In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes in fair value recognized in net income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet has been eliminated by this ASU. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect adoption ofadopted ASU 2016-01 toin the first quarter of 2018 and such adoption did not have a material effectimpact on ourthe Company’s condensed consolidated financial statements.statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact that ASU No. 2016-13 will have on the Company'sCompany’s condensed consolidated financial statements.
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017, the Company commenced the Regulation D 506(b) private placement of shares of Series 1, together with warrants to acquire the Company'sCompany’s common stock, to accredited investors. On January 31, 2018 the Company closed this offering.
The holders of the Series 1 Preferred Stock are entitled to receive, when and as authorized by ourthe Company’s board of directors and declared by us out of legally available funds, cumulative, cash dividends on each Share at an annual rate of 5.50% of the Stated Value pari passu with the dividend preference of the Series A Preferred Stock and in preference to any payment of any dividend on ourthe Company’s common stock; provided, however, that Qualified Purchasers (who purchased $1.0 million or more in a single closing) are entitled to receive, when and as authorized by ourthe Company’s board of directors and declared by us out of legally available funds, cumulative, cash dividends on each ShareSeries 1 share held by such Qualified Purchaser at an annual rate of 5.75% of the Stated Value (instead of the annual rate of 5.50% for all other holders of the Shares)Series 1 shares) until April 7, 2018, at which time, the annual dividend rate will be reduced to 5.50% of Stated Value; provided further, however, that ifsince a Listing Event has not occurred by April 7, 2018, the annual dividend rate on all SharesSeries 1 shares (without regard to Qualified Purchaser status) will behas been increased to 7.00% of the Stated Value until the occurrence of a Listing Event, at which time, the annual dividend rate will be reduced to 5.50% of the Stated Value. BaseBased on the number of Series 1 shares outstanding at September 30, 2017,2019, the increased dividend rate would cost the Company approximately $50,000$150,000 more per quarter in Series 1 dividends.
The following subsequent events have been evaluated through the date of this filing with the SEC.
Certain statements included in this quarterly report on Form 10-Q (this "Quarterly Report") that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements. Forward-looking statements are typically identified by the use of terms such as "may," "should," "expect," "could," "intend," "plan," "anticipate," "estimate," "believe," "continue," "predict," "potential" or the negative of such terms and other comparable terminology.
the fact that the Company has a limited operating history, as property operations began in 2016;
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TABLE OF CONTENTSthe fact that the Company has experienced net losses since inception and may continue to experience additional losses;the performance of properties the Company has acquired or may acquire or loans the Company has made or may make that are secured by real property;
changes in economic conditions generally and the real estate and debt markets specifically;
legislative or regulatory changes, including changes to the laws governing the taxation of real estate investment trusts (“REITs”);
the outcome of pending litigation or investigations;
potential damage and costs arising from natural disasters, terrorism and other extraordinary events, including extraordinary events affecting parking facilities included in the Company’s portfolio;
risks inherent in the real estate business, including ability to secure leases or parking management contracts at favorable terms, tenant defaults, potential liability relating to environmental matters and the lack of liquidity of real estate investments;
competitive factors that may limit the Company’s ability to make investments or attract and retain tenants;
the Company’s ability to generate sufficient cash flows to pay distributions to the Company’s stockholders;
the Company’s failure to maintain status as a REIT;
the Company’s ability to successfully integrate pending transactions and implement an operating strategy;
the Company’s ability to list shares of common stock on a national securities exchange or complete another liquidity event;
the availability of capital and debt financing generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions, covenants and requirements of that debt;
changes in interest rates;
changes to generally accepted accounting principles, or GAAP; and
potential adverse impacts from changes to the U.S. tax laws.
Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertakethe Company undertakes no obligation to publicly update or revise any forward – looking statements made after the date of this Quarterly Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward – looking statements included in this Quarterly Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved.
This report may include market data and forecasts with respect to the REIT industry. Although we arethe Company is responsible for all of the disclosure contained in this report, in some cases we relythe Company relies on and referrefers to market data and certain industry forecasts that were obtained from third party surveys, market research, consultant surveys, publicly available information and industry publications and surveys that we believeare believed to be reliable.
Overview
MVP REIT II, Inc. (the "Company," "we," "us," or "our") is a Maryland corporation formed on May 4, 2015 and intends to qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes upon the filing of the federal tax return for theCommencing with its taxable year endedending December 31, 2017. The2017, the Company believes that it has been organized and has operated in a manner that has enabled it to qualify as a REIT commencing with the taxable year ending December 31, 2017; however, if the company is unable to meet the REIT qualification for 2017 we will continue to operate as a C corporation for U.S. federal income tax purposes. As of December 31, 2016, the Company ceased all selling efforts for the initial public offering (the "Common Stock Offering") of its common stock, $0.0001 par value per share, at $25.00 per share, pursuant to a registration statement on Form S-11 filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. The Company accepted additional subscriptions through March 31, 2017, the last day of the Common Stock Offering. As of September 30, 2017, the Company raised approximately $67.7 million in the Common Stock Offering before payment of deferred offering costs of approximately $1.1 million, contribution from the Sponsor of approximately $1.1 million and cash distributions of approximately $0.6 million. The Company has also registered $50 million in shares of common stock for issuance pursuant to a distribution reinvestment plan (the "DRIP") under which common stockholders may elect to have their distributions reinvested in additional shares of common stock at the current price of $25.00 per share.
On October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock. The Company commenced the private placement of the shares of Series A, together with warrants to acquire the Company's common stock, to accredited investors on November 1, 2016 and closed the offering on March 24, 2017. As of September 30, 2017, the Company raised approximately $2.6 million, net of offering costs, in the Series A private placements and has 2,862 shares of Series A issued and outstanding.
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017, the Company commenced the private placement of shares of Series 1, together with warrants to acquire the Company's common stock, to accredited investors. As of September 30, 2017, the Company had raised approximately $11.8 million, net of offering costs, in the Series 1 private placements and had 13,445 shares of Series 1 issued and outstanding.
REIT. The Company was formed to focus primarily on investments in parking facilities, including parking lots, parking garages and other parking structures throughout the United States and Canada. No more than 10% of the proceeds of the Common Stock Offering will be used for investment in Canadian properties. To a lesser extent, the Company may also invest in parking properties that contain other thansources of rental income, potentially including office, retail, storage, residential, billboard or cell towers. As of September 30, 2019, the Company held 40 properties in various cities, all of which are parking facilities.
See note C – -36-Commitments and Contingencies
in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
The Company was incorporated in Maryland on May 4, 2015 and is the sole general partnermember of MVP REIT IIthe Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership").Partnership. The Company plans to ownowns substantially all of its assets and conduct its operations through the Operating Partnership. The Company's wholly owned subsidiary, MVP REIT II Holdings, LLC, is the sole limited partner of the Operating Partnership. The operating agreement provides that the Operating Partnership is operated in a manner that enables the Company to (1) satisfy the requirements for being classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability, and (3) ensure that the Operating Partnership is not classified as a "publicly traded partnership" for purposes of Section 7704 of the Internal Revenue Code, which classification could result in the Operating Partnership being taxed as a corporation.
The Company utilizes an Umbrella Partnership Real Estate Investment Trust ("UPREIT") structure to enable us to acquire real property in exchange for limited partnership interests in the Company's Operating Partnership from owners who desire to defer taxable gain that would otherwise normally be recognized by them upon the disposition of their real property or transfer of their real property to us in exchange for shares of the Company's common stock or cash.
As part of the Company's initial capitalization, the Company sold 8,000 shares of common stock for $200,000 to MVP Capital Partners II, LLC (the "Sponsor"), the sponsor of the Company. The Sponsor is owned 60% by Vestin Realty Mortgage II, Inc., a Maryland corporation and OTC pink sheet listed company ("VRM II"), and 40% by Vestin Realty Mortgage I, Inc., a Maryland corporation and OTC pink sheet listed company ("VRM I"), both which are managed by Vestin Mortgage, LLC, a Nevada limited liability company in which Michael Shustek wholly owns. The Company also sold 5,000 shares of common stock directly to VRM II.
The Company's advisor is MVP Realty Advisors, LLC (the "Advisor"), a Nevada limited liability company, which is owned sixty percent (60%) by VRM II and forty percent (40%) by VRM I. The Advisor is responsible for managing the Company's affairs on a day-to-day basis and for identifying and making investments on the Company's behalf pursuant to an advisory agreement between the Company and the Advisor (the "Advisory Agreement"). The Company has no paid employees. The Advisor also advises MVP REIT, Inc. ("MVP REIT"), a real estate investment trust registered with the SEC with substantially the same investment strategy as the Company in that MVP REIT also invests primarily in parking facilities.
From inception through September 30, 2017, the Company has paid approximately $2.1 million in distributions, including issuing 54,336 shares of its common stock as DRIP, issuing 85,358 shares of its common stock as dividend in distributions to the Company's common stockholders and $200,000 in distributions for preferred stockholders, all of which have been paid from offering proceeds and constituted a return of capital. All of the cash distributions have been paid from offering proceeds and constituted a return of capital. The Company may pay distributions from sources other than cash flow from operations, including proceeds from the Offering, the sale of assets, or borrowings. The Company has no limits on the amounts it may pay from such sources. If the Company continues to pay distributions from sources other than cash flow from operations, the funds available to the Company for investments would be reduced and the share value may be diluted.
The following table is a summary of the acquisitions for the nine months ended September 30, 2017.
Property | Location | Date Acquired | Property Type | # Spaces | Size / Acreage | Retail /Office Square Ft. | Investment Amount | Ownership % |
MVP Detroit Center Garage | Detroit, MI | 01/10/2017 | Garage | 1,275 | 8.78 | N/A | $55,000,000 | 80.00% |
St Louis Broadway, LLC | St Louis, MO | 02/01/2017 | Lot | 161 | 0.96 | N/A | $2,400,000 | 100.00% |
St Louis Seventh & Cerre, LLC | St Louis, MO | 02/01/2017 | Lot | 174 | 1.20 | N/A | $3,300,000 | 100.00% |
MVP Preferred Parking, LLC | Houston, TX | 06/29/2017 | Garage & Lot | 521 | 1.0 | 784 | $20,500,000 | 100.00% |
During April 2017, MVP REIT reduced its ownership interest in MVP Houston Preston Lot from 80% to 40%, by selling a portion of its ownership to the Company for $1.12 million. This transaction was completed at par value with no gain or loss recorded by MVP REIT or the Company. Our ownership interest in MVP Houston Preston Lot increased from 20% to 60% and we will be considered the controlling party starting May 1, 2017.
As of September 30, 2017 the Company had investments in the following facilities:
Parking Facility | Date Acquired | Type | Zoning | Height Restriction | MVP REIT I % Owned | MVP REIT II % Owned | 3rd Party % Owned | Property Purchase Price |
MVP Minneapolis Venture | 1/6/2016 | Lot | B4C-1 | Unlimited | 87% | 13% | 0% | $6,100,000 |
MVP Denver Sherman 1935 | 2/12/2016 | Lot | CMX-16 | 200 Feet | 76% | 24% | 0% | $2,437,500 |
MVP Bridgeport Fairfield Garage | 3/30/2016 | Garage | DVD-CORE | 65 Feet | 90% | 10% | 0% | $7,800,000 |
Minneapolis City Parking | 1/6/2016 | Lot | B4C-1 | Unlimited | 87% | 13% | 0% | $9,395,000 |
MVP Cleveland West 9th | 5/11/2016 | Lot | CBD LLR-B4 | 175 Feet | 49% | 51% | 0% | $5,675,000 |
33740 Crown Colony | 5/17/2016 | Lot | LLR-D5 | 250 Feet | 49% | 51% | 0% | $3,030,000 |
MVP San Jose 88 Garage | 6/15/2016 | Garage | DC | N/A | 0% | 100% | 0% | $3,575,500 |
MCI 1372 Street | 7/8/2016 | Lot | B-5 | 375 Feet | 0% | 100% | 0% | $700,000 |
MVP Cincinnati Race Street Garage | 7/8/2016 | Garage | DD-A | 500 Feet | 0% | 100% | 0% | $4,500,000 |
MVP St. Louis Washington | 7/18/2016 | Lot | CBD I | 100 Feet | 0% | 100% | 0% | $3,000,000 |
MVP St. Paul Holiday Garage | 8/12/2016 | Garage | B-5 | Unlimited | 0% | 100% | 0% | $8,200,000 |
MVP Louisville Station Broadway | 8/23/2016 | Lot | CBD I | Unlimited | 0% | 100% | 0% | $3,050,000 |
White Front Garage Partners | 9/30/2016 | Garage | CBD I | Unlimited | 20% | 80% | 0% | $11,496,000 |
Cleveland Lincoln Garage Owners | 10/19/2016 | Garage | SI / GR-E5 | 250 Feet | 0% | 100% | 0% | $7,316,950 |
MVP Houston Jefferson Lot | 11/22/2016 | Lot | NONE | Unlimited | 0% | 100% | 0% | $700,000 |
MVP Houston Preston Lot | 11/22/2016 | Lot | NONE | Unlimited | 40% | 60% | 0% | $2,800,000 |
MVP Houston San Jacinto Lot | 11/22/2016 | Lot | NONE | Unlimited | 0% | 100% | 0% | $3,200,000 |
MVP Detroit Center Garage | 1/10/2017 | Garage | PD | Unlimited | 20% | 80% | 0% | $55,000,000 |
St. Louis Broadway Group | 2/1/2017 | Lot | CBD I | 200 Feet | 0% | 100% | 0% | $2,400,000 |
St. Louis Seventh & Cerre | 2/1/2017 | Lot | CBD I | 200 Feet | 0% | 100% | 0% | $3,300,000 |
MVP St. Louis Cardinal Lot, DST * | 5/31/2017 | Lot | -- | -- | 0% | 51% | 49% | $11,350,000 |
MVP Preferred Parking (Preston) | 6/29/2017 | Garage | NONE | Unlimited | 0% | 100% | 0% | $16,500,000 |
MVP Preferred Parking (Congress) | 6/29/2017 | Lot | NONE | Unlimited | 0% | 100% | 0% | $4,000,000 |
* The Company acquired a 51.0% beneficial interest in MVP St. Louis Cardinal Lot, DST, a Delaware statutory trust, or MVP St Louis, for approximately $2.8 million. MVP St. Louis purchased the St. Louis parking lot from an unaffiliated seller for a purchase price of $11,350,000, plus payment of closing costs, financing costs, and related transactional costs. MVP St. Louis used the Company's investment to fund a portion of the purchase price for the property. The remaining equity portion was funded through short-term investments by the Advisor pending the private placements of additional beneficial interest in MVP St. Louis exempt from registration under the Securities Act.
The Company intends to operate as a REIT for the year ended December 31, 2017. The Company is not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor is the Company subject to any regulation thereunder. As a REIT, the Company is required to have a December 31 fiscal year end. As a REIT, the Company will not be subject to federal income tax on income that is distributed to stockholders. Among other requirements, REITs are required to satisfy certain gross income and asset tests, which may affect the composition of assets the Company acquires with the proceeds of the offering. In addition, REITs are required to distribute to stockholders at least 90% of their annual REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain).
If the Company does not qualify as a REIT for the tax year ended December 31,2017, we will file as a C corporation and deferred tax assets and liabilities will be established for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for the deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on the available evidence at the time the determination is made. For the tax year ended December 31, 2016, we concluded that due to our cumulative book losses, a valuation allowance should be recorded against our net deferred tax assets.
The Company's board of directors will at all times have ultimate oversight and policy-making authority over the Company, including responsibility for governance, financial controls, compliance and disclosure. Pursuant to the Company's advisory agreement, however, the Company's board has delegated to MVP Realty Advisors, LLC, the Company's advisor, authority to manage the Company's day-to-day business, in accordance with the Company's investment objectives, strategy, guidelines, policies and limitations. Vestin Realty Mortgage II, Inc., ("VRM II") owns 60% of the Advisor, and the remaining 40% is owned by Vestin Realty Mortgage I, Inc. ("VRM I"); both are managed by Vestin Mortgage, LLC. The Company's sponsor is MVP Capital Partners II, LLC (" the "Sponsor"). The Sponsor is owned 60% by Vestin Realty Mortgage II, Inc., a Maryland corporation and OTC pink sheet listed company ("VRM II"), and 40% by Vestin Realty Mortgage I, Inc., a Maryland corporation and OTC pink sheet listed company ("VRM I"), both which are managed by Vestin Mortgage, LLC, a Nevada limited liability company in which Michael Shustek wholly owns. The Company also sold 5,000 shares of common stock directly to VRM II.
VRM I, an OTC Pink Sheet-listed company, and VRM II, an OTC Pink Sheet -listed company, are engaged primarily in the business of investing in commercial real estate and loans secured by commercial real estate. As the owners of the Advisor, VRM I and VRM II may benefit from any fees and other compensation that the Company pays to the Advisor under the Advisor Agreement. In this regard, the Company notes that the Advisor has agreed to waive certain fees and expenses it otherwise would be entitled under the Advisory Agreement. Please refer to Note E – Related Party Transactions and Arrangements – Fees and Expenses Paid in Connection With the Operations of the Company in Part I, Item 1 Financial Statements of this Quarterly Report on Form 10-Q for more information. If the owners of the Advisor determine that such waivers are no longer in the best interests of their stockholders or otherwise refuse to grant future waivers of fees or expenses if requested by the Company, then the Company's operating expenses could increase significantly, which could adversely affect the Company's results of operations and the amount of distributions to stockholders.
In addition, the Company may compete against MVP REIT, VRM I and VRM II, all of whom are managed by affiliates of the Company's sponsor, for the acquisition of investments. The Company believes this potential conflict with respect to VRM I and VRM II, is mitigated, in part, by the Company's focus on parking facilities as its core investments, while the investment strategy of VRM I and VRM II focuses on acquiring office buildings and other commercial real estate and loans secured by commercial real estate. MVP REIT has substantially the same investment strategy as the Company, in that MVP REIT is also focused primarily on investments in parking facilities. For additional discussion regarding potential conflicts of interests, please see "Risk Factors—Risks Related to Conflicts of Interest" and "Item 13 – Certain Relationships and Related Transactions, and Director Independence" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
In October 2016 the Board of Directors appointed a special committee to evaluate liquidity options. After consideration, in January 2017 the special committee of the Board of Directors decided to explore a merger with MVP REIT.
