UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 110-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2017
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission File Number: 333-205893
MVP REIT II, INC. |
(Exact name of registrant as specified in its charter) |
MARYLAND | | 47-3945882 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
Incorporation or Organization) | | Identification No.) |
8880 W. SUNSET RD SUITE 240,340, LAS VEGAS, NV 89148
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (702) 534-5577
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X][ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] | Smaller reporting company [ X ] |
Emerging growth company [ X ] | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2bib-2 of the Act).
Yes [ ] No [X][ X ]
As of May 9, November 14, 2017, the registrant had 2,538,3042,612,182 shares of common stock outstanding.
EXPLANATORY NOTE
We are filing this Amendment No. 1 on Form 10-Q/A to amend and restate in their entirety the following items of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 as originally filed with the Securities and Exchange Commission on May 5, 2017 (the "Original Form 10-Q"): (i) Item 1 of Part I "Financial Information," (ii) Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations" "Funds from Operations and Modified Funds from Operations," and (iii) Item 4 of Part I, "Controls and Procedures", and we have also updated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1 and 32.2, and our financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101. No other sections were affected, but for the convenience of the reader, this report on Form 10-Q/A restates in its entirety, as amended, our Original Form 10-Q. This report on Form 10-Q/A is presented as of the filing date of the Original Form 10-Q and does not reflect events occurring after that date, or modify or update disclosures in any way other than as required to reflect the restatement described below.
We have determined that our previously reported results for the quarter ended March 31, 2017 did not include an interest expense accrual and rent received. The condensed statement of operations for the quarter ended March 31, 2017 included in this Form 10-Q/A have been restated to include the accrual of $141,000 of interest and $27,000 of revenue. The condensed balance sheet as of March 31, 2017 included in this Form 10-Q/A have been restated to incorporate these changes which increased accounts payable and accrued expenses as previously reported by $141,000 and decreased the deferred revenue by $27,000. The condensed statement of cash flows for the quarter ended March 31, 2017 included in this Form 10-Q/A includes certain adjustments to correspond to the statement of operations and the statement of equity adjustments as described above. We have made necessary conforming changes in "Management's Discussion and Analysis of Financial Condition and Results of Operations" resulting from the correction of this error.
Amendment
This Form 10-Q/A sets forth the Original Filing, as modified and superseded where necessary to reflect the Restatement and related matters. Specifically, the following items of the Original Quarterly Report on Form 10-Q are amended by this Form 10-Q/A to reflect the Restatement and related matters:
Part I - Item 1. Financial Statements, and updates to selected notes impacted by the Restatement in the Notes to the Condensed Consolidated Financial Statements.
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part I - Item 2. Funds from Operations and Modified Funds from Operations
Part I - Item 4. Controls and Procedures
MVP REIT II, Inc.
(A Maryland Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | September 30, 2017 | | | December 31, 2016 | |
| | March 31, 2017 | | | December 31, 2016 | | | (unaudited) | | | | |
ASSETS | | (unaudited) (As restated) | | | | | ASSETS | |
Cash | | $ | 4,675,000 | | | $ | 4,885,000 | | |
Cash - restricted | | | 1,125,000 | | | | 100,000 | | |
Prepaid expenses | | | 696,000 | | | | 283,000 | | |
Accounts receivable | | | 351,000 | | | | 208,000 | | |
Investments in MVP REIT, Inc. | | | 3,086,000 | | | | 3,034,000 | | |
Investment in real estate | | | | | | | | | |
Investments in real estate | | | | | | | |
Land and improvements | | | 41,554,000 | | | | 28,854,000 | | | $ | 60,358,000 | | | $ | 28,854,000 | |
Buildings and improvements | | | 72,903,000 | | | | 24,889,000 | | | | 78,104,000 | | | | 24,889,000 | |
Construction in progress | | | 521,000 | | | | -- | | | | 1,263,000 | | | | -- | |
| | | 114,978,000 | | | | 53,743,000 | | | | 139,725,000 | | | | 53,743,000 | |
Accumulated depreciation | | | (620,000 | ) | | | (195,000 | ) | | | (1,599,000 | ) | | | (195,000 | ) |
Total investments in real estate, net | | | 114,358,000 | | | | 53,548,000 | | | | 138,126,000 | | | | 53,548,000 | |
| | | | | | | | | | | | | | | | |
Other assets | | | 282,000 | | | | 4,575,000 | | |
Assets held for sale | | | 730,000 | | | | 700,000 | | |
Investment in equity method investee | | | 1,150,000 | | | | 1,150,000 | | | | 465,000 | | | | 1,150,000 | |
Investments in cost method investee – held for sale | | | 836,000 | | | | 836,000 | | | | 838,000 | | | | 836,000 | |
Investments in cost method investee | | | 923,000 | | | | 936,000 | | | | 902,000 | | | | 936,000 | |
Assets held for sale | | | | -- | | | | 700,000 | |
Cash | | | | 2,589,000 | | | | 4,885,000 | |
Cash - restricted | | | | 5,348,000 | | | | 100,000 | |
Prepaid expenses | | | | 223,000 | | | | 283,000 | |
Accounts receivable | | | | 115,000 | | | | 208,000 | |
Due from related parties | | | | 1,589,000 | | | | -- | |
Investments in MVP REIT, Inc. | | | | 3,121,000 | | | | 3,034,000 | |
Investment in DST | | | | 2,821,000 | | | | -- | |
Other assets | | | | 101,000 | | | | 4,575,000 | |
Total assets | | $ | 128,212,000 | | | $ | 70,255,000 | | | $ | 156,238,000 | | | $ | 70,255,000 | |
LIABILITIES AND EQUITY | | | | | | | | | LIABILITIES AND EQUITY | |
Liabilities | | | | | | | | | | | | | | | | |
Notes payable, net of unamortized loan issuance costs of approximately $0.9 million and $0.1 million as of September 30, 2017 and December 31, 2016, respectively | | | $ | 76,734,000 | | | $ | 5,318,000 | |
Notes payable - related party | | | | 2,100,000 | | | | -- | |
Lines of credit, net of unamortized loan issuance costs of approximately $0.2 million as of September 30, 2017 and December 31, 2016, respectively | | | | 1,445,000 | | | | 7,957,000 | |
Accounts payable and accrued liabilities | | $ | 765,000 | | | $ | 485,000 | | | | 1,527,000 | | | | 485,000 | |
Security Deposit | | | 46,000 | | | | 2,000 | | | | 130,000 | | | | 2,000 | |
Due to related parties | | | 929,000 | | | | 575,000 | | | | -- | | | | 575,000 | |
Liabilities related to assets held for sale | | | 26,000 | | | | -- | | |
Line of credit, net of unamortized loan issuance costs of approximately $0.2 million as of March 31, 2017 and December 31, 2016 | | | 19,674,000 | | | | 7,957,000 | | |
Deferred revenue | | | 82,000 | | | | 45,000 | | | | 253,000 | | | | 45,000 | |
Notes payable, net of unamortized loan issuance costs of approximately $0.2 million and $0.1 million as of March 31, 2017 and December 31, 2016, respectively | | | 41,724,000 | | | | 5,318,000 | | |
Total liabilities | | | 63,246,000 | | | | 14,382,000 | | | | 82,189,000 | | | | 14,382,000 | |
Commitments and contingencies | | | -- | | | | -- | | | | -- | | | | -- | |
Equity | | | | | | | | | | | | | | | | |
MVP REIT II, Inc. Stockholders' Equity | | | | | | | | | | | | | | | | |
Preferred stock, $0.0001 par value, 1,000,000 shares authorized, none outstanding | | | -- | | | | -- | | |
Preferred stock Series A, $0.0001 par value, 50,000 shares authorized, 2,862 shares issued and outstanding | | | -- | | | | -- | | |
Preferred stock Series A, $0.0001 par value, 50,000 shares authorized, 2,862 shares issued and outstanding (stated liquidation value of $2,876,000 as of September 30, 2017 and none as of December 31, 2016) | | | | -- | | | | -- | |
Preferred stock Series 1; $0.0001 par value, 97,000 shares authorized, 13,445 shares issued and outstanding (stated liquidation value of $13,504,000 as of September 30, 2017 and none as of December 31, 2016) | | | | -- | | | | -- | |
Non-voting, non-participating convertible stock, $0.0001 par value, no shares issued and outstanding | | | | | | | | | | | -- | | | | -- | |
Common stock, $0.0001 par value, 98,999,000 shares authorized, 2,521,088 and 2,301,828 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively | | | -- | | | | -- | | |
Common stock, $0.0001 par value, 98,999,000 shares authorized, 2,601,537 and 2,301,828 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | | | | -- | | | | -- | |
Additional paid-in capital | | | 63,283,000 | | | | 56,143,000 | | | | 76,769,000 | | | | 56,875,000 | |
Accumulated deficit | | | (7,494,000 | ) | | | (4,394,000 | ) | | | (11,574,000 | ) | | | (5,126,000 | ) |
Total MVP REIT II, Inc. Shareholders' Equity | | | 55,789,000 | | | | 51,749,000 | | | | 65,195,000 | | | | 51,749,000 | |
Non-controlling interest – related party | | | 9,177,000 | | | | 4,124,000 | | | | 8,854,000 | | | | 4,124,000 | |
Total equity | | | 64,966,000 | | | | 55,873,000 | | | | 74,049,000 | | | | 55,873,000 | |
Total liabilities and equity | | $ | 128,212,000 | | | $ | 70,255,000 | | | $ | 156,238,000 | | | $ | 70,255,000 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MVP REIT II, Inc.
