aggregate amount of OP Units redeemed was $10.9 million and $2.3 million, respectively. The estimated maximum redemption value (unaudited) as of March 31, 2023 and December 31, 2022 was $468.4 million and $488.3 million, respectively.
11. RELATED PARTY TRANSACTIONS
Summary of Fees and Expenses
The table below summarizes the fees and expenses incurred by us for services provided by the Advisor and its affiliates, and by the Dealer Manager related to the services the Dealer Manager provided in connection with our public offerings and any related amounts payable:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | Payable as of | | ||||||||
(in thousands) |
| 2023 |
| 2022 |
| March 31, 2023 |
| December 31, 2022 | | ||||
Selling commissions and dealer manager fees (1) | | $ | 512 | | $ | 1,042 | | $ | — | | $ | — | |
Ongoing distribution fees (1)(2) | | | 2,154 | | | 1,298 | | | 741 | | | 748 | |
Advisory fees—fixed component | | | 9,538 | | | 7,144 | | | 2,905 | | | 2,868 | |
Performance participation allocation (3) | |
| — | |
| 12,192 | |
| — | |
| 23,747 | |
Other expense reimbursements—Advisor (4)(5) | |
| 3,106 | |
| 2,140 | |
| 3,439 | |
| 4,192 | |
Other expense reimbursements—Dealer Manager | |
| — | |
| 27 | |
| 70 | |
| 109 | |
Property accounting fee (6) | | | 489 | | | — | | | 489 | | | 478 | |
DST Program selling commissions, dealer manager and distribution fees (1) | |
| 2,671 | |
| 7,524 | |
| 241 | |
| 241 | |
Other DST Program related costs—Advisor (5) | |
| 1,931 | |
| 4,951 | |
| 146 | |
| 146 | |
Total | | $ | 20,401 | | $ | 36,318 | | $ | 8,031 | | $ | 32,529 | |
| (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 $59.1 million and $60.9 million as of March 31, 2023 and December 31, 2022, respectively, are included in other liabilities on the condensed consolidated balance sheets. |
| (3) | The 2022 performance participation allocation in the amount of $23.7 million became payable on December 31, 2022, and the Advisor elected to settle the amounts owed in cash in January 2023. |
20
| (4) | 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 below after footnote 6, allocated rent paid to both third parties and affiliates of our Advisor, equipment, utilities, insurance, travel and entertainment. |
| (5) | Includes costs reimbursed to the Advisor related to the DST Program. |
| (6) | 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 March 31, 2023, and
Performance Participation Allocation
As used below, “Fund Interests” means our outstanding shares of common stock, along with OP Units, which may be renewed for an unlimited number of successive one-year terms. The current termor were held directly or indirectly by the Advisor, the Former Sponsor, members or affiliates of the Advisory Agreement expires on June 30, 2018. Per the Advisory Agreement, in consideration for asset management services performed, we pay our Advisor an advisory fee comprised of two separate components: (1)Former Sponsor, and third parties.
The performance participation allocation is a fixedperformance-based amount that accrues
The allocation of the performance participation 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 Advisor. The performance hurdle was not achieved as of March 31, 2023, therefore no performance participation allocation expense was recognized in our condensed consolidated statements of operations for the three months ended March 31, 2023. As the performance hurdle was achieved as of March 31, 2022, we recognized approximately $12.2 million of performance participation allocation expense in our condensed consolidated statements of operations for the three months ended March 31, 2022.
21
12. 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 March 31, | | ||||
(in thousands, except per share data) |
| 2023 |
| 2022 | | ||
Net (loss) income attributable to common stockholders—basic | | $ | (2,004) | | $ | 21,011 | |
Net (loss) income attributable to redeemable noncontrolling interests | | | (18) | | | 246 | |
Net (loss) income attributable to noncontrolling interests | |
| (549) | |
| 3,537 | |
Net (loss) income attributable to common stockholders—diluted | | $ | (2,571) | | $ | 24,794 | |
Weighted-average shares outstanding—basic | |
| 206,774 | |
| 178,528 | |
Incremental weighted-average shares effect of conversion of noncontrolling interests | |
| 56,252 | |
| 32,148 | |
Weighted-average shares outstanding—diluted | |
| 263,026 | |
| 210,676 | |
Net (loss) income per share attributable to common stockholders: | |
|
| |
|
| |
Basic | | $ | (0.01) | | $ | 0.12 | |
Diluted | | $ | (0.01) | | $ | 0.12 | |
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and disclosure of non-cash investing and financing activities is as follows:
| | | | | | |
| | For the Three Months Ended | ||||
| | March 31, | ||||
(in thousands) | | 2023 | | 2022 | ||
Supplemental disclosure of non-cash investing and financing activities: | | | | | | |
Distributions reinvested in common stock | | $ | 7,990 | | $ | 6,743 |
(Decrease) increase in accrued future ongoing distribution fees | | | (1,800) | | | 7,828 |
Increase in DST Program Loans receivable through DST Program capital raising | |
| 14,015 | |
| 14,827 |
Redeemable noncontrolling interest issued as settlement of performance participation allocation | | | — | | | 15,327 |
Issuances of OP Units for DST Interests | |
| — | |
| 39,441 |
Restricted Cash
Restricted cash consists of lender and property-related escrow accounts. The following table presents the components of the beginning of period and end of period cash, cash equivalents and restricted cash reported within the condensed consolidated statements of cash flows:
| | | | | | | |
| | For the Three Months Ended | | ||||
| | March 31, | | ||||
(in thousands) |
| 2023 |
| 2022 | | ||
Beginning of period: | | | | | | | |
Cash and cash equivalents | | $ | 13,336 | | $ | 10,605 | |
Restricted cash | |
| 3,850 | |
| 3,747 | |
Cash, cash equivalents and restricted cash | | $ | 17,186 | | $ | 14,352 | |
End of period: | | | | | | | |
Cash and cash equivalents | | $ | 36,894 | | $ | 22,626 | |
Restricted cash | |
| 3,859 | |
| 4,021 | |
Cash, cash equivalents and restricted cash | | $ | 40,753 | | $ | 26,647 | |
22
14. COMMITMENTS AND CONTINGENCIES
Litigation
We and the Operating 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 have been or will be subject to environmental reviews either by us or the previous owners. In addition, pursuant to the Advisory Agreement, we will pay directly, or reimburse our Advisor and our Dealer Manager (defined below) if they pay on our behalf any issuer organizational and offering expenses (meaning organizational and offering expenses other than underwriting compensation) relating to any public offerings as and when incurred. After the termination of the primary portion of the offering and again after termination of the distribution reinvestment plan portion of the offering, our Advisor has agreed to reimburse us to the extent that total cumulative organization and offering expenses (including underwriting compensation) thatmay incur environmental remediation costs associated with certain land parcels we incur exceed 15% of our gross proceeds from the applicable offering.
| 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 | ||||||||
15. SEGMENT FINANCIAL INFORMATION
Our four reportable segments are office, retail, residential and further amended on September 19, 2016 and March 2, 2017 (the “Prior Agreement”). The Prior Agreement amended the prior operating partnership agreement by establishing two series of Class E OP Units, with different redemption and registration rights. The currently existing third-party holders of Class E OP Units now hold Series 1 Class E OP Units, and continueindustrial. Factors used to have the same redemption and registration rights they had previously, whichdetermine our reportable segments include the right, in certain circumstances to require our Operating Partnership to redeem the OP Units for Class E shares of the Company or cash. Any purchasers of Interests in the 2016 DST Program that ultimately acquire OP Units through the FMV Option will acquire Series 2 Class E OP Units, which will have similar redemptionphysical and registration rights to those of the holders of Series 1 Class E OP Units, except that their redemption rights will in certain circumstances require our Operating Partnership to redeem the OP Units for either Class I shares of the Company or cash (as determined by our Operating Partnership in its sole discretion). In addition, the Prior Agreement provides that a redemption fee of 1.5% of the shares otherwise payable to a limited partner upon redemption of Series 2 Class E Units will be paid to an affiliate of the DST Manager (defined below). Holders of Series 1 or Series 2 Class E OP Units cannot require us to redeem their Series 1 or Series 2 Class E OP Units with cash.