On May 26, 2017, the Company, MVP REIT Inc., a Maryland corporation ("MVP REIT"),I, MVP Merger Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company ("(“Merger Sub"Sub”), and MVP Realty Advisors, LLC, the Company's and MVP REIT's external advisor (the "Advisor"),former Advisor entered into an agreement and plan of merger (the "Merger Agreement"“Merger Agreement”). Subject, pursuant to the terms and conditions of the Merger Agreement,which MVP REIT willI would merge with and into Merger Sub (the "Merger"“Merger”), with Merger Sub surviving. On December 15, 2017, the Merger (the "Surviving Entity"), such that followingwas consummated. Following the Merger, the Surviving EntityCompany contributed 100% of its equity interests in Merger Sub to the Operating Partnership.
The Company was externally managed by MVP Realty Advisors, LLC, dba The Parking REIT Advisors (the “former Advisor”), a Nevada limited liability company prior to the management Internalization that became effective on April 1, 2019. The former Advisor was responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making investments on the Company’s behalf pursuant to the restated advisory agreement among the Company, the Operating Partnership and the former Advisor. As a result of the management Internalization, the Company will continueno longer incur an asset management fee equal to 1.1% of the cost of all assets held by the Company, effective April 1, 2019. See Note A — Organization and Business Operations in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
The Company elected to be taxed as a wholly owned subsidiaryreal estate investment trust (“REIT”) under Sections 856 through 860 of the Company. Code commencing with the taxable year ended December 31, 2017.
Investment Objectives
The Merger is intended to qualify as a "reorganization" under, and withinCompany’s primary investment objectives are to:
realize growth in the meaning of, Section 368(a)value of the Internal Revenue Code of 1986, as amended (the "Code"). The combined company will be renamed "The Parking REIT, Inc."Company’s investments; and
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of MVP REIT's common stock, $0.001 par value per share (the "MVP REIT Common Stock"), will be automatically cancelled and retired, and converted into the right to receive 0.365 shares of common stock, $0.0001 par value per share, of the Company (the "Company Common Stock") (such ratio, as it may be adjusted pursuant to the Merger Agreement, the "Exchange Ratio"). Holders of shares of MVP REIT Common Stock will receive cash in lieu of fractional shares.
At the effective time of the Merger each share of MVP REIT Common Stock, if any, then held by any wholly owned subsidiary of MVP REIT or by the Company or any of its wholly owned subsidiaries will no longer be outstanding and will automatically be retired and will cease to exist, and no consideration will be paid, nor will any other payment or right inure or be made with respect to such shares of MVP REIT Common Stock in connection with or as a consequence of the Merger. In addition, each share of MVP REIT's Non-Participating, Non-Voting Convertible Stock, $0.001 par value per share ("MVP REIT Convertible Stock"), all 1,000 of which are held by the Advisor, will automatically be retired and will cease to exist, and no consideration will be paid, nor will any other payment or right inure or be made with respect to such shares of MVP REIT Convertible Stock in connection with or as a consequence of the Merger.Investment Strategy
The Merger Agreement contains customary covenants,Company’s investment strategy focuses, and will continue to focus, primarily on acquiring, owning and managing parking facilities, including covenants prohibiting MVP REITparking lots, parking garages and its subsidiariesother parking structures throughout the United States and representativesCanada. To a lesser extent, the Company may also invest in parking properties that contain other sources of rental income, potentially including office, retail, storage, residential, billboard or cell towers. No more than 10% of the proceeds of the Common Stock Offering are authorized to be used for investment in Canadian properties. The Company intends to focus primarily on investing in income-producing parking lots and garages with air rights in central business districts. The Company generally seeks geographically targeted investments that present key demand drivers, which are expected to generate steady cash flows and provide greater predictability during periods of economic uncertainty. Such targeted investments include, but are not limited to, parking facilities near one or more of the following demand drivers:
Government buildings and courthouses
Investment Criteria
The Company will focus on acquiring properties that meet the following criteria:
properties that generate current cash flow;
properties that are located in populated metropolitan areas; and
while the Company may acquire properties that require renovation, the Company will only do so if the Company anticipates the properties will produce income within 12 months of the Company’s acquisition.
The foregoing criteria are guidelines, and Management and the Company’s board of directors may vary from soliciting, providing information or enteringthese guidelines to acquire properties which they believe represent value opportunities.
Management Internalization
On March 29, 2019, the Company and the former Advisor entered into discussions concerning proposals relatingdefinitive agreements to alternative business combination transactions, subject to certain limited exceptions. However,internalize the Company’s management function effective April 1, 2019 (the “Internalization”). Since their formation, under the termssupervision of the Merger Agreement, during the period beginning on the date of the Merger Agreement and continuing until 11:59 p.m. New York City time on July 10, 2017 (the "Go Shop Period End Time"), MVP REIT (through the MVP REIT special committee and its representatives) was permitted to initiate, solicit, provide information and enter into discussions concerning proposals relating to alternative business combination transactions. From May 30, 2017, through July 10, 2017, in connection with the ''go shop'' process provided for under the Merger Agreement, Robert A. Stanger & Co., Inc., ("Stanger") contacted approximately 78 parties, which the MVP I Special Committee and Stanger believed had the financial ability and potential strategic interest in reviewing the opportunity, to solicit their interest in a possible alternative transaction with MVP REIT. Stanger and Venable, LLP negotiated with 12 parties with regard to signing a confidentiality agreement of which 8 confidentiality agreements were executed. No bids were received prior to the July 10, 2017 Go Shop Period End Time.
Pursuant to the Merger Agreement, the board of directors (the “Board of Directors”), the former Advisor has been responsible for managing the operations of the Company (the "Company Board") will, effective asand MVP I, which merged with a wholly owned indirect subsidiary of the effective timeCompany in December 2017. As part of the Merger, increase the number of directors comprisingInternalization, among other things, the Company Board to eight and Nicholas Nilsen, Robert J. Aalberts and Shawn Newson, previous Directors of MVP REIT, will be elected to the Company Board.
As previously announced, the stockholders of MVP REIT have approved the Merger and the Merger Agreement at the special meeting of stockholders of MVP REIT held on September 27, 2017. The completion of the Merger remains subject to receipt of certain third party consents and satisfaction of other customary closing conditions.
Amended and Restated Advisory Agreement
Concurrentlyagreed with the entry into the Merger Agreement, on May 26, 2017, the Company, MVP REIT II Operating Partnership, LP and theformer Advisor entered intoto (i) terminate the Second Amended and Restated Advisory Agreement, (the "Second Amendeddated as of May 26, 2017 and, Restated Advisory Agreement"), which will become effective atfor the effective timeavoidance of doubt, the Merger. The SecondThird Amended and Restated Advisory Agreement, will amenddated as of September 21, 2018, which by its terms would have become effective only upon a listing of the Company's existing advisory agreement, dated October 5, 2015 (the "Original Agreement"Company’s common stock on a national securities exchange (collectively, the “Management Agreements”), to provide for,each entered into among other amendments, (i) elimination of acquisition fees, disposition fees and subordinated performance fees and (ii) the payment of an asset management fee by the Company, to the Advisor calculated and paid monthly in an amount equal to one-twelfth of 1.1% of the (a) cost of each asset then held by the Company, without deduction for depreciation, bad debts or other non-cash reserves, or (b) the Company's proportionate share thereof in the case of an investment made through a joint venture or other co-ownership arrangement excluding (only for clause (b)) debt financing on the investment. Pursuant to the Second Amended and Restated Advisory Agreement, the asset management fee may not exceed $2,000,000 per annum (the "Asset Management Fee Cap") until the earlier of such time, if ever, that (i) the Company holds assets with an Appraised Value (as defined Second Amended and Restated Advisory Agreement) equal to or in excess of $500,000,000 or (ii) the Company reports AFFO (as defined in the Second Amended and Restated Advisory Agreement) equal to or greater than $0.3125 per share of Company Common Stock (an amount intended to reflect a 5% or greater annualized return on $25.00 per share of the Company Common Stock) (the "Per Share Amount") for two consecutive quarters, on a fully diluted basis. All amounts of the asset management fee in excess of the Asset Management Fee Cap, plus interest thereon at a rate of 3.5% per annum, will be due and payable by the Company no later than ninety (90) days after the earlier of the date that (i) the Company holds assets with an Appraised Value equal to or in excess of $500,000,000 or (ii) the Company reports AFFO per share of Company Common Stock equal to or greater than the Per Share Amount for two consecutive quarters, on a fully diluted basis.
In the event that the Merger Agreement is terminated prior to the consummation of the Merger, the Second Amended and Restated Advisory Agreement will automatically terminate and be of no further effect and the Company, MVP REIT II Operating Partnership, LP and the Advisor will have the rights and obligations set forth in the Original Agreement.
Termination Agreement
Concurrently with the entry into the Merger Agreement, on May 26, 2017, the Company, MVP REIT, theformer Advisor and MVP REIT II Operating Partnership, LP (the “Operating Partnership”); (ii) extend employment to the executives and other employees of the former Advisor; (iii) arrange for the former Advisor to continue to provide certain services with respect to outstanding indebtedness of the Company and its subsidiaries; and (iv) lease the employees of the former Advisor for a limited period of time prior to the time that such employees become employed by the Company.
Contribution Agreement
On March 29, 2019, the Company entered into a terminationContribution Agreement (the “Contribution Agreement”) with the Manager, Vestin Realty Mortgage I, Inc. ("VRTA") (solely for purposes of Section 1.01(c) thereof), Vestin Realty Mortgage II, Inc. ("VRTB") (solely for purposes of Section 1.01(c) thereof) and fee agreement (the "Termination Agreement")Shustek (solely for purposes of Section 4.03 thereof). PursuantIn exchange for the Contribution, the Company agreed to issue to the Termination Agreement, atManager 1,600,000 shares of Common Stock as the effective timeConsideration. The Consideration is issuable in four equal installments. The first installment of 400,000 shares of Common Stock was issued on the Merger, the Advisory Agreement, dated September 25, 2012, as amended, among MVP REIT and the AdvisorEffective Date. The remaining installments will be terminatedissued on December 31, 2019, December 31, 2020 and December 31, 2021 (or if December 31st is not a business day, the day that is the last business day of such year). If requested by the Company will pay the Advisor an Advisor Acquisition Payment (as such term is defined in the Termination Agreement) of approximately $3.6 million, subject to adjustment in the event that additional properties are acquired by MVP REIT prior to closing, which shall be the only fee payable to the Advisor in connection with any contemplated capital raise by the Merger. InCompany, the event that the Merger Agreement is terminated priorManager has agreed not to the consummationsell, pledge or otherwise transfer or dispose of any of the Merger,Consideration for a period not to exceed the Termination Agreement will automatically terminate and be of no further effect and no Advisor Acquisition Payment will be owed and payable.
The foregoing descriptionlock-up period that otherwise would apply to other stockholders of the Merger Agreement, the Amended and Restated Advisory Agreement and the Termination Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the applicable agreements, each of which is filed with as a Form 8-K exhibit with the SEC on May 31, 2017.
Amended Charter
In connection with the Merger, at the Company annual stockholders' meeting held on September 27, 2017, the Company's stockholders approved, among other matters, the amendment and restatement of its charter (the "Amended Charter"). As described in more detail in the final proxy statement distributed to our stockholders for the annual meeting, the Amended Charter is primarily intended to accomplish two objectives in connection with such capital raise. The Internalization Transaction should mitigate perceived or actual conflicts of interest between the possible listingCompany and the Manager and as an all stock deal the Internalization Transaction should better align the interests of the Company's Common Stock afterCompany and its stockholders. See the closing of8-K filed on April 3, 2019 for more information regarding the Merger: (1) to remove provisions of our charter that we believe may unnecessarily restrict our ability to take advantage of further opportunities for liquidity events or are redundant with or otherwise addressed or permitted to be addressed under Maryland law and (2) to amend certain provisions in a manner that we believe would be more suitable for becoming a publicly-traded REIT.
-41-
Management Internalization.
The Amended Charter will become effective upon its filing withInternalization transaction closed on April 1, 2019, and the State Departmentfirst installment of Assessments and Taxation400,000 shares of Maryland. We expect to file the proposed Amended Charter immediately before the Company's Common Stock becomes listed for trading on a national securities exchange. This means that the changeswas issued to the charter will not be effective unless and until we complete an exchange listing.
Please seeManager on April 1, 2019. See Note P-P — MergerManagement Internalization for additional information regardingin Part I, Item 1 Notes to the Merger, the Merger Agreement, the Second Amended and Restated Advisory Agreement, the Termination Agreement and the Amended Charter.
Review Condensed Consolidated Financial Statements ofthe Company's Policies
The Company's board of directors, including the independent directors, have reviewed the policies described in this Quarterly Report and determined that they are in the best interest of the Company's stockholders because: (1) they increase the likelihood that the Company will be able to acquire a diversified portfolio of income producing properties, thereby reducing risk in its portfolio; (2) the Company's executive officers, directors and affiliates of the advisor have expertise with the type of real estate investments the Company seeks; and (3) borrowings should enable the Company to purchase assets and earn rental income more quickly, thereby increasing the likelihood of generating income for the Company's stockholders and preserving stockholder capital.additional information.
Results of Operations for the three months ended September 30, 2019 compared to the three months ended September 30, 2018.
| | For the Three Months Ended September 30, | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Revenues | | | | | | | | | | | | |
Base rent income | | $ | 5,036,000 | | | $ | 4,992,000 | | | $ | 44,000 | | | | 1 | % |
Percentage rent income | | | 1,045,000 | | | | 1,010,000 | | | | 35,000 | | | | 3.5 | % |
Total revenues | | $ | 6,081,000 | | | $ | 6,002,000 | | | $ | 79,000 | | | | 1 | % |
Rental revenue
The increase in rental revenues is due to a combination of decreases related to properties sold in 2018 offset by more favorable terms agreed upon for certain leases within the portfolio, which were renewed during 2018 and early 2019.
On December 5, 2018 the operating lease of MVP PF St. Louis 2013, LLC (“MVP St. Louis”) by SP+ expired. Upon the expiration of the operating lease, MVP St. Louis entered into a new modified triple net (“Mod NNN”) operating lease with SP+. The term of the lease is 5 years with the option of one five-year extension. SP+ will pay annual rent of $450,000. In addition, the lease provides percentage rent with MVP St. Louis receiving 70% of gross receipts over $650,000 per lease year. The tenant is responsible for paying property taxes up to $60,000.
On January 31, 2019 the operating lease of MVP PF Ft. Lauderdale 2013, LLC (“MVP Ft. Lauderdale”) by SP+ expired. Upon the expiration of the operating lease, MVP Ft. Lauderdale entered into a new double net (“NN”) operating lease with Lanier Parking Solutions (“Lanier”). The term of the lease is 5 years. Lanier will pay annual rent of $70,000. In addition, the lease provides percentage rent with MVP Ft. Lauderdale receiving 70% of gross receipts over $140,000 per lease year. Subsequently, on September 23, 2019 the Company, through an entity wholly owned by the Company, sold the surface parking lot and office building in Ft. Lauderdale for cash consideration of $6.1 million to 625 SE 3rd Avenue, LLC, a third-party buyer.
On February 28, 2019 the operating lease of MVP PF Memphis Court 2013, LLC (“MVP Memphis Court”) by SP+ was cancelled. Upon the cancellation of the operating lease, MVP Memphis Court entered into a triple net (“NNN”) lease agreement with Premium Parking of Memphis, LLC (“Premium Parking”). The term of the lease will be for 5 years. Premium Parking will pay annual rent of $3,000. In addition, the lease provides percentage rent with MVP Memphis Court receiving 60% of gross receipts over $3,000 per lease year. Should monthly gross receipts exceed $4,500 for six consecutive months during the term, monthly rent shall adjust for the remainder of the term to $2,500 (“Adjusted Minimum Monthly Rent”), plus percentage rent of 65% of gross receipts in excess of the Adjusted Minimum Monthly Rent.
On February 28, 2019 the operating lease of MVP PF Memphis Poplar 2013, LLC (“MVP Memphis Poplar”) by Best Park, Inc. expired. Upon the expiration of the operating lease MVP Memphis Poplar entered into a Mod NNN lease agreement with Premium Parking of Memphis, LLC (“Premium Parking”). The term of the lease is 5 years. Premium Parking will pay annual rent of $320,000. In addition, the lease provides percentage rent with MVP Memphis Poplar receiving 65% of gross receipts over $390,000 per lease year. The tenant is responsible for paying property taxes up to $40,000.