(A Maryland Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | For the Three Months Ended September 30 | | | For the Nine Months Ended September 30 | |
| | For the Three Months Ended March 31, 2017 | | | For the Three Months Ended March 31, 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Revenues | | (As restated) | | | | | | | | | | | | | | | | |
Rental revenue | | $ | 2,002,000 | | | $ | -- | | |
Base rent income | | | $ | 2,206,000 | | | $ | 607,000 | | | $ | 6,258,000 | | | $ | 676,000 | |
Percentage rent income | | | | 16,000 | | | | -- | | | | 523,000 | | | | -- | |
Total revenues | | | 2,002,000 | | | | -- | | | | 2,222,000 | | | | 607,000 | | | | 6,781,000 | | | | 676,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 – related party | | | | 345,000 | | | | 51,000 | | | | 839,000 | | | | 66,000 | |
General and administrative | | | 328,000 | | | | 151,000 | | | | 400,000 | | | | 267,000 | | | | 1,051,000 | | | | 602,000 | |
Merger costs | | | 125,000 | | | | -- | | | | 824,000 | | | | -- | | | | 1,596,000 | | | | -- | |
Acquisition expenses | | | 1,766,000 | | | | -- | | | | 113,000 | | | | 529,000 | | | | 2,156,000 | | | | 748,000 | |
Acquisition expenses – related party | | | 1,118,000 | | | | 109,000 | | | | -- | | | | 1,011,000 | | | | 1,710,000 | | | | 1,427,000 | |
Operation and maintenance | | | 351,000 | | | | -- | | |
Operation and maintenance – related party | | | 237,000 | | | | -- | | |
Seminar | | | | -- | | | | -- | | | | -- | | | | 6,000 | |
Depreciation | | | 425,000 | | | | -- | | | | 508,000 | | | | 43,000 | | | | 1,404,000 | | | | 46,000 | |
Total operating expenses | | | 4,350,000 | | | | 260,000 | | | | 2,553,000 | | | | 2,143,000 | | | | 9,643,000 | | | | 3,157,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | (2,348,000 | ) | | | (260,000 | ) | | | (331,000 | ) | | | (1,536,000 | ) | | | (2,862,000 | ) | | | (2,481,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (796,000 | ) | | | (1,000 | ) | | | (1,297,000 | ) | | | -- | | | | (3,146,000 | ) | | | (1,000 | ) |
Distribution income – related party | | | 52,000 | | | | -- | | | | 75,000 | | | | -- | | | | 174,000 | | | | -- | |
Income (loss) from investment in equity method investee | | | 14,000 | | | | (1,000 | ) | |
Total other expense | | | (730,000 | ) | | | (2,000 | ) | |
| | | | | | | | | |
Loss from continuing operations | | | (3,078,000 | ) | | | (262,000 | ) | |
| | | | | | | | | |
Discontinued operations, net of income taxes | | | | | | | | | |
Income from assets held for sale, net of income taxes | | | 6,000 | | | | -- | | |
Total income from discontinued operations | | | 6,000 | | | | -- | | |
| | | | | | | | | |
Provision for income taxes | | | -- | | | | -- | | |
Gain from sale of investment in real estate | | | | 1,200,000 | | | | -- | | | | 1,200,000 | | | | -- | |
Income 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | (3,072,000 | ) | | | (262,000 | ) | | | (351,000 | ) | | | (1,531,000 | ) | | | (4,615,000 | ) | | | (2,473,000 | ) |
Net income attributable to non-controlling interest – related party | | | 28,000 | | | | -- | | | | 41,000 | | | | 58,000 | | | | 269,000 | | | | 61,000 | |
Net loss attributable to MVP REIT II, Inc.'s stockholders | | $ | (3,100,000 | ) | | $ | (262,000 | ) | | $ | (392,000 | ) | | $ | (1,589,000 | ) | | $ | (4,884,000 | ) | | $ | (2,534,000 | ) |
| | | | | | | | | | | | | | | | | |
Preferred stock distributions declared - Series A | | | | (55,000 | ) | | | -- | | | | (101,000 | ) | | | -- | |
Preferred stock distributions declared - Series 1 | | | | (157,000 | ) | | | -- | | | | (172,000 | ) | | | -- | |
Net loss attributable to MVP REIT II, Inc.'s common stockholders | | | | (604,000 | ) | | | (1,589,000 | ) | | | (5,157,000 | ) | | | (2,534,000 | ) |
| | | | | | | | | | | | | | | | | |
Basic and diluted loss per weighted average common share: | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from continuing operations attributable to MVP REIT II, Inc.'s common stockholders – basic and diluted | | $ | (1.27 | ) | | $ | (1.14 | ) | |
Income from discontinued operations – basic and diluted | | $ | 0.01 | | | $ | -- | | |
Net loss attributable to MVP REIT II, Inc.'s common stockholders - basic and diluted | | $ | (1.28 | ) | | $ | (1.14 | ) | |
Net loss per share attributable to MVP REIT II, Inc.'s common stockholders - basic and diluted | | | $ | (0.24 | ) | | $ | (1.18 | ) | | $ | (2.00 | ) | | $ | (3.30 | ) |
Distributions declared per common share | | $ | (0.20 | ) | | $ | (0.10 | ) | | $ | 0.25 | | | $ | 0.27 | | | $ | 0.62 | | | $ | 0.47 | |
Weighted average common shares outstanding, basic and diluted | | | 2,425,200 | | | | 228,843 | | | | 2,577,514 | | | | 1,341,769 | | | | 2,516,496 | | | | 766,902 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MVP REIT II, Inc.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
For the ThreeNine Months Ended March 31,September 30, 2017
(Unaudited)
(As restated)
| | Preferred stock | | | Common stock | | | | | | | | | | | | | | | Preferred stock | | | Common stock | | | | | | | | | | | | | |
| | Number of Shares | | | Par Value | | | Number of Shares | | | Par Value | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Non-controlling Interest -Related Party | | | Total | | | Number of Shares | | | Par Value | | | Number of Shares | | | Par Value | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Non-controlling Interest -Related Party | | | Total | |
Balance, December 31, 2016 | | | -- | | | $ | -- | | | | 2,301,828 | | | $ | -- | | | $ | 56,143,000 | | | $ | (4,394,000 | ) | | $ | 4,124,000 | | | $ | 55,873,000 | | | | -- | | | $ | -- | | | | 2,301,828 | | | $ | -- | | | $ | 56,875,000 | | | $ | (5,126,000 | ) | | $ | 4,124,000 | | | $ | 55,873,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distributions to non-controlling interest | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | (50,000 | ) | | | (50,000 | ) | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | (1,809,000 | ) | | | (1,809,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock | | | -- | | | | -- | | | | 189,988 | | | | -- | | | | 4,750,000 | | | | -- | | | | -- | | | | 4,750,000 | | | | -- | | | | -- | | | | 196,985 | | | | -- | | | | 4,925,000 | | | | -- | | | | -- | | | | 4,925,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock – DRIP | | | -- | | | | -- | | | | 11,420 | | | | -- | | | | 285,000 | | | | -- | | | | -- | | | | 285,000 | | | | -- | | | | -- | | | | 40,153 | | | | -- | | | | 901,000 | | | | -- | | | | -- | | | | 901,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock - Dividend | | | -- | | | | -- | | | | 17,852 | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | |
Issuance of preferred Series A | | | | 2,862 | | | | -- | | | | -- | | | | -- | | | | 2,573,000 | | | | -- | | | | -- | | | | 2,573,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of preferred stock | | | 2,862 | | | | -- | | | | -- | | | | -- | | | | 2,556,000 | | | | -- | | | | -- | | | | 2,556,000 | | |
Issuance of preferred Series 1 | | | | 13,445 | | | | -- | | | | -- | | | | -- | | | | 11,768,000 | | | | -- | | | | -- | | | | 11,768,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-controlling interest | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | 5,075,000 | | | | 5,075,000 | | |
Contributions | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | 6,264,000 | | | | 6,264,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distributions | | | -- | | | | -- | | | | -- | | | | -- | | | | (451,000 | ) | | | -- | | | | -- | | | | (451,000 | ) | |
Consolidation of Houston Preston | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | 6,000 | | | | 6,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distributions - Common | | | | -- | | | | -- | | | | -- | | | | -- | | | | (1,564,000 | ) | | | -- | | | | -- | | | | (1,564,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distributions – Series A | | | | -- | | | | -- | | | | -- | | | | -- | | | | (101,000 | ) | | | -- | | | | -- | | | | (101,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distributions – Series 1 | | | | -- | | | | -- | | | | -- | | | | -- | | | | (172,000 | ) | | | -- | | | | -- | | | | (172,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock dividend | | | | -- | | | | -- | | | | 62,571 | | | | -- | | | | 1,564,000 | | | | (1,564,000 | ) | | | -- | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | (3,100,000 | ) | | | 28,000 | | | | (3,072,000 | ) | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | (4,884,000 | ) | | | 269,000 | | | | (4,615,000 | ) |
Balance, March 31, 2017 | | | 2,862 | | | $ | -- | | | | 2,521,088 | | | $ | -- | | | $ | 63,283,000 | | | $ | (7,494,000 | ) | | $ | 9,177,000 | | | $ | 64,966,000 | | |
Balance, September 30, 2017 | | | | 16,307 | | | $ | -- | | | | 2,601,537 | | | $ | -- | | | $ | 76,769,000 | | | $ | (11,574,000 | ) | | $ | 8,854,000 | | | $ | 74,049,000 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MVP REIT II, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| | | For the Nine Months Ended September 30 | |
| | For the Three Months Ended March 31, 2017 | | | For the Three Months Ended March 31, 2016 | | | 2017 | | | 2016 | |
Cash flows from operating activities: | | (As restated) | | | | | | | | | | |
Net Loss | | $ | (3,072,000 | ) | | $ | (262,000 | ) | | $ | (4,615,000 | ) | | $ | (2,473,000 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: Income (loss) from investment in equity method investee | | | (14,000 | ) | | | 1,000 | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | |
Depreciation expense | | | | 1,404,000 | | | | 46,000 | |
Gain on sale of investment in real estate | | | | (1,200,000 | ) | | | -- | |
Income from investment in equity method investee | | | | (19,000 | ) | | | (9,000 | ) |
Distribution from MVP REIT | | | (52,000 | ) | | | -- | | | | (122,000 | ) | | | -- | |
Distribution from DST | | | | (52,000 | ) | | | -- | |
Amortization of loan costs | | | 96,000 | | | | -- | | | | 335,000 | | | | -- | |
Depreciation expense | | | 425,000 | | | | -- | | |
Changes in operating assets and liabilities | | | | | | | | | | | | | | | | |
Cash - Restricted | | | (1,025,000 | ) | | | -- | | | | (5,248,000 | ) | | | -- | |
Due to related parties | | | 354,000 | | | | 37,000 | | | | (2,164,000 | ) | | | 9,000 | |
Accounts payable | | | 278,000 | | | | 32,000 | | | | 1,028,000 | | | | 593,000 | |
Loan fees | | | (183,000 | ) | | | -- | | |
Security deposits | | | 44,000 | | | | -- | | | | 298,000 | | | | -- | |
Deferrerd revenue | | | 37,000 | | | | -- | | |
Assets held for sale, net of liabilities | | | (4,000 | ) | | | -- | | |
Other assets | | | | 258,000 | | | | -- | |
Deferred revenue | | | | -- | | | | 17,000 | |
Accounts receivable | | | (143,000 | ) | | | -- | | | | 93,000 | | | | (71,000 | ) |
Prepaid expenses | | | (413,000 | ) | | | 58,000 | | | | 60,000 | | | | 138,000 | |
Net cash used in operating activities | | | (3,672,000 | ) | | | (134,000 | ) | | | (9,944,000 | ) | | | (1,750,000 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Purchase of investment in real estate | | | (56,700,000 | ) | | | -- | | | | (81,200,000 | ) | | | (36,642,000 | ) |
Security deposits | | | | -- | | | | (957,000 | ) |
Investment for 20% ownership Houston Preston, net of cash in bank account | | | | (1,015,000 | ) | | | -- | |
Investment in DST | | | | (2,821,000 | ) | | | -- | |
Building improvements | | | (14,000 | ) | | | -- | | | | (1,962,000 | ) | | | -- | |
Payments made for future acquisitions | | | (227,000 | ) | | | -- | | |
Distribution received from investment in cost method investee | | | 13,000 | | | | -- | | |
Distribution received from investment in equity method investee | | | 14,000 | | | | -- | | |
Assets held for sale, net of liabilities | | | | 623,000 | | | | -- | |
Proceeds from Investments | | | | 87,000 | | | | -- | |
Proceeds from sale of investment in real estate | | | | 1,577,000 | | | | -- | |
Deposits applied to purchase of investment in real estate | | | | 4,216,000 | | | | -- | |
Distribution received from investments | | | | 237,000 | | | | -- | |
Investment in cost method investee | | | -- | | | | (2,793,000 | ) | | | (8,000 | ) | | | (1,353,000 | ) |
Investment in cost method investee – held for sale | | | | (2,000 | ) | | | (836,000 | ) |
Investment in equity method investee | | | -- | | | | (600,000 | ) | | | (50,000 | ) | | | (600,000 | ) |