| 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 | |||||||
| 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 | ||||||
The following table reflects our total consolidated assets by business segment as of March 31, 2023 and characteristicsDecember 31, 2022:
| | | | | | |
| | As of | ||||
(in thousands) |
| March 31, 2023 | | December 31, 2022 | ||
Assets: | | | | | | |
Office properties | | $ | 379,355 | | $ | 377,546 |
Retail properties | |
| 517,000 | |
| 537,147 |
Residential properties | |
| 1,485,956 | |
| 1,495,532 |
Industrial properties | |
| 1,252,141 | |
| 1,248,255 |
Corporate | |
| 553,851 | |
| 516,244 |
Total assets | | $ | 4,188,303 | | $ | 4,174,724 |
23
The following table is a reconciliation of our buildings, the relatedreported net income (loss) attributable to common stockholders to our net 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 segmentsincome for the three and nine months ended September 30, 2017March 31, 2023 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 | |||||||
| | | | | | | |
| | For the Three Months Ended | | ||||
| | March 31, | | ||||
(in thousands) |
| 2023 |
| 2022 | | ||
Net (loss) income attributable to common stockholders | | $ | (2,004) | | $ | 21,011 | |
Debt-related income | |
| (5,761) | |
| (3,468) | |
Real estate-related depreciation and amortization | |
| 33,197 | |
| 27,451 | |
General and administrative expenses | |
| 3,044 | |
| 2,037 | |
Advisory fees | |
| 9,538 | |
| 7,144 | |
Performance participation allocation | |
| — | |
| 12,192 | |
Acquisition costs and reimbursements | |
| 1,169 | |
| 1,629 | |
Impairment loss on debt-related investment held for sale | |
| 2,520 | |
| — | |
Equity in loss from unconsolidated joint venture partnerships | | | 2,446 | | | 1,010 | |
Interest expense | |
| 37,545 | |
| 24,410 | |
Gain on sale of real estate property | |
| (36,884) | |
| (53,881) | |
Loss on extinguishment of debt and financing commitments, net | |
| 700 | |
| — | |
Loss (gain) on derivative instruments | | | 103 | | | (1,550) | |
Provision for current expected credit losses | | | 5,630 | | | — | |
Other income | | | (1,016) | | | (577) | |
Net (loss) income attributable to redeemable noncontrolling interests | | | (18) | | | 246 | |
Net (loss) income attributable to noncontrolling interests | |
| (549) | |
| 3,537 | |
Net operating income | | $ | 49,660 | | $ | 41,191 | |
The following table sets forth consolidated financial results by segment for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | |
(in thousands) |
| Office |
| Retail |
| Residential |
| Industrial |
| Consolidated | |||||
For the Three Months Ended March 31, 2023 | | | | | | | | | | | | | | | |
Rental revenues | | $ | 13,349 | | $ | 14,518 | | $ | 28,848 | | $ | 21,245 | | $ | 77,960 |
Rental expenses |
| | (6,630) |
| | (3,584) |
| | (13,190) |
| | (4,896) |
| | (28,300) |
Net operating income | | $ | 6,719 | | $ | 10,934 | | $ | 15,658 | | $ | 16,349 | | $ | 49,660 |
Real estate-related depreciation and amortization | | $ | 3,963 | | $ | 4,035 | | $ | 9,489 | | $ | 15,710 | | $ | 33,197 |
For the Three Months Ended March 31, 2022 | | | | | | | | | | | | | | | |
Rental revenues | | $ | 13,633 | | $ | 17,066 | | $ | 16,354 | | $ | 15,452 | | $ | 62,505 |
Rental expenses | | | (6,192) |
| | (4,629) |
| | (6,944) |
| | (3,549) | | | (21,314) |
Net operating income | | $ | 7,441 | | $ | 12,437 | | $ | 9,410 | | $ | 11,903 | | $ | 41,191 |
Real estate-related depreciation and amortization | | $ | 3,997 | | $ | 4,654 | | $ | 8,353 | | $ | 10,447 | | $ | 27,451 |
We consider NOInet operating income to be an appropriate supplemental financial performance measure and believe net operating income provides useful information to our investors regarding our financial condition and results of operations because NOInet operating income 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 real estate-related depreciation and amortization, general and administrative expenses, advisory fees, acquisition-related expenses, interest and other (expense) income,impairment charges, interest expense, (gain) lossgains on sale of properties, other income and expense, gains and losses on the extinguishment of debt and financing commitments, gain on the sale of real property, and noncontrolling interests. However, NOInet operating income should not be viewed as an alternative measure of our financial performance as a whole, since it excludes such items, thatwhich could materially impact our results of operations. Further, our NOInet operating income may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI.net operating income. Therefore, we believe net income, as defined by GAAP, to be the most appropriate measure to evaluate our overall financial performance.
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 | |||||||
16. SUBSEQUENT EVENTS
Renewal of Advisory Agreement
Ares Real Estate Income Trust Inc., the Operating Partnership and the Advisor previously entered into that certain Amended and Restated Advisory Agreement (2022), effective May 1, 2022 (the “2022 Advisory Agreement”). The following table reflects our total assets by business segmentterm of the 2022 Advisory Agreement continued through April 30, 2023, subject to renewal for an unlimited number of one-year periods. Effective as of SeptemberApril 30, 20172023, Ares Real Estate Income Trust Inc., the Operating Partnership and December 31, 2016 (amounts in thousands):the Advisor renewed the 2022 Advisory Agreement through April 30, 2024 by entering into the Amended and Restated Advisory Agreement (2023) (the “2023 Advisory Agreement”). The terms of the 2023 Advisory Agreement are substantially the same as the terms of the prior version of the agreement.
25
| 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 | |||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. |
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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 March 31, 2023, our consolidated real property portfolio consisted of 91 properties, totaling approximately 18.6 million square feet located in 33 markets throughout the U.S. We also owned 159 properties through our unconsolidated joint venture partnerships as of March 31, 2023. 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 no more than 50% of the purchase price of the DST Interests to certain purchasers of the interests in the Delaware statutory trusts. During the three months ended March 31, 2023, we sold $101.8 million of gross interests related to the DST Program, $14.0 million of which were financed by DST Program Loans. See “Note 6 to the Condensed Consolidated Financial Statements” for certain operating costs. Our primary expenses include rental expenses, depreciation and amortization expenses, general and administrative expenses, advisory fees and interest expenses.
We currently have three business segments, consisting of investmentsoperate in (i)four reportable segments: office, property, (ii) industrial property,retail, residential and (iii) retail property. We may have additional segments in the future to the extent we enter into additional real property sectors, such as multifamily, hospitality, and other real property types. For a discussion of our business segments and the associated revenue and net operating income by segment, see Note 10 to our financial statements included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q. We also have investments in real estate related-debt investments (which we refer to as “debt-related investments”).
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Average | | | | | | | | | |
| | | | | | | | % of Total | | Effective Annual | | | | | | | % of |
| |
($ 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 |
| 8 | | 1,572 |
| 8.5 | % | $ | 34.93 |
| 75.6 | % | $ | 591,700 |
| 13.0 | % |
Retail properties |
| 8 |
| 18 | | 2,318 |
| 12.5 | |
| 19.39 |
| 96.4 | |
| 693,150 |
| 15.2 | |
Residential properties |
| 8 |
| 14 | | 4,205 |
| 22.6 | |
| 27.60 |
| 93.8 | |
| 1,683,050 |
| 36.8 | |
Industrial properties |
| 28 |
| 51 | | 10,507 |
| 56.4 | |
| 5.96 |
| 97.9 | |
| 1,600,450 |
| 35.0 | |
Total real property portfolio |
| 33 |
| 91 |
| 18,602 |
| 100.0 | % | $ | 14.44 |
| 94.9 | % | $ | 4,568,350 |
| 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 March 31, 2023. |
27
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 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 weother foreign jurisdictions, and in other sectors such as triple net lease, real estate debt (which may owninclude mortgages and subordinated interests), real estate-related securities, properties in eachsectors adjacent to our primary investment sectors and/or infrastructure, to create a diversified blend of these categories, we are not tied to specific allocation targetscurrent income and we may not always have significant holdings, or any holdings at all, in each category. For example, we do not currently own multifamily real estate assets, although we intend to consider multifamily investment opportunities in the future 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 ofincluding 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
28
Topic 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.