For additional information see Note D – Investments in Real Estate, Part I, Item 1 - Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
During the three months ended September 30, 2019 and 2018 the Company received percentage rent on the following properties:
| | For the Three Months Ended September 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Percentage rent income | | | | | | | | | | | | |
MVP PF Ft. Lauderdale(a) | | $ | 33,000 | | | $ | -- | | | $ | 33,000 | | | | 100 | % |
MVP St Louis 2013(b) | | | -- | | | | 63,000 | | | | (63,000 | ) | | | (100 | %) |
Mabley Place Garage | | | 316,000 | | | | 309,000 | | | | 2,000 | | | | 1 | % |
MVP St Louis Lucas(c) | | | -- | | | | 5,000 | | | | (5,000 | ) | | | (100 | %) |
MVP Indianapolis Washington | | | 36,000 | | | | 31,000 | | | | 5,000 | | | | 16 | % |
MVP Milwaukee Arena | | | 16,000 | | | | -- | | | | 25,000 | | | | 100 | % |
MVP St Paul Holiday | | | 57,000 | | | | 40,000 | | | | 17,000 | | | | 43 | % |
MVP Louisville Station Broadway | | | -- | | | | 6,000 | | | | (6,000 | ) | | | (100 | %) |
White Front Garage | | | -- | | | | 6,000 | | | | (6,000 | ) | | | (100 | %) |
MVP Detroit Center Garage (d) | | | 566,000 | | | | 516,000 | | | | 103,000 | | | | 20 | % |
St. Louis Broadway | | | 4,000 | | | | -- | | | | 4,000 | | | | 100 | % |
MVP Raider Park Garage | | | 17,000 | | | | 34,000 | | | | (17,000 | ) | | | (50 | %) |
Total revenues | | $ | 1,045,000 | | | $ | 1,010,000 | | | $ | 35,000 | | | $ | 3 | % |
a) | New lease terms with addition of percentage rent. |
b) | New lease terms with increase to monthly base rent and higher breakpoint for percentage rent. |
c) | Property sold June 2018. |
d) | Increase in collections by tenant on monthly parking contracts. |
| | For the Three Months Ended September 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Operating expenses | | | | | | | | | | | | |
Property taxes | | $ | 734,000 | | | $ | 668,000 | | | $ | 66,000 | | | | 10 | % |
Property operating expense | | | 421,000 | | | | 305,000 | | | | 116,000 | | | | 38 | % |
Asset management expense – related party | | | -- | | | | 313,000 | | | | (313,000 | ) | | | (100 | %) |
General and administrative | | | 1,625,000 | | | | 893,000 | | | | 732,000 | | | | 82 | % |
Professional fees | | | 3,869,000 | | | | 328,000 | | | | 3,541,000 | | | | 1080 | % |
Management internalization | | | -- | | | | 25,000 | | | | (25,000 | ) | | | (100 | %) |
Acquisition expenses | | | 1,000 | | | | 7,000 | | | | (6,000 | ) | | | (86 | %) |
Depreciation and amortization | | | 1,285,000 | | | | 1,262,000 | | | | 23,000 | | | | 2 | % |
Impairment | | | 500,000 | | | | -- | | | | 500,000 | | | | 100 | % |
Total operating expenses | | | 8,435,000 | | | | 3,801,000 | | | | 4,634,000 | | | | 122 | % |
Income (loss) from operations | | $ | (2,354,000 | ) | | $ | 2,201,000 | | | $ | (4,555,000 | ) | | | (207 | %) |
To the extent that the Company continues to acquire new properties, the Company expects to see operations, maintenance and depreciation expenses increase.
Property taxes
The increase in property taxes in 2019 compared to 2018 is attributable primarily to the increase of assessed property values or increased tax rates, which resulted in an increase in property tax expense in certain municipalities and the acquisition of a property in June 2018.
Property operating expense
The increase in property operating expense in 2019 compared to 2018 is attributable primarily to properties acquired in the prior year, which accounted for higher operating expenses. Additionally, there was an increase to insurance expense, HOA fees and legal expense for the three months ended September 30, 2019 compared to the same period in 2018.
Asset management expense – related party
The decrease in asset management fee is due to the Internalization, as a result of which the Company will no longer incur an asset management expense beginning April 1, 2019.
See Note E — Related Party Transactions and Arrangements in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
General and administrative
Approximately $0.5 million of the increase in general and administrative expenses was attributable to an increase in directors and officers liability insurance. Additionally, due to the Internalization, the Company is now responsible for additional expenses previously paid by the former Advisor, including payroll, rent, office equipment, utilities and other expenses.
Asset management expense, general and administrative expenses and professional fees, in aggregate, were approximately $5.4 million and $1.5 million during the three months ended September 30, 2019 and 2018, respectively.
Professional fees
The increase in professional fees was primarily due to legal expenses incurred relating to lawsuits filed in 2019 and the SEC investigation, which was initiated in June of 2019.
See Note O – Legal in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
Management internalization
The Company was externally managed by the former Advisor prior to the management internalization that became effective on April 1, 2019. These expenses include (i) the Internalization Consideration to be paid in aggregate to the Manager and (ii) professional fees incurred to complete the Internalization of the Company’s management. See Note A — Organization and Business Operations and Note P – Deferred Management Internalization in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
Acquisition expenses
Acquisition expenses related to purchased properties are capitalized with the investment in real estate. Acquisition expenses incurred during the three months ended September 30, 2019 and 2018 relate solely to dead deals.
Depreciation and amortization expenses
The increase in depreciation and amortization expenses was due to assets placed in service following the completion of construction projects or general improvements on properties already held.
Impairment
During the three months ended September 30, 2019, the Company recorded asset impairment charges totaling approximately $500,000. These impairment charges consisted of $500,000 associated with the Minneapolis City lot. These charges were recorded to write down the carrying value of this asset to its current appraised value net of estimated closing costs. The Company recorded no impairment charges for the three months ended September 30, 2018. See Note B — Summary of Significant Accounting Policies in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
| | For the Three Months Ended September 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Other income (expense) | | | | | | | | | | | | |
Interest expense | | $ | (2,375,000 | ) | | $ | (2,170,000 | ) | | $ | (205,000 | ) | | | 9 | % |
Gain from sale of investment in real estate | | | 2,294,000 | | | | 962,000 | | | | 1,332,000 | | | | 138 | % |
Other income | | | 50,000 | | | | 7,000 | | | | 43,000 | | | | 614 | % |
Income from DST | | | 52,000 | | | | 52,000 | | | | -- | | | | -- | |
Total other expense | | $ | 21,000 | | | $ | (1,149,000 | ) | | $ | 1,170,000 | | | | (102 | %) |
Interest expense
The increase in interest expense of approximately $0.2 million for the three months ended September 30, 2019, as compared to the same period in 2018, is primarily attributable to the Company’s increased use of debt on properties throughout the year.
To maximize the use of cash, the Company will continue to look for opportunities to utilize debt financing in future acquisitions, including use of long-term debt. The interest expense will vary based on the amount of the Company’s borrowings and current interest rates at the time of financing. The Company will seek to secure appropriate leverage with the lowest interest rate available. The terms of the loans will vary depending on the quality of the applicable property, the credit worthiness of the tenant and the amount of income the property is able to generate through parking leases. There is no assurance, however, that the Company will be able to secure additional financing on favorable terms or at all.
Interest expense recorded for the three months ended September 30, 2019 includes amortization of loan issuance costs. Total amortization of loan issuance cost for the three months ended September 30, 2019 and 2018 was approximately $0.2 million.
For additional information see Note K – Notes Payable in Part I, Item 1 – Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
Gain from sale of investment in real estate
During September 2019, the Company sold the surface parking lot and office building in Ft. Lauderdale for $6.1 million, which resulted in a gain from sale of investments of approximately $2.3 million.
During August 2018, the Company sold two surface lots in Kansas City for $4.0 million, which resulted in a gain from sale of investments of real estate of approximately $1.0 million.
Other income
During August 2019, the Company received $50,000 from Inner Fire Fitness, LLC for the early termination of the retail lease at Mabley Place Garage.
During August 2018, the Company received a rebate of approximately $7,000 for the completion of a project to replace and improve the lighting of MVP Indianapolis City Park.
Results of Operations for the nine months ended September 30, 20172019 compared to the three and nine months ended September 30, 2016.2018.
| | For the Nine Months Ended September 30, | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Revenues | | | | | | | | | | | | |
Base rent income | | $ | 15,126,000 | | | $ | 14,511,000 | | | $ | 615,000 | | | | 4 | % |
Percentage rent income | | | 1,756,000 | | | | 1,776,000 | | | | (20,000 | ) | | | (1 | %) |
Total revenues | | $ | 16,882,000 | | | $ | 16,287,000 | | | $ | 595,000 | | | | 4 | % |
Rental revenue
The Company began purchasingincrease of approximately $0.6 million in rental revenues is mainly attributable to the acquisition of a property in June 2018. Additionally, decreases due to properties sold in May 20162018 were offset by more favorable terms agreed upon for certain leases within the portfolio, which were renewed during 2018 and early 2019.
On December 5, 2018 the resultsoperating lease of operations below reflect start-up costs as well as acquisition expenses incurred in connectionMVP PF St. Louis 2013, LLC (“MVP St. Louis”) by SP+ expired. Upon the expiration of the operating lease, MVP St. Louis entered into a new modified triple net (“Mod NNN”) operating lease with purchasing properties asSP+. The term of the lease is 5 years with the option of one five-year extension. SP+ will pay annual rent of $450,000. In addition, the lease provides percentage rent with MVP St. Louis receiving 70% of gross receipts over $650,000 per lease year. The tenant is responsible for paying property taxes up to $60,000.
On January 31, 2019 the operating lease of MVP PF Ft. Lauderdale 2013, LLC (“MVP Ft. Lauderdale”) by SP+ expired. Upon the expiration of the operating lease, MVP Ft. Lauderdale entered into a new double net (“NN”) operating lease with Lanier Parking Solutions (“Lanier”). The term of the lease is 5 years. Lanier will pay annual rent of $70,000. In addition, the lease provides percentage rent with MVP Ft. Lauderdale receiving 70% of gross receipts over $140,000 per lease year. Subsequently, on September 23, 2019 the Company, seeksthrough an entity wholly owned by the Company, sold the surface parking lot and office building in Ft. Lauderdale for cash consideration of $6.1 million to deploy625 SE 3rd Avenue, LLC, a third-party buyer.
On February 28, 2019 the Company's offering proceeds.operating lease of MVP PF Memphis Court 2013, LLC (“MVP Memphis Court”) by SP+ was cancelled. Upon the cancellation of the operating lease, MVP Memphis Court entered into a triple net (“NNN”) lease agreement with Premium Parking of Memphis, LLC (“Premium Parking”). The Company expects that income and expenses relatedterm of the lease will be for 5 years. Premium Parking will pay annual rent of $3,000. In addition, the lease provides percentage rent with MVP Memphis Court receiving 60% of gross receipts over $3,000 per lease year. Should monthly gross receipts exceed $4,500 for six consecutive months during the term, monthly rent shall adjust for the remainder of the term to $2,500 (“Adjusted Minimum Monthly Rent”), plus percentage rent of 65% of gross receipts in excess of the Adjusted Minimum Monthly Rent.
On February 28, 2019 the operating lease of MVP PF Memphis Poplar 2013, LLC (“MVP Memphis Poplar”) by Best Park, Inc. expired. Upon the expiration of the operating lease MVP Memphis Poplar entered into a Mod NNN lease agreement with Premium Parking of Memphis, LLC (“Premium Parking”). The term of the lease is 5 years. Premium Parking will pay annual rent of $320,000. In addition, the lease provides percentage rent with MVP Memphis Poplar receiving 65% of gross receipts over $390,000 per lease year. The tenant is responsible for paying property taxes up to $40,000.
For additional information see Note D – Investments in Real Estate, Part I, Item 1 - Notes to the Company's portfolio will increase in future years as a result Condensed Consolidated Financial Statements of owning the properties acquired for a full year and as a result of anticipated future acquisitions of real estate and real estate-related assets. The results of operations described below may not be indicative of future results of operations.this Quarterly Report.
| | For the three months | | | For the nine months | |
| | ended September 30, | | | ended September 30, 2016 | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Revenue | | | | | | | | | | | | | | | | | | | | | | | | |
Parking Base rent | | $ | 2,180,000 | | | | 98 | % | | $ | 406,000 | | | | 67 | % | | $ | 5,719,000 | | | | 84 | % | | $ | 451,000 | | | | 67 | % |
Retail rent | | | 26,000 | | | | 1 | % | | | -- | | | | 0 | % | | | 57,000 | | | | 1 | % | | | 1,000 | | | | 0 | % |
Management Agreement (a) | | | -- | | | | 0 | % | | | 201,000 | | | | 33 | % | | | 482,000 | | | | 7 | % | | | 224,000 | | | | 33 | % |
Percentage rent (b) | | | 16,000 | | | | 1 | % | | | -- | | | | 0 | % | | | 523,000 | | | | 8 | % | | | -- | | | | 0 | % |
Total revenues | | $ | 2,222,000 | | | | 100 | % | | $ | 607,000 | | | | 100 | % | | $ | 6,781,000 | | | | 100 | % | | $ | 676,000 | | | | 100 | % |
During the nine months ended September 30, 2019 and 2018 the Company received percentage rent on the following properties:
| | For the Nine Months Ended September 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Percentage rent income | | | | | | | | | | | | |
MVP PF Ft. Lauderdale(a) | | $ | 33,000 | | | $ | -- | | | $ | 33,000 | | | | 100 | % |
MVP St. Louis PF 2013 (b) | | | -- | | | | 80,000 | | | | (80,000 | ) | | | (100 | %) |
Mabley Place Garage | | | 316,000 | | | | 309,000 | | | | 7,000 | | | | 2 | % |
MVP Ft Worth Taylor (c) | | | 8,000 | | | | 22,000 | | | | (14,000 | ) | | | (64 | %) |
MVP St. Louis Convention (d) | | | -- | | | | 60,000 | | | | (60,000 | ) | | | (100 | %) |
MVP St. Louis Lucas (d) | | | -- | | | | 65,000 | | | | (65,000 | ) | | | (100 | %) |
MVP Indianapolis Washington | | | 36,000 | | | | 31,000 | | | | 5,000 | | | | 16 | % |
MVP Milwaukee Arena (e) | | | 47,000 | | | | 25,000 | | | | 22,000 | | | | 88 | % |
MVP Denver 1935 Sherman (f) | | | 9,000 | | | | 6,000 | | | | 3,000 | | | | 50 | % |
MVP Cleveland West 9th (g) | | | 11,000 | | | | -- | | | | 11,000 | | | | 100 | % |
MVP San Jose 88 Garage (h) | | | -- | | | | 24,000 | | | | (24,000 | ) | | | (100 | %) |
MVP St. Paul Holiday | | | 82,000 | | | | 76,000 | | | | 6,000 | | | | 8 | % |
MVP Louisville Station Broadway (i) | | | -- | | | | 6,000 | | | | (6,000 | ) | | | (100 | %) |
White Front Garage (i) | | | -- | | | | 6,000 | | | | (6,000 | ) | | | (100 | %) |
MVP Detroit Center Garage (j) | | | 1,155,000 | | | | 1,032,000 | | | | 123,000 | | | | 12 | % |
St. Louis Broadway | | | 4,000 | | | | -- | | | | 4,000 | | | | 100 | % |
MVP Raider Park | | | 17,000 | | | | 34,000 | | | | (17,000 | ) | | | (50 | %) |
MVP New Orleans Rampart (k) | | | 38,000 | | | | -- | | | | 38,000 | | | | 100 | % |
Total revenues | | $ | 1,756,000 | | | $ | 1,776,000 | | | $ | (20,000 | ) | | | (1 | %) |
a) | Through February 28, 2017, the San Jose 88 Garage was subject to a parking management agreement and the rental income represents the gross revenues generated by the property. Operating expenses for this property are included in Operations and Maintenance. Starting on March 1, 2017, this property was leased to a national parking operator,New lease terms with an annual base rentaddition of $450,000 per year.percentage rent. |
During January 2017, MVP Detroit Center Garage received a settlement amount of approximately $345,000 for the operations of the garage until SP+ assumed operations under a longer-term lease agreement.
b) | During May 2017, MVP Detroit Center Garage, LLC amended theirNew lease terms with SP+increase to set themonthly base rent and higher break point for percentage rent trigger amount and periods from 80% of $5,000,000 over the first 12 months to the following:rent. |
·c) | 80% over $833,333 from February 2017 to March 2017Timing of tenant’s collections. |
·d) | 80% over $1,250,000 from April 2017 toProperty sold during June 20172018. |
·e) | 80% over $2,916,667 from July 2017The new Fiserv Forum Arena became fully operational in late August 2018, which had a positive impact on operations, a trend expected to January 2018continue. |
f) | Improved operations by tenant. |
g) | Increased volume in area due to additional multi-tenant apartment complex and decrease in competing surface lots. |
h) | Due to construction on the property the new revenue control system experienced some technical difficulties which have been repaired and are not anticipated to impede percentage rent in the future. |
i) | Decrease in monthly collections by tenant. |
j) | Heavy snow in the first quarter had impact on transient parking offset by increase in collections by tenant on monthly parking contracts. |
k) | Initial lease year reporting percentage rent. |
| | For the Nine Months Ended September 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Operating expenses | | | | | | | | | | | | |
Property taxes | | $ | 2,254,000 | | | $ | 1,963,000 | | | $ | 291,000 | | | | 15 | % |
Property operating expense | | | 1,157,000 | | | | 1,041,000 | | | | 116,000 | | | | 11 | % |
Asset management expense – related party | | | 854,000 | | | | 2,000,000 | | | | (1,146,000 | ) | | | (57 | %) |
General and administrative | | | 3,737,000 | | | | 3,167,000 | | | | 949,000 | | | | 34 | % |
Professional fees | | | 5,598,000 | | | | 2,875,000 | | | | 2,419,000 | | | | 76 | % |
Management internalization | | | 32,004,000 | | | | 50,000 | | | | 31,879,000 | | | | n/a | |
Acquisition expenses | | | 251,000 | | | | 411,000 | | | | (160,000 | ) | | | (39 | %) |
Depreciation and amortization | | | 3,876,000 | | | | 3,653,000 | | | | 223,000 | | | | 6 | % |
Impairment | | | 1,452,000 | | | | -- | | | | 1,452,000 | | | | 100 | % |
Total operating expenses | | | 51,183,000 | | | | 15,160,000 | | | | 36,023,000 | | | | 238 | % |
Income (loss) from operations | | $ | (34,301,000 | ) | | $ | 1,127,000 | | | $ | (35,428,000 | ) | | | n/a | |
To the extent that the Company continues to acquire new properties, the Company expects to see operations and maintenance and depreciation expenses increase.
The increase in property taxes in 2019 compared to 2018 is attributable primarily to the increase of assessed property values or increased tax rates which resulted in an increase in property tax expense in certain municipalities and the acquisition of a property in June 2018.
Property operating expense
The increase in property operating expense in 2019 compared to 2018 is attributable primarily to properties acquired in the prior year, which accounted for higher operating expenses. Additionally, there was an increase to insurance expense, HOA fees and legal expense for the nine months ended September 30, 2019 compared to the same period in 2018.
Asset management expense – related party
The decrease in asset management expense is due to the Internalization, as a result of which the Company will no longer incur an asset management expense beginning April 1, 2019.
See Note E — Related Party Transactions and Arrangements in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this amendment, MVP Detroit Center Garage, LLC earned approximately $498,000 in percentage rent from February 2017 to September 2017.Quarterly Report for additional information.
General and administrative
InApproximately $0.5 million of the increase in general and administrative expenses was attributable to an increase in directors and officers liability insurance. Additionally, due to the Internalization, the Company is now responsible for additional expenses previously paid by the former Advisor, including payroll, rent, office equipment, utilities and other expenses.