Proceeds from non-controlling interest | | | 5,075,000 | | | | -- | | | | 5,075,000 | | | | -- | |
Net cash used in investing activities | | | (51,839,000 | ) | | | (3,393,000 | ) | | | (75,243,000 | ) | | | (40,388,000 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | | | | |
Proceeds from note payable | | | 36,415,000 | | | | -- | | | | 75,752,000 | | | | 434,000 | |
Payments on note payable | | | (173,000 | ) | | | (45,000 | ) | | | (1,388,000 | ) | | | (106,000 | ) |
Proceeds from of line of credit | | | 11,968,000 | | | | -- | | |
Payments made to line of credit | | | (284,000 | ) | | | -- | | |
Proceeds from line of credit | | | | 32,643,000 | | | | -- | |
Loan fees paid | | | | (1,111,000 | ) | | | -- | |
Payments made on line of credit | | | | (39,526,000 | ) | | | -- | |
Distribution to non-controlling interest | | | (50,000 | ) | | | -- | | | | (1,809,000 | ) | | | (17,000 | ) |
Distribution from investment in equity method investee | | | | -- | | | | 7,000 | |
Proceeds from issuance of common stock | | | 5,035,000 | | | | 8,687,000 | | | | 5,826,000 | | | | 42,564,000 | |
Proceeds from issuance of preferred stock | | | 2,556,000 | | | | -- | | | | 14,341,000 | | | | -- | |
Distribution made to common stockholders | | | (161,000 | ) | | | (10,000 | ) | |
Distribution made to preferred stockholders | | | (5,000 | ) | | | -- | | |
Dividends paid to stockholders | | | | (1,837,000 | ) | | | (142,000 | ) |
Net cash provided by financing activities | | | 55,301,000 | | | | 8,632,000 | | | | 82,891,000 | | | | 42,740,000 | |
| | | | | | | | | |
Net change in cash | | | (210,000 | ) | | | 5,105,000 | | | | (2,296,000 | ) | | | 602,000 | |
Cash, beginning of period | | | 4,885,000 | | | | 2,268,000 | | | | 4,885,000 | | | | 2,268,000 | |
Cash, end of period | | $ | 4,675,000 | | | $ | 7,373,000 | | | $ | 2,589,000 | | | $ | 2,870,000 | |
| | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | |
Interest Paid | | $ | 595,000 | | | $ | 1,000 | | |
Non-cash investing and financing activities: | | | | | | | | | |
Distributions - DRIP | | $ | 285,000 | | | $ | 14,000 | | |
Deposits applied to purchase of investment in real estate | | $ | 4,000,000 | | | $ | -- | | |
MVP REIT II, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
| | For the Nine Months Ended September 30 | |
| | 2017 | | | 2016 | |
Supplemental disclosures of cash flow information: | | | | | | |
Interest Paid | | $ | 2,737,000 | | | $ | -- | |
Non-cash investing and financing activities: | | | | | | | | |
Distributions - DRIP | | $ | 901,000 | | | $ | 217,000 | |
Dividend shares | | $ | 1,402,000 | | | $ | -- | |
Dividends declared not yet paid | | $ | 235,000 | | | $ | 143,000 | |
Deposits applied to purchase of investment in real estate | | $ | 4,216,000 | | | $ | -- | |
Conversion from debt to preferred shares | | $ | 2,000,000 | | | $ | -- | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
MVP REIT II, Inc.
(A Maryland Corporation)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31,September 30, 2017
(Unaudited)
Note A — Organization and Proposed Business Operations
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 the year ended December 31, 2016.2017. 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 March 31,September 30, 2017, the Company had raised approximately $61.1$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 $435,000.$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.
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 properties other than parking facilities.
The Company is the sole general partner of MVP REIT II Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership"). The Company intends to own 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.
We utilize 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, we 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 company ("VRM II"), and 40% by Vestin Realty Mortgage I, Inc., a Maryland corporation and OTC pink sheet company ("VRM I"), both which are managed by Vestin Mortgage, LLC, a Nevada limited liability company in whichwholly owned by Michael Shustek wholly owns. The Company also sold 5,000 shares of common stock to VRM II in the Common Stock Offering.
The Company's advisor is MVP Realty Advisors, LLC (the "Advisor"), a Nevada limited liability company, which is owned 60% by VRM II and 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.
From inception through March 31,September 30, 2017, the Company has paid approximately $1.2$2.1 million in distributions, including issuing 29,73154,336 shares of its common stock as DRIP shares, issuing 47,11685,358 shares of its common stock as dividend in distributions to the Company's common stockholders and $5,000approximately $200,000 in distributions for preferred stockholders, all of which have been paid from offering proceeds and constituted a return of capital. The Company may continue to pay distributions
from sources other than cash flow from operations, including proceeds from the Common Stock Offering and other stock sales, 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.
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, Inc. ("MVP REIT"). On May 26, 2017, the Company, MVP REIT, MVP Merger Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company ("Merger Sub"), and MVP Realty Advisors, LLC, the Company's and MVP REIT's external advisor (the "Advisor"), entered into an agreement and plan of merger (the "Merger Agreement"). Subject to the terms and conditions of the Merger Agreement, MVP REIT will merge with and into Merger Sub (the "Merger"), with Merger Sub surviving the Merger (the "Surviving Entity"), such that following the Merger, the Surviving Entity will continue as a wholly owned subsidiary of the Company. On September 27, 2017, the stockholders of MVP REIT approved the Merger Agreement and the parties are currently in the process of satisfying the remaining conditions to completion of the merger.
See Note P- Merger for additional information.
Capitalization
As of March 31,September 30, 2017, the Company had 2,521,088 2,601,537 shares of common stock issued and outstanding. During the threenine months ended March 31,September 30, 2017, the Company had received consideration of approximately $4.7$4.9 million for the issuance of its common stock in connection with the Common Stock Offering. In connection with its formation, the Company sold 8,000 shares of common stock to the Sponsor for $200,000. As of March 31, 2017, the Company had 2,862 shares of preferred stock issued and outstanding
The Company offered up to $50 million in shares of the Company's Series A Convertible Redeemable Preferred Stock ("Series A"), par value $0.0001 per share, together with warrants to acquire the Company's common stock, in a Regulation D 506(c) private placement to accredited investors. In connection with the private placement, onOn 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.Stock, par value $0.0001 per share (the "Series A") The Company commenced thea 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. The Company raised approximately $2.6 million, net of offering costs, in the Series A private placements.placement and has 2,862 Series A shares issued and outstanding.
As disclosed on an 8-K filed with the SEC onOn March 30,29, 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. Theshare (the "Series 1"). On April 7, 2017 the Company commenced the Regulation D 506(b)a private placement of shares of Series 1, together with warrants to acquire the Company's common stock to accredited investors commencing April 7, 2017.investors. As of May 9,September 30, 2017, the Company has not received any fundshad raised approximately $11.8 million, net of offering costs, in relation to the Series 1 offering.private placements and had 13,445 Series 1 shares issued and outstanding. The Company continues to raise additional funds through a private placement of Series 1 Convertible Redeemable Preferred Stock.
Stockholders may elect to reinvest distributions received from the Company in common shares by participating in the Company's DRIP. The stockholder may enroll in the DRIP by completing the distribution change form. The stockholder may also withdraw at any time, without penalty, by delivering written notice to the Company. Participants will acquire DRIP shares at a fixed price of $25.00 per share until (i) all such shares registered in the Common Stock Offering are issued, (ii) the Common Stock Offering terminates and the Company elects to deregister any unsold shares under the DRIP, or (iii) the Company's board decides to change the purchase price for DRIP shares or terminate the DRIP for any reason. Commencing no later than May 29, 2018 (the "Valuation Date"), which is 150 days following the second anniversary of the date to satisfy the minimum offering requirement in the Offering, if the DRIP is ongoing, the Company will adjust the price of shares offered in the DRIP to equal the net asset value ("NAV") per share. The Company will update the NAV per share at least annually following the Valuation Date and further adjust the per share price in the Company's DRIP accordingly. The Company has registered $50,000,000 in shares for issuance under the DRIP.
The Company may amend, suspend or terminate the DRIP for any reason, except that the Company may not amend the DRIP to eliminate a participant's ability to withdraw from the DRIP, without first providing 10 days prior written notice to participants.
In addition, the Company has a Share Repurchase Program ("SRP") that may provide stockholders who generally have held their shares for at least two years an opportunity to sell their shares to the Company, subject to certain restrictions and limitations. Prior to the date that the Company establishes an estimated value per share of common stock, the purchase price will be 95.0% of the purchase price paid for the shares if redeemed at any time between the second and third anniversaries of the purchase date, and 97.0% of the purchase price paid if redeemed after the third anniversary. After the Company establishes an estimated NAV per share of common stock, the purchase price will be 95.0% of the NAV per share for the shares if redeemed at any time between the second and third anniversaries of the purchase date, 97.0% of the NAV per share if redeemed at any time between the third and fifth anniversaries, and 100.0% of the NAV per share if redeemed after the fifth anniversary.
The number of shares to be repurchased during a calendar quarter is limited to the lesser of: (i) 5.0% of the weighted average number of shares of common stock outstanding during the prior calendar year, and (ii) those repurchases that
can be funded from the net proceeds of the sale of shares under the DRIP in the prior calendar year plus such additional funds as may be reserved for that purpose by the Company's board of directors; provided however, that the above volume limitations shall not apply to repurchases requested in connection with the death or qualifying disability of a stockholder. The board of directors may also limit the amounts available for repurchase at any time at its sole discretion. The SRP will terminate if the shares of common stock are listed on a national securities exchange. Redemption requests other than those made in connection with the death or disability (as defined in the Internal Revenue Code of 1986, as amended (the "Code") of a stockholder will continue to be repurchased as of March 31st, June 30th, September 30th and December 31st of each year in accordance with the terms of the SRP. As of March 31,September 30, 2017, there were no shares had been redeemed.eligible for redemption (other than in connection with a death or disability of a stockholder).
Note B — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying unaudited condensed consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with principles generally accepted in the United States of America ("GAAP") for interim financial information as contained in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim period. Operating results for the three and nine months ended March 31,September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
The condensed consolidated balance sheet as of December 31, 2016 contained herein has been derived from the audited financial statements as of December 31, 2016, but does not include all disclosures required by GAAP.
