UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A10-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 September 30, 2017March 31, 2018
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
THE PARKING REIT, 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.) |
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number:Number, including Area Code: (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 ] 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 bib-2 of the Act).
Yes [ ] No [ X ]
As of November 14, 2017,July 13, 2018, the registrant had 2,612,1826,550,200 shares of common stock outstanding.
| Page | ||
| Part I | FINANCIAL INFORMATION | |
| Part II | OTHER INFORMATION | |
| EXHIBIT 31.1 | ||
| EXHIBIT 31.2 | ||
| EXHIBIT 32 |
THE PARKING REIT, INC.
| March 31, 2018 | December 31, 2017 | |||||||
| (UNAUDITED) | ||||||||
| ASSETS | ||||||||
| Investments in real estate and fixed assets | ||||||||
| Land and improvements | $ | 139,284,000 | $ | 131,169,000 | ||||
| Buildings and improvements | 153,521,000 | 153,456,000 | ||||||
| Construction in progress | 2,004,000 | 750,000 | ||||||
| Intangible Assets | 2,427,000 | 2,427,000 | ||||||
| Software | 63,000 | -- | ||||||
| 297,299,000 | 287,802,000 | |||||||
| Accumulated depreciation | (3,426,000 | ) | (2,231,000 | ) | ||||
| Total investments in real estate, net | 293,873,000 | 285,571,000 | ||||||
| Assets held for sale | 6,543,000 | 6,543,000 | ||||||
| Cash | 4,938,000 | 8,501,000 | ||||||
| Cash – restricted | 6,841,000 | 8,229,000 | ||||||
| Prepaid expenses | 706,000 | 184,000 | ||||||
| Accounts receivable | 551,000 | 409,000 | ||||||
| Investment in DST | 2,821,000 | 2,821,000 | ||||||
| Deposits | 3,435,000 | -- | ||||||
| Other assets | 34,000 | 685,000 | ||||||
| Total assets | $ | 319,742,000 | $ | 312,943,000 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities | ||||||||
| Notes payable, net of unamortized loan issuance costs of approximately $1.8 million and $1.9 million as of March 31, 2018 and December 31, 2017, respectively | $ | 123,373,000 | $ | 123,770,000 | ||||
| Lines of credit, net of unamortized loan issuance costs of approximately $0.7 million and $0.5 million as of March 31, 2018 and December 31, 2017, respectively | 23,065,000 | 22,302,000 | ||||||
| Accounts payable and accrued liabilities | 5,830,000 | 3,913,000 | ||||||
| Security Deposit | 161,000 | 202,000 | ||||||
| Due to related parties | 233,000 | 385,000 | ||||||
| Deferred revenue | 138,000 | 195,000 | ||||||
| Total liabilities | 152,800,000 | 150,767,000 | ||||||
| Commitments and contingencies | -- | -- | ||||||
| Equity | ||||||||
| The Parking REIT, Inc. Stockholders' Equity | ||||||||
| Preferred stock Series A, $0.0001 par value, 50,000 shares authorized, 2,862 shares issued and outstanding (stated liquidation value of $2,862,000) as of March 31, 2018 and as of December 31, 2017. | -- | -- | ||||||
| Preferred stock Series 1; $0.0001 par value, 97,000 shares authorized, 39,811 and 29,789 shares issued and outstanding (stated liquidation value of $ 39,811,000 and $29,789,000) as of March 31, 2018 and December 31, 2017, respectively. | -- | -- | ||||||
| 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, 6,568,378 and 6,532,009 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively | -- | -- | ||||||
| Additional paid-in capital | 186,214,000 | 177,598,000 | ||||||
| Accumulated deficit | (22,012,000 | ) | (18,173,000 | ) | ||||
| Total The Parking REIT, Inc. Shareholders' Equity | 164,202,000 | 159,425,000 | ||||||
| Non-controlling interest | 2,740,000 | 2,751,000 | ||||||
| Total equity | 166,942,000 | 162,176,000 | ||||||
| Total liabilities and equity | $ | 319,742,000 | $ | 312,943,000 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
THE PARKING REIT, INC.