Asset management expense, general and administrative expenses and professional fees, in aggregate, were approximately $10.0 million and $8.0 million during the nine months ended September 2017, White Front Garage Partners received approximately $16,00030, 2019 and 2018, respectively.
Professional fees
The increase in percentage rentprofessional fees was primarily due to legal expenses incurred relating to lawsuits filed in accordance2019 and the SEC investigation, which was initiated in June of 2019.
See Note O – Legal in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
Management internalization
The Company was externally managed by the former Advisor prior to the management internalization that became effective on April 1, 2019. These expenses include (i) the Internalization Consideration to be paid in aggregate to the Manager and (ii) professional fees incurred to complete the Internalization of the Company’s management. See Note A — Organization and Business Operations and Note P – Deferred Management Internalization in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
Acquisition expenses
Acquisition expenses related to purchased properties are capitalized with the lease agreement between White Front Garage Partnersinvestment in real estate. Acquisition expenses incurred during the nine months ended September 30, 2019 relate solely to dead deals. The decrease in cost from the nine months ended September 30, 2018 to the same period in 2019 of approximately $0.2 million is a result of reduced acquisition activity.
Depreciation and Premier Parking.amortization expenses
The increase in depreciation and amortization expenses was due to the properties acquired during 2018 and assets placed in service following the completion of construction projects or general improvements on properties already held.
Total rental revenue earned, including percentage rent, from our 18 consolidated parking facilities (held by 16 different subsidiaries), which have continued operations, totaledImpairment
During the nine months ended September 30, 2019, the Company recorded asset impairment charges totaling approximately $6.8$1,452,000. These impairment charges consisted of $558,000 associated with the Memphis Court lot, $344,000 associated with the San Jose 88 garage, $50,000 associated with the St. Louis Washington lot and $500,000 associated with the Minneapolis City lot. These charges were recorded to write down the carrying value of these assets to their current appraised values net of estimated closing costs. The Company recorded no impairment charges for the nine months ended September 30, 2018. See Note B — Summary of Significant Accounting Policies in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
| | For the Nine Months Ended September 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Other income (expense) | | | | | | | | | | | | |
Interest expense | | $ | (7,164,000 | ) | | $ | (6,337,000 | ) | | $ | (827,000 | ) | | | 13 | % |
Gain from sale of investment in real estate | | | 2,294,000 | | | | 1,971,000 | | | | 323,000 | | | | 16 | % |
Other income | | | 81,000 | | | | 62,000 | | | | 19,000 | | | | 31 | % |
Income from DST | | | 170,000 | | | | 154,000 | | | | 16,000 | | | | 10 | % |
Total other expense | | $ | (4,619,000 | ) | | $ | (4,150,000 | ) | | $ | (469,000 | ) | | | 11 | % |
Interest expense
The increase in interest expense of approximately $0.8 million for the nine months ended September 30, 2017,2019, as compared to total revenuesthe same period in 2018, is primarily attributable to the Company’s increased use of $676,000 from 8debt on properties throughout the year.
To maximize the use of our consolidated propertiescash, the Company will continue to look for opportunities to utilize debt financing in future acquisitions, including use of long-term debt. The interest expense will vary based on the amount of the Company’s borrowings and current interest rates at the time of financing. The Company will seek to secure appropriate leverage with the lowest interest rate available. The terms of the loans will vary depending on the quality of the applicable property, the credit worthiness of the tenant and the amount of income the property is able to generate through parking leases. There is no assurance, however, that the Company will be able to secure additional financing on favorable terms or at all.
Interest expense recorded for the nine months ended September 30, 2016. All2019 and 2018 includes amortization of the properties held asloan issuance costs. Total amortization of September 30, 2016, were purchased in May 2016 or later, not providing a full nine months' worth of rental income in 2016. The increase in rental revenues and the number of properties held is a result of the Company's planned and continued growth through acquisitions of new properties. In particular the acquisition of the $55.0 million garage in Detroit, which accountedloan issuance cost for a majority of the increase, generating approximately $3.1 million in rental income to the Company during the nine months ended September 30, 2017. As2019 and 2018 was approximately $0.7 million and $0.6 million, respectively.
For additional information see Note K – Notes Payable in Part I, Item 1 – Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
Gain from sale of investment in real estate
During September 2019, the Company continuessold the surface parking lot and office building in Ft. Lauderdale for $6.1 million, which resulted in a gain from sale of investments of approximately $2.3 million.
During August 2018, the Company sold two surface lots in Kansas City for $4.0 million, which resulted in a gain from sale of investments of real estate of approximately $1.0 million.
During June 2018, the Company sold two surface lots in St. Louis for $8.5 million, which resulted in a gain from sale of investments of real estate of approximately $1.0 million.
Other income
During January 2019, the Company received a rebate of approximately $31,000 from Hawaii Energy for the completion of a project to acquire new properties, by meansreplace and improve the lighting of equity raises, debt financingthe property located in Hawaii
During August 2019, the Company received $50,000 from Inner Fire Fitness, LLC for the early termination of the retail lease at Mabley Place Garage.
During May 2018, the Company received a rebate of approximately $5,000 for the completion of a project to replace and improve the lighting of Cleveland Lincoln Garage. In addition, the Company also received $50,000 from PCAM, LLC for the early termination of the lease of MVP Milwaukee Wells.
During August 2018, the Company received a pending merger withrebate of approximately $7,000 for the completion of a project to replace and improve the lighting of MVP REIT, we expect to see our rental revenue to continue to grow year over year.Indianapolis City Park.
Income from DST
During the last week of August 2017, Houston Texas experienced major flooding due to Hurricane Harvey. This resulted in limited access to the Houston area and a shutdown of most business and government operations. Our parking garage and parking lots located in Houston, TX experienced minimal damage during this time; however, we are still assessing the long-term impact. As ofnine months ended September 30, 2017, we have not seen2019, the Company recorded a reduction in the base rentone-time accrual of $18,000 for income from our operator, who will continue to operate these locations under the terms of the current leases.DST.
Rental Income and Property Gross Revenues
Since a majority of the Company'sCompany’s property leases call for additional percentage rent, the Company monitors the gross revenue generated by each property on a monthly basis. The higher the property'sproperty’s gross revenue the higher the Company'sCompany’s potential percentage rent. The graph below shows the comparison of the Company's monthlyCompany’s quarterly rental income to the gross revenue generated by the properties.
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Operating expenses | | | | | | | | | | | | |
Property taxes | | $ | 90,000 | | | $ | 22,000 | | | $ | 279,000 | | | $ | 24,000 | |
Property operating expense | | | 273,000 | | | | 220,000 | | | | 608,000 | | | | 238,000 | |
Asset management expense | | | 345,000 | | | | 51,000 | | | | 839,000 | | | | 66,000 | |
General and administrative | | | 400,000 | | | | 267,000 | | | | 1,051,000 | | | | 602,000 | |
Merger costs | | | 824,000 | | | | -- | | | | 1,596,000 | | | | -- | |
Acquisition expenses | | | 113,000 | | | | 529,000 | | | | 2,156,000 | | | | 748,000 | |
Acquisition expenses – related party | | | -- | | | | 1,011,000 | | | | 1,710,000 | | | | 1,427,000 | |
Seminar | | | -- | | | | -- | | | | -- | | | | 6,000 | |
Depreciation | | | 508,000 | | | | 43,000 | | | | 1,404,000 | | | | 46,000 | |
Total operating expenses | | $ | 2,553,000 | | | $ | 2,143,000 | | | $ | 9,643,000 | | | $ | 3,157,000 | |
Operating expenses for the nine months ended September 30, 2017, increased $6.5 million, as compared to the nine months ended September 30, 2016. Other than costs relating to the Merger, the increase in expenses is primarily attributable to the Company's growth in investments in parking facilities. During the nine months ended September 30, 2017, the Company acquired a controlling interest in five parking facilities totaling approximately $81.2 million, as compared to 12 properties totaling approximately $56.5 million during the nine months ended September 30, 2016. The majority of the 2016 acquisitions occurred in the third and fourth quarters of 2016. The increase in acquisitions resulted in increased property taxes, other property operating expense, asset management fees, acquisitions expenses and depreciation. As the Company continues to acquire new properties, by means of the equity raises, debt financing and the pending merger with MVP REIT, we expect to see our operations and maintenance, asset management fees and depreciation grow.
In addition, the pending merger of the Company and MVP REIT resulted in approximately $0.8 million and $1.6 million in expenses during the three and nine months ended September 30, 2017, respectively. There were no similar expenses incurred during the three and nine months ended September 30, 2016. We estimated the total merger costs for the Company to continue to increase as we move closer to the completion of the merger, including a merger success fee of $3.6 million payable to our Advisor under the Termination Agreement.
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Other income (expense) | | | | | | | | | | | | |
Interest expense | | $ | (1,297,000 | ) | | $ | -- | | | $ | (3,146,000 | ) | | $ | (1,000 | ) |
Distribution income – related party | | | 75,000 | | | | -- | | | | 174,000 | | | | -- | |
Gain from sale of investment | | | 1,200,000 | | | | -- | | | | 1,200,000 | | | | -- | |
Income (loss) from investment in equity method investee | | | 2,000 | | | | 5,000 | | | | 19,000 | | | | 9,000 | |
Total other income (expense) | | $ | (20,000 | ) | | $ | 5,000 | | | $ | (1,753,000 | ) | | $ | 8,000 | |
The increase in interest expense for the three and nine months ended September 30, 2017, as compared to the same period in 2016, is related to the Company's increased use of debt to acquire properties. To maximize the use of our cash, the Company will continue to look for opportunities to utilize financing on future acquisitions, including with the use of our line of credit with KeyBank or permanent debt at the time of acquisitions. The interest expense will vary based on the amount of our borrowings and current interest rates at the time of financing. The Company will seek to secure appropriate leverage with the lowest interest rate available to us. The terms of the loans will greatly depend on the quality of the property, the credit worthiness of the tenant and the amount of income the property is able to generate through our parking leases. There is no assurance, however, that the Company will be able to secure additional financing on favorable terms or at all. Interest expense recorded for the three and nine months ended September 30, 2017 includes loan amortization costs. Total loan amortization cost for the three and nine months ended September 30, 2017 was approximately $0.2 million and $0.4 million, respectively.
See Note J – Line of Credit and Note K – Notes Payable of the Notes to the Unaudited Condensed ConsolidatedNon-GAAP Financial Statements included in Part I, Item 1 Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.Measures
Funds from Operations and Modified Funds from Operations
The AdvisorManagement believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, the Company believes that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts ("NAREIT")NAREIT promulgated a measure known as funds from operations ("FFO").FFO. FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, the Company believes that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of the Company'sCompany’s performance relative to the Company'sCompany’s competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than the Company does, making comparisons less meaningful.
The Investment Program Association ("IPA"(“IPA”) issued Practice Guideline 2010-01 (the "IPA“IPA MFFO Guideline"Guideline”) on November 2, 2010, which extended financial measures to include modified funds from operations ("MFFO"(“MFFO”). In computing MFFO, FFO is adjusted for certain non-operating cash items such as acquisition fees and expenses and certain non-cash items such as straight-line rent, amortization of in-place lease valuations, amortization of discounts and premiums on debt investments, nonrecurring impairments of real estate-related investments, mark-to-market adjustments included in net income (loss), and nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Management is responsible for managing interest rate, hedge and foreign exchange risk. To achieve the Company'sCompany’s objectives, the Company may borrow at fixed rates or variable rates. In order to mitigate the Company'sCompany’s interest rate risk on certain financial instruments, if any, the Company may enter into interest rate cap agreements and in order to mitigate the Company'sCompany’s risk to foreign currency exposure, if any, the Company may enter into foreign currency hedges. The Company views fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. Additionally, the Company believes it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations, assessments regarding general market conditions, and the specific performance of properties owned, which can change over time.
No less frequently than annually, the Company evaluates events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present, the Company assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) expected from the use of the assets and the eventual disposition. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of MFFO as described above, investors are cautioned that due to the fact thatbecause impairments are based on estimated future undiscounted cash flows and the relatively limited term of the Company'sCompany’s operations, it could be difficult to recover any impairment charges through operational net revenues or cash flows prior to any liquidity event. The Company adopted the IPA MFFO Guideline as management believes that MFFO is a helpful indicator of the Company'sCompany’s on-going portfolio performance. More specifically, MFFO isolates the financial results of the REIT'sREIT’s operations. MFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings.earnings in accordance with GAAP. Further, since the measure is based on historical financial information, MFFO for the period presented may not be indicative of future results or the Company'sCompany’s future ability to pay the Company'sCompany’s dividends. By providing FFO and MFFO, the Company presents information that assists investors in aligning their analysis with management'smanagement’s analysis of long-term operating activities. MFFO also allows for a comparison of the performance of the Company'sCompany’s portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of the Company'sCompany’s performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and the Company believebelieves it is often used by analysts and investors for comparison purposes. As explained below, management'smanagement’s evaluation of the Company'sCompany’s operating performance excludes items considered in the calculation of MFFO based on the following economic considerations:
Straight-line rent. Most of the Company’s leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company’s portfolio.
Amortization of in-place lease valuation. As this item is a cash flow adjustment made to net income in calculating the cash flows provided by (used in) operating activities, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company’s portfolio.
·
| Straight-line rent. Most of the Company's leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company's portfolio.
|
·��� | Amortization of in-place lease valuation. As this item is a cash flow adjustment made to net income in calculating the cash flows provided by (used in) operating activities, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company's portfolio.
|
· | Acquisition-related costs. The Company was organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to the Company'sCompany’s stockholders. In the process, with respect to periods prior to the Internalization, the Company incursincurred non-reimbursable affiliated and non-affiliated acquisition-related costs, which, in accordance with GAAP, are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss). These costs have been and will continue to be funded with cash proceeds from the OfferingCommon Stock and Preferred Offerings or included as a component of the amount borrowed to acquire such real estate. If the Company acquires a property after all offering proceeds from the OfferingCommon Stock and Preferred Offerings have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, unless the Advisor determines to waive the payment of any then-outstanding acquisition-related costs otherwise payable to the Advisor, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. In evaluating the performance of the Company'sCompany’s portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments'investments’ revenues and expenses. Acquisition-related costs may negatively affect the Company'sCompany’s operating results, cash flows from operating activities and cash available to fund distributions during periods in which properties are acquired, as the proceeds to fund these costs would otherwise be invested in other real estate related assets. By excluding acquisition-related costs, MFFO may not provide an accurate indicator of the Company'sCompany’s operating performance during periods in which acquisitions are made. However, it can provide an indication of the Company'sCompany’s on-going ability to generate cash flow from operations and continue as a going concern after the Company ceases to acquire properties on a frequent and regular basis, which can be compared to the MFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to the Company.Company. Management believes that excluding these costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management. |
For all of these reasons, the Company believes the non-GAAP measures of FFO and MFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of the Company'sCompany’s real estate portfolio. However, a material limitation associated with FFO and MFFO is that they are not indicative of the Company'sCompany’s cash available to fund distributions since other uses of cash, such as capital expenditures at the Company'sCompany’s properties and principal payments of debt, are not deducted when calculating FFO and MFFO. Additionally, MFFO has limitations as a performance measure in an offering such as the Company'sCompany’s prior Common Stock Offering where the price of a share of common stock is a stated value. The use of MFFO as a measure of long-term operating performance on value is also limited if the Company does not continue to operate under the Company'sCompany’s current business plan as noted above. MFFO is useful in assisting management and investors in assessing the Company's on-goingCompany’s ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods, and, in particular, afternow that the Common Stock Offering and acquisition stages are complete, and net asset value ("NAV")NAV is disclosed. However, MFFO is not a useful measure in evaluating NAV because impairments are taken into accountconsidered in determining NAV but not in determining MFFO. Therefore, FFO and MFFO should not be viewed as a more prominent a measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
NeitherNone of the SEC, NAREIT noror any other organization body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and the Company may have to adjust the calculation and characterization of this non-GAAP measure.
The Company'sCompany’s calculation of FFO and MFFO attributable to common shareholders is presented in the following table for the three and nine months ended September 30, 20172019 and 2016.2018:
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Net loss attributable to MVP REIT II, Inc. common shareholders | | $ | (604,000 | ) | | $ | (1,589,000 | ) | | $ | (5,157,000 | ) | | $ | (2,534,000 | ) |
Add (Subtract): | | | | | | | | | | | | | | | | |
Gain on Sale of real estate | | | (1,200,000 | ) | | | -- | | | | (1,200,000 | ) | | | -- | |
Depreciation of real estate assets | | | 508,000 | | | | 43,000 | | | | 1,404,000 | | | | 46,000 | |
FFO | | $ | (1,296,000 | ) | | $ | (1,546,000 | ) | | $ | (4,953,000 | ) | | $ | (2,488,000 | ) |
Add: | | | | | | | | | | | | | | | | |
Acquisition fees and expenses to non-affiliates | | | 113,000 | | | | 529,000 | | | | 2,156,000 | | | | 748,000 | |
Acquisition fees and expenses to affiliates | | | -- | | | | 1,011,000 | | | | 1,710,000 | | | | 1,427,000 | |
Acquisition / Merger costs | | | 824,000 | | | | -- | | | | 1,596,000 | | | | -- | |
MFFO attributable to MVP REIT II, Inc. shareholders | | $ | (359,000 | ) | | $ | (6,000 | ) | | $ | 509,000 | | | $ | (313,000 | ) |
Distributions paid to Common Shareholders | | $ | 481,000 | | | $ | 221,000 | | | $ | 1,402,000 | | | $ | 359,000 | |
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Net loss attributable to The Parking REIT, Inc. common shareholders | | $ | (3,145,000 | ) | | $ | 261,000 | | | $ | (41,232,000 | ) | | $ | (5,127,000 | ) |
Add (subtract): | | | | | | | | | | | | | | | | |
Gain on sale of real estate | | | (2,294,000 | ) | | | (962,000 | ) | | | (2,294,000 | ) | | | (1,971,000 | ) |
Impairment of real estate | | | 500,000 | | | | -- | | | | 1,452,000 | | | | -- | |
Depreciation and amortization expenses of real estate assets | | | 1,285,000 | | | | 1,262,000 | | | | 3,876,000 | | | | 3,653,000 | |
FFO | | $ | (3,654,000 | ) | | $ | 561,000 | | | $ | (38,198,000 | ) | | $ | (3,445,000 | ) |
Add (subtract): | | | | | | | | | | | | | | | | |
Acquisition fees and expenses to non-affiliates | | | 1,000 | | | | 7,000 | | | | 251,000 | | | | 411,000 | |
Change in deferred rental assets | | | (10,000 | ) | | | (11,000 | ) | | | (32,000 | ) | | | (53,000 | ) |
MFFO attributable to The Parking REIT, Inc. shareholders | | $ | (3,663,000 | ) | | $ | 557,000 | | | $ | (37,979,000 | ) | | $ | (3,087,000 | ) |
Distributions paid to Common Shareholders | | $ | -- | | | $ | -- | | | $ | -- | | | $ | 817,000 | |
CapitalLiquidity and LiquidityCapital Resources
The Company commenced operations on December 30, 2015.