Restatement of Financial Statements
We have determined that our previously reported results for the quarter ended March 31, 2017 did not include an interest expense accrual and rent received. The condensed statement of operations for the quarter ended March 31, 2017 included in this Form 10-Q/A have been restated to include the accrual of $141,000 of interest and $27,000 of revenue. The condensed balance sheet as of March 31, 2017 included in this Form 10-Q/A have been restated to incorporate these changes which increased accounts payable and accrued expenses as previously reported by $141,000 and decreased the deferred revenue by $27,000. The condensed statement of cash flows for the quarter ended March 31, 2017 included in this Form 10-Q/A includes certain adjustments to correspond to the statement of operations and the statement of equity adjustments as described above. We have made necessary conforming changes in "Management's Discussion and Analysis of Financial Condition and Results of Operations" resulting from the correction of this error.
Effect on Balance Sheet:
| March 31, 2017 | |
| As previously reported | | Effect of restatement | | As restated | |
Accounts payable and accrued liabilities | | $ | 624,000 | | | $ | 141,000 | | | $ | 765,000 | |
Deferred revenue | | $ | 109,000 | | | $ | (27,000 | ) | | $ | 82,000 | |
Accumulated deficit | | $ | (7,380,000 | ) | | $ | (114,000 | ) | | $ | (7,494,000 | ) |
Effect on Statement of Operations:
| | March 31, 2017 | |
| | As previously reported | | | Effect of restatement | | | As restated | |
Rental revenue | | $ | 1,975,000 | | | $ | 27,000 | | | $ | 2,002,000 | |
Interest expense | | $ | 655,000 | | | $ | (141,000 | ) | | $ | 796,000 | |
Net loss | | $ | (2,958,000 | ) | | $ | (114,000 | ) | | $ | (3,072,000 | ) |
Net loss attributable to MVP REIT II, Inc.'s stockholders | | $ | (2,986,000 | ) | | $ | (114,000 | ) | | $ | (3,100,000 | ) |
Loss from continuing operations attributable to MVP REIT II, Inc.'s common stockholders – basic and diluted | | $ | (1.22 | ) | | $ | (0.05 | ) | | $ | (1.27 | ) |
Net loss attributable to MVP REIT II, Inc.'s common stockholders – basic and diluted | | $ | (1.23 | ) | | $ | (0.05 | ) | | $ | (1.28 | ) |
Effect on Statement of Cash Flows:
| | March 31, 2017 | |
| | As previously reported | | | Effect of restatement | | | As restated | |
Net loss | | $ | (2,958,000 | ) | | $ | (114,000 | ) | | $ | (3,072,000 | ) |
Accounts payable and accrued liabilities | | $ | 137,000 | | | $ | 141,000 | | | $ | 278,000 | |
Deferred revenue | | $ | 64,000 | | | $ | (27,000 | ) | | $ | 37,000 | |
Consolidation
The Company's consolidated financial statements include its accounts and the accounts of its subsidiaries, Operating Partnership and all of the following subsidiaries. All intercompany profits and losses, balances and transactions are eliminated in consolidation.
West 9th Street Properties II, LLC
MVP San Jose 88 Garage, LLC
MCI 1372 Street, LLC
Cincinnati Race Street, LLC
St. Louis Washington, LLC
St. Paul Holiday Garage, LLC
Louisville Station Broadway, LLC
White Front Garage Partners, LLC
Cleveland Lincoln Garage, LLC
MVP Houston Jefferson Lot, LLC
MVP Houston San Jacinto Lot, LLC
MVP Detroit Center Garage, LLC
St Louis Broadway, LLC
West 9th Street Properties II, LLC | Cleveland Lincoln Garage, LLC |
MVP San Jose 88 Garage, LLC | MVP Houston Jefferson Lot, LLC** |
MCI 1372 Street, LLC | MVP Houston Preston Lot, LLC * |
Cincinnati Race Street, LLC | MVP Houston San Jacinto Lot, LLC |
St. Louis Washington, LLC | MVP Detroit Center Garage, LLC |
St. Paul Holiday Garage, LLC | St Louis Broadway, LLC |
Louisville Station Broadway, LLC | St Louis Seventh & Cerre, LLC |
White Front Garage Partners, LLC | MVP Preferred Parking, LLC |
* Entity is consolidated with the Company starting May 1, 2017. See Note E Related Party Transactions for additional information.
** See Note M – Gain on Sale of Investment in Real Estate for additional information
Under GAAP, the Company's consolidated financial statements will also include the accounts of its consolidated subsidiaries and joint ventures in which the Company is the primary beneficiary, or in which the Company has a controlling interest. In determining whether the Company has a controlling interest in a joint venture and the
requirement to consolidate the accounts of that entity, the Company's management considers factors such as an entity's purpose and design and the Company's ability to direct the activities of the entity that most significantly impacts the entity's economic performance, ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity in which it will absorb the majority of the entity's expected losses, if they occur, or receive the majority of the expected residual returns, if they occur, or both.
Equity investments in which the Company exercises significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. The Company's share of its equity method investees' earnings or losses is included in other income in the accompanying unadutiedunaudited condensed consolidated statements of operations. Investments in which the Company is not able to exercise significant influence over the investee are accounted for under the cost method.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, and derivative financial instruments and hedging activities, as applicable.
Concentration
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, the company is still assessing the long-term impact. As of September 30, 2017, we have not seen a reduction in the base rent from our operator, who will continue to operate these locations under the terms of the current leases.
The Company had eight parking tenants as of March 31, 2017.September 30, 2017 and four parking tenants as of September 30, 2016. One tenant, Standard Parking + ("SP+"), represented a 61.3% concentration for the threenine months ended March 31,September 30, 2017, in regards to parking base rental revenue. During the three months ended March 31, 2017, SP+ accounted for 65%, of the parking base rental revenue. Below is a table that summarizes base parking rent by tenant:
Parking Tenant | | Percentage of Total Base Rental Revenue | | For the Nine Months Ended September 30, | | Parking Tenant | | 2017 | | | 2016 | | SP + | | | 61.3 | % | | | 60.3 | % | iPark Services | | | 10.3 | % | | | 0.0 | % | Premier Parking | | | 8.1 | % | | | 0.0 | % | Interstate Parking | | | 6.0 | % | | | 17.3 | % | St. Louis Parking | | | 4.1 | % | | | 0.0 | % | Lanier Parking | | | 4.0 | % | | | 0.0 | % | ABM | | | 3.9 | % | | | 17.4 | % | Riverside Parking | | | 2.3 | % | | | 5.0 | % | Grand Total | | | 100.0 | % | | | 100.0 | % |
In addition, the Company had concentrations in various cities based on parking rental revenue for the nine months ended September 30, 2017 and 2016, as well as concentrations in various cities based on the real estate we owned as of September 30, 2017 and December 31, 2016. The below tables summarize this information by city.
City Concentration for Parking Rent | | | | For the Nine Months Ended September 30, | | | | 2017 | | | 2016 | | Detroit | | | 49.5 | % | | | 0.0 | % | Cleveland | | | 12.0 | % | | | 47.4 | % | Nashville | | | 8.5 | % | | | 0.0 | % | St Paul | | | 6.3 | % | | | 17.3 | % | St Louis | | | 6.2 | % | | | 9.8 | % | Houston | | | 6.1 | % | | | 0.0 | % | San Jose | | | 4.4 | % | | | 10.8 | % | Cincinnati | | | 3.9 | % | | | 6.6 | % | Louisville | | | 2.4 | % | | | 5.0 | % | Canton | | | 0.7 | % | | | 3.1 | % | Grand Total | | | 100.0 | % | | | 100.0 | % |
Real Estate Concentration by City | | Based on the Company's Ownership % | | | | As of | | | | September 30, 2017 | | | December 31, 2016 | | Detroit | | | 34.1 | % | | | 0.0 | % | Houston | | | 20.2 | % | | | 10.5 | % | St Louis | | | 11.2 | % | | | 5.7 | % | Cleveland | | | 9.1 | % | | | 22.2 | % | Nashville | | | 7.1 | % | | | 17.4 | % | St Paul | | | 6.4 | % | | | 15.5 | % | Cincinnati | | | 3.5 | % | | | 8.5 | % | San Jose | | | 2.8 | % | | | 6.8 | % | Louisville | | | 2.4 | % | | | 5.8 | % | Minneapolis | | | 1.6 | % | | | 3.8 | % | Bridgeport | | | 0.6 | % | | | 1.4 | % | Canton | | | 0.5 | % | | | 1.3 | % | Denver | | | 0.5 | % | | | 1.1 | % | Grand Total | | | 100.0 | % | | | 100.0 | % |
(as of March 31, 2017)
| |
SP + | | | 65.3 | % |
Premier Parking | | | 9.3 | % |
Interstate Parking | | | 7.1 | % |
ABM | | | 5.1 | % |
iPark Services | | | 4.7 | % |
St. Louis Parking | | | 3.6 | % |
Riverside Parking | | | 2.7 | % |
Lanier | | | 2.2 | % |
Grand Total | | | 100.00 | % |
Acquisitions
The Company records the acquired tangible and intangible assets and assumed liabilities of acquisitions of all operating properties and those development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date. The Company assesses and considers fair value based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates that the Company deems appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land, buildings and improvements, construction in progress and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any.
The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements, tenant improvements, and leasing costs are based upon current market replacement costs and other relevant market rate information.
The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) management's estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market operating leases. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. The Company's below-market operating leases generally do not include fixed rate or below-market renewal options.
The fair value of acquired in-place leases is derived based on management's assessment of lost revenue and costs incurred for the period required to lease the "assumed vacant" property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered by the Company in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, current market conditions, and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand at market rates.
In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related expenses. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If a lease were to be terminated or if termination were determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related unamortized in-place lease intangible would be accelerated.
The determination of the fair value of any debt assumed in connection with a property acquisition is estimated by discounting the future cash flows using interest rates available for the issuance of debt with similar terms and remaining maturities.
The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions requires us to make significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of the Company's acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities. In addition, because the value of above and below market leases are amortized as either a reduction or increase to rental income, respectively, the Company's judgments for these intangibles could have a significant impact on the Company's reported rental revenues and results of operations.
Costs directly associated with all operating property acquisitions and those development and redevelopment acquisitions that meet the accounting criteria to be accounted for as business combinations are expensed as incurred.incurred within operating expenses in the consolidated statement of operations. During the three months and nine months ended March 31,September 30, 2017, the Company expensed approximately $1.1$0 and $1.7 million in related party acquisition costs, respectively. The Company also had $0.1 million and $1.8$2.1 million of non-related party acquisition costs, respectively, for the purchase of an interest in three properties.four properties (see Note I – Acquisitions). During the three and nine months ended March 31,September 30, 2016, the Company did not acquire any properties.expensed approximately $1.0 million and $1.4 million, respectively, in related party acquisition costs. The Company also expensed $0.5 million and $0.7 million in non-related party acquisition costs for the three and nine months ended September 30, 2016. The Company's acquisition expenses are directly related to the Company's acquisition activity and if the Company's acquisition activity was to increase or decrease, so would the Company's acquisition costs.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Cash
Cash includes cash in bank accounts. The Company deposits cash with high quality financial institutions.institutions with the majority of its cash at KeyBank. These deposits are guaranteed by the Federal Deposit Insurance Company up to an insurance limit up of $250,000. As of March 31,September 30, 2017 and December 31, 2016, the Company had approximately $2.7$1.2 million and $3.4 million, respectively, in excess of the federally insured limits.As of September 30, 2017, the Company has not experienced any losses on cash deposits.