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 March 31, 2023 and December 31, 2022:
| | | | | | | |
|
| As of | |||||
(in thousands) | | March 31, 2023 | | | December 31, 2022 | ||
Investments in office properties | | $ | 591,700 | | | $ | 610,850 |
Investments in retail properties | |
| 693,150 | | |
| 740,400 |
Investments in residential properties | |
| 1,683,050 | | |
| 1,685,000 |
Investments in industrial properties | |
| 1,600,450 | | |
| 1,603,500 |
Total investment in real estate properties | | | 4,568,350 | | | | 4,639,750 |
Investments in unconsolidated joint venture partnerships | |
| 149,010 | | |
| 141,272 |
Debt-related investments | |
| 259,305 | | |
| 260,841 |
Investments in real estate-related securities | | | 14,979 | | | | 14,896 |
DST Program Loans | | | 93,621 | | | | 79,049 |
Total investments | | | 5,085,265 | | | | 5,135,808 |
Cash and cash equivalents | |
| 36,894 | | |
| 13,336 |
Restricted cash | |
| 3,859 | | |
| 3,850 |
Other assets | |
| 50,965 | | |
| 44,269 |
Line of credit, term loans and mortgage notes | |
| (1,602,831) | | |
| (1,631,324) |
Financing obligations associated with our DST Program | |
| (1,225,146) | | |
| (1,141,866) |
Other liabilities | |
| (70,910) | | |
| (72,966) |
Accrued performance participation allocation | | | — | | | | (23,747) |
Accrued advisory fees | |
| (3,201) | | |
| (3,157) |
Noncontrolling interests in consolidated joint venture partnerships | |
| (1,610) | | |
| (1,582) |
Aggregate Fund NAV | | $ | 2,273,285 | | | $ | 2,322,621 |
Total Fund Interests outstanding | |
| 263,332 | | |
| 263,232 |
The following table sets forth the NAV per Fund Interest as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| 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 | | $ | 2,273,285 | | $ | 243,212 | | $ | 430,771 | | $ | 64,215 | | $ | 599,002 | | $ | 453,652 | | $ | 482,433 |
Fund Interests outstanding | |
| 263,332 | | | 28,173 | | | 49,899 | | | 7,439 | | | 69,387 | | | 52,550 | | | 55,884 |
NAV Per Fund Interest | | $ | 8.6328 | | $ | 8.6328 | | $ | 8.6328 | | $ | 8.6328 | | $ | 8.6328 | | $ | 8.6328 | | $ | 8.6328 |
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 pursuantMarch 31, 2023, we estimated approximately $59.1 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
29
to reflect our estimated value on the date that we determine our NAV.
Financing obligations associated with our DST Program, as reflected in our NAV table above, represent outstanding proceeds raised from our private placements under the DST Program due to the fact that we have an option (which may or may not be exercised) to purchase the interests in the Delaware statutory trusts and thereby acquire the real property owned by the trusts. We may acquire these properties using OP Units, cash, or a combination of both. See “Note 6 to the Condensed Consolidated Financial Statements” for additional details regarding our DST Program. We may use proceeds raised from our DST Program for the repayment of debt, acquisition of properties and other investments, distributions to our stockholders, payments under our debt obligations and master lease agreements related to properties in our DST Program, redemption payments, capital expenditures and other general corporate purposes. We pay our Advisor an annual, fixed component of our advisory fee of 1.10% of the consideration received for selling interests in DST Properties to third-party investors, net of upfront fees and expense reimbursements payable out of gross proceeds from the sale of such interests and DST Interests financed through DST Program Loans.
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 considerreflect the potential impact of 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.
The September 30, 2017 valuation forvaluations of our real properties wasas of March 31, 2023, 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 |
| 6.4 | % | 6.3 | % | 4.9 | % | 5.2 | % | 5.4 | % |
Discount rate / internal rate of return |
| 7.3 | % | 7.0 | % | 6.1 | % | 6.3 | % | 6.5 | % |
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 |
| 2.9 | % | 2.5 | % | 3.6 | % | 3.6 | % | 3.3 | % |
|
| 0.25% increase |
| (2.7) | % | (2.3) | % | (3.2) | % | (3.2) | % | (3.0) | % |
Discount rate (weighted-average) |
| 0.25% decrease |
| 2.1 | % | 1.9 | % | 2.0 | % | 2.1 | % | 2.0 | % |
|
| 0.25% increase |
| (2.0) | % | (1.9) | % | (2.0) | % | (2.0) | % | (2.0) | % |
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
30
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 March 31, 2023, 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%.
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 March 31, 2023:
| | | |
(in thousands) | | As of March 31, 2023 | |
Total stockholder's equity | | $ | 768,645 |
Noncontrolling interests | | | 393,098 |
Total equity under GAAP | | | 1,161,743 |
| | | |
Adjustments: | | | |
Accrued distribution fee (1) | | | 59,119 |
Redeemable noncontrolling interests (2) | | | 17,791 |
Unrealized net real estate, financing obligations, debt and interest rate hedge appreciation (depreciation) (3) | | | 444,110 |
Unrealized gain (loss) on investments in unconsolidated joint venture partnerships (4) | | | 23,844 |
Accumulated depreciation and amortization (5) | | | 564,160 |
Other adjustments (6) | | | 2,518 |
Aggregate Fund NAV | | $ | 2,273,285 |
| (1) | Accrued distribution fee represents the accrual for the full cost of the distribution fee for Class T, Class S, and Class D shares and OP Units. 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. Similarly, we accrued a liability for future distribution fees we expect will be paid for our estimate of how long Class T, Class S, and Class D OP Units will be outstanding, also as an offering cost. 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) | Redeemable noncontrolling interests are related to our OP Units, and are included in our determination of NAV but not included in equity under GAAP. |
| (3) | Our real estate and real estate-related investments are presented at historical cost in our condensed consolidated financial statements. Additionally, our mortgage notes, term loans, line of credit and financing obligations are presented at their carrying value in our condensed consolidated financial statements. As such, any increases or decreases in the fair market value of our real estate, real estate-related investments, debt instruments or financing obligations are not included in our GAAP results. For purposes of determining our NAV, our real estate, real estate-related investments, financing obligations 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). |
| (4) | Our investments in unconsolidated joint venture partnerships are presented at historical cost in our condensed consolidated financial statements. As such, any increases or decreases in the fair market value of the underlying investments or underlying debt instruments are not included in our GAAP results. For purposes of determining our NAV, the investments in the underlying real |
31
| estate and certain of the underlying debt are recorded at fair value and reflected in our NAV at our proportional ownership interest. |
| (5) | 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. |
| (6) | Includes (i) straight-line rent receivables, which are recorded in accordance with GAAP but not recorded for purposes of determining our NAV, and (ii) other minor adjustments. |
Performance
Our NAV decreased from $8.82 per share as of December 31, 2022 to $8.63 per share as of March 31, 2023. The decrease in NAV was primarily driven by expansion in the weighted-averagecapital market assumptions that are a major factor used in the valuation of our real estate portfolio. This decrease was partially offset by strong leasing and above-average market rent growth in our industrial and residential properties, the disposition of one partial retail property for net proceeds of approximately $53.7 million at a sale price in excess of carrying value, as well as the acquisition of one industrial property for a contractual purchase price of $17.4 million.
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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 of 0.25% would decreasehedges, are intended to be held to maturity, effectively eliminating all mark-to-market adjustments for such loans and hedges from the fair valuecalculation 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 obligationsinstruments beginning with the December 31, 2019 NAV:
| | | | | | | | | | | | | | | |
|
| |
| |
| One-Year |
| |
| |
| | | Since NAV |
|
| | Trailing | | | | (Trailing | | Three-Year | | Five-Year | | Ten-Year | | Inception |
|
(as of March 31, 2023) (1) | | Three-Months | | Year-to-Date | | 12-Months) | | Annualized | | Annualized | | Annualized | | Annualized (2) |
|
Class T Share Total Return (with upfront selling commissions and dealer manager fees) (3) | | (4.65) | % | (4.65) | % | (0.70) | % | 7.50 | % | 6.39 | % | 6.18 | % | 6.79 | % |
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) | | (5.57) | % | (5.57) | % | (0.02) | % | 8.68 | % | 6.84 | % | 6.40 | % | 7.00 | % |
Difference | | 0.92 | % | 0.92 | % | (0.68) | % | (1.18) | % | (0.45) | % | (0.22) | % | (0.21) | % |
| | | | | | | | | | | | | | | |
Class T Share Total Return (without upfront selling commissions and dealer manager fees) (3) | | (1.32) | % | (1.32) | % | 2.78 | % | 8.74 | % | 7.13 | % | 6.50 | % | 6.92 | % |
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) | | (2.26) | % | (2.26) | % | 3.48 | % | 9.94 | % | 7.58 | % | 6.72 | % | 7.13 | % |
Difference | | 0.94 | % | 0.94 | % | (0.70) | % | (1.20) | % | (0.45) | % | (0.22) | % | (0.21) | % |
| | | | | | | | | | | | | | | |
Class S Share Total Return (with upfront selling commissions and dealer manager fees) (3) | | (4.65) | % | (4.65) | % | (0.70) | % | 7.50 | % | 6.39 | % | 6.18 | % | 6.79 | % |
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) | | (5.57) | % | (5.57) | % | (0.02) | % | 8.68 | % | 6.84 | % | 6.40 | % | 7.00 | % |
Difference | | 0.92 | % | 0.92 | % | (0.68) | % | (1.18) | % | (0.45) | % | (0.22) | % | (0.21) | % |
| | | | | | | | | | | | | | | |
Class S Share Total Return (without upfront selling commissions and dealer manager fees) (3) | | (1.32) | % | (1.32) | % | 2.78 | % | 8.74 | % | 7.13 | % | 6.50 | % | 6.92 | % |
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) | | (2.26) | % | (2.26) | % | 3.48 | % | 9.94 | % | 7.58 | % | 6.72 | % | 7.13 | % |
Difference | | 0.94 | % | 0.94 | % | (0.70) | % | (1.20) | % | (0.45) | % | (0.22) | % | (0.21) | % |
| | | | | | | | | | | | | | | |
Class D Share Total Return (3) | | (1.17) | % | (1.17) | % | 3.39 | % | 9.39 | % | 7.77 | % | 7.08 | % | 7.20 | % |
Adjusted Class D Share Total Return (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | (2.12) | % | (2.12) | % | 4.10 | % | 10.59 | % | 8.22 | % | 7.31 | % | 7.41 | % |
Difference | | 0.95 | % | 0.95 | % | (0.71) | % | (1.20) | % | (0.45) | % | (0.23) | % | (0.21) | % |
| | | | | | | | | | | | | | | |
Class I Share Total Return (3) | | (1.11) | % | (1.11) | % | 3.65 | % | 9.66 | % | 8.04 | % | 7.47 | % | 7.59 | % |
Adjusted Class I Share Total Return (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | (2.06) | % | (2.06) | % | 4.36 | % | 10.87 | % | 8.49 | % | 7.69 | % | 7.80 | % |
Difference | | 0.95 | % | 0.95 | % | (0.71) | % | (1.21) | % | (0.45) | % | (0.22) | % | (0.21) | % |
| | | | | | | | | | | | | | | |
Class E Share Return Total Return (3) | | (1.11) | % | (1.11) | % | 3.65 | % | 9.66 | % | 8.04 | % | 7.51 | % | 7.63 | % |
Adjusted Class E Share Total Return (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | (2.06) | % | (2.06) | % | 4.36 | % | 10.87 | % | 8.49 | % | 7.74 | % | 7.85 | % |
Difference | | 0.95 | % | 0.95 | % | (0.71) | % | (1.21) | % | (0.45) | % | (0.23) | % | (0.22) | % |
| (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 |
33
| 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. |
| (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. |
Trends Affecting Our Business
Our results of operations are affected by approximately 0.22%a variety of factors, including conditions in both the U.S. and global financial markets and the economic and political environments.