The Company'sCompany’s principal demand for funds is for the acquisition of real estate assets, the payment of operating expenses, capital expenditures, principal and interest on the Company'sCompany’s outstanding indebtedness and the payment of distributions to the Company'sCompany’s stockholders. Over time, the Company intends to generally fund its operating expenses from its cash flow from operations. The cash required for acquisitions and investments in real estate will behas to date been funded primarily from the sale of shares of the Company'sCompany’s common stock and preferred stock, including those shares offered for sale through the Company'sCompany’s distribution reinvestment plan, dispositions of properties in the Company'sCompany’s portfolio and through third party financing and the assumption of debt on acquired properties.
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On December 31, 2016, the Company ceased all selling efforts for its initial public offering of shares of its common stock at $25.00 per share, pursuant to a registration statement on Form S-11 (No. 333-205893). The Company accepted additional subscriptions through March 31, 2017, the last day of the initial public offering, and raised approximately $61.3 million in the initial public offering before payment of deferred offering costs of approximately $1.1 million, contribution from an affiliate of the former Advisor of approximately $1.1 million and cash distributions of approximately $1.8 million.
The Company anticipates raising additional funds through equity financings, such as private placements of its preferred stock, as well as through additional debt financing. As of September 30, 2017, the Company had raised approximately $2.6$2.5 million, net of offering costs, in funds from the private placements of Series A Convertible Redeemable Preferred Stock and approximately $11.8$36.0 million, net of offering costs, in funds from the private placements of Series 1 Convertible Redeemable Preferred Stock. The
As disclosed in Note O - Legal in Part I, Item 1 – Notes to the Condensed Consolidated Financial Statements of this Quarterly Report, Nasdaq has informed the Company continuesthat (i) the Company’s common stock will not be approved for listing currently on the Nasdaq Global Market, and (ii) it is highly unlikely that the Company’s common stock would be approved for listing while the SEC investigation is ongoing. There can be no assurance that the Company’s common stock will ever be approved for listing on the Nasdaq Global Market or any other stock exchange, even if the SEC investigation referred to above is completed and no wrongdoing is found and no action is taken in connection therewith against the Company, Mr. Shustek or any other person. As a result of this Nasdaq decision, the Company has determined not to proceed at this time with the registration and sale of the Company’s common stock as contemplated by the Registration Statement (File No. 333-205893) on Form S-11 filed with the U.S. Securities and Exchange Commission on October 5, 2018 and such Registration Statement was withdrawn on August 29, 2019. As a result of the forgoing, our ability to raise equity capital will be limited in the future and the Company may seek to raise additional funds through private placementsadditional debt financings or the sale of Series 1 Convertible Redeemable Preferred Stock.assets. There can be no assurance that the Company will be able to obtain additional debt financing on acceptable terms or at all or that the Company will be able to sell existing assets at attractive prices or at all. Further, there can be no assurance that the Company will be able to generate cash from operations sufficient to fund its operating expenses and other capital needs. In addition, there can be no assurance that cash distributions to the Company’s common stockholders will be resumed in the future.
As of September 30, 2019, the Company’s debt consisted of approximately $120.4 million in fixed rate debt and $39.5 million in variable rate debt, net of loan issuance costs and the Company’s cash and cash equivalents and restricted cash were approximately $9.7 million ($3.4 million of which was restricted cash).
NetSources and Uses of Cash
The following table summarizes the Company’s cash used in operating activitiesflows for the nine months ended September 30, 2017 totaled2019 and 2018:
| | For the Nine Months Ended September 30, | |
| | 2019 | | | 2018 | |
Net cash used in operating activities | | $ | (3,203,000 | ) | | $ | (858,000 | ) |
Net cash provided by (used in) investing activities | | $
| 2,502,000 | | | $
| (25,706,000 | ) |
Net cash provided by financing activities | | $
| 989,000 | | | $
| 19,047,000 | |
Comparison of the nine months ended September 30, 2019, to the nine months ended September 30, 2018
The Company’s cash and cash equivalents and restricted cash were approximately $9.0 million. Operating cash flows were used for the payment$9.7 million as of normal operating expenses such as management fees, insurance, accounting fees and legal bills. Net cash used in investing activities totaled approximately $76.2 million and mainly consisted of purchase of investments in real estate totaling $81.2 million (with proceeds from non-controlling interest totaling $5.1 million and use of deposits from prior periods totaling $4.5 million), building improvementsSeptember 30, 2019, which was an increase of approximately $2.0$0.5 million additional investment in Houston Preston of approximately $1.0 million andfrom the purchase of an investment in a DST for $2.8 million. Net cash provided by financingbalance at September 30, 2018.
Cash flows from operating activities totaled approximately $82.9 million and mainly consisted of proceeds from notes payable of approximately $75.8 million, proceeds from the Company's KeyBank line of credit of approximately $32.6 million, proceeds from issuance of preferred stock of approximately $14.3 million, proceeds from issuance of common stock of approximately $5.8 million, netted with payments on the KeyBank line of credit of approximately $39.5 million, distributions to non-controlling interests of approximately $1.8 million, payments on notes payable of approximately $1.4 million, distributions to stockholders of approximately $1.8 million and loan fees paid of approximately $1.1 million. In addition, financing activities consisted of proceeds from issuance of common stock of approximately $5.8 million and issuance of preferred stock of approximately $14.3 million.
Net cash used in operating activities for the nine months ended September 30, 2016 totaled2019 was approximately $3.2 million, compared to approximately $0.9 million for the same period in 2018. The increase in cash used was primarily due to an increase in cash used of approximately $1.2 million of cash used to fund an increase in prepaid expenses including approximately $1.8 million. Operatingmillion of prepaid directors and officers insurance premiums, other assets and accounts receivable partially offset by an increase in net loss and adjustments to reconcile net loss to cash of approximately $2.4 million.
Cash flows were usedfrom investing activities
Net cash provided by investing activities for the paymentnine months ended September 30, 2019 was approximately $2.5 million, compared to approximately $25.7 million of normal operating expenses. Netnet cash used, to acquire investments, for the same period in investing2018. The reduction in cash used was due primarily to the fact that no investments were acquired during the nine months ended September 30, 2019 and one asset was sold in 2019.
Cash flows from financing activities totaled approximately $40.4 million and consisted of investments in real estate of approximately $36.6 million, investment in equity method investee of approximately $0.6 million, investments in cost method investees of approximately $1.4 million, investment in cost method investees held for sale of approximately $0.8 million and security deposits on future acquisitions of approximately $1 million.
Net cash provided by financing activities totaled approximately $42.7 million and consisted of proceeds from issuance of common stock of approximately $42.6 million, proceeds from notes payable related to a cost method investment property of approximately $0.4 million, distributions of approximately $0.1 million and payments on notes payable of approximately $0.1 million.
On October 5, 2016,for the Company, through its Operating Partnership, and MVP REIT, through a wholly owned subsidiary (the "Borrowers"), entered into a credit agreement (the "Unsecured Credit Agreement") with KeyBank, National Association ('KeyBank") as the administrative agent and KeyBank Capital Markets ("KeyBank Capital Markets") as the lead arranger. Pursuant to the Unsecured Credit Agreement, the Borrowers were provided with a $30 million unsecured credit facility (the "Unsecured Credit Facility"), which may be increased up to $100 million, in minimum increments of $10 million. The Unsecured Credit Facility has an initial term of two years, maturing on October 5, 2018, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. The Unsecured Credit Facility has an annual interest rate calculated based on LIBOR Rate plus 2.25% or Base Rate plus 1.25%, both as provided in the Unsecured Credit Agreement. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus ½ of 1%. Payments under the Unsecured Credit Facility are interest only and are due on the first day of each quarter. The obligations of the Borrowers of the Unsecured Credit Agreement are joint and several. The REITs have entered into cross-indemnification provisions with respect to their joint and several obligations under the Unsecured Credit Agreement.
On June 26, 2017, the Company and MVP REIT (together, the "REITs"), each through a wholly owned subsidiary, MVP REIT II Operating Partnership, LP and MVP Real Estate Holdings, LLC (together, the "Borrowers"), entered into a credit agreement (the "Working Capital Credit Agreement") with KeyBank, National Association ("KeyBank") as the administrative agent and KeyBanc Capital Markets ("KeyBanc Capital Markets") as the lead arranger. Pursuant to the Working Capital Credit Agreement, the Borrowers were provided with a $6.0 million credit facility (the "Total Commitment"), which may be increased up to $10 million, in minimum increments of $1 million. The Total Commitment has an initial term of six months, maturing on December 26, 2017. The Working Capital Credit Agreement has an interest rate calculated based on LIBOR Rate plus 4.5% or Base Rate plus 3.5%, both as provided in the Working Capital Credit Agreement. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus ½ of 1%. Payments under the Working Capital Credit Facility require 100% of the net proceeds of all capital events and equity issuances by the REITs within 5 business days of receipt. The obligations of the Borrowers of the Unsecured Credit Agreement are joint and several. The REITs have entered into cross-indemnification provisions with respect to their joint and several obligations under the Unsecured Credit Agreement.
As of September 30, 2017, the balance on the Working Capital Credit Facility was approximately $1.5 million (net of unamortized loan costs), of which our portion of the current draw was approximately $1.5 million. As of September 30, 2017, the REITs had an additional available draw of approximately $4.4 million. The Company used net proceeds from the private placement of the Series 1 Convertible Redeemable Preferred Stock to paydown the $1.5 million in October 2017. For the three and nine months ended September 30, 2017, we expensed2019 was approximately $49,000$1.0 million compared to approximately $19.0 million during the same period in interest expense. For2018. The reduction in cash provided by financing activities was primarily due to the three andfact that no preferred stock or other equity was issued during the nine months ended September 30, 2017, we expensed2019 compared to approximately $1,600$9.1 million of preferred stock issued during the same period in unused line fees associated with our draw. Total loan amortization cost for2018 and a decrease in net proceeds from long term debt of approximately $9.7 million partially offset by a decrease of approximately $0.8 million in stock redemptions and distributions paid to shareholders during the three and nine months ended September 30, 2017 were $50,000 and $53,000, respectively. As of November 14, 2017,2019 compared to the balance on the Working Capital Line of Credit was approximately zero.same period in 2018.
In connection with our KeyBank Unsecured Credit Agreement, the Borrowers are required to maintain a minimum liquidity requirement of $2.0 million, which is defined as the sum of unencumbered cash and cash equivalentsCompany Indebtedness
On February 8, 2019, subsidiaries of the BorrowerCompany, consisting of MVP PF St. Louis 2013, LLC (“MVP St. Louis”), and its Subsidiaries. In addition,MVP PF Memphis Poplar 2013 (“MVP Memphis Poplar”), LLC entered into a loan agreement, dated as of February 8, 2019, with LoanCore Capital Credit REIT LLC (“LoanCore”). Under the terms of the Loan Agreement, LoanCore agreed to loan MVP St. Louis and MVP Memphis Poplar $5.5 million to repay and discharge the outstanding KeyBank loan agreement. The loan is secured by a Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing on each of the properties owned by MVP St. Louis and MVP Memphis Poplar.
The loan with Bank of America for the MVP Detroit Center Parking garage requires the Company and MVP REIT to maintain a combined $2.3 million in liquidity at all times, which is defined as unencumbered cash and cash equivalents. As of November 14, 2017,the date of this filing, the Company and MVP REIT werewas in compliance with both of thesethis lender requirements.requirement.
The Company’s secured mortgage debt of approximately $54.0 million and $58.6 million as of September 30, 2019 and December 31, 2018, respectively, require Mr. Shustek and the former Manager to continue to provide guarantees. In connection with the Contribution Agreement and the Internalization, Mr. Shustek and the former Manager will continue to provide such guarantees. For additional information regarding the Company’s indebtedness, please see Note K – Notes Payable in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
The Company will experience a relative decrease in liquidity as offering proceeds from its debt or equity financings are used to acquire and operate assets and may experience a temporary, relative increase in liquidity if and when investments are sold, to the extent such sales generate proceeds that are available for additional investments. The AdvisorManagement may, but is not required to, establish working capital reserves from proceeds from any common or preferred stock offering proceeds ofor cash flow generated by the Company'sCompany’s investments or out of proceeds from the sale of investments. The Company does not anticipateanticipates establishing a general working capital reserve;reserve in the future but is not required to as previously mentioned; however, the Company may establish capital reserves with respect to particular investments. The Company also may, but is not required to, establish reserves out of cash flow generated by investments or out of net sale proceeds in non-liquidating sale transactions. Working capital reserves are typically utilized to fund tenant improvements, leasing commissions and major capital expenditures. The Company'sCompany’s lenders also may require working capital reserves.
To the extent that the working capital reserve is insufficient to satisfy the Company'sCompany’s cash requirements, additional funds may be provided from cash generated from operations or through short-term borrowing. In addition, subject to thecertain exceptions and limitations, previously described in the Company's prospectus, the Company may incur indebtedness in connection with the acquisition of any real estate asset, refinance the debt thereon, arrange for the leveraging of any previously unfinancedunencumbered property or reinvest the proceeds of financing or refinancing in additional properties.
The Company's management is not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting the Company's targeted portfolio, the U.S. parking facility industry, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of the Company's assets.
In addition to making investments in accordance with the Company's investment objectives, the Company expects to use its capital resources to make certain payments to the Company's advisor and the selling agent(s). During the acquisition and development stage, the Company expects to make payments to the Company's advisor in connection with the selection or purchase of investments, the management of the Company's assets and costs incurred by the Company's advisor in providing services to us. For a discussion of the compensation to be paid to the Company's advisor, see "Fees and Expenses Paid in Connection with the Operations of the Company", included in Note E — Related Party Transactions and Arrangements Part I, Item 1 Financial Statements of this Quarterly Report on Form 10-Q for more information. The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of the Company's advisor and the Company's board of directors.
Management Compensation Summary
The following table summarizes all compensation and fees incurred by us and paid or payable to the Company'sformer Advisor and its affiliates in connection with the Company'sCompany’s organization operations for the three and nine months ended September 30, 20172019 and 2016.2018.
| | For the three months ended September 30, | | | For the nine months ended September 30, | | | For the Three Months Ended September 30, | | | For the Nine months ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Acquisition Fees – related party | | $ | -- | | | $ | 1,011,000 | | | $ | 1,710,000 | | | $ | 1,427,000 | | |
Asset Management Fees | | | 345,000 | | | | 51,000 | | | | 839,000 | | | | 66,000 | | | $ | -- | | | $ | 313,000 | | | $ | 854,000 | | | $ | 2,000,000 | |
Total | | $ | 345,000 | | | $ | 1,062,000 | | | $ | 2,549,000 | | | $ | 1,493,000 | | | $ | -- | | | $ | 313,000 | | | $ | 854,000 | | | $ | 2,000,000 | |
The Company ceased payment of asset management fees effective April 1, 2019, as a result of the Internalization.
Distributions and Stock Dividends
TheOn March 22, 2018 the Company intends to make regularsuspended the payment of distributions on its common stock. There can be no assurance that cash and stock distributions to itsthe Company’s common stockholders and cash distributed to its Series A preferred stock and Series 1 preferred stock, typically on a monthly basis.will be resumed in the future. The actual amount and timing of distributions, if any, will be determined by the Company'sCompany’s board of directors in its discretion and typically will depend on the amount of funds available for distribution, which is impacted by current and projected cash requirements, tax considerations and other factors. As a result, the Company'sCompany’s distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT for federal income tax purposes, the Company must make distributions equal to at least 90% of its REIT taxable income each year.year (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). In addition, the Company will be subject to corporate income tax to the extent the Company distributes less than 100% of the net taxable income including any net capital gain.
The Company is not currently and may not in the future generate sufficient cash flow from operations to fully fund distributions. All or a portion of the distributions may be paid from other sources, such as cash flows from equity offerings, financing activities, borrowings, or by way of waiver or deferral of fees. The Company has not established any limit on the extent to which distributions could be funded from these other sources. Accordingly, the amount of distributions paid may not reflect current cash flow from operations and distributions may include a return of capital, (rather than a return on capital). If the Company pays distributions from sources other than cash flow from operations, the funds available to the Company for investments would be reduced and the share value may be diluted. The level of distributions will be determined by the board of directors and depend on several factors including current and projected liquidity requirements, anticipated operating cash flows and tax considerations, and other relevant items deemed applicable by the board of directors.
Common Stock
On October 23, 2015, the Company announced that its board of directors has approved a plan for payment of initial monthly cash distributions of $0.0625 per share and monthly stock dividends $0.0625 per share, based on a purchase price of $25.00 per common share, commencing after the Company breaks escrow upon receiving subscriptions for the minimum offering amount of $2 million. The initial cash distribution and stock dividend were paid on February 10, 2016 to stockholders of record as of January 24, 2016. The initial cash distributions were paid from offering proceeds rather than funds from operations and therefore may represent a return of capital. There can be no assurance that distributions and dividends will continue to be paid at this rate. The Company's board of directors may at any time change the distribution and dividend rate or suspend payment of distributions and dividends if it determines that such action is in the best interest of the Company and its stockholders. The Company expects that its board of directors will continue to authorize, and it will declare, distributions based on a record date on the 24th of each month, and it expects to continue to pay distributions on the 10th day of the following month (or the next business day if the 10th is not a business day), monthly in arrears. The Company has not established a minimum distribution level, and its charter does not require that it make distributions to its stockholders; however, the Company anticipates the payment of monthly distributions. The Company may also make special stock dividends.