Restricted Cash
Restricted cash primarily consists of escrowed tenant improvement funds, real estate taxes, capital improvement funds, insurance premiums, and other amounts required to be escrowed pursuant to loan agreements.
Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of the Company's leases will provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. Percentage rents will be recorded when earned and certain thresholds have been met.
The Company will continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant'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. In the event that the collectability of a receivable is in doubt, the Company will record an increase in the Company's allowance for uncollectible accounts or record a direct write-off of the receivable after exhaustive efforts at collection.
Advertising Costs
Advertising costs incurred in the normal course of operations and are expensed as incurred. During the three and nine months ended March 31,September 30, 2017 and 2016, the Company had no advertising costs.
Investments in Real Estate and Fixed Assets
Investments in real estate and fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 40 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
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's analysis of comparable properties in the Company'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 account 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'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'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's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant'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 of 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 Company's 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.
Organization, Offering and Related Costs
Certain organization and offering costs will be incurred by the Advisor. Pursuant to the terms of the Advisory Agreement, the Company will not reimburse the Advisor for these out of pocket costs and future organization and
offering costs it may incur. Such costs shall include legal, accounting, printing and other offering expenses, including marketing, and direct expenses of the Advisor's employees and employees of the Advisor's affiliates and others.
All direct offering costs incurred and or paid by us that are directly attributable to a proposed or actual offering, including sales commissions, if any, were charged against the gross proceeds of the Offering and recorded as an offset to additional paid-in-capital. All indirect costs will be expensed as incurred.
Offering costs were reclassified from deferred costs to stockholders' equity when the Company commenced its Offering, and included all expenses incurred by the Company in connection with its Offering as of such date.
Stock-Based Compensation
The Company has a stock-based incentive award plan, which is accounted for under the guidance for share based payments. The expense for such awards will be included in general and administrative expenses and is recognized over the vesting period or when the requirements for exercise of the award have been met (See Note G — Stock-Based Compensation).
Income Taxes
The Company will electis organized and operate in a manner that will allow the Company,conducts operations to qualify to be taxed as a REIT under Sections 856 throughto 860 of the Internal Revenue Code of 1986, as amended commencing(the "Code") and to comply with the taxable year ended December 31, 2016. Ifprovisions of the Company qualifies for taxation as aInternal Revenue Code with respect thereto. A REIT itis generally will not be subject to federal corporate income tax to the extent it distributes allon that portion of its REIT taxable income ("Taxable Income"), which is distributed to its stockholders, and so long as it distributesprovided that at least 90% of its REITTaxable Income is distributed and provided that certain other requirements are met. Our Taxable Income may substantially exceed or be less than our net income as determined based on GAAP, because, differences in GAAP and taxable income. REITs are subject to a numbernet income consist primarily of other organizationalallowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and operational requirements. Even iflosses, and deferred income.
If the Company qualifies to be taxeddoes 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 may be subject to certain state and local taxesis 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 did not realize the benefits of its income and property, and federal income and excise taxes on its undistributed income.deferred tax assets, a valuation allowance was recorded against our net deferred tax assets.
Per Share Data
The Company calculates basic income (loss) per share by dividing net income (loss) for the period by weighted-average shares of its common stock outstanding for the respective period. Diluted income per share takes into account the effect of dilutive instruments, such as stock options and convertible stock, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding. The Company had no outstanding common share equivalents during the three and nine months ended March 31,September 30, 2017 and 2016.
There is a potential for dilution from the Company's Series A Convertible Redeemable Preferred Stock which may be converted into the Company's common stock at any time beginning upon the earlier of (i) 90 days after the occurrence of a listing event or (ii) the second anniversary of the final closing of the offering (whether or not a Listing Eventlisting event has occurred). As of May 9,September 30, 2017, there were 2,862 shares of the Series A Convertible Redeemable Preferred Stock issues.issued and outstanding.
There is a potential for dilution from the Company's Series 1 Convertible Redeemable Preferred Stock which may be converted into the Company's common stock at any time beginning upon the earlier of (i) 45 days after the occurrence of a listing event or (ii) April 7, 2019 (whether or not a listing event has occurred). As of September 30, 2017, there were 13,445 shares of the Series 1 Convertible Redeemable Preferred Stock issued and outstanding.
Each share of Series A preferred stock and Series 1 preferred stock will convert into the number of shares of the Company's common stock determined by dividing (i) the stated value per Series A share or Series 1 share of $1,000 (as may be adjusted pursuant to the applicable articles supplementary) plus any accrued but unpaid dividends to, but not including, the conversion date by (ii) the conversion price. The conversion price is equal to 100% or, if the conversion notice is received before December 1, 2017 (for Series 1 shares) or December 31, 2017 (for Series A shares), 110% of the volume weighted average price per share of the Company's common stock for the 20 trading days prior to the delivery date of the conversion notice; provided that if the Company's common stock is not then traded on a national securities exchange, the conversion price will be equal to the net asset value per share of the Company's common stock. The Company will have the right (but not the obligation) to redeem any Series A or Series 1 shares that are subject to a conversion notice on the terms set forth in the applicable articles supplementary.
Reportable Segments
We currently operate one reportable segment.
Reclassifications
Amounts listed in connection with certain expense accounts on the condensed consolidated statements of operations in the 2016 have been reclassified to conform to the September 30, 2017 presentation.
Accounting and Auditing Standards Applicable to "Emerging Growth Companies"
The Company is an "emerging growth company" under the Jumpstart Our Business Startups Act (the "JOBS Act"). For as long as the Company remains an "emerging growth company," which may be up to five fiscal years, the Company is not required to (1) comply with any new or revised financial accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies, (2) provide an auditor's attestation report on management's assessment of the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (3) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer or (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. The Company intends to take advantage of such extended transition period. Since the Company will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, the Company's financial statements may not be comparable to the financial statements of companies that comply with public company effective
dates. If the Company were to subsequently elect to instead comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
Share Repurchase Program
The Company has a Share Repurchase Program ("SRP") that enables stockholders to sell their shares to the Company. Under the SRP, stockholders may request that the Company redeem all or any portion, subject to certain minimum conditions described below, if such repurchase does not impair the Company's capital or operations.
Prior to the time that the Company's shares are listed on a national securities exchange, the repurchase price per share will depend on the length of time investors have held such shares as follows: no repurchases for the first two years unless shares are being repurchased in connection with a stockholder's death or disability (as defined in the Code). Repurchase requests made in connection with the death or disability of a stockholder will be repurchased at a price per share equal to 100% of the amount the stockholder paid for each share, or once we have established an estimated NAV per share, 100% of such amount as determined by the Company's board of directors, subject to any special distributions previously made to the Company's stockholders. With respect to all other repurchases, prior to the date that we establish an estimated value per share of common stock, the purchase price will be 95.0% of the purchase price paid for the shares, if redeemed at any time between the second and third anniversaries of the purchase date, and 97.0% of the purchase price paid if redeemed after the third anniversary. After we establish an estimated NAV per share of common stock, the purchase price will be 95.0% of the NAV per share for the shares, if redeemed at any time between the second and third anniversaries of the purchase date, 97.0% of the NAV per share if redeemed at any time between the third and fifth anniversaries, and 100.0% of the NAV per share if redeemed after the fifth anniversary. In the event that the Company does not have sufficient funds available to repurchase all of the shares for which repurchase requests have been submitted in any quarter, we will repurchase the shares on a pro rata basis on the repurchase date. The SRP will be terminated if the Company's shares become listed for trading on a national securities exchange or if the Company's board of directors determines that it is in the Company's best interest to terminate the SRP.
The Company is not obligated to repurchase shares of common stock under the share repurchase program. The number of shares to be repurchased during the calendar quarter is limited to the lesser of: (i) 5% of the weighted average number of shares outstanding during the prior calendar year, and (ii) those repurchases that could be funded from the net proceeds of the sale of shares under the DRIP in the prior calendar year plus such additional funds as may be reserved for that purpose by the Company's board of directors; provided, however, that the above volume limitations shall not apply to repurchases requested in connection with the death or qualifying disability of a stockholder. Because of these limitations, the Company cannot guarantee that the Company will be able to accommodate all repurchase requests.
The Company will repurchase shares as of March 31st, June 30th, September 30th, and December 31st of each year. Each stockholder whose repurchase request is approved will receive the repurchase payment approximately 30 days following the end of the applicable quarter, effective as of the last day of such quarter. The Company refers to the last day of such quarter as the repurchase date. If funds available for the Company's share repurchase program are not sufficient to accommodate all requests, shares will be repurchased as follows: (i) first, repurchases due to the death of a stockholder, on the basis of the date of the request for repurchase; (ii) next, in the discretion of the Company's board of directors, repurchases because of other involuntary exigent circumstances, such as bankruptcy; (iii) next, repurchases of shares held by stockholders subject to a mandatory distribution requirement under the stockholder's IRA; and (iv) finally, all other repurchase requests based upon the postmark of receipt. If the Stockholder's repurchase request is not honored during a repurchase period, the Stockholder will be required to resubmit the request to have it considered in a subsequent repurchase period.
On October 27, 2016, the Company filed a Form 8-K announcing, among other things, an amendment to the SRP providing for participation in the SRP by any holder of the Company's Series A Convertible Redeemable Preferred Stock, or any future board-authorized series or class of preferred stock that is convertible into common stock of the Company. Under the amendment, which becomesbecame effective on November 26, 2016, a preferred stock holder may participate in the SRP by converting its preferred stock into common stock of the Company, and submitting such common shares for repurchase. The time period, for purposes of determining how long such stockholder has held the common shares submitted for repurchase, begins as of the date such preferred stockholder acquired the underlying preferred shares that were converted into common shares and submitted for repurchase.
The board of directors may, in its sole discretion, terminate, suspend or further amend the share repurchase program upon 30 days' written notice without stockholder approval if it determines that the funds available to fund the share repurchase program are needed for other business or operational purposes or that amendment, suspension or termination of the share repurchase program is in the best interest of the stockholders. Among other things, we may amend the plan to repurchase shares at prices different from those described above for the purpose of ensuring the Company's dividends are not "preferential" for incomes tax purposes. Any notice of a termination, suspension or amendment of the share repurchase program will be made via a report on Form 8-K filed with the SEC at least 30 days prior to the effective date of such termination, suspension or amendment. The board of directors may also limit the amounts available for repurchase at any time in its sole discretion. Notwithstanding the foregoing, the share repurchase program will terminate if the shares of common stock are listed on a national securities exchange. As of March 31,September 30, 2017, no shares are eligible for redemption (other than in connection with a death or disability of a stockholder).