The commercial real estate markets continued to be impacted by the challenging macroeconomic environment, including continued high inflation and interest rates and geopolitical uncertainty. In addition, during the first quarter of 2023, several financial institutions in the U.S. and abroad sustained liquidity problems resulting in further volatility in the financial markets and concerns with respect to liquidity, in particular across regional banks. Given the current macroeconomic environment, property valuations adjusted downwards, with capitalization rate compressions waning and yields widening. 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.
We believe some of these market trends may be offset by the continued strong fundamentals of real estate. We believe our portfolio is well-positioned for this market environment. Real estate market fundamentals remain favorable, supported by strong rent growth, low vacancy rates and demand generally outpacing supply in certain sectors like multifamily and industrial. However, there is no guarantee that our outlook will remain positive for the long-term, especially if leasing fundamentals weaken in the future.
RESULTS OF OPERATIONS
Summary of 2023 Activities
During the three months ended March 31, 2023, we completed the following activities:
| ● | We acquired one industrial property for a contractual purchase price of approximately $17.4 million. We invested $7.7 million in our unconsolidated joint venture partnerships, which acquired an additional three properties. |
| ● | We sold one partial retail property for net proceeds of approximately $53.7 million and recorded a net gain on sale of approximately $36.9 million related to the sale of this property. |
| ● | We leased approximately 125,000 square feet of our commercial properties, which included 65,000 square feet of new leases and 60,000 square feet of renewals. During the first quarter of 2023, rent growth on comparable leases averaged 12.6%, calculated using cash basis rental rates (19.0% when calculated using GAAP basis rental rates). As of March 31, 2023, rents across our industrial properties and residential properties, our two largest segments, are estimated to be 24.7% and 3.9% below market (on a weighted-average basis), respectively, providing the opportunity for meaningful net operating income growth. |
| ● | We decreased our leverage ratio from 31.8% as of December 31, 2022, to 31.2% as of March 31, 2023. Our leverage ratio for reporting purposes is calculated as the outstanding principal balance of our borrowings less cash and cash equivalents divided |
34
| by the fair value of our real property, net investments in unconsolidated joint venture partnerships, investments in real estate-related securities and debt-related investments not associated with the DST Program (determined in accordance with our valuation procedures). |
| ● | We raised gross proceeds of $149.5 million from the sale of our common stock and DST Interests. This includes $47.7 million from the sale of 5.4 million shares of our common stock in our ongoing public offerings, including proceeds from our distribution reinvestment plan of approximately $8.0 million and $101.8 million of gross capital through private placement offerings by selling DST Interests, $14.0 million of which were financed by DST Program Loans. |
| ● | We redeemed 4.0 million shares of common stock at a weighted-average purchase price of $8.81 per share for an aggregate amount of $35.5 million. |
| ● | We entered into one interest rate cap agreement with a notional amount of $150.0 million that became effective in February 2023. |
35
Results for the Three Months Ended March 31, 2023 Compared to Prior Periods
The following table sets forth information regarding our consolidated results of operations for the quarterly changesthree months ended March 31, 2023, as compared to the three months ended December 31, 2022 and as compared to the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| For the Three Months Ended |
| Change |
|
| For the Three Months Ended |
| Change | | ||||||||||||||
($ in thousands, except per share data) |
| March 31, 2023 |
| December 31, 2022 |
| $ |
| % |
|
| March 31, 2023 |
| March 31, 2022 |
| $ |
| % | | ||||||
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Rental revenues | | $ | 77,960 | | $ | 76,247 | | $ | 1,713 | | 2.2 | % | | $ | 77,960 | | $ | 62,505 | | $ | 15,455 | | 24.7 | % |
Debt-related income | | | 5,761 | | | 4,127 | | | 1,634 | | 39.6 | | | | 5,761 | | | 3,468 | | | 2,293 | | 66.1 | |
Total revenues | |
| 83,721 | |
| 80,374 | |
| 3,347 | | 4.2 | | |
| 83,721 | |
| 65,973 | |
| 17,748 | | 26.9 | |
Operating expenses: | |
| | | | | |
| | | | | |
| | |
| | |
| | | | |
Rental expenses | |
| 28,300 | |
| 29,648 | |
| (1,348) | | (4.5) | | |
| 28,300 | |
| 21,314 | |
| 6,986 | | 32.8 | |
Real estate-related depreciation and amortization | |
| 33,197 | |
| 33,550 | |
| (353) | | (1.1) | | |
| 33,197 | |
| 27,451 | |
| 5,746 | | 20.9 | |
General and administrative expenses | |
| 3,044 | |
| 2,784 | | | 260 | | 9.3 | | |
| 3,044 | |
| 2,037 | | | 1,007 | | 49.4 | |
Advisory fees | |
| 9,538 | |
| 9,396 | | | 142 | | 1.5 | | |
| 9,538 | |
| 7,144 | | | 2,394 | | 33.5 | |
Performance participation allocation | | | — | | | 1,659 | | | (1,659) | | (100.0) | | | | — | | | 12,192 | | | (12,192) | | (100.0) | |
Acquisition costs and reimbursements | |
| 1,169 | |
| 1,529 | | | (360) | | (23.5) | | |
| 1,169 | |
| 1,629 | | | (460) | | (28.2) | |
Impairment loss on debt-related investment held for sale | | | 2,520 | | | 1,799 | | | 721 | | 40 | | | | 2,520 | | | — | | | 2,520 | | NM | |
Total operating expenses | |
| 77,768 | |
| 80,365 | | | (2,597) | | (3.2) | | |
| 77,768 | |
| 71,767 | | | 6,001 | | 8.4 | |
Other (income) expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Equity in loss (income) from unconsolidated joint venture partnerships | | | 2,446 | | | (672) | | | 3,118 | | NM | | | | 2,446 | | | 1,010 | | | 1,436 | | NM | |
Interest expense | |
| 37,545 | |
| 39,967 | | | (2,422) | | (6.1) | | |
| 37,545 | |
| 24,410 | | | 13,135 | | 53.8 | |
Gain on sale of real estate property | | | (36,884) | | | — | | | (36,884) | | NM | | | | (36,884) | | | (53,881) | | | 16,997 | | 31.5 | |
Loss on extinguishment of debt and financing commitments, net | | | 700 | | | — | | | 700 | | NM | | | | 700 | | | — | | | 700 | | NM | |
Loss (gain) on derivative instruments | | | 103 | | | (500) | | | 603 | | NM | | | | 103 | | | (1,550) | | | 1,653 | | NM | |
Provision for current expected credit losses | | | 5,630 | | | — | | | 5,630 | | NM | | | | 5,630 | | | — | | | 5,630 | | NM | |
Other income | | | (1,016) | | | (1,009) | | | (7) | | (0.7) | | | | (1,016) | | | (577) | | | (439) | | (76.1) | |
Total other expenses (income) | |
| 8,524 | |
| 37,786 | | | (29,262) | | (77.4) | | |
| 8,524 | |
| (30,588) | | | 39,112 | | NM | |
Net (loss) income | |
| (2,571) | |
| (37,777) | | | 35,206 | | 93.2 | | |
| (2,571) | |
| 24,794 | | | (27,365) | | NM | |
Net loss (income) attributable to redeemable noncontrolling interests | |
| 18 | |
| 303 | | | (285) | | (94.1) | | |
| 18 | |
| (246) | | | 264 | | NM | |
Net loss (income) attributable to noncontrolling interests | |
| 549 | |
| 6,936 | | | (6,387) | | (92.1) | | |
| 549 | |
| (3,537) | | | 4,086 | | NM | |
Net (loss) income attributable to common stockholders | | $ | (2,004) | | $ | (30,538) | | | 28,534 | | 93.4 | % | | $ | (2,004) | | $ | 21,011 | | $ | (23,015) | | NM | % |
Weighted-average shares outstanding—basic | |
| 206,774 | |
| 205,435 | | | 1,339 | | 0.7 | % | | | 206,774 | | | 178,528 | | | 28,246 | | 15.8 | % |
Weighted-average shares outstanding—diluted | | | 263,026 | | | 254,103 | | | 8,923 | | 3.5 | % | | | 263,026 | | | 210,676 | | | 52,350 | | 24.8 | % |
Net (loss) income attributable to common stockholders per common share—basic and diluted | | $ | (0.01) | | $ | (0.15) | | | 0.14 | | 93.3 | % | | $ | (0.01) | | $ | 0.12 | | $ | (0.13) | | NM | % |
NM = Not meaningful
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 $1.7 million and $15.5 million for the three months ended March 31, 2023 as compared to the three months ended December 31, 2022 and March 31, 2022, respectively, primarily due to the increase in non-same store revenues resulting from significant growth in our portfolio and increased recovery revenue at certain properties during the first quarter of 2023. See “Same Store Portfolio Results of Operations” below for further details of the same store revenues.