From inception through September 30, 2017,2019, the Company had paid approximately $0.8$1.8 million in cash, issued 54,33683,437 shares of its common stock as DRIP and issued 85,358153,826 shares of its common stock as dividend in distributions to the Company'sCompany’s stockholders. All of the cash distributions were paid from offering proceeds and constituted a return of capital. On March 22, 2018 the Company suspended payment of distributions and as such there are currently no distributions to invest in the DRIP.
The Company'sCompany’s total distributions paid for the period presented, the sources of such distributions, the cash flows provided by (used in) operations and the number of shares of common stock issued pursuant to the Company's distribution reinvestment plan, orCompany’s DRIP are detailed below.
To date, all distributions were paid from offering proceeds and therefore may representrepresented a return of capital.
| | Distributions paid in Cash | | | Distributions paid through DRIP | | | Total Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
1st Quarter, 2017 | | $ | 161,000 | | | $ | 285,000 | | | $ | 446,000 | | | $ | (3,672,000 | ) |
2nd Quarter, 2017 | | | 168,000 | | | | 307,000 | | | | 475,000 | | | | (3,943,000 | ) |
3rd Quarter, 2017 | | | 172,000 | | | | 309,000 | | | | 481,000 | | | | (1,623,000 | ) |
Total 2017 | | $ | 501,000 | | | $ | 901,000 | | | $ | 1,402,000 | | | $ | (9,238,000 | ) |
| | Distributions Paid in Cash | | | Distributions Paid through DRIP | | | Total Distributions Paid | | | Cash Flows used in Operations (GAAP basis) | |
1st Quarter, 2019 | | $ | -- | | | $ | -- | | | $ | -- | | | $ | (1,272,000 | ) |
2nd Quarter, 2019 | | | -- | | | | -- | | | | -- | | | | (942,000 | ) |
3rd Quarter, 2019 | | | -- | | | | -- | | | | -- | | | | (989,000 | ) |
Total 2019 | | $ | -- | | | $ | -- | | | $ | -- | | | $ | (3,203,000 | ) |
| | Distributions paid in Cash | | | Distributions paid through DRIP | | | Total Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
1st Quarter, 2016 | | $ | 10,000 | | | $ | 14,000 | | | $ | 24,000 | | | $ | (134,000 | ) |
2nd Quarter, 2016 | | | 47,000 | | | | 67,000 | | | | 114,000 | | | | (435,000 | ) |
3rd Quarter, 2016 | | | 85,000 | | | | 136,000 | | | | 221,000 | | | | (1,181,000 | ) |
4th Quarter, 2016 | | | 132,000 | | | | 241,000 | | | | 373,000 | | | | (1,894,000 | ) |
Total 2016 | | $ | 274,000 | | | $ | 458,000 | | | $ | 732,000 | | | $ | (3,644,000 | ) |
| | Distributions Paid in Cash | | | Distributions Paid through DRIP | | | Total Distributions Paid | | | Cash Flows Provided by (used in) Operations (GAAP basis) | |
1st Quarter, 2018 | | $ | 806,000 | | | $ | 418,000 | | | $ | 1,224,000 | | | $ | (1,015,000 | ) |
2nd Quarter, 2018 | | | -- | | | | -- | | | | -- | | | | (506,000 | ) |
3rd Quarter, 2018 | | | -- | | | | -- | | | | -- | | | | 663,000 | |
4th Quarter, 2018 | | | -- | | | | -- | | | | -- | | | | (813,000 | ) |
Total 2018 | | $ | 806,000 | | | $ | 418,000 | | | $ | 1,224,000 | | | $ | (1,671,000 | ) |
Preferred Series A Stock
The Company offered up to $50 million in shares of the Company'sCompany’s Series A Convertible Redeemable Preferred Stock ("(“Series A"A”), par value $0.0001 per share, together with warrants to acquire the Company'sCompany’s common stock, in a Regulation D 506(c) private placement to accredited investors. In connection with the private placement, on October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock. The Company commenced the private placement of the Shares to accredited investors on November 1, 2016 and closed the offering on March 24, 2017. The Company raised approximately $2.6$2.5 million, net of offering costs, in the Series A private placements.
The offering price was $1,000 per share. In addition, each investor in the Series A received, for every $1,000 in shares subscribed by such investor, 30 detachable warrants to purchase shares of the Company’s common stock par value $0.0001 per share, of the Company if the Company'sCompany’s common stock is listed on a national securities exchange. The warrants'warrants’ exercise price is equal to 110% of the volume weighted average closing stock price of the Company'sCompany’s common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of November, 14, 2017,12, 2019, there were potentially 85,74084,510 detachable warrants that may be exercised after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event.
For additional information see Note N —-51- Preferred Stock and Warrants
in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
From inceptioninitial issuance through September 30, 2017,2019, the Company hashad declared distributions of approximately $507,000 of which approximately $489,000 had been paid $87,000 in distributions forto Series A stockholders, all of which were paid from offering proceeds and constituted a return of capital.stockholders.
To date, all distributions were paid from offering proceeds and therefore may represent a return of capital.
| | Total Series A Distributions Paid | | | Cash Flows used in Operations (GAAP basis) | |
1st Quarter, 2019 | | $ | 54,000 | | | $ | (1,272,000 | ) |
2nd Quarter, 2019 | | | 54,000 | | | | (942,000 | ) |
3rd Quarter, 2019 | | | 54,000 | | | | (989,000 | ) |
Total 2019 | | $ | 162,000 | | | $ | (3,203,000 | ) |
| | Total Series A Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
1st Quarter, 2017 | | $ | 5,000 | | | $ | (3,672,000 | ) |
2nd Quarter, 2017 | | | 41,000 | | | | (3,943,000 | ) |
3rd Quarter, 2017 | | | 41,000 | | | | (1,623,000 | ) |
Total 2017 | | $ | 87,000 | | | $ | (9,238,000 | ) |
| | Total Series A Distributions Paid | | | Cash Flows Provided by (used in) Operations (GAAP basis) | |
1st Quarter, 2018 | | $ | 41,000 | | | $ | (1,015,000 | ) |
2nd Quarter, 2018 | | | 51,000 | | | | (506,000 | ) |
3rd Quarter, 2018 | | | 54,000 | | | | 663,000 | |
4th Quarter, 2018 | | | 54,000 | | | | (813,000 | ) |
Total 2018 | | $ | 200,000 | | | $ | (1,671,000 | ) |
Preferred Series 1 Stock
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017, the Company commenced the Regulation D 506(b) private placement of shares of Series 1, together with warrants to acquire the Company'sCompany’s common stock, to accredited investors. As of November 14, 2017,On January 31, 2018, the Company hadclosed this offering. The Company raised approximately $21.6$36.5 million,, net of offering costs, in the Series 1 private placements and had 21,62839,811 shares of Series 1 issued and outstanding.
The offering price is $1,000 per share. In addition, each investor in the Series 1 will receive, for every $1,000 in shares subscribed by such investor, 35 detachable warrants to purchase shares of the Company’s common stock par value $0.0001 per share, of the Company if the Company'sCompany’s common stock is listed on a national securities exchange. The warrants'warrants’ exercise price is equal to 110% of the volume weighted average closing stock price of the Company'sCompany’s common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of November, 14, 2017,12, 2019, there were potentially 750,855 1,382,675 detachable warrants that may be exercised after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event.
For additional information see Note N — Preferred Stock and Warrants in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
From inceptionissuance date through September 30, 2017,2019, the Company has paid $112,000 inhad declared distributions forSeries 1 stockholders, allof approximately $5.2 million of which wereapproximately $5.0 million had been paid from offering proceeds and constituted a return of capital.
To date, all distributions were paid from offering proceeds and therefore may represent a return of capital.
| | Total Series 1 Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
1st Quarter, 2017 | | $ | -- | | | $ | (3,672,000 | ) |
2nd Quarter, 2017 | | | 14,000 | | | | (4,883,000 | ) |
3rd Quarter, 2017 | | | 98,000 | | | | (1,623,000 | ) |
Total 2017 | | $ | 112,000 | | | $ | (10,178,000 | ) |
The Company may not generate sufficient cash flow from operations to fully fund distributions. All or a portion of the distributions may be paid from other sources, such as cash flows from equity offerings, financing activities, borrowings, cash advances from the Advisor, or by way of waiver or deferral of fees. The Company has not established any limit on the extent to which distributions could be funded from these other sources. Accordingly, the amount of distributions paid may not reflect current cash flow from operations and distributions may include a return of capital, rather than a return on capital. If the Company continues to pay distributions from sources other than cash flow from operations, the funds available to the Company for investments would be reduced and the share value may be diluted. The level of distributions will be determined by the board of directors and depend on a number of factors including current and projected liquidity requirements, anticipated operating cash flows and tax considerations, and other relevant items deemed applicable by the board of directors.Series 1 stockholders.
-52--47-
| | Total Series 1 Distributions Paid | | | Cash Flows used in Operations (GAAP basis) | |
1st Quarter, 2019 | | $ | 697,000 | | | $ | (1,272,000 | ) |
2nd Quarter, 2019 | | | 695,000 | | | | (942,000 | ) |
3rd Quarter, 2019 | | | 696,000 | | | | (989,000 | ) |
Total 2019 | | $ | 2,088,000 | | | $ | (3,203,000 | ) |
| | Total Series 1 Distributions Paid | | | Cash Flows Provided by (used in) Operations (GAAP basis) | |
1st Quarter, 2018 | | $ | 477,000 | | | $ | (1,015,000 | ) |
2nd Quarter, 2018 | | | 639,000 | | | | (506,000 | ) |
3rd Quarter, 2018 | | | 697,000 | | | | 663,000 | |
4th Quarter, 2018 | | | 697,000 | | | | (813,000 | ) |
Total 2018 | | $ | 2,510,000 | | | $ | (1,671,000 | ) |
Related-Party Transactions and Arrangements
ThePrior to the Internalization, the Company hashad entered into agreements with affiliates of its Sponsor, whereby the Company willwould pay certain fees
or reimbursements to the former Advisor or its affiliates in connection with, among other things, acquisition and financing activities, asset management services and reimbursement of operating and offering related costs. SeeFor additional information see Note E — Related Party Transactions and Arrangements in in Part I, Item 1 Notes to the Condensed Consolidated Financial Statementsof this Quarterly Report on Form 10-Q for a discussion of the various related party transactions, agreements and fees.fees and the Internalization.
On November 5, 2016, the Company purchased 338,409 shares of MVP REIT'sI’s common stock from an unrelated third party for $3.0 million or $8.865 per share. During the three and nine monthsyear ended September 30,December 31, 2017, the Company received approximately $23,000 and $122,000$189,000, in stock distributions, related to the Company'sCompany’s ownership of MVP REITI common stock.
At the effective time of the Merger, 174,026 shares of MVP I Common Stock held by the Company was retired.
On March 29, 2019, the Company and the former Advisor entered into definitive agreements to internalize the Company's management function effective April 1, 2019. As a result of the Internalization, the Management Agreements were terminated.
Inflation
The Company expects to include provisions in its tenant leases designed to protect the Company from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market.
TheCommencing with the taxable year ended December 31, 2017, the Company isbelieves it has been organized and conducts operations to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the "Code") and to comply with the provisions of the Internal Revenue Code with respect thereto.Code. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income, ("Taxable Income"), which is distributed to its stockholders, provided that at least 90% of Taxable Incomesuch taxable income is distributed and provided that certain other requirements are met. Our Taxable IncomeThe Company’s REIT taxable income may substantially exceed or be less than our netthe income as determined based on GAAP, because, differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.
Ifcalculated according to GAAP. In addition, the Company does not qualify as a REIT for the tax year ended December 31,2017, we will file as a C corporation and deferred tax assets and liabilities will be established for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for the deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on the available evidence at the time the determination is made. For the tax year ended December 31, 2016, the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets, a valuation allowance should be recorded against our net deferred tax assets.
The Company will be electingsubject to be treated as a REIT for the tax year beginning January 1, 2017 and ending December 31, 2017, and believes that it has been organized and has operated during 2017 in such a manner to meet the qualifications to be treated as a REIT for federal and statecorporate income tax purposes. During 2016,to the Company was subject to U.S. federal and stateextent that less than 100% of the net taxable income taxes as it will file income tax returns as a C corporation. As such, we account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
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distributed, including any net capital gain.
The Company uses a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. The Company believes that its income tax filing positions and deductions would be sustained upon examination; thus, the Company has not recorded any uncertain tax positions as of September 30, 2017.2019.
A full valuation allowance for deferred tax assets was provided since the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets. A change in circumstances may cause the Company to change its judgment about whether deferred tax assets willshould be recorded, and further whether any such assets would more likely than not be realized. The Company would generally report any change in the valuation allowance through its income statement in the period in which such changes in circumstances occur.
As Because the Company is a REIT, the Companyit will generally not be subject to corporate level federal income taxes on earnings distributed to ourthe Company’s stockholders and therefore may not realize any benefit from deferred tax assets arising during the Company's pre-2017 periods before the Company became2019 or any prior period in which a REIT.valid REIT election was in effect. The Company intends to distribute at least 100% of its taxable income annually and intends to do so for the tax year ending December 31, 20172019 and in all future periods. Accordingly, the Company has not included any provisions for federal income taxes in the accompanying consolidated financial statements for the three and nine months ended September 30, 2017. The Company owns and rents real estate in various states and municipalities within the United States, and, as a result, the Company or one or more of its subsidiaries may have income or other tax return filing requirements, and may be subject to income or franchise taxes, in state and municipal jurisdictions.
The Company has a net deferred tax asset of $1.6 million which is subject toplaced a full valuation allowance on all of its deferred tax assets, and thus no asset is not recorded on the Company'sCompany’s balance sheet. The deferred tax asset is primarily made up of net operating losses and capitalized acquisition costs which are deducted for books but capitalized for tax. If the Company makes a REIT election, the net operating losses will not be available to offset future income; however they may be used to offset any built-in gains. Due to the valuation allowance, the Company's effective rate is approximately 0%.
REIT Compliance
TheAs discussed above, the Company intendsbelieves that it has been organized and have operated in a manner that has enabled the Company to qualify as a REIT forcommencing with the taxable year ended December 31, 2017 for federal income tax purposes, and therefore the Company generally will not be subject to federal income tax on income that the Company distributes to the stockholders. If the Company fails to qualify as a REIT in any taxable year, including and after the taxable year in which the Company initially elects to be taxed as a REIT, the Company will be subject to federal income tax on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is denied. Failing to qualify as a REIT could materially and adversely affect the Company's net income.
2017. To qualify as a REIT for tax purposes, the Company will beis required to distribute at least 90% of its REIT taxable income to the Company's stockholders.Company’s stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). In addition, the Company will be subject to corporate income tax to the extent that the Company distributes less than 100% of the net taxable income including any net capital gain. The Company must also meet certain asset and income tests, as well as other requirements. The Company will monitor the business and transactions that may potentially impact the Company'sCompany’s REIT status. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on the taxable income at regular corporate rates.
Off-Balance Sheet Arrangements
Series A Preferred Stock
Each investor in the Series A shall receive,received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 30 shares of the Company'sCompany’s common stock par value $0.0001 per share, if the Company'sCompany’s common stock is listed on a national securities exchange. The warrants'warrants’ exercise price is equal to 110% of the volume weighted average closing stock price of the Company'sCompany’s common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of September 30, 2017,2019, there were detachable warrants that may be exercised for 85,74084,510 shares of the Company'sCompany’s common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential Warrantswarrants outstanding at September 30, 20172019 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, gross proceeds to usthe Company would be approximately $2.1 million and we would as a result issue an additional 85,74084,510 shares of common stock.stock and would receive gross proceeds of approximately $2.1 million.
SeeFor additional information see “— Liquidity and Capital Resources” and “—Preferred Series A Stock” above and Note RN — Preferred Stock and Warrantsin in Part I, Item 1 Notes to the Condensed Consolidated Financial Statementsof this Quarterly Report on Form 10-Qfor a discussion of the various related party transactions, agreements and feesadditional information.
Series 1 Preferred Stock
Each investor in the Series 1 shall receive,received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 35 shares of the Company'sCompany’s common stock par value $0.0001 per share, if the Company'sCompany’s common stock is listed on a national securities exchange. The warrants'warrants’ exercise price is equal to 110% of the volume weighted average closing stock price of the Company'sCompany’s common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of September 30, 2017,2019, there were detachable warrants that may be exercised for 466,795approximately 1,382,675 shares of the Company'sCompany’s common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential Warrantswarrants outstanding at September 30, 20172019 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, gross proceeds to usthe Company would be approximately $11.7 million and we would as a result issue an additional 466,7951,382,675 shares of common stock.stock and would receive gross proceeds of approximately $34.6 million.
SeeFor additional information see “— Liquidity and Capital Resources” and “—Preferred Series A Stock” above and Note RN — Preferred Stock and Warrantsin in Part I, Item 1 Notes to the Condensed Consolidated Financial Statementsof this Quarterly Report on Form 10-Qfor a discussionadditional information.
Critical Accounting Policies
The Company'sCompany’s accounting policies have been established to conformin conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management'smanagement’s judgment or interpretation of the facts and circumstances relating to various transactions is different, it is possible that different accounting policies will be applied, or different amounts of assets, liabilities, revenues and expenses will be recorded, resulting in a different presentation of the financial statements or different amounts reported in the financial statements.
Additionally, other companies may utilize different estimates that may impact comparability of the Company'sCompany’s results of operations to those of companies in similar businesses. Below is a discussion of the accounting policies that management considers to be most critical once the Company commences significant operations. These policies require complex judgment in their application or estimates about matters that are inherently uncertain.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
The Company are is required to make subjective assessments as to the useful lives of the Company'sCompany’s properties for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company'sCompany’s investments in real estate. These assessments have a direct impact on the Company'sCompany’s net income because if the Company were to shorten the expected useful lives of the Company'sCompany’s investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
The Company is required to present the operations related to properties that have been sold or properties that are intended to be sold, as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as "held for sale" on the balance sheet.