(UNAUDITED)
For The Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Revenues | ||||||||
| Base rent income | $ | 4,716,000 | $ | 2,024,000 | ||||
| Percentage rent income | 375,000 | -- | ||||||
| Total revenues | 5,091,000 | 2,024,000 | ||||||
| Operating expenses | ||||||||
| Property taxes | 636,000 | 92,000 | ||||||
| Property operating expense | 308,000 | 275,000 | ||||||
| Asset management expense – related party | 832,000 | 237,000 | ||||||
| General and administrative | 3,028,000 | 328,000 | ||||||
| Merger costs | -- | 125,000 | ||||||
| Acquisition expenses | 217,000 | 1,766,000 | ||||||
| Acquisition expenses – related party | -- | 1,118,000 | ||||||
| Depreciation | 1,194,000 | 425,000 | ||||||
| Total operating expenses | 6,215,000 | 4,366,000 | ||||||
| Loss from operations | (1,124,000 | ) | (2,342,000 | ) | ||||
| Other income (expense) | ||||||||
| Interest expense | (1,948,000 | ) | (796,000 | ) | ||||
| Distribution income – related party | -- | 52,000 | ||||||
| Income from DST | 52,000 | -- | ||||||
| Income from investment in equity method investee | -- | 14,000 | ||||||
| Total other expense | (1,896,000 | ) | (730,000 | ) | ||||
| Net loss | (3,020,000 | ) | (3,072,000 | ) | ||||
| Net income attributable to non-controlling interest | 2,000 | 28,000 | ||||||
Net loss attributable to The Parking REIT, Inc.'s stockholders | $ | (3,022,000 | ) | $ | (3,100,000 | ) | ||
| Preferred stock distributions declared - Series A | (43,000 | ) | (19,000 | ) | ||||
| Preferred stock distributions declared - Series 1 | (523,000 | ) | -- | |||||
Net loss attributable to The Parking REIT, Inc.'s common stockholders | (3,588,000 | ) | (3,119,000 | ) | ||||
| Basic and diluted loss per weighted average common share: | ||||||||
| Net loss per share attributable to The Parking REIT, Inc.'s common stockholders - basic and diluted | $ | (0.55 | ) | $ | (1.29 | ) | ||
| Distributions declared per common share | $ | 0.12 | $ | 0.19 | ||||
| Weighted average common shares outstanding, basic and diluted | 6,550,728 | 2,425,200 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
THE PARKING REIT, INC.
For The Three Months Ended March 31, 2018
(UNAUDITED)
| Preferred stock | Common stock | |||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Non-controlling interest | Total | |||||||||||||||||||||||||
| Balance, December 31, 2017 | 32,651 | $ | 6,532,009 | $ | -- | $ | 177,598,000 | $ | (18,173,000 | ) | $ | 2,751,000 | $ | 162,176,000 | ||||||||||||||||||
| Distributions to non-controlling interest | -- | -- | -- | -- | -- | -- | (13,000 | ) | (13,000 | ) | ||||||||||||||||||||||
| Issuance of common stock – DRIP | -- | -- | 11,326 | -- | 283,000 | -- | -- | 283,000 | ||||||||||||||||||||||||
| Issuance of preferred Series 1 | 10,022 | -- | -- | -- | 9,090,000 | -- | -- | 9,090,000 | ||||||||||||||||||||||||
| Redeemed Shares | (7,636 | ) | (191,000 | ) | -- | (191,000 | ) | |||||||||||||||||||||||||
| Distributions - Common | -- | -- | -- | -- | (817,000 | ) | -- | (817,000 | ) | |||||||||||||||||||||||
| Distributions – Series A | -- | -- | -- | -- | (43,000 | ) | -- | -- | (43,000 | ) | ||||||||||||||||||||||
| Distributions – Series 1 | -- | -- | -- | -- | (523,000 | ) | -- | -- | (523,000 | ) | ||||||||||||||||||||||
| Stock dividend | -- | -- | 32,679 | -- | 817,000 | (817,000 | ) | -- | -- | |||||||||||||||||||||||
| Net income (loss) | -- | -- | -- | -- | -- | (3,022,000 | ) | 2,000 | (3,020,000 | ) | ||||||||||||||||||||||
| Balance, March 31, 2018 | 42,673 | $ | 6,568,378 | $ | -- | $ | 186,214,000 | $ | (22,012,000 | ) | $ | 2,740,000 | $ | 166,942,000 | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
THE PARKING REIT, INC.