36
The following table presents the components of NAVour consolidated rental revenues:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | Change | | | For the Three Months Ended March 31, | | Change | | ||||||||||||||
(in thousands) |
| March 31, 2023 |
| December 31, 2022 |
| $ |
| % | |
| 2023 |
| 2022 |
| $ |
| % | | ||||||
Rental income | | $ | 76,064 | | $ | 74,675 | | $ | 1,389 | | 1.9 | % | | $ | 76,064 | | $ | 60,752 | | $ | 15,312 | | 25.2 | % |
Straight-line rent | |
| 1,068 | |
| 550 | |
| 518 | | 94.2 | | |
| 1,068 | |
| 726 | |
| 342 | | 47.1 | |
Amortization of above- and below-market intangibles | |
| 828 | |
| 1,022 | |
| (194) | | (19.0) | | |
| 828 | |
| 1,027 | |
| (199) | | (19.4) | |
Total rental revenues | | $ | 77,960 | | $ | 76,247 | | $ | 1,713 |
| 2.2 | % | | $ | 77,960 | | $ | 62,505 | | $ | 15,455 |
| 24.7 | % |
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 Companythree months ended March 31, 2023 decreased by $1.3 million as compared to the three months ended December 31, 2022 primarily due to (i) decreased repairs and maintenance expense across our portfolio, in aggregate; and (ii) decreased bad debt expense at certain properties. Total rental expenses for the reconciliationthree months ended March 31, 2023 increased by $7.0 million as compared to the three months ended March 31, 2022 primarily due to (i) an increase in non-same store rental expenses as a result of NAV changesour acquisition activity since January 1, 2022, which was partially offset by our disposition activity since January 1, 2022; and (ii) increased real estate tax expense across our portfolio, in aggregate. See “Same Store Portfolio Results of Operations” below for each classfurther details of shares (amountsthe same store expenses.
The following table presents the various components of our rental expenses:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | Change | | | For the Three Months Ended March 31, | | Change | | ||||||||||||||
(in thousands) |
| March 31, 2023 |
| December 31, 2022 |
| $ |
| % | |
| 2023 |
| 2022 |
| $ |
| % | | ||||||
Real estate taxes | | $ | 12,448 | | $ | 12,753 | | $ | (305) | | (2.4) | % | | $ | 12,448 | | $ | 8,822 | | $ | 3,626 | | 41.1 | % |
Repairs and maintenance | |
| 5,780 | |
| 6,210 | |
| (430) | | (6.9) | | |
| 5,780 | |
| 4,883 | |
| 897 | | 18.4 | |
Utilities | |
| 2,888 | |
| 2,765 | |
| 123 | | 4.4 | | |
| 2,888 | |
| 2,530 | |
| 358 | | 14.2 | |
Property management fees | |
| 1,933 | |
| 1,903 | |
| 30 | | 1.6 | | |
| 1,933 | |
| 1,561 | |
| 372 | | 23.8 | |
Insurance | |
| 1,184 | |
| 1,237 | |
| (53) | | (4.3) | | |
| 1,184 | |
| 958 | |
| 226 | | 23.6 | |
Other | |
| 4,067 | |
| 4,780 | |
| (713) | | (14.9) | | |
| 4,067 | |
| 2,560 | |
| 1,507 | | 58.9 | |
Total rental expenses | | $ | 28,300 | | $ | 29,648 | | $ | (1,348) | | (4.5) | % | | $ | 28,300 | | $ | 21,314 | | $ | 6,986 | | 32.8 | % |
All Remaining Income and Expenses. In aggregate, the remaining income and expenses decreased by $32.1 million for the three months ended March 31, 2023, as compared to the three months ended December 31, 2022, primarily due to the following:
| ● | an increase in gain on sale of real estate property of $36.9 million related to the sale of one partial retail property in 2023. |
Partially offset by:
| ● | an increase in provision for current expected credit loss of $5.6 million related to our debt-related investments. |
In aggregate, the remaining income and expenses increased $35.8 million for the three months ended March 31, 2023, as compared to the same period in thousands, except per share information):2022, primarily due to the following:
| ● | a decrease in gain on sale of real estate property of $17.0 million driven by fewer disposition activity in 2023; |
| ● | an increase in interest expense of $13.1 million driven primarily by higher interest expense on financing obligations associated with an increase in the sale of interests related to our DST Program and higher interest expense on certain variable interest rate debt; |
| ● | an increase in real estate-related depreciation and amortization of $5.7 million driven by our net acquisition activity; and |
| ● | an increase in provision for current expected credit loss of $5.6 million related to our debt-related investments. |
Partially offset by:
| ● | a decrease in performance participation allocation of $12.2 million as the requisite performance hurdle was met in 2022 and performance participation allocation expense was then recognized, while the performance hurdle was not met in 2023 and no performance participation allocation expense was recognized; and |
| ● | an increase in debt-related income of $2.3 million related to our additional debt-related investments. |
| 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 | |||||||||||||||
37
Same Store Portfolio Results
Net operating income (“NOI”) is a discussion of our operating results, followed by a discussion of FFO (as defined below), which we consider to be a meaningful supplemental non-GAAP measure of our property operating performance.results. We also usedefine NOI as operating revenues less operating expenses. While we believe our net operating income ("NOI")(loss), as defined by GAAP, to be the most appropriate measure to evaluate our overall performance, we consider NOI to be an appropriate supplemental performance measure. We believe NOI provides useful information to our investors regarding our results of 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,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 believeNOI, therefore, our investors should consider net income (loss) as defined by GAAP, to be the most appropriate measure to evaluateprimary indicator our overall financial performance.
We present NOIevaluate 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 tables below,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 include a reconciliationprior reporting periods for which the operations had been stabilized. Unconsolidated properties are excluded from the same store portfolio because we account for our interest in our joint venture partnership using the equity method of accounting; therefore, our proportionate share of income and loss is recognized in income (loss) of our unconsolidated joint venture partnership on the condensed consolidated statements of operations. Other operating properties not meeting the same store criteria are reflected in the non-same store portfolio. Our same store analysis may not be comparable to net income, as defined bythat of other real estate companies and should not be considered to be more relevant or accurate in evaluating our operating performance than current GAAP in Note 10 to our financial statements included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
The same store operating portfolio for the three months ended September 30, 2017 from incomeMarch 31, 2023 as compared to the three months ended December 31, 2022 presented below includes 89 properties totaling 18.4 million square feet owned as of approximately $3.0 millionOctober 1, 2022, which represented 98.7% of total rentable square feet as of March 31, 2023. The same store operating portfolio for the three months ended September 30, 2016. The decrease was primarily a result of (i) a decrease in real property NOI from continuing operations primarilyMarch 31, 2023 as a result of the expiration of our lease with Sybase Inc. ("Sybase") in January 2017 and (ii) a decrease in interest income received from our CDO securities portfolio partially offset by a decrease in impairment of real estate property.