Distribution Reinvestment Plan
Pursuant to the DRIP stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP. Participants purchasing shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the Offering. The board of directors may designate that certain cash or other distributions be excluded from the DRIP. The Company has the right to amend any aspect of the DRIP or terminate the DRIP with ten days' notice to participants. Shares issued under the DRIP are recorded to equity in the accompanying balance sheets in the period distributions are declared. We have issued a total of 29,731shares54,336 shares of common stock under the DRIP as of March 31,September 30, 2017. The DRIP program is currently suspended in connection with the merger.
Non-controlling Interests
The FASB issued authoritative guidance for non-controlling interests in December 2007, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest.
Note C — Commitments and Contingencies
Litigation
InThe nature of our business exposes our properties, us and our operating partnership to the risk of claims and litigation in the normal course of business. Other than routine litigation arising out of the ordinary course of business, the Company may becomewe are not presently subject to any material litigation or claims. There are nonor, to our knowledge, is any material legal proceedings pending or known to be contemplatedlitigation threatened against the Company.us.
Environmental Matters
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. We do not believe that compliance with existing laws will have a material adverse effect on the Company's financial condition or results of operations. However, we cannot predict the impact of any unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Note D – Investments in Real Estate
As of March 31,September 30, 2017, the Company had the following Investments in Real Estate:Estate that were consolidated on our balance sheet:
Property | Location | Date Acquired | | Investment Amount | | | Zoning | | | Height Restriction | | Parking Tenant | Lease Commencement Date |
MVP San Jose 88 Garage, LLC | San Jose, CA | 6/15/2016 | | $ | 3,575,000 | | | DC | | | N/A | | Lanier Parking | 3/01/2017 |
MCI 1372 Street, LLC | Canton, OH | 7/8/2016 | | $ | 700,000 | | | B-5 | | | 375 FT | | ABM | 7/8/2016 |
MVP Cincinnati Race Street Garage, LLC | Cincinnati, OH | 7/8/2016 | | $ | 4,500,000 | | | DD-A | | | 500 FT. | | SP + | 9/1/2016 |
MVP St. Louis Washington, LLC | St Louis, MO | 7/18/2016 | | $ | 3,000,000 | | | CBD I | | | 100 FT. | | SP + | 7/21/2016 |
MVP St. Paul Holiday Garage, LLC | St Paul, MN | 8/12/2016 | | $ | 8,200,000 | | | B-5 | | | Unlimited | | Interstate Parking | 8/12/2016 |
MVP Louisville Station Broadway, LLC | Louisville, KY | 8/23/2016 | | $ | 3,050,000 | | | CBD I | | | Unlimited | | Riverside Parking | 8/23/2016 |
Cleveland Lincoln Garage Owners, LLC | Cleveland, OH | 10/19/2016 | | $ | 7,331,000 | | | SI-E5 / GR-E5 | | | 250 FT. | | SP + | 10/25/2016 |
MVP Houston San Jacinto Lot, LLC | Houston, TX | 11/22/2016 | | $ | 3,200,000 | | | NONE | | | Unlimited | | iPark Services | 12/1/2016 |
White Front Garage Partners, LLC | Nashville, TN | 9/30/2016 | | $ | 11,496,000 | | | CBD I | | | Unlimited | | Premier Parking | 10/1/2016 |
West 9th Street Properties II, LLC | Cleveland, OH | 5/11/2016 | | $ | 5,675,000 | | | CBD LLR-B4 | | | 175 FT. | | SP + | 5/11/2016 |
33740 Crown Colony, LLC | Cleveland, OH | 5/17/2016 | | $ | 3,030,000 | | | LLR-D5 | | | 250 FT. | | SP + | 5/17/2016 |
MVP Detroit Center Garage, LLC | Detroit, MI | 01/10/2017 | | $ | 55,000,000 | | | PD | | | Unlimited | | SP + | 2/1/2017 |
St Louis Broadway, LLC | St Louis, MO | 02/01/2017 | | $ | 2,400,000 | | | CBD I | | | 200 FT. | | St Louis Parking Co | 2/1/2017 |
St Louis Seventh & Cerre, LLC | St Louis, MO | 02/01/2017 | | $ | 3,300,000 | | | CBD I | | | 200 FT. | | St Louis Parking Co | 2/1/2017 |
Construction in progress | | | | $ | 521,000 | | | | | | | | | |
| | | | $ | 114,978,000 | | | | | | | | | |
Property | Location | Date Acquired | Investment Amount | Parking Tenant | Lease Commencement Date |
MVP San Jose 88 Garage, LLC | San Jose, CA | 6/15/2016 | $3,824,000 | Lanier Parking | 3/01/2017 |
MCI 1372 Street, LLC | Canton, OH | 7/8/2016 | $700,000 | ABM | 7/8/2016 |
MVP Cincinnati Race Street Garage, LLC | Cincinnati, OH | 7/8/2016 | $5,408,000 | SP + | 9/1/2016 |
MVP St. Louis Washington, LLC | St Louis, MO | 7/18/2016 | $3,000,000 | SP + | 7/21/2016 |
MVP St. Paul Holiday Garage, LLC | St Paul, MN | 8/12/2016 | $8,310,000 | Interstate Parking | 8/12/2016 |
MVP Louisville Station Broadway, LLC | Louisville, KY | 8/23/2016 | $3,107,000 | Riverside Parking | 8/23/2016 |
Cleveland Lincoln Garage Owners, LLC | Cleveland, OH | 10/19/2016 | $7,412,000 | SP + | 10/25/2016 |
MVP Houston San Jacinto Lot, LLC | Houston, TX | 11/22/2016 | $3,250,000 | iPark Services | 12/1/2016 |
MVP Houston Preston Lot, LLC | Houston, TX | 11/22/2016* | * $2,820,000 | iPark Services | 12/1/2016 |
White Front Garage Partners, LLC | Nashville, TN | 9/30/2016 | $11,672,000 | Premier Parking | 10/1/2016 |
West 9th Street Properties II, LLC** | Cleveland, OH | 5/11/2016 | $5,733,000 | SP + | 5/11/2016 |
33740 Crown Colony, LLC** | Cleveland, OH | 5/17/2016 | $3,050,000 | SP + | 5/17/2016 |
MVP Detroit Center Garage, LLC | Detroit, MI | 01/10/2017 | $55,139,000 | SP + | 2/1/2017 |
St Louis Broadway, LLC | St Louis, MO | 02/01/2017 | $2,400,000 | St Louis Parking Co | 2/1/2017 |
St Louis Seventh & Cerre, LLC | St Louis, MO | 02/01/2017 | $3,300,000 | St Louis Parking Co | 2/1/2017 |
MVP Preferred Parking, LLC | Houston, TX | 6/29/2017 | $20,600,000 | iPark Services | 8/01/2017 |
| | | $139,725,000 | | |
* 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 fees paid and 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 have been considered the controlling party starting May 1, 2017.
** In November 2016, these properties merged into one holding company called West 9th Street Properties II, LLC, for the purposes of debt financing.
Note E — Related Party Transactions and Arrangements
The transactions described in this Note were approved by a majority of the Company's board of directors (including a majority of the independent directors) not otherwise interested in such transaction as fair and reasonable to the Company and on terms and conditions no less favorable to the Company than those available from unaffiliated third parties.
Ownership of Company Stock
During May 2017, VRM II acquired approximately 35,000 shares of our stock from third party investors in exchange for various trust deed investments. During the nine months ended September 30, 2017, VRM II received approximately $11,900 in distributions in accordance with the Company's DRIP program.
As of March 31,September 30, 2017, the Company's Sponsor owned 8,0008,839 shares and VRM II owned 5,00041,435 shares of the Company's outstanding common stock.
Ownership of MVP REIT
On November 5, 2016, the Company purchased 338,409 shares of MVP REIT common stock from an unrelated third party for $3.0 million or $8.865 per share. During the three and nine months ended March 31,September 30, 2017, MVP REIT paid us,the Company, approximately $52,000$23,000 and $122,000, respectively, in stock distributions and in addition the Company received 2,544 common shares of MVP REIT common shares in accordance with their DRIP program.
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 MVP REIT owed the Company $1.5 million, related to the Company's ownership of their common stock.various acquisitions and ongoing operations.
Ownership of the Advisor
VRM I and VRM II own 40% and 60%, respectively, of the Advisor. Neither VRM I nor VRM II paid any up-front consideration for these ownership interests, but each willagreed to be responsible for its proportionate share of future expenses of the Advisor. The operating agreement of the Advisor provides that once VRM I and VRM II have been repaid in full for any capital contributions to the Advisor or for any expenses advanced on the Advisor's behalf, or capital investment, and once they have received an annualized return on their capital investment of 7.5%, then Michael Shustek will receive 40% of the net profits of the Advisor.
-16-Note Payable to the Advisor
$2.1 million to the Company ("Loan Agreement") for the purchase of the Houston Systems Lot. The terms of this 1-year Loan Agreement includes an annual interest rate of 5% with no penalty for prepayment. Interest and principal are due upon maturity.
Fees Paid in Connection with the Offering – Common Stock
Various affiliates of the Company are involved in thisthe Common Stock offering and the Company's operations including MVP American Securities, LLC, or ("MVP American Securities"), which is a broker-dealer and member of the Financial Industry Regulatory Authority, Inc., or FINRA. MVP American Securities is owned by MS MVP Holdings, LLC which is owned and managed by Mr. Shustek. Additionally, the Company's board of directors, including a majority of the Company's independent directors, may engage an affiliate of the Advisor to perform certain property management services for us.
The Company's Sponsor or its affiliates will paypaid selling commissions of up to 6.5% of gross offering proceeds from the sale of shares in the primary offeringCommon Stock Offering without any right to seek reimbursement from the Company.
The Company's sponsor or its affiliates also may paypaid non-affiliated selling agents a one-time fee separately negotiated with each selling agent for due diligence expenses, subject to the total underwriting compensation limitation set forth below. We expect suchSuch due diligence expenses were approximately 1.25% to average up to 1%2.00% of total offering proceeds at the maximum offering amount.proceeds. Such commissions and fees will bewere paid by the Company's sponsor or its affiliates (other than the Company) without any right to seek reimbursement from the Company'sCompany company..
Fees Paid in Connection with the Offering – Preferred Stock
In connection with the private placement of the Series A and Series 1 preferred stock, the Company may pay selling commissions of up to 6.0% of gross offering proceeds from the sale of shares in the private placements, including sales by affiliated and non-affiliated selling agents. During the three and nine months ended September 30, 2017, the Company paid approximately $0.7 million and $1.3 million, respectively, in selling commissions, of which 0.2 million and $0.3 million, respectively, were paid to affiliated selling agents.
The Company may pay non-affiliated selling agents a one-time fee separately negotiated with each selling agent for due diligence expenses of up to 2.0% of gross offering proceeds. The Company may also pay a dealer manager fee to MVP American Securities of up to 2.0% of gross offering proceeds from the sale of the shares in the private placements as compensation for acting as dealer manager. During the three and nine months ended September 30, 2017, the Company paid approximately $0.2 million and $0.3 million, respectively, to MVP American Securities as compensation.