(Unaudited)
For The Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Loss | $ | (3,020,000 | ) | $ | (3,072,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | 1,194,000 | 425,000 | ||||||
| Income from investment in equity method investee | -- | (14,000 | ) | |||||
| Distribution from MVP REIT | -- | (52,000 | ) | |||||
| Distribution from DST | (52,000 | ) | -- | |||||
| Amortization of loan costs | 81,000 | 96,000 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Due to/from related parties | (152,000 | ) | 354,000 | |||||
| Accounts payable | 1,917,000 | 278,000 | ||||||
| Loan Fees | (197,000 | ) | (183,000 | ) | ||||
| Security deposits | (98,000 | ) | 44,000 | |||||
| Other assets | (24,000 | ) | -- | |||||
| Assets held for sale | -- | (4,000 | ) | |||||
| Deferred revenue | -- | 37,000 | ||||||
| Accounts receivable | (142,000 | ) | (143,000 | ) | ||||
| Prepaid expenses | (522,000 | ) | (413,000 | ) | ||||
| Net cash used in operating activities | (1,015,000 | ) | (2,647,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of investment in real estate | (8,105,000 | ) | (56,700,000 | ) | ||||
| Building improvements | (1,329,000 | ) | (14,000 | ) | ||||
| Fixed asset purchase | (63,000 | ) | -- | |||||
| Proceeds from Investments | 52,000 | -- | ||||||
| Payments made for future acquisitions | (2,760,000 | ) | (227,000 | ) | ||||
| Proceeds from non-controlling interest | -- | 5,075,000 | ||||||
| Net cash used in investing activities | (12,205,000 | ) | (51,866,000 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from note payable | -- | 36,415,000 | ||||||
| Payments on note payable | (477,000 | ) | (173,000 | ) | ||||
| Proceeds from line of credit | 4,400,000 | 11,968,000 | ||||||
| Payments made on line of credit | (3,440,000 | ) | (284,000 | ) | ||||
| Distribution to non-controlling interest | (13,000 | ) | (50,000 | ) | ||||
| Distribution from investment in cost method investee | -- | 13,000 | ||||||
| Distribution from investment in equity method investee | -- | 14,000 | ||||||
| Proceeds from issuance of common stock | -- | 5,035,000 | ||||||
| Proceeds from issuance of preferred stock | 9,090,000 | 2,556,000 | ||||||
| Redeemed shares | (191,000 | ) | -- | |||||
| Dividends paid to stockholders | (1,100,000 | ) | (166,000 | ) | ||||
| Net cash provided by financing activities | 8,269,000 | 55,328,000 | ||||||
| Net change in cash and cash equivalents and restricted cash | (4,951,000 | ) | 815,000 | |||||
| Cash cash and cash equivalents and restricted cash, beginning of period | 16,730,000 | 4,985,000 | ||||||
| Cash cash and cash equivalents and restricted cash, end of period | $ | 11,779,000 | $ | 5,800,000 | ||||
| Reconciliation of Cash and Cash Equivalents and Restricted Cash: | ||||||||
| Cash and cash equivalents at beginning of period | $ | 8,501,000 | $ | 4,885,000 | ||||
| Restricted cash at beginning of period | 8,229,000 | 100,000 | ||||||
| Restricted cash included in discontinued operations at beginning of period | -- | -- | ||||||
| Cash and cash equivalents and restricted cash at beginning of period | $ | 16,730,000 | $ | 4,985,000 | ||||
| Cash and cash equivalents at end of period | $ | 4,938,000 | $ | 4,675,000 | ||||
| Restricted cash at end of period | 6,841,000 | 1,125,000 | ||||||
| Restricted cash included in discontinued operations at end of period | -- | -- | ||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 11,779,000 | $ | 5,800,000 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest Paid | $ | (1,867,000 | ) | $ | (700,000 | ) | ||
| Non-cash investing and financing activities: | ||||||||
| Distributions - DRIP | $ | 283,000 | $ | 285,000 | ||||
| Dividend shares | $ | 817,000 | $ | 446,000 | ||||
| Dividends declared not yet paid | $ | 200,000 | $ | 156,000 | ||||
| Deposits applied to purchase of investment in real estate | $ | 150,000 | $ | 4,000,000 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
THE PARKING REIT, INC.