38
The following table reconciles GAAP net income (loss) to same store portfolio NOI for the three and nine months ended September 30, 2017 andMarch 31, 2023 as compared to the three and nine months ended September 30, 2016,December 31, 2022 and (ii) all otherMarch 31, 2022:
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Three Months Ended March 31, | ||||||||
(in thousands) |
| March 31, 2023 |
| December 31, 2022 | | 2023 |
| 2022 | ||||
Net (loss) income attributable to common stockholders | | $ | (2,004) | | $ | (30,538) | | $ | (2,004) | | $ | 21,011 |
Debt-related income | |
| (5,761) | |
| (4,127) | |
| (5,761) | |
| (3,468) |
Real estate-related depreciation and amortization | |
| 33,197 | |
| 33,550 | |
| 33,197 | |
| 27,451 |
General and administrative expenses | |
| 3,044 | |
| 2,784 | |
| 3,044 | |
| 2,037 |
Advisory fees | |
| 9,538 | |
| 9,396 | |
| 9,538 | |
| 7,144 |
Performance participation allocation | |
| — | |
| 1,659 | |
| — | |
| 12,192 |
Acquisition costs and reimbursements | |
| 1,169 | |
| 1,529 | |
| 1,169 | |
| 1,629 |
Impairment loss on debt-related investment held for sale | | | 2,520 | | | 1,799 | | | 2,520 | |
| — |
Equity in loss (income) from unconsolidated joint venture partnerships | | | 2,446 | | | (672) | | | 2,446 | | | 1,010 |
Interest expense | |
| 37,545 | |
| 39,967 | |
| 37,545 | |
| 24,410 |
Gain on sale of real estate property | |
| (36,884) | |
| — | |
| (36,884) | |
| (53,881) |
Loss on extinguishment of debt and financing commitments, net | |
| 700 | |
| — | |
| 700 | |
| — |
Loss (gain) on derivative instruments | | | 103 | | | (500) | | | 103 | | | (1,550) |
Provision for current expected credit losses | | | 5,630 | | | — | | | 5,630 | | | — |
Other income | | | (1,016) | | | (1,009) | | | (1,016) | | | (577) |
Net (loss) income attributable to redeemable noncontrolling interests | | | (18) | | | (303) | | | (18) | | | 246 |
Net (loss) income attributable to noncontrolling interests | |
| (549) | |
| (6,936) | |
| (549) | |
| 3,537 |
Net operating income | | $ | 49,660 | | $ | 46,599 | | $ | 49,660 | | $ | 41,191 |
Less: Non-same store NOI | | | 358 | | | 855 | | | 12,071 | | | 5,008 |
Same store NOI | | $ | 49,302 | | $ | 45,744 | | $ | 37,589 | | $ | 36,183 |
Our markets are aggregated into four reportable segments: office, retail, residential and industrial. Our segments are based on our internal reporting of operating properties, which were acquired or disposed duringresults used to assess performance based on the same period (the “Non-Same Store Portfolio”). The Same Store Portfolio includes 50 properties, comprising approximately 8.1 million square feet or 95.0%type of our total portfolio when measuredproperties. These segments are comprised of the markets by square feet.which management and its operating teams conduct and monitor business. See “Note 15 to the Condensed Consolidated Financial Statements” for further information on our segments. Management considers rental revenues and NOI aggregated by segment to be an appropriate way to analyze performance.
39
The following table illustrates the changes inincludes a breakout of results for our same store portfolio by segment for rental revenues, rental expenses and net operating income for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 (dollar amounts in thousands, except footnoted information).
| 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 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | Change | | | For the Three Months Ended March 31, | | Change | | ||||||||||||||
($ in thousands, except per square foot data) | | March 31, 2023 |
| December 31, 2022 |
| | $ |
| % | | | 2023 |
| 2022 |
| $ |
| % | | |||||
Rental revenues: | | |
| | |
| | |
| |
| | | |
| | |
| | |
| |
| |
Office | | $ | 13,140 | | $ | 12,436 | | $ | 704 | | 5.7 | % | | $ | 12,360 | | $ | 12,771 | | $ | (411) | | (3.2) | % |
Retail | |
| 14,088 | |
| 14,229 | |
| (141) | | (1.0) | | |
| 14,088 | |
| 13,756 | |
| 332 | | 2.4 | |
Residential | |
| 28,847 | |
| 28,297 | |
| 550 | | 1.9 | | |
| 16,455 | |
| 14,811 | |
| 1,644 | | 11.1 | |
Industrial | |
| 21,245 | |
| 20,206 | |
| 1,039 | | 5.1 | | |
| 15,021 | |
| 13,855 | |
| 1,166 | | 8.4 | |
Total same store rental revenues | |
| 77,320 | |
| 75,168 | |
| 2,152 | | 2.9 | | |
| 57,924 | |
| 55,193 | |
| 2,731 | | 4.9 | |
Non-same store properties | |
| 640 | |
| 1,079 | |
| (439) | | (40.7) | | |
| 20,036 | |
| 7,312 | |
| 12,724 | | NM | |
Total rental revenues | | $ | 77,960 | | $ | 76,247 | | $ | 1,713 | | 2.2 | % | | $ | 77,960 | | $ | 62,505 | | $ | 15,455 | | 24.7 | % |
Rental expenses: | | |
| | |
| | |
| |
| | | |
| | |
| | |
| |
| |
Office | | $ | (6,620) | | $ | (6,962) | | $ | 342 | | 4.9 | % | | $ | (6,344) | | $ | (5,653) | | $ | (691) | | (12.2) | % |
Retail | |
| (3,315) | |
| (4,082) | |
| 767 | | 18.8 | | |
| (3,315) | |
| (3,824) | |
| 509 | | 13.3 | |
Residential | |
| (13,191) | |
| (14,028) | |
| 837 | | 6.0 | ��� | |
| (7,245) | |
| (6,378) | |
| (867) | | (13.6) | |
Industrial | |
| (4,892) | |
| (4,352) | |
| (540) | | (12.4) | | |
| (3,431) | |
| (3,155) | |
| (276) | | (8.7) | |
Total same store rental expenses | |
| (28,018) | |
| (29,424) | |
| 1,406 | | 4.8 | | |
| (20,335) | |
| (19,010) | |
| (1,325) | | (7.0) | |
Non-same store properties | |
| (282) | |
| (224) | |
| (58) | | (25.9) | | |
| (7,965) | |
| (2,304) | |
| (5,661) | | NM | |
Total rental expenses | | $ | (28,300) | | $ | (29,648) | | $ | 1,348 | | 4.5 | % | | $ | (28,300) | | $ | (21,314) | | $ | (6,986) | | (32.8) | % |
NOI: | |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
| |
Office | | $ | 6,520 | | $ | 5,474 | | $ | 1,046 | | 19.1 | % | | $ | 6,016 | | $ | 7,118 | | $ | (1,102) | | (15.5) | % |
Retail | |
| 10,773 | |
| 10,147 | |
| 626 | | 6.2 | | |
| 10,773 | |
| 9,932 | |
| 841 | | 8.5 | |
Residential | |
| 15,656 | |
| 14,269 | |
| 1,387 | | 9.7 | | |
| 9,210 | |
| 8,433 | |
| 777 | | 9.2 | |
Industrial | |
| 16,353 | |
| 15,854 | |
| 499 | | 3.1 | | |
| 11,590 | |
| 10,700 | |
| 890 | | 8.3 | |
Total same store NOI | |
| 49,302 | |
| 45,744 | |
| 3,558 | | 7.8 | | |
| 37,589 | |
| 36,183 | |
| 1,406 | | 3.9 | |
Non-same store properties | |
| 358 | |
| 855 | |
| (497) | | (58.1) | | |
| 12,071 | |
| 5,008 | |
| 7,063 | | NM | |
Total NOI | | $ | 49,660 | | $ | 46,599 | | $ | 3,061 | | 6.6 | % | | $ | 49,660 | | $ | 41,191 | | $ | 8,469 | | 20.6 | % |
Same store average percentage leased: | | | | | | | | | | | | | | | | | | | | | | | | |
Office | |
| 75.0 | % |
| 75.4 | % | | | |
| | |
| 73.6 | % |
| 78.6 | % | |
| |
| |
Retail | |
| 95.9 | |
| 95.1 | | |
| |
| | |
| 95.9 | |
| 94.3 | | |
| |
| |
Residential | |
| 94.5 | |
| 93.8 | | |
| |
| | |
| 94.3 | |
| 93.0 | | |
| |
| |
Industrial | |
| 99.7 | |
| 99.7 | | |
| |
| | |
| 99.6 | |
| 97.6 | | |
| |
| |
Same store average annualized base rent per square foot: | | | | | | | | | | | | | | | | | | | | | | | | |
Office | | $ | 35.52 | | $ | 35.51 | | |
| |
| | | $ | 36.17 | | $ | 34.62 | | |
| |
| |
Retail | |
| 19.39 | |
| 19.40 | | |
| |
| | |
| 19.39 | |
| 18.77 | | |
| |
| |
Residential | |
| 27.60 | |
| 27.34 | | |
| |
| | |
| 31.03 | |
| 28.19 | | |
| |
| |
Industrial | |
| 5.96 | |
| 5.91 | | |
| |
| | |
| 6.45 | |
| 6.07 | | |
| |
| |
NM = Not meaningful
40
Office Segment. For the three months ended September 30, 2017 from approximately $36.2 million for the same period in 2016.
| 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 | % | |||||||||||||
Retail Segment. For the three months ended September 30, 2017.