Fees Paid in Connection with the Operations of the Company
The Advisor or its affiliates will receive an acquisition fee of 2.25% of the purchase price of any real estate provided, however, the Company will not pay any fees when acquiring loans from affiliates. During the three and threenine months ended March 31,September 30, 2017, approximately zero and $1.7 million, respectively, in acquisition fees had been earned by the Advisor. During the three and nine months ended September 30, 2016, approximately $1.1$1.0 million and approximately $0.1$1.4 million, respectively, in acquisition fees had been earned by the Advisor.
The Advisor or its affiliates willcan be reimbursed for actual expenses paid or incurred in the investment. During the three and nine months ended March 31,September 30, 2017 and 2016, no acquisition expenses had been reimbursed to the Advisor.
The Advisor or its affiliates will receive a monthly asset management fee at an annual rate equal to 1.0% of the cost of all assets then held by the Company, or the Company's proportionate share thereof in the case of an investment made through a joint venture or other co-ownership arrangement. The Company will determine the Company's NAV, on a date not later than the Valuation Date. Following the Valuation Date, the asset management fee will be based on the value of the Company's assets rather than their historical cost. Asset management fees for the three and nine months ended March 31,September 30, 2017 were approximately $237,000. No asset$0.3 million and $0.8 million, respectively. Asset management fees were earned for the three and nine months ended March 31, 2016.September 30, 2016 were approximately $51,000 and $66,000, respectively.
The Company will reimburse the Advisor or its affiliates for costs of providing administrative services, subject to the limitation that we will not reimburse the Advisor for any amount by which the Company's operating expenses, at the end of the four preceding fiscal quarters (commencing after the quarter in which we make the Company's first investment), exceed the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income connection with the selection or acquisition of an investment, whether or not the Company ultimately acquires, unless the excess amount is approved by a majority of the Company's independent directors. We will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives a separate fee, such as an acquisition fee, disposition fee or debt financing fee, or for the salaries and benefits paid to the Company's executive officers. In
addition, we will not reimburse the Advisor for rent or depreciation, utilities, capital equipment or other costs of its own administrative items. During the three and nine months ended March 31,September 30, 2017 and 2016, no operating expenses have been incurredreimbursed to the Advisor.
In connection with the merger, the Advisory Agreement with MVP Realty Advisor will be amended effective at the closing of the merger to eliminate all fees except a 1.1% asset management fee, which will be limited to $2.0 million per year until the merged company:
· | holds assets with an Appraised Value equal to or in excess of $500,000,000 or, |
· | the Company reports AFFO per share of Company Common Stock equal to or greater than the $0.3125 per share for two consecutive quarters, on a fully diluted basis at which time all fees subordinated will be paid. |
In connection with the merger, pursuant to the Termination Agreement, at the effective time of the Merger, the Advisory Agreement, dated September 25, 2012, as amended, among MVP REIT and the Advisor will be terminated and 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 Advisor.only fee payable to the Advisor in connection with the Merger.
Fees Paid in Connection with the Liquidation or Listing of the Company's Real Estate Assets
For substantial assistance in connection with the sale of investments, as determined by the independent directors, we will pay the Advisor or its affiliate the lesser of (i) 3.0% of the contract sale price of each real estate-related secured loan or other real estate investment or (ii) 50% of the customary commission which would be paid to a third-party broker for the sale of a comparable property. The amount paid, when added to the sums paid to unaffiliated parties, may not exceed either the customary commission or an amount equal to 6.0% of the contract sales price. The disposition fee will be paid concurrently with the closing of any such disposition of all or any portion of any asset. During the three and nine months ended March 31,September 30, 2017 and 2016, no disposition fees have been earned by the Advisor.
After the Company's stockholders have received a return of their net capital invested and a 6.0% annual cumulative, non-compounded return, then the Company's Advisor will be entitled to receive 15.0% of the remaining proceeds. We will pay this subordinated performance fee only upon one of the following events: (i) if the Company's shares are listed on a national securities exchange; (ii) if the Company's assets are sold or liquidated; (iii) upon a merger, share exchange, reorganization or other transaction pursuant to which the Company's investors receive cash or publicly-traded securities in exchange for their shares; or (iv) upon termination of the Company's advisory agreement. During the three and nine months ended March 31,September 30, 2017 and 2016, no subordinated performance fees have been earned by the Company's Advisor.
Upon completion of the merger of MVP REIT and the Company these fees will be terminated.
Note F — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition services, the sale of shares of the Company's common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations. In addition, the Sponsor pays selling commissions in connection with the sale of the Company's shares in the Offering and the Advisor pays the Company's organization and offering expenses.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note G — Stock-Based Compensation
Long-Term Incentive Plan
The Company's board of directors has adopted a long-term incentive plan which we willmay use to attract and retain qualified directors, officers, employees, and consultants. The Company's long-term incentive plan will offer these individuals an opportunity to participate in the Company's growth through awards in the form of, or based on, the Company's common stock. We currently anticipate that we will not issue awards under the Company's long-term incentive plan, although we may do so in the future, including possible equity grants to the Company's independent directors as a form of compensation.
The long-term incentive plan authorizes the granting of restricted stock, stock options, stock appreciation rights, restricted or deferred stock units, dividend equivalents, other stock-based awards and cash-based awards to directors, officers, employees and consultants of the Company and the Company's affiliates' selected by the board of directors for participation in our long-term incentive plan. Stock options granted under the long-term incentive plan will not exceed an amount equal to 10% of the outstanding shares of our common stock on the date of grant of any such stock options. Stock options may not have an exercise price that is less than the fair market value of a share of our common stock on the date of grant.
Our board of directors or a committee appointed by our board of directors will administer the long-term incentive plan, with sole authority to determine all of the terms and conditions of the awards, including whether the grant, vesting or settlement of awards may be subject to the attainment of one or more performance goals. No awards will be granted under the long-term incentive plan if the grant or vesting of the awards would jeopardize our status as a REIT under the Code or otherwise violate the ownership and transfer restrictions imposed under our charter. Unless otherwise determined by our board of directors, no award granted under the long-term incentive plan will be transferable except through the laws of descent and distribution.
We have authorized and reserved an aggregate maximum number of 500,000 common shares for issuance under the long-term incentive plan. In the event of a transaction between our company and our stockholders that causes the per-share value of our common stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering or large nonrecurring cash dividend), the share authorization limits under the long-term incentive plan will be adjusted proportionately and the board of directors will make such adjustments to the long-term incentive plan and awards as it deems necessary, in its sole discretion, to prevent dilution or enlargement of rights immediately resulting from such transaction. In the event of a stock split, a stock dividend or a combination or consolidation of the outstanding shares of common stock into a lesser number of shares, the authorization limits under the long-term incentive plan will automatically be adjusted proportionately and the shares then subject to each award will automatically be adjusted proportionately without any change in the aggregate purchase price.
Our board of directors may in its sole discretion at any time determine that all or a portion of a participant's awards will become fully vested. The board may discriminate among participants or among awards in exercising such discretion. The long-term incentive plan will automatically expire on the tenth anniversary of the date on which it is approved by our board of directors and stockholders, unless extended or earlier terminated by our board of directors. Our board of directors may terminate the long-term incentive plan at any time. The expiration or other termination of the long-term incentive plan will not, without the participant's consent, have an adverse impact on any award that is outstanding at the time the long-term incentive plan expires or is terminated. Our board of directors may amend the long-term incentive plan at any time, but no amendment will adversely affect any award without the participant's consent and no amendment to the long-term incentive plan will be effective without the approval of our stockholders if such approval is required by any law, regulation or rule applicable to the long-term incentive plan. During the three and nine months ended March 31,September 30, 2017 and 2016, no grants have been made under the long-term incentive plan.
Note H – Recent Accounting Pronouncements
In March 2016, the FASBMay 2014, Financial Accounting Standards Board ("FASB") issued ASU No. 2016-07, Investments - Equity Method2014-09, Revenue from Contracts with Customers, an updated standard on revenue recognition. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and Joint Ventures (Topic 323): Simplifying the Transitionrelevant facts and circumstances. The standard requires expanded disclosure surrounding revenue recognition. Early application is not permitted. The standard was initially to the Equity Method of Accounting ("ASU 2016-07"). ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. ASU 2016-07 isbe effective for annual and interimfiscal periods beginning after December 15, 2016 and early adoption is permitted. We do not currently have significant investments that are accountedallows for either full retrospective or modified retrospective adoption. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Deferral of Effective Date, which delays the effective date of ASU 2014-09 by a method other than the equity method and do not expect ASU 2016-07one year to have a significant impact on our consolidated financial condition and results of operations.
fiscal periods beginning after December 15, 2017. In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718):2016-08, ImprovementsRevenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspectsimprove the operability and understandability of the accounting for employee share-based payment transactions, includingimplementation guidance on principal versus agent considerations and the accounting for income taxes, forfeitures, and statutory tax withholdingeffective date is the same as requirements as well as classification in the statement of cash flows. ASU 2016-07 is effective for annual and interim periods beginning after December 15, 2016 and early2015-14. The Company does not expect adoption is permitted. We are currently assessing the potential impact of ASU 2016-092014-09 to have a material effect on our consolidated financial condition and results of operations. The Company does not believe that the adoption of ASU 2016-09 will materially impact the accounting; however, we are continuing to evaluate the impact.statements.
In AugustJanuary 2016, the FASB issued ASU No. 2016-15,2016-01, ClassificationFinancial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Certain Cash ReceiptsFinancial Assets and Cash PaymentsFinancial 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 of ASU 2016-01 to have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases – (Topic 842). This update provides guidancewill require lessees to recognize all leases with terms greater than 12 months on how to record eight specific cash flow issues.their balance sheet as lease liabilities with a corresponding right-of-use asset. This update maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The basic principle is that leases of all types convey the right to direct the use and obtain substantially all the economic benefits of an identified asset, meaning they create an asset and liability for lessees. Lessees will classify leases as either finance leases (comparable to current capital leases) or operating leases (comparable to current operating leases). Costs for a finance lease will be split between amortization and interest expense, with a single lease expense reported for operating leases. This update also will require both qualitative and quantitative disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; however, early adoption is permitted. We have determined that the provisions of ASU 2016-02 may result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities for leases. The Company is currently evaluating whether or not the adoption of ASU 2014-09 will have a material effect on the Company's consolidated financial 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's consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statements of cash flows include restricted cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance sheet, companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. This update will become effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company will adopt ASU 2016-18 starting first quarter 2018.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. This update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This update will become effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company will adopt ASU 2016-18 starting first quarter 2018.
In May 2017, the FASB issued Accounting Standards Update ASU 2017-09, Compensation-Stock Compensation: Scope of Stock Compensation Modification Accounting. The ASU was issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The update is effective for annual periods beginning after December 15, 2017, and interim periods thereafter. Early adoption is permitted, and a retrospective transition method should be applied. including adoption in any interim period. The Company adopteddoes not expect adoption of ASU 2016-152017-09 to have a material effect on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objective of ASU 2017-12 is to expand hedge accounting for both financial (interest rate) and commodity risks, and create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. ASU 2017-12 will be effective January 1, 2017for public business entities for fiscal years beginning after December 15, 2018, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company is in the process of determining the impact that the implementation of ASU 2017-12 will have on a retrospective basis, by recasting all prior periods shown to reflect the effect of adoption, the effect of which is not material.Company's financial statements.