Purchase Price Allocation
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company'sCompany’s analysis of comparable properties in the Company'sCompany’s portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by the Company in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into accountconsidering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company will include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period. Estimates of costs to execute similar leases including leasing commissions, legal and other related expenses are also utilized. Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management'smanagement’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease. The capitalized below-market lease values will be amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, the Company initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant'stenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on the Company'sCompany’s evaluation of the specific characteristics of each tenant'stenant’s lease and the Company'sCompany’s overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of the Company'sCompany’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant'stenant’s credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event, does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
In making estimates of fair values for purposes of allocating purchase price, the Company will utilize a number ofseveral sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company will also consider information obtained about each property as a result of the pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Deferred Costs
Deferred costs may consist of deferred financing costs, deferred offering costs and deferred leasing costs. Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Contractual Obligations
As of September 30, 2017, our2019, the Company’s contractual obligations consisted of the mortgage notes secured by ourthe acquired properties and the Revolving Credit Facilities:properties:
Contractual Obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
Long-term debt obligations | | $ | 79,757,000 | | | $ | 173,000 | | | $ | 8,914,000 | | | $ | 2,076,000 | | | $ | 68,594,000 | | | $ | 159,919,000 | | | $ | 3,478,000 | | | $ | 47,741,000 | | | $ | 4,750,000 | | | $ | 103,950,000 | |
Lines of credit: | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
Interest | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
Principal | | | 1,445,000 | | | | 1,445,000 | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
Total | | $ | 81,202,000 | | | $ | 1,618,000 | | | $ | 8,914,000 | | | $ | 2,076,000 | | | $ | 68,594,000 | | | $ | 159,919,000 | | | $ | 3,478,000 | | | $ | 47,741,000 | | | $ | 4,750,000 | | | $ | 103,950,000 | |
Contractual obligationobligations table amount does not reflect the unamortized loan issuance costs of approximately $0.9$2.0 million for notes payable and approximately $0.2 million for the line of credit as of September 30, 2017.2019.
Subsequent Events
See Note SR — Subsequent Eventsin in Part I, Item 1 Notes to the Condensed Consolidated Financial Statementsof this Quarterly Report on Form 10-Q for a discussion of the various subsequent events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for a smaller reporting company.Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing the Company’s business plan, the Company expects that the primary market risk to which the Company will be exposed is interest rate risk. The Company’s primary interest rate exposure will be the one-month LIBOR.
As of September 30, 2019, the Company’s debt consisted of approximately $120.4 million in fixed rate debt and $39.5 million in variable rate debt, net of loan issuance costs. The Company’s variable interest rate debt is related to the LoanCore loan, where the floating rate loan is set at one-month LIBOR plus 3.65%, with a LIBOR floor of 1.95% and the Company has purchased a rate cap that caps LIBOR at 3.50%. Changes in interest rates have different impacts on the fixed rate and variable rate debt. A change in interest rates on fixed rate debt impacts its fair value but has no impact on interest incurred or cash flows. A change in interest rates on variable rate debt could impact the interest incurred and cash flows and its fair value. Assuming no increase in the level of the Company’s variable debt, if interest rates increased by 1.0%, or 100 basis points, cash flow would decrease by approximately $0.4 million per year. At September 30, 2019 LIBOR was approximately 2.05%. Assuming no increase in the level of variable rate debt, if LIBOR were reduced to 1.95%, cash flow would increase by approximately $0.1 million per year.
The following tables summarizes gross annual debt maturities, average interest rates and estimated fair values on the Company’s outstanding debt as of September 30, 2019:
Debt Maturity Schedule as of September 30, 2019 | |
| | 2019 | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Thereafter | | | Total | | | Fair Value | |
Fixed rate debt | | $ | 3,478,000 | | | $ | 45,683,000 | | | $ | 2,058,000 | | | $ | 2,252,000 | | | $ | 2,498,000 | | | $ | 103,950,000 | | | $ | 159,919,000 | | | $ | 153,159,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average interest rate | | | 6.57 | % | | | 5.78 | % | | | 4.87 | % | | | 4.88 | % | | | 4.89 | % | | | 4.78 | % | | | | | | | | |
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
During the third quarter 2017, the Company took additional steps to identify revenue from all sources to improve our quarterly REIT testing process. In addition, numerous employees of the Advisor completed additional REIT compliance training as conducted by Morrison & Foerster LLP's REIT experts. The Company believes these additional procedures and controls have been effective in regards to our REIT testing. The Company will continue to monitor these controls on an on-going basis to evaluate their effectiveness. There have been no other changes in internal control over financial reporting during the third quarter of 2017,2019, that have materially affected, or are reasonably likely to materially affect, the Company'scompany’s internal control over financial reporting.
On May 19, 2017, the Audit Committee of the Company's Board of Directors engaged RSM US LLP ("RSM") as the Company's independent registered public accounting firm.
During the Company's two most recent fiscal years ended December 31, 2015 and 2016 and the period from January 1, 2017 through November 14, 2017, the Company did not consult with RSM on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company's consolidated financial statements, and RSM did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) any matter that was the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
PART II OTHER INFORMATION
None.
ITEM 1. LEGAL PROCEEDINGS
See Note O — Legal in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for a description of a purported class action lawsuit that was filed on March 12, 2019.
The nature of the Company'sCompany’s business exposes its properties, the Company, its Operating Partnership and its operating partnershipother subsidiaries to the risk of claims and litigation in the normal course of business. Other than as noted above or routine litigation arising out of the ordinary course of business, the Company is not presently subject to any material legal proceedingslitigation nor, to the Company'sits knowledge, is any material legal proceedingslitigation threatened against the Company.
There have been noThe following risk factors are material changes fromonly and should be read in conjunction with the risk factors set forth in our Annual Reportthe Company’s annual report on Form 10-K for the year ended December 31, 2016.2018.
Risks Related to an Investment in the Company
There are a number of pending legal matters involving us and our affiliates, which could distract our officers from attending to the Company's business and could have a material adverse effect on the Company.
The pending investigations and legal proceedings involving us, and our affiliates could harm the reputation of the Company and may distract our management from attending to the Company's business. The adverse publicity arising out of the pendency of such investigations or proceedings could impair our ability to raise additional capital or purse liquidity transactions. The loss of key personnel or circumstances causing such personnel to otherwise become unavailable to manage our business, would result in the loss of experience, skill, resources, relationships and contacts of individuals that we believe are important to our investment and operating strategies.
On March 12, 2019, stockholder SIPDA Revocable Trust (“SIPDA”) filed a purported class action complaint in the United States District Court for the District of Nevada, against the Company and certain of its current and former officers and directors. SIPDA filed an Amended Complaint on October 11, 2019. The Amended Complaint purports to assert class action claims on behalf of all public shareholders of the Company and MVP I between August 11, 2017 and April 1, 2019 in connection with the (i) August 2017 proxy statements filed with the SEC to obtain shareholder approval for the merger of the Company and MVP I (the "proxy statements"), and (ii) August 2018 proxy statement filed with the SEC to solicit proxies for the election of certain directors (the “2018 proxy statement”). The Amended Complaint alleges, among other things, that the 2017 proxy statements failed to disclose that two major reasons for the merger and certain charter amendments implemented in connection therewith were (i) to facilitate the execution of an amended advisory agreement that allegedly was designed to benefit Mr. Shustek financially in the event of an internalization and (ii) to give Mr. Shustek the ability to cause the Company to internalize based on terms set forth in the amended advisory agreement. The Amended Complaint further alleges, among other things, that the 2018 proxy statement failed to disclose the Company’s purported plan to internalize its management function.
The Amended Complaint alleges, among other things, (i) that all defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, by disseminating proxy statements that allegedly contain false and misleading statements or omit to state material facts; (ii) that the director defendants violated Section 20(a) of the Exchange Act; and (iii) that the director defendants breached their fiduciary duties to the members of the class and to the Company.
The Amended Complaint seeks, among other things, unspecified damages; declaratory relief; and the payment of reasonable attorneys' fees, accountants' and experts' fees, costs and expenses.
On June 13, 2019, the court granted SIPDA’s motion for Appointment as Lead Plaintiff. The litigation is still at a preliminary stage. The Company and the Board of Directors have reviewed the allegations in the Amended Complaint and believe the claims asserted against them in the Amended Complaint are without merit and intend to vigorously defend this action.
On May 31, 2019, and June 27, 2019, alleged stockholders filed class action lawsuits alleging direct and derivative claims against the Company, certain of our officers and directors, MVP Realty Advisors, Vestin Realty Mortgage I, and Vestin Realty Mortgage II in the Circuit Court for Baltimore City, captioned Arthur Magowski v. The Parking REIT, Inc., et. al, No. 24-C-19003125 (filed on May 31, 2019) (the “Magowski Complaint”) and Michelle Barene v. The Parking REIT, Inc., et. al, No. 24-C-19003527 (filed on June 27, 2019) (the “Barene Complaint”).
The Magowski Complaint asserts purportedly direct claims on behalf of all stockholders (other than the defendants and persons or entities related to or affiliated with any defendant) for breach of fiduciary duty and unjust enrichment arising from the Company’s decision to internalize its advisory function. In this Complaint, Plaintiff Magowski asserts that the stockholders have allegedly been directly injured by the internalization and related transactions. The Barene Complaint asserts both direct and derivative claims for breach of fiduciary duty arising from substantially similar allegations as those contained in the Magowski Complaint. The purportedly direct claims are asserted on behalf of the same class of stockholder as the purportedly direct claims in the Magowski Complaint, and the derivative claims in the Barene Complaint are asserted on behalf of the Company.
On September 12 and 16, 2019, the defendants filed motions to dismiss the Magowski and Barene complaints, respectively. The Magowski and Barene Complaints seek, among other things, damages; declaratory relief; equitable relief to reverse and enjoin the internalization transaction; and the payment of reasonable attorneys' fees, accountants' and experts' fees, costs and expenses. The actions are at a preliminary stage. The Company and the board of directors intend to vigorously defend against these lawsuits.
The Magowski Complaint also previewed that a stockholder demand would be made on the Board to take action with respect to claims belonging to the Company for the alleged injury to the Company. On June 19, 2019, Magowski submitted a formal demand letter to the Board asserting the same alleged wrongdoing as alleged in the Magowski Complaint and demanding that the Board investigate the alleged wrongdoing and take action to remedy the alleged injury to the Company. The demand includes that claims be initiated against the same defendants as are named in the Magowski Complaint. In response to this stockholder demand letter, on July 16, 2019, the Board established a demand review committee of two independent directors to investigate the allegations of wrongdoing made in the letter and to make a recommendation to the Board for a response to the letter. The work of the demand review committee is on-going.
The Securities and Exchange Commission (“SEC”) is conducting an investigation relating to the Parking REIT. In June 2019, the SEC issued subpoenas to the Company and its chairman and chief executive officer Michael V. Shustek. In connection with each subpoena, the SEC stated that: “this investigation is a non-public, fact-finding inquiry. We are trying to determine whether there have been any violations of the federal securities laws. The investigation and the subpoena do not mean that we have concluded that the recipient of the subpoena or anyone else has violated the law. Also, the investigation does not mean that we have a negative opinion of any person, entity or security.” The Company has received additional requests for information and expects to receive more in the future. The Company and Mr. Shustek intend to cooperate fully with the SEC in this matter. However, the Company cannot predict the outcome or the duration of the SEC investigation or any other legal proceedings or any enforcement actions or other remedies, if any, that may be imposed on Mr. Shustek, the Company or any other entity arising out of the SEC investigation.
Shares of our common stock are illiquid. No public market currently exists for our shares, and our charter does not require us to liquidate our assets or list our shares on an exchange by any specified date, or at all. It will be difficult for stockholders to sell shares, and if stockholders are able to sell shares, it will likely be at a substantial discount.
There is no current public market for our shares, and our charter does not require us to liquidate our assets or list our shares on an exchange by any specified date, or at all. Our charter limits stockholders' ability to transfer or sell shares unless the prospective stockholder meets the applicable suitability and minimum purchase standards. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of our outstanding capital stock or more than 9.8% in value or number, whichever is more restrictive, of the aggregate of our outstanding common stock unless exempted prospectively or retroactively by our board of directors. These restrictions may inhibit large investors from desiring to purchase stockholders' shares. Moreover, our share repurchase program was suspended in May 2018, other than with respect to hardship repurchases in connection with a shareholders’ death. It will be difficult for stockholders to sell shares promptly or at all. If stockholders are able to sell shares, stockholders will likely have to sell them at a substantial discount to their purchase price. It is also likely that stockholders' shares would not be accepted as the primary collateral for a loan.
In addition, Nasdaq has informed us that (i) our common stock will not be approved for listing currently on the Nasdaq Global Market, and (ii) it is highly unlikely that our common stock would be approved for listing while the SEC investigation is ongoing. There can be no assurance that our common stock will ever be approved for listing on the Nasdaq Global Market or any other stock exchange, even if the SEC investigation referred to above is completed and no wrongdoing is found and no action is taken in connection therewith against us, Mr. Shustek or any other person. Even if we are successful in listing our shares of common stock on a national securities exchange, we cannot assure stockholders that the market price of our common stock will not fluctuate or decline significantly after listing, including as a result of factors unrelated to our operating performance or prospects. From time to time our board of directors evaluates actions that could provide liquidity for our stockholders. However, our ability to achieve liquidity for our stockholders is subject to market conditions and legal requirements, and there can be no assurance that we will affect a liquidity event. If we do not successfully implement a liquidity event, our shares of common stock may continue to be illiquid and stockholders may, for an indefinite period of time, be unable to convert their investments to cash easily and could suffer losses on their investments.
We have a limited operating history which makes our future performance difficult to predict.
We were formed on May 4, 2015 and merged with MVP REIT, Inc., which was formed on April 3, 2012, on December 15, 2017. In addition, our management function was internalized effective April 1, 2019. Accordingly, we have a limited operating history, particularly as an internally managed company. Stockholders should not assume that our performance will be similar to the past performance of other real estate investment programs sponsored by an affiliate of the former Advisor. Our lack of an operating history increases the risk and uncertainty that stockholders face in making or holding an investment in our shares.
Our cash distributions are not guaranteed and may fluctuate.
The Company's board of directors unanimously authorized a suspension of our cash distributions and stock dividends to holders of our common stock, effective as of March 22, 2018. Our board is focused on preserving capital in order to maintain sufficient liquidity to continue to operate the business and maintain compliance with debt covenants, including minimum liquidity covenants and to seek to enhance our value for stockholders through potential future acquisitions or other transactions. We expect that cash retained by the suspension of cash distributions will allow us to continue to pursue investment opportunities while also preparing for a possible liquidity event in the future. Our board will continue to evaluate our performance and expects to assess our distribution policy quarterly. There can be no assurance that we will resume payment of distributions to common stockholders at any time in the future, that any acquisitions will be completed on an attractive basis, or at all, or that any liquidity event will occur or when such event may occur.
We have paid, and may continue to pay, our distributions from sources other than cash flow from operations, which has reduced the funds available for the acquisition of properties and may reduce our stockholders' overall return.
Prior to suspending our payment of cash distributions to holders of our common stock, we had paid all of our cash distributions from sources other than cash flow from operations, including proceeds from issuance of our common and preferred shares. Our organizational documents permit us to pay distributions from any source, including offering proceeds, borrowings or sales of assets. We have not placed a cap on the use of offering or other proceeds to fund distributions. Our long-term objective is to fund the payment of regular distributions to our stockholders from cash flow from our operations. However, we may not generate sufficient cash flow from operations to fund distributions. Therefore, if distributions resume, we may need to continue to utilize proceeds from the sale of securities or incur indebtedness to pay distributions. We can give no assurance that we will be able to pay distributions solely from our funds from operations in the future. If we pay distributions from sources other than our cash flow from operations, we will have fewer funds available for investments and stockholders' overall return may be reduced.
We depend on our management team. The loss of key personnel could have a material adverse effect upon our ability to conduct and manage our business.
Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of our management team in the identification and acquisition of investments, the determination of any financing arrangements, the management of our assets and operation of our day-to-day activities. The loss of services of one or more members of our key personnel or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, parking facility operators and managers and other industry personnel, which could materially and adversely affect our business, financial condition, results of operations and ability to make distributions to stockholders in the future and the value of our common stock.
Stockholders should not rely on the estimated NAV per share as being an accurate measure of the current value of our shares of common stock.
Our board of directors, including all of our independent directors, approves and establishes at least annually an estimated per share NAV of our common stock, which is based on an estimated market value of our assets less the estimated market value of our liabilities, divided by the number of shares of our common stock outstanding. The objective of our board of directors in determining the estimated NAV per share was to arrive at a value, based on the most recent data available, that it believed was reasonable based on methodologies that it deemed appropriate. However, the market for real estate can fluctuate quickly and substantially and the value of our assets is expected to change in the future and may decrease. In addition, as with any valuation method, the methods used to determine the estimated NAV per share were based upon a number of assumptions, estimates and judgments that may not be accurate or complete.
Our assets have been valued based upon appraisal standards and the values of our assets using these methods are not required to reflect market value under those standards and will not necessarily result in a reflection of fair value under generally accepted accounting principles. Further, different parties using different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive a different estimated NAV per share, which could be significantly different from the estimated NAV per share determined by our board of directors. The estimated NAV per share is not a representation or indication that, among other things: a stockholder would be able to realize the estimated NAV per share if he or she attempts to sell shares; a stockholder would ultimately realize distributions per share equal to the estimated NAV per share upon liquidation of assets and settlement of our liabilities or upon a sale of our company; shares of our common stock, if listed, would trade at the estimated NAV per share on a national securities exchange; a third party would offer the estimated NAV per share in an arms-length transaction to purchase all or substantially all of our shares of common stock; or the methodologies used to determine the estimated NAV per share would be acceptable to FINRA, the Employee Retirement Income Security Act of 1974, as amended, or ERISA, or other regulatory authorities (including state regulators), with respect to their respective requirements. Further, the estimated NAV per share was calculated as of a specific time and the value of our shares will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and changes in the real estate and capital markets.
Moreover, we issued shares of our common stock under our distribution reinvestment plan and purchase shares of our common stock under our share repurchase plan (to the limited extent still in effect) based on the estimated NAV per share. Stockholders may pay more than realizable value when they purchase shares under our distribution reinvestment plan or receive less than realizable value for their investment when selling their shares under our share repurchase plan.
Risks Related to Our Financing Strategy
We may not be able to access financing sources on attractive terms or at all, which could adversely affect our ability to execute our business plan.