Residential Segment. For the three months ended September 30, 2017,March 31, 2023, our residential segment same store NOI increased by $1.4 million and $0.8 million, respectively, as compared to the same period in 2016, primarily due to (i) a higher outstanding principal balance and (ii) an increase of the weighted average interest rate to 3.4% as of September 30, 2017 from 3.2% as of September 30, 2016. During 2017 and 2016, we repaid $487.0 million of mortgage note borrowings with proceeds from our revolving line of credit and issued $386.1 million of new mortgage note borrowings. The following table further describes our interest expense by debt obligation, and includes amortization of deferred financing costs, amortization related to our derivatives, and amortization of discounts and premiums for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
| 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 | |||||||
Industrial Segment. For the three months ended March 31, 2023, our industrial segment same store NOI increased by $0.5 million and $2.1$0.9 million, respectively. Duringrespectively, as compared to the ninethree months ended September 30, 2017December 31, 2022 and 2016, we had a gain on saleMarch 31, 2022, primarily due to decreased bad debt expense, along with increased occupancy at certain of real property of approximately $11.0 million and $43.5 million, respectively. For a detailed discussion of the real properties we disposed of during the three and nine months ended September 30, 2017 and 2016, see Note 3 to our financial statements included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
ADDITIONAL MEASURES OF PERFORMANCE
Funds From Operations
We believe that FFO and AFFO, 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, these supplemental, non-GAAP measures should not be considered as alternatives to net income (loss) or to cash flows from operating activities as indications of our performance and are not intended to be used as liquidity measures 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, AFFO 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 | |||||||||||
AFFO. AFFO further adjusts FFO calculation does not present, nor do we intend it to present, a complete picturereflect the performance of our financial condition and operating performance. We caution investors against usingportfolio by adjusting for items we believe are not directly attributable to our operations. Our adjustments to FFO to determinearrive at AFFO include removing the impact of (i) our performance participation allocation, (ii) unrealized (gain) loss from changes in fair value of financial instruments and (iii) financing obligation liability appreciation (depreciation).
Although some REITs may present certain performance measures differently, we believe FFO and AFFO generally facilitate a pricecomparison to earnings ratio or yield relativeother REITs that have similar operating characteristics to our NAV.us. We believe investors are best served if the information that is made available to them allows them to align their analyses and evaluation with the same performance metrics used by management in planning and executing our business strategy. Neither the SEC, NAREIT, nor any regulatory body has passed judgment on the acceptability of the adjustments used to calculate AFFO. In the future, the SEC, NAREIT, or a regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry at which point we may adjust our calculations and characterizations of AFFO.
41
The following unaudited table presents a reconciliation of GAAP net income (loss) computed under GAAP remains theto NAREIT FFO and AFFO:
| | | | | | | |
| | For the Three Months Ended March 31, | | ||||
(in thousands, except per share data) |
| 2023 |
| 2022 | | ||
GAAP net (loss) income | | $ | (2,571) | | $ | 24,794 | |
Weighted-average shares outstanding—diluted | | | 263,026 | | | 210,676 | |
GAAP net (loss) income per common share—diluted | | $ | (0.01) | | $ | 0.12 | |
Adjustments to arrive at FFO: | | | | | | | |
Real estate-related depreciation and amortization | |
| 33,197 | |
| 27,451 | |
Gain on sale of real estate property | | | (36,884) | | | (53,881) | |
Our share of adjustments from joint venture partnerships | |
| 3,024 | |
| 2,032 | |
NAREIT FFO | | $ | (3,234) | | $ | 396 | |
NAREIT FFO per common share—diluted | | $ | (0.01) | | $ | 0.00 | |
Adjustments to arrive at AFFO: | |
| | |
| | |
Performance participation allocation | | | — | | | 12,192 | |
Unrealized (gain) loss on financial instruments (1) | |
| 9,374 | |
| (1,550) | |
Financing obligation liability appreciation | | | 2,862 | | | 4,007 | |
Our share of adjustments from joint venture partnerships | |
| 286 | |
| (10) | |
AFFO | | $ | 9,288 | | $ | 15,035 | |
| (1) | Unrealized (gain) loss from changes in fair value of financial instruments primarily relates to mark-to-market changes on our derivatives not designated as cash flow hedges and our debt-related investments. |
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 March 31, 2023, our financial position was strong with 31.2% leverage, calculated as outstanding principal balance of our borrowings less cash and cash equivalents divided by the fair value of our real property, net investments in our unconsolidated joint venture partnerships, investments in real estate-related securities and prospective debt or equity issuances willdebt-related investments not associated with the DST Program
42
(determined in accordance with our valuation procedures). In addition, our consolidated portfolio was 94.5% occupied (94.9% leased) as of March 31, 2023 and is diversified across 91 properties totaling 18.6 million square feet across 33 geographic markets. Our properties contain a diverse roster of 400 commercial customers, large and small, and has an allocation based on fair value of real properties as determined by our NAV calculation of 36.8% residential, 35.0% industrial, 15.2% retail which is primarily grocery-anchored, and 13.0% office.
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 Three Months Ended March 31, | | | | | ||||
(in thousands) |
| 2023 |
| 2022 |
| $ Change | | |||
Total cash provided by (used in): | | |
| | |
| | |
| |
Operating activities | | $ | (15,773) | | $ | 24,403 | | $ | (40,176) | |
Investing activities | |
| 19,170 | |
| (241,166) | |
| 260,336 | |
Financing activities | |
| 20,170 | |
| 229,058 | |
| (208,888) | |
Net increase in cash, cash equivalents and restricted cash | | $ | 23,567 | | $ | 12,295 | | $ | 11,272 | |
Net cash provided by operating activities decreased by approximately $40.2 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to changes in operating assets and liabilities of $34.8 million as compared to the prior period due to the $23.7 million settlement of the 2022 performance participation allocation in cash in January 2023.
Net cash used in investing activities decreased by approximately $260.3 million for the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a decrease in real estate property acquisition activity of $353.5 million. This driver was partially offset by a decrease in proceeds from disposition of real estate property of $115.7 million.
Net cash provided by financing activities decreased by approximately $208.9 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to a decrease in net offering activity from our DST Program and public offering of $240.0 million and an increase in redemption activity of $29.5 million. These drivers were partially offset by an increase in net borrowing activity of 65.5 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 March 31, 2023, we had an aggregate of $1.7 billion of commitments under our unsecured credit agreement, including $900.0 million under our line of credit and $800.0 million under our two term loans. As of that date, we had: (i) $277.0 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 4.40%, which includes the effect of the interest rate swap and cap agreements related to $800.0 million in borrowings under our term loans.
As of March 31, 2023, the unused and available portions under our line of credit were $623.0 million and $565.6 million, respectively. Our $900.0 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 as its
43
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 March 31, 2023, 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 intend to monitor the developments with respect to the phasing out of LIBOR after June 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 March 31, 2023, we do not qualifyhad property-level borrowings of approximately $517.7 million outstanding with a weighted-average remaining term of approximately 4.2 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 3.85%. 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 March 31, 2023.
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.
Future Minimum Lease Payments Related to the DST Program.As of September 30, 2017,March 31, 2023, we had approximately $5.8 million$1.1 billion of cash and cash equivalents comparedfuture minimum lease payments related to $13.9 million asthe DST Program. The underlying interests of December 31, 2016. The following discussion summarizes the sources and uses of our cash during the nine months ended September 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 | % | ||||||||
Offering Proceeds. For the three months ended September 30, 2017 includes (i) a 73,000 square foot lease with Trinet Group, Inc. at an office property in East Bay, CAMarch 31, 2023, the amount of aggregate gross proceeds raised from our public offerings (including shares issued pursuant to partially replace Sybase and (ii) a 61,000 square foot lease renewal with Proctor & Gamble at an office property in Fayetteville, AR.
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.