Note I -– Acquisitions
The following table is a summary of the acquisitions for the threenine months ended March 31,September 30, 2017.
Property | Location | Date Acquired | Property Type | | # Spaces | | | Size / Acreage | | | Retail /Office Square Ft. | | | Investment Amount | | | Ownership % | | Location | Date Acquired | Property Type | # Spaces | Size / Acreage | Retail /Office Square Ft. | Cash Consideration | Ownership % |
MVP Detroit Center Garage* | Detroit, MI | 01/10/2017 | Garage | | | 1,275 | | | | 8.78 | | | | N/A | | | $ | 55,000,000 | | | | 80.00 | % | |
MVP Detroit Center Garage | | Detroit, MI | 01/10/2017 | Garage | 1,275 | 8.78 | N/A | $55,000,000 | 80% |
St Louis Broadway, LLC | St Louis, MO | 02/01/2017 | Lot | | | 161 | | | | 0.96 | | | | N/A | | | $ | 2,400,000 | | | | 100.00 | % | St Louis, MO | 02/01/2017 | Lot | 161 | 0.96 | N/A | $2,400,000 | 100% |
St Louis Seventh & Cerre, LLC | St Louis, MO | 02/01/2017 | Lot | | | 174 | | | | 1.20 | | | | N/A | | | $ | 3,300,000 | | | | 100.00 | % | St Louis, MO | 02/01/2017 | Lot | 174 | 1.20 | N/A | $3,300,000 | 100% |
MVP Preferred Parking, LLC | | Houston, TX | 06/29/2017 | Garage & Lot | 521 | 1.0 | 784 | $20,500,000 | 100% |
| | Assets | | | Liabilities | | | | | | Assets | |
| | Land and Improvements | | | Building and improvements | | | Total assets acquired | | | Notes Payable | | | Net assets and liabilities acquired | | | Land and Improvements | | | Building and improvements | | | Total assets acquired | |
MVP Detroit Center Garage | | | 7,000,000 | | | | 48,000,000 | | | | 55,000,000 | | | | 31,500,000 | | | | 23,500,000 | | | $ | 7,000,000 | | | $ | 48,000,000 | | | $ | 55,000,000 | |
St Louis Broadway, LLC | | | 2,400,000 | | | | -- | | | | 2,400,000 | | | | -- | | | | 2,400,000 | | | | 2,400,000 | | | | -- | | | | 2,400,000 | |
St Louis Seventh & Cerre, LLC | | | 3,300,000 | | | | -- | | | | 3,300,000 | | | | -- | | | | 3,300,000 | | | | 3,300,000 | | | | -- | | | | 3,300,000 | |
MVP Preferred Parking, LLC | | | | 15,800,000 | | | | 4,700,000 | | | | 20,500,000 | |
| | | | | | | | | | | | | | | | | | | | | | $ | 28,500,000 | | | $ | 52,700,000 | | | $ | 81,200,000 | |
| | $ | 12,700,000 | | | $ | 48,000,000 | | | $ | 60,700,000 | | | $ | 31,500,000 | | | $ | 29,200,000 | | |
(As amended) (*) - MVP Detroit Center Garage, LLC – In connections with-23-
The following table of results of operations of the percentage rentacquired properties for the Company is to receive, 80% of gross revenues over $5.0 million, SP+ has decided to pay the company our portion on a monthly basis. For thethree and nine months ended February 28, 2017 and March 31, 2017, SP+ has paid the Company approximately $38,000 and $129,000, respectively. In accordance, with ASC Section 840-20, we have not recognized these payments into revenue during the first quarter and have been accounted for as deferred revenue.September 30, 2017:
| | Three Month Ended 9/30/2017 | | | Nine Month Ended 9/30/2017 | |
| | Total Revenues | | | Net Income | | | Total Revenues | | | Net Income | |
2017 acquisitions | | $ | 1,271,000 | | | $ | 263,000 | | | $ | 3,743,000 | | | $ | 664,000 | |
Pro forma results of the Company
The following table of pro forma consolidated results of operations of the Company for the three and nine months ended March 31,September 30, 2017 and 2016, and assumes that the acquisitions were completed as of January 1, 2016.
| | | For the three months ended September 30, | | | For the nine months ended September 30, | |
| | March 31, 2017 (As restated) | | | March 31, 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Revenues from continuing operations | | $ | 2,179,000 | | | $ | 958,000 | | | $ | 2,222,000 | | | $ | 1,933,000 | | | $ | 7,693,000 | | | $ | 4,653,000 | |
Net income (loss) available to common stockholders | | $ | (2,923,000 | ) | | $ | 696,000 | | | $ | (392,000 | ) | | $ | (307,000 | ) | | $ | (4,104,000 | ) | | $ | 1,311,000 | |
Net income (loss) available to common stockholders per share – basic | | $ | (2.17 | ) | | $ | 3.04 | | | $ | (0.15 | ) | | $ | (0.23 | ) | | $ | (1.63 | ) | | $ | 1.71 | |
Net income (loss) available to common stockholders per share – diluted | | $ | (2.17 | ) | | $ | 3.04 | | | $ | (0.15 | ) | | $ | (0.23 | ) | | $ | (1.63 | ) | | $ | 1.71 | |
Note J — Line of Credit
On October 5, 2016, the Company, through its Operating Partnership, and MVP REIT, (the "REITs") 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 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.
-20-
September 30, 2017 the interest rate was 3.49%.
As of March 31,September 30, 2017, the REITsBorrowers had 15 propertiesone property listed on the line of credit, which provided an available draw of approximately $28$2.2 million, and had drawn approximately $27.9$2.0 million, of which our portion of the current draw was approximately $19.7 million,$0, based on our pro-ratepro-rata ownership of the properties listed on the line of credit. Based on the 15 propertiesone property on the line of credit as of March 31,September 30, 2017, the REITs had an additional available draw of approximately $145,000.$0.2 million. For the three and nine months ended March 31,September 30, 2017, we had accruedexpensed approximately $139,000$34,000 and $220,000, respectively, in interest expense, amortizedexpense. For the three and nine months ended September 30, 2017, we expensed approximately $36,000 in loan fees$9,000 and $1,500$18,400, respectively, in unused line fees associated with our draw. Total loan amortization cost for the three and nine months ended September 30, 2017 were $62,000 and $189,000, respectively.
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 had an initial term of six months, maturing on December 26, 2017. In October 2017, this was extended to March 31, 2018. 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 interest rate was 5.73%.
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 expensed approximately $49,000 in interest expense. For the three and nine months ended September 30, 2017, we expensed approximately $1,600 in unused line fees associated with our draw. Total loan amortization cost for the three and nine months ended September 30, 2017 were $50,000 and $53,000, respectively.
Note K — Notes Payable and Notes Payable Related Party
During October 2016, West 9th Properties II issued a promissory note to American National Insurance CompanyAs of New York for a $5.3 million loan secured by real properties located in Cleveland, OH, of which we own a 49% interest in these entities. The loan has a term of 10 years, has an annual interest rate of 4.5% and isSeptember 30, 2017, the principal balances on notes payable in monthly installment payments of principal and interest totaling approximately $30,000, maturing in October 2026.are as follows:
In November 2016, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 3.8%. The agreement required a down payment of $25,000 and nine monthly payments of $14,000 beginning on November 3, 2016.
Property | Original Debt Amount | Monthly Payment | Balance as of 9/30/2017 | Lender | Term | Interest Rate | Loan Maturity |
MVP Realty Advisors | $2,100,000 | -- | $2,100,000 | MVP Realty Advisors | 1 Year (I/O) | 5.00% | 6/30/2018 |
West 9th Properties II, LLC | $5,300,000 | $30,000 | $5,192,000 | American National Insurance Co. | 10 year | 4.50% | 11/1/2026 |
MVP Detroit Center Garage, LLC | $31,500,000 | $194,000 | $31,112,000 | Bank of America | 10 year | 5.52% | 2/1/2027 |
MVP San Jose 88 Garage, LLC | $2,200,000 | Interest Only | $2,200,000 | Owens Realty Mortgage, Inc. | 2 year (I/O) | 7.75% | 1/15/2019 |
MVP Cincinnati Race Street Garage, LLC | $3,000,000 | Interest Only | $3,000,000 | Moonshell, LLC | 3 Months (I/O) | 9.00% | 1/10/2018 |
MVP St Louis Washington, LLC | $1,380,000 | Interest Only | $1,380,000 | KeyBank | 10 year (2 year I/O) | 4.90% | 5/1/2027 |
St Paul Holiday Garage, LLC | $4,132,000 | Interest Only | $4,132,000 | KeyBank | 10 year (2 year I/O) | 4.90% | 5/1/2027 |
Cleveland Lincoln Garage, LLC | $3,999,000 | Interest Only | $3,999,000 | KeyBank | 10 year (2 year I/O) | 4.90% | 5/1/2027 |
Louisville Broadway Station, LLC | $1,682,000 | Interest Only | $1,682,000 | Cantor Commercial Real Estate (CCRE) | 10 year (I/O) | 5.03% | 5/6/2027 |
Whitefront Garage, LLC | $6,454,000 | Interest Only | $6,454,000 | Cantor Commercial Real Estate (CCRE) | 10 year (I/O) | 5.03% | 5/6/2027 |
MVP Houston Preston Lot, LLC | $1,627,000 | Interest Only | $1,627,000 | Cantor Commercial Real Estate (CCRE) | 10 year (I/O) | 5.03% | 5/6/2027 |
MVP Houston San Jacinto Lot, LLC | $1,820,000 | Interest Only | $1,820,000 | Cantor Commercial Real Estate (CCRE) | 10 year (I/O) | 5.03% | 5/6/2027 |
St. Louis Broadway, LLC | $1,671,000 | Interest Only | $1,671,000 | Cantor Commercial Real Estate (CCRE) | 10 year (I/O) | 5.03% | 5/6/2027 |
St. Louis Seventh & Cerre, LLC | $2,058,000 | Interest Only | $2,058,000 | Cantor Commercial Real Estate (CCRE) | 10 year (I/O) | 5.03% | 5/6/2027 |
MVP Preferred Parking, LLC | $11,330,000 | Interest Only | $11,330,000 | Key Bank | 10 year | 5.02% | 8/1/2027 |
Less unamortized loan issuance costs | | | ($923,000) | | | | |
| | | $78,834,000 | | | | |
During January 2017, the Company and MVP REIT, through MVP Detroit Center Garage, LLC, entered into a secured Loan Agreement with Bank of America, N.A. to fund a portion of the purchase price for a multi-level parking garage in Detroit, Michigan. The Loan Agreement is for a 10-year term, has an annual interest rate of 5.52% and in payable in monthly installments of principal and interest totaling approximately $253,000 and maturing in February 2027.-25-