Our operating income has been, and we expect may continue to be, insufficient to cover our operating expenses and other liquidity needs. In addition, we have and intend to continue to finance our assets with outside capital. As a result of Nasdaq’s decision not to approve the listing of the Company’s common stock, our ability to raise equity capital will be limited in the future and we may seek to raise additional funds through additional debt financings or the sale of assets. We may also periodically use short-term financing to complete planned development projects, perform renovations to our properties, or to meet other liquidity needs.
There can be no assurance that we will be able to obtain additional debt financing on acceptable terms or at all, and our access to sources of financing will depend upon a number of factors, over which we have little or no control, including:
general market conditions;
a financing source’s view of the quality of our assets;
a financing source’s perception of our financial condition and growth potential; and
our current and potential future earnings and cash distributions.
In addition, if we are unable to obtain debt financing on acceptable terms or at all, our ability to sell assets may also be limited due to several factors, including general market conditions and limitations under our existing loan agreements, and as a result, we may receive less than the value at which those assets are carried on our consolidated financial statements or we may be unable to sell certain assets at all.
If we cannot obtain sufficient capital on acceptable terms, our businesses and our ability to operate could be materially adversely impacted.
In addition to customary representations, warranties, covenants, and indemnities, our existing loan agreements require us and/or our subsidiaries to comply with covenants involving, among other matters, limitations on incurrence of indebtedness, debt cancellation, property cash flow allocation, liens on properties and requirements to maintain minimum unrestricted cash balances. Our existing loan agreements contain covenants that may limit our ability to sell assets, including covenants that limit debt cancellation and assignment of debt in connection with the sale of an asset. In addition, certain of our assets are collateral under multiple loan agreements, which may limit our ability to sell such assets. We may enter into additional loan agreements that also may contain covenants, including those requiring us to comply with various financial covenants.
If we breach covenants under our loan agreements, we could be held in default under such loans, which could accelerate our repayment date and materially adversely affect our financial condition, results of operations and cash flows.
Our failure to comply with covenants in any of our loan agreements will likely constitute an event of default and, if not cured or waived, may result in:
acceleration of all of our debt under such loan agreement (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all;
our inability to borrow any unused amounts under such loan agreement, even if we are current in payments on borrowings under such loan agreement; and/or
the loss of some or all of our assets to foreclosure or sale.
Further, our loan agreements may contain cross default provisions, which could result in a default on our other outstanding debt.
Any such event of default, termination of commitments, acceleration of payments, or foreclosure of our assets could have a material adverse effect on our financial condition, results of operations and cash flows and ability to continue to operate or make distributions to our stockholders in the future. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets. A default could also make it difficult for us to satisfy the qualification requirements necessary to maintain our status as a REIT for U.S. federal income tax purposes. It is also possible that we could become involved in litigation related to matters concerning the loan, and such litigation could result in significant costs to us.
Risks Related to Conflicts of Interest
Our executive officers face conflicts of interest related to their positions and interests in our affiliates, which could hinder our ability to implement our business strategy and to generate returns to stockholders.
Our executive officers are also executive officers, directors, managers and key professionals of other affiliated entities. As a result, they owe duties to each of these entities, their members and limited partners and these investors, which duties may from time to time conflict with the duties that they owe to us. Their loyalties to these other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (a) allocation of new investments and management time and services between us and the other entities, (b) the timing and terms of the investment in or sale of an asset, (c) development of our properties by such affiliates, and (d) investments with such affiliates. The loyalties of these individuals to other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to stockholders and to maintain or increase the value of our assets.
Further, our directors and officers and any of their respective affiliates are not prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition or sale of real estate investments or that otherwise compete with us.
The issuance of common stock as consideration in the Internalization has and will have a dilutive effect and we could incur other significant costs associated with the Internalization.
The issuances of shares of Common Stock as the consideration in connection with the Internalization had and will have a dilutive effect and will reduce the voting power and relative ownership percentage interests of holders of Common Stock prior to the Internalization.
In addition, following the Internalization, our direct expenses continue to include increased general and administrative costs. We also employ personnel are subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances as well as incur the compensation and benefits costs of our officers and other employees and consultants. We have issued and may issue additional equity awards to officers, employees and consultants, which awards would decrease our net income and FFO and may further dilute a stockholder's investment.
Our independent board members reviewed and analyzed the estimated costs of Internalization and the anticipated and perceived benefits and savings associated therewith and compared them against the estimated costs of continuing to be externally managed. The costs of Internalization and cost savings estimates, however, were based upon certain assumptions, including regarding future growth, and may prove to be incorrect. If so, our income per share could be lower as a result of the Internalization than it otherwise would have been, potentially decreasing the amount of cash available to distribute to our stockholders and the value of our shares.
The Internalization was only recently completed. We could have difficulty integrating these functions as a stand-alone entity, which could result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management's attention could be diverted from most effectively managing our investments.
As noted above, the Internalization is already the subject of litigation. Although we believe that the related claims are without merit, we could be forced to spend significant amounts of money defending such claims or other claims, which would reduce the amount of cash available for us to acquire assets and to pay distributions.
Stockholders' interest in us could be diluted if we issue additional shares, which could reduce the overall value of their investment.
Stockholders do not have preemptive rights to any shares issued by us in the future and generally have no appraisal rights. Our charter currently has authorized 100,000,000 shares of capital stock. Of the total number of shares of capital stock authorized, 98,999,000 shares are classified as common stock, par value $0.0001 per share; and 1,000,000 shares are classified as preferred stock, par value $0.0001 per share, within which (i) 97,000 shares are classified and designated as Series 1 Convertible Redeemable Preferred Stock, and (ii) 50,000 shares are classified and designated as Series A Convertible Redeemable Preferred Stock, and 1,000 shares are classified as convertible stock, par value $0.0001 per share. Subject to any limitations set forth under Maryland law, a majority of our board of directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, or classify or reclassify any unissued shares into other classes or series of stock without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our board of directors. A stockholder's interest in us may be diluted in the event that we (1) sell additional shares in the future, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of our common stock to the former Advisor, its successors or assigns, in payment of an outstanding fee obligation as set forth under our Amended and Restated Advisory Agreement or (5) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our operating partnership. In connection with the Internalization, we issued the former manager 400,000 shares of Common Stock and agreed to issue the former Advisor 400,000 additional shares of Common Stock on each of December 31, 2019, 2020 and 2021. We have the option to repurchase up to 1,100,000 of such shares at a price equal to $17.50 but there can be no assurance that we will do so. Because of these and other reasons described in this "Risk Factors" section, stockholders should not expect to be able to own a significant percentage of our shares. In addition, depending on the terms and pricing of any additional offerings and the value of our investments, stockholders also may experience dilution in the book value and fair mark value of, and the amount of distributions paid on, their shares.
Our charter also authorizes our board of directors, without stockholder approval, to designate and issue any classes or series of preferred stock (including equity or debt securities convertible into preferred stock) and to set or change the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions and qualifications or terms or conditions of redemption of each class or series of shares so issued. Because our board of directors has the power to establish the preferences and rights of each class or series of preferred stock, it may afford the holders of any series or class of preferred stock preferences, powers, and rights senior to the rights of holders of common stock or preferred stock.
Under this power, our board of directors has created the Series A preferred stock and the Series 1 preferred stock, each of which ranks senior to our common stock with respect to the payment of dividends and rights upon liquidation, dissolution or winding up. Specifically, payment of any distribution preferences on the Series A preferred stock, Series 1 preferred stock, or any future series of preferred stock would reduce the amount of funds available for the payment of distributions on our common stock. Further, holders of our preferred stock are entitled to receive a preference payment if we liquidate, dissolve, or wind up before any payment is made to the common stockholders, likely reducing the amount common stockholders would otherwise receive upon such an occurrence. Holders of our preferred stock will have the right to require us to convert their shares into shares of our common stock. The conversion of our preferred stock into common stock may further dilute the ownership interest of our common stockholders. Following a Listing Event (as defined below), we also have the right, but not the obligation, to redeem the Series A preferred stock and Series 1 preferred stock and pay the redemption payments in the form of shares of our common stock, which may further dilute the ownership interest of our common stockholders. Although the dollar amounts of such payments are unknown, the number of shares to be issued in connection with such payments may fluctuate based on the price of our common stock. If we elect to redeem any of our preferred stock with cash, the exercise of such rights may reduce the availability of our funds for investment purposes or to pay for distributions on our common stock. A Listing Event is defined in the Articles Supplementary for the Series A preferred stock and Series 1 preferred stock as a liquidity event involving the listing of our shares of common stock on national securities exchange or a merger or other transaction in which our stockholders will receive shares listed on a national securities exchange as consideration in exchange for their shares in us.
Any sales or perceived sales in the public market of shares of our common stock issuable upon the conversion or redemption of our preferred stock could adversely affect prevailing market prices of shares of our common stock. The issuance of common stock upon any conversion or redemption of our preferred stock also may have the effect of reducing our net income per share (or increasing our net loss per share). In addition, if a Listing Event occurs, the existence of our preferred stock may encourage short selling by market participants because the existence of redemption payments could depress the market price of shares of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On March 29, 2017, theThe Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 sharesdid not sell any of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017,equity securities during the Company commenced the private placement of shares of Series 1, and warrants to acquire the Company's common stock, to accredited investors. During the third quarter of 2017, the Company had raised approximately $7.6 million, net of offering costs, in the Series 1 private placements and had issued 8,375 Series 1 shares and warrants to acquire 291,000 shares of our common stock issued and outstanding.
The Series 1 preferred stock and warrants have ended September 30, 2019 that were not been registered under the Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Company is relying on the private placement exemption from registration provided by Section 4(a)(2) of the Securities Act and by Rule 506(b) of Regulation D promulgated thereunder by the Securities and Exchange Commission (the "SEC"). The Company has filed file a Form D with the SEC in accordance with the requirements of Regulation D.
Use of Offering Proceeds
On October 22, 2015, the Company's registration statement on Form S-11 registering a public offering (No. 333-205893) of up to $550,000,000 in shares of the Company's common stock was declared effective under the Securities Act of 1933, as amended, or the Securities Act, and the Company commenced the initial public offering. The Company offered up to 20,000,000 shares of its common stock to the public in the primary offering at $25.00 per share and continues to offer up to 2,000,000 shares of its common stock pursuant to the distribution reinvestment plan at $25.00 per share. The Company entered into selling agreements with MVP American Securities, LLC ("MVP AS") and other non-affiliated selling agents to distribute shares of the Company's common stock to its clients. As of December 31, 2016, the Company ceased all selling efforts for the initial public offering but accepted additional subscriptions through March 31, 2017.
As of November 14, 2017,12, 2019, the Company had 2,612,182 6,933,253shares of common stock issued and outstanding, 2,862 shares of preferred Series A stock outstanding and 21,629 39,811 shares of preferred Series 1 stock outstanding for a total net proceeds of approximately $85.8 Million,$187.9 million, less offering costs.
The following is a table of summary of offering proceeds from inception through September 30, 2017:2019:
Type | | Number of Shares - Preferred | | | Number of Shares - Common | | | Value | | | Number of Shares Preferred | | | Number of Shares Common | | | Value | |
Issuance of common stock | | | -- | | | | 2,451,238 | | | | 61,281,000 | | | -- | | | 2,851,238 | | | $ | 68,281,000 | |
Redeemed shares | | | -- | | | (42,761 | ) | | (1,046,000 | ) |
DRIP shares | | | -- | | | | 58,464 | | | | -- | | | -- | | | 83,437 | | | 2,086,000 | |
Issuance of preferred stock Series A | | | 2,862 | | | | -- | | | | 2,573,000 | | |
Issuance of preferred stock Series 1 | | | 13,445 | | | | -- | | | | 11,768,000 | | |
Issuance of Series A preferred stock | | | 2,862 | | | -- | | | 2,544,000 | |
Issuance of Series 1 preferred stock | | | 39,811 | | | -- | | | 35,981,000 | |
Dividend shares | | | -- | | | | 91,835 | | | | 2,296,000 | | | -- | | | 153,826 | | | 3,845,000 | |
Distributions | | | -- | | | | -- | | | | (1,210,000 | ) | | -- | | | -- | | | (9,555,000 | ) |
Deferred offering costs | | | -- | | | | -- | | | | (1,086,000 | ) | | -- | | | -- | | | (1,086,000 | ) |
Contribution from Advisor | | | -- | | | | -- | | | | 1,147,000 | | |
Contribution from advisor | | | -- | | | -- | | | 1,147,000 | |
Shares added for merger | | | | -- | | | | 3,887,513 | | | | 85,701,000 | |
Total | | | 16,307 | | | | 2,601,537 | | | $ | 76,769,000 | | | | 42,673 | | | | 6,933,253 | | | $ | 187,898,000 | |
From October 22, 2015 through September 30, 2017,2019, the Company incurred organization and offering costs in connection with the issuance and distribution of the registered securities of approximately $1.1 million, which were paid to unrelated parties by the Sponsor. From October 22, 2015 through September 30, 2017,2019, the net proceeds to the Company from its offerings, after deducting the total expenses and deferred offering costs incurred and paid by the Company as described above, were $76.8approximately $187.9 million. A majority of these proceeds were used, along with other sources of debt financing, to make investments in parking facilities, and ourof which the Company’s portion of the total purchase price for these parking facilities was approximately $125.9$320.0 million, which includes ourits $2.8 million investment in the DST. In addition, a portion of these proceeds were used to make cash distributions of approximately $1.2$1.8 million to the Company's stockholders. The ratio of the costs of raising capital to the capital raised is approximately 1.5%0.6%.
Share Repurchase Program-58-
As of September 30, 2017, the Company has not redeemed shares through the share repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE AND SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
During the third quarter of 2017, theThe Company is not aware of any information that was required to be disclosed in a report on Form 8-K during the third quarter of 2019, that was not disclosed in a report on Form 8-K.
Exhibit No. | Description |
2.1(8) | Agreement and Plan of Merger, dated as of May 26, 2017, by and among MVP REIT, Inc., MVP REIT II, Inc., MVP Merger Sub, LLC and MVP Realty Advisors, LLC |
3.1(1) | |
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3.3(7) | |
3.3(9) | |
4.1(3) | |
4.2(4) | |
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4.3(5) | Amended and Restated Escrow Agreement, dated October 5, 2015, between MVP REIT II, Inc. and UMB Bank, N.A. |
4.4(6) | Second Amended and Restated Escrow Agreement, dated November 30, 2015, by and among MVP REIT II, Inc., MVP American Securities, LLC, and UMB Bank, N.A. |
4.5(7) | Form of warrants to acquire the Company's common stock |
10.1(8) | Second Amended and Restated AdvisoryContribution Agreement, dated as of May 26, 2017, byMarch 29, 2019 and effective as of April 1, 2019, among MVP REITthe Company, the Manager, VRM I (solely for purposes of Section 1.01(c) thereof), VRM II Inc., MVP REIT II Operating Partnership, LP(solely for purposes of Section 1.01(c) thereof) and MVP Realty Advisors, LLCMichael V. Shustek (solely for purposes of Section 4.03 thereof). |
10.2(8) | Termination and Fee |
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101(*) | The following materials from the Company'sCompany’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017,2019, formatted in XBRL (eXtensible(extensible Business Reporting Language (i) Balance Sheets; (ii) Statements of Operations; (iii) Statement of Stockholder'sStockholder’s Equity; (iv) Statements of Cash Flows; and (v) Notes to Financial Statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
* | Filed concurrently herewith. |
(1) | Filed previously with Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 on September 24, 2015 and incorporated herein by reference. |
(2) | Filed previously on Form 8-K on December 18, 2017 and incorporated herein by reference. |
(3) | Filed previously with the Registration Statement on Form S-11 on July 28, 2015 and incorporated herein by reference. |
(3)(4) | Filed previously as Exhibit A to Supplement No. 1 to the Registrant's prospectus filed December 3, 2015,on Form 8-K on October 28, 2016 and incorporated herein by reference. |
(4)(5) | Filed previously as Appendix D to the Registrant's prospectus filed October 23, 2015,on Form 8-K on March 30, 2017 and incorporated herein by reference. |
(5)(6) | Filed previously on Form 8-K on October 28, 2016 and incorporated herein by reference. |
(7) | Filed previously on Form 8-K on May 15, 2017 and incorporated herein by reference. |
(8) | Filed previously with Pre-Effective Amendment No. 3 to the Registration Statement on Form S-11 on October 6, 2015 and incorporated herein by reference. |
(6)(9) | Filed previously on Form 8-K on DecemberApril 3, 2015,2019 and incorporated herein by reference. |
(7) | Filed previously on Form 8-K on October 27, 2016 and incorporated herein by reference. |
(8) | Filed previously on Form 8-K on January 11, 2016 and incorporated herein by reference. |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MVPThe Parking REIT, II, Inc. |
| | |
| By: | /s/ Michael V. Shustek |
| | Michael V. Shustek |
| | Chief Executive Officer and PresidentChairman |
| Date: | November 15, 2017 13, 2019 |
| | |
| By: | /s/ Ed BentzenJ. Kevin Bland |
| | Ed BentzenJ. Kevin Bland |
| | Chief Financial Officer |
| Date: | November 15, 2017 13, 2019 |
| |
|
CERTIFICATIONS
I, Michael V. Shustek, certify that:
1. I have reviewed this Form 10-Q of MVP REIT II, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Intentionally omitted;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 15, 2017
/s/ Michael V. Shustek |
Michael V. Shustek |
Chief Executive Officer and President
(Principal Executive Officer)
|
MVP REIT II, Inc. |
CERTIFICATIONS
I, Ed Bentzen, certify that:
1. I have reviewed this Form 10-Q of MVP REIT II, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Intentionally omitted;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 15, 2017
/s/ Ed Bentzen |
Ed Bentzen |
Chief Financial Officer |
(Principal Accounting Officer)
MVP REIT II, Inc.
|
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
Michael V. Shustek, as President and Chief Executive Officer of MVP REIT II, Inc. (the "Registrant"), and Ed Bentzen, as Chief Financial Officer of the Registrant, hereby certify, pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Registrant's Report on Form 10-Q for the nine months ended September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: November 15, 2017
/s/ Michael V. Shustek |
Michael V. Shustek |
Chief Executive Officer and President
(Principal Executive Officer)
|
MVP REIT II, Inc. |
Date: November 15, 2017
/s/ Ed Bentzen |
Ed Bentzen |
Chief Financial Officer |
(Principal Accounting Officer)
MVP REIT II, Inc.
|
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