44
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 March 31, 2023 | | | For the Three Months Ended March 31, 2022 | | ||||||
($ in thousands) | | Amount | | Percentage | | | Amount | | Percentage | | ||
Distributions | | | | | | | | | | | | |
Paid in cash (1) | | $ | 16,644 | | 67.5 | % | | $ | 12,885 | | 65.2 | % |
Reinvested in shares | | | 8,009 | | 32.5 | | | | 6,876 | | 34.8 | |
Total (2) | | $ | 24,653 | | 100.0 | % | | $ | 19,761 | | 100.0 | % |
Sources of Distributions | |
|
| |
| | |
|
| |
| |
Cash flows from operating activities | | $ | — | | — | % | | $ | 12,885 | | 65.2 | % |
Borrowings | |
| 16,644 | | 67.5 | | |
| — | | — | |
DRIP (3) | |
| 8,009 | | 32.5 | | |
| 6,876 | | 34.8 | |
Total (2) | | $ | 24,653 | | 100.0 | % | | $ | 19,761 | | 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) |
| (3) |
For the three months ended March 31, 2023 and 2022, our FFO was $(3.2) million, or (13.1)% of our total distributions, and $0.4 million, or 2.0% 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 three months ended March 31, 2023 and Restated Class A, W and I Share Redemption Program (which terminated effective September 1, 2017) (the “Class AWI SRP”) and (iv) repurchases pursuant to2022. 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 Three Months Ended March 31, | |||||
(in thousands, except for per share data) |
| 2023 |
| 2022 | | ||
Number of shares redeemed or repurchased |
| | 4,026 |
| | 1,788 | |
Aggregate dollar amount of shares redeemed or repurchased | | $ | 35,455 | | $ | 14,555 | |
Average redemption or repurchase price per share | | $ | 8.81 | | $ | 8.15 | |
For the three months ended September 30, 2017.
We experienced aggregate positive net inflows during the first quarter ended March 31, 2023, from the proceeds of our capital raising efforts, including the sale of DST Interests in the DST Program. When measuring capital inflows for these purposes (and aggregating them for quarter-to-date purposes), proceeds from new subscriptions in a month are included on the first day of the next month because that is the first day on which such stockholders have rights in the Company. New subscriptions for DST Interests in our DST Program are included in the month in which they close. We record DST Interests as financing obligation liabilities for accounting purposes. If and when we exercise our option to reacquire a DST Property by issuing OP Units in exchange for DST Interests, we extinguish the financing obligation liability and record the issuance of the OP Units as an issuance of equity. When measuring monthly capital outflows for these purposes (and aggregating them for quarter-to-date purposes), both share and OP unit redemption requests received in a month are included on the last day of such month because that is the last day the shareholders or
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unitholders, respectively, have rights in the Company. We record these redemptions pursuant to our New SRP of approximately 6.3 million shares of common stock for approximately $46.9 million.
SUBSEQUENT EVENTS
See “Note 16 to the Condensed Consolidated Financial Statements” for information regarding subsequent events.
CRITICAL ACCOUNTING ESTIMATES
Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of this Quarterly Report onthe 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 Condition and Results of Operations” in our 2022 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 March 31, 2023, our debt outstanding consisted of borrowings under our line of credit, term loans and mortgage notes.
Fixed Interest Rate Debt. As of March 31, 2023, our fixed interest rate debt consisted of $310.1 million under our mortgage notes and $650.0 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 60.2% of our outstanding borrowings havetotal consolidated debt as of March 31, 2023. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed interest rates, which minimize our exposure to the risk that fluctuatingrate debt unless such instruments mature or are otherwise terminated. However, interest rates may pose to our operating results and liquidity.
Variable Interest Rate Debt.As of September 30, 2017, we had approximately $680.1March 31, 2023, our consolidated variable interest rate debt consisted of $277.0 million of unhedged floating-rate borrowings outstanding indexed to LIBOR rates. If the LIBOR rates relevant tounder our remaining variable rateline of credit, $150.0 million of borrowings were to increase 10%, we estimate thatunder our quarterly interest expense would increase by approximately $210,000 based onterm loans and $207.6 million under our outstanding floating-rate debt asmortgage notes, which represented 39.8% of September 30, 2017.
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Derivative Instruments. As of March 31, 2023, we had 15 outstanding and forecasted debt obligations as well as our potential offsetting hedge positions. While this hedging strategy iseffective derivative instruments, with a total notional amount of $1.0 billion. These derivative instruments were comprised of interest rate swaps and interest rate caps that were designed to minimizemitigate the impactrisk of future interest rate increases by either providing a fixed interest rate or capping the variable interest rate for a limited, pre-determined period of time. See “Note 5 to the Condensed Consolidated Financial Statements” for further detail on our net income (loss)derivative instruments. We are exposed to credit risk of the counterparty to our interest rate cap and funds from operations 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. During the nine months ended September 30, 2017, we recorded an increase in our net asset value of approximately $932,000 as a result of changesswap agreements in the valueevent of our derivatives. Changesnon-performance under the terms of the agreements. If we were not able to replace these caps or swaps in the event of non-performance by the counterparty, we would be subject to variability of the interest rate yield curve directly impacton the valueamount outstanding under our debt that is fixed or capped through the use of our derivatives and, as capital market expectations of future interest rates have declined, so have the value of our derivatives.
ITEM 4. CONTROLS AND PROCEDURES
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 March 31, 2023. Based upon theon this evaluation, our Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer have concluded that, theas of March 31, 2023, 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 three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 under the same headingdiscussed in Part I, Item 1A, “Risk Factors” of our 2022 Form 10-K, which could materially affect our business, financial condition and/or future results. The risks described in our Annual Report on2022 Form 10-K. These new risk factors10-K, are equally applicablenot the only risks facing us. Additional risks and uncertainties not currently known to all ofus or that we currently deem to be immaterial also may materially adversely affect our current investors, regardless of which class of our common stock they own. In addition, the following updates the similar risk factors in our Registration Statement:
There have been satisfied beginning with the fourth quarter of 2016, in the future we could experience situations like that described above in which redemption demand exceeds capacity. Our current share redemption program has different limitations than our share redemption program did during that time, but it remains true that our ability to redeem your shares may be limited, and our board of directors may modify, suspend or terminate our share redemption program at any time. Furthermore, we may redeem fewer shares than have been requested in any particular month to be redeemed under our share redemption program, or none at all, in our discretion at any time. If a redemption request under our share redemption program is unsatisfied, it must be resubmitted after the start of the next month or quarter, or upon the recommencement of the share redemption program, as applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
47
withdraw its redemption request by notifying the transfer agent before 4:00 p.m. (Eastern time) on the last business day of the applicable month.
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). For purposes of measuring our redemption capacity pursuant to our share redemption program, proceeds from new subscriptions in a month are included in capital inflows on the first day of the next month because that is the first day on which such shareholders have rights in the Company. Also for purposes of measuring our redemption capacity pursuant to our share redemption program, redemption requests received in a month are included in capital outflows on the last day of such month because that is the last day shareholders have rights in the Company. We record these redemptions in our financial statements as having occurred on the first day of the next month following receipt of the redemption request because shares redeemed in a given month are outstanding through the last day of the month. 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)(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
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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 September 30, 2017, weMarch 31, 2023, 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: |
|
|
| |
|
|
|
|
|
January 31, 2023 |
| 909 | | $ | 8.87 |
| 909 | | — |
February 28, 2023 |
| 2,114 | |
| 8.82 |
| 2,114 |
| — |
March 31, 2023 (3) |
| 1,003 | |
| 8.72 |
| 1,003 |
| — |
Total |
| 4,026 | | $ | 8.81 |
| 4,026 |
| — |
| 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 |
| ● | 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. |
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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, 518 17thOne Tabor Center, 1200 Seventeenth Street, Suite 1700,2900, Denver, Colorado 80202, Telephone: (303) 228-2200.
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ITEM 6.
EXHIBITS
Exhibit | Description | |||
|---|---|---|---|---|
| | | ||
3.1 | ||||
| ||||
| | | ||
3.2 | | |||
| | | ||
3.3 | | |||
| | | ||
3.4 | | |||
| | | ||
3.5 | | |||
| | | ||
3.6 | | |||
| | | ||
3.7 | | |||
| | | ||
3.8 | | |||
| | | ||
3.9 | | |||
| | | ||
3.10 | | |||
| | | ||
3.11 | | |||
| | | ||
4.1 | | |||
| | | ||
4.2 | | |||
| | | ||
4.3 | ||||
| ||||
| | |
4.4 | | |
| | |
4.5 | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
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Exhibit | Description | |
|---|---|---|
| | |
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 March 31, 2023, filed on May 11, 2023, 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. |
| | |
May 11, 2023 | By: | /s/ JEFFREY W. TAYLOR |
| | Jeffrey W. Taylor |
| | |
May 11, 2023 | By: | /s/ LAINIE P. MINNICK |
| | Lainie P. Minnick Managing Director, Chief Financial Officer and Treasurer |
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