MARCH 31, 2018
(UNAUDITED)
Note A — Organization and Business Operations
The purpose of this Amendment No. 1 to Form 10-Q of The Parking REIT, Inc. (formerly, formerly known as MVP REIT II, Inc. (the "Company"), 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 quarter ended September 30, 2017 (the "Form 10-Q") is to amend and re-file Exhibits 31.1 and 31.2 to the Form 10-Q in response to comments received from the stafffiling of the federal tax return for the year ended December 31, 2017. The Company believes that it has been organized and has operated in a manner that has enabled it to qualify as a REIT for federal income tax purposes commencing with the taxable year ended December 31, 2017; however, if the Company is unable to satisfy the requirements for REIT qualification for the year ended December 31, 2017, the Company 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 (No. 333-205893) filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Company accepted additional subscriptions through March 31, 2017, the last day of the Common Stock Offering. As of March 31, 2018, the Company had raised approximately $61.3 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 $1.8 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 were 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 substantially all of 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 to qualify and maintain qualification as a REIT for federal income 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 of 1986, as amended (the "Code"), which classification could result in the Operating Partnership being taxed as a corporation.
The Company utilizes an Umbrella Partnership Real Estate Investment Trust ("UPREIT") structure to enable the Company to acquire real property in exchange for limited partnership interests in the Operating Partnership from owners who desire to defer taxable gain that would otherwise normally be recognized by letter datedthem upon the disposition of their real property or transfer of their real property to the Company in exchange for shares of the Company's common stock or cash.
As part of the Company's initial capitalization, 8,000 shares of common stock were sold for $200,000 to MVP Capital Partners II, LLC (the "Sponsor"), the Company's sponsor. The Sponsor is owned 60% by Vestin Realty Mortgage II, Inc. ("VRM II"), and 40% by Vestin Realty Mortgage I, Inc. ("VRM I"). Both VRM II and VRM I are Maryland corporations which trade on the OTC pink sheets and were managed by Vestin Mortgage, LLC, a Nevada limited liability company wholly owned by Michael Shustek ("Vestin Mortgage"), prior to being internalized in January 2018.
The Company's advisor is MVP Realty Advisors, LLC, dba The Parking REIT Advisors (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 a second amended and restated advisory agreement between the Company and the Advisor (the "Amended and Restated Advisory Agreement"), which became effective upon consummation of the Merger (as such term is defined below). As of July 13, 2018, the Company had no paid employees.
As previously disclosed, the Company's board of directors unanimously authorized a suspension of cash distributions and stock dividends to holders of common stock, effective as of March 22, 2018. The Company is focused on preserving capital in order to maintain sufficient liquidity to continue to operate the business and maintain compliance with debt covenants, including minimum liquidity covenants and to seek to enhance value for stockholders through potential future acquisitions. The Company expects that cash retained by the suspension of cash distributions will allow the Company to continue to pursue investment opportunities while also preparing for a possible liquidity event in the future. The Conpany's board will continue to evaluate the Company's performance and expects to assess the Company's distribution policy quarterly. There can be no assurance that the Company will resume payment of distributions to common stockholders at any time in the future, that any acquisitions will be completed on an attractive basis, or at all, or that any liquidity event will occur or when such event may occur.
From inception through March 31, 2018 , the Company has paid approximately $3.8 million in distributions, including issuing 83,437 shares of its common stock as DRIP shares, issuing 153,827 shares of its common stock as dividend in distributions to the Company's common stockholders, all of which have been paid from offering proceeds and constituted a return of capital. If the Company resumes the payment of distributions, 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.
On May 26, 2017, the Company, MVP REIT, Inc., a Maryland corporation ("MVP I"), MVP Merger Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company ("Merger Sub"), and the Advisor entered into an agreement and plan of merger (the "Merger Agreement"), pursuant to which MVP I would merge with and into Merger Sub (the "Merger").
On December 15, 2017, the Merger was consummated. Following the Merger, the Company contributed 100% of its equity interests in Merger Sub to the Operating Partnership. The Company owns substantially all of its assets and conducts substantially all of its operations through the Operating Partnership and is advised by the Advisor.
At the effective time of the Merger, each share of MVP I common stock, par value $0.001 per share, that was issued and outstanding immediately prior to the Merger (the "MVP I Common Stock"), was converted into the right to receive 0.365 shares of Company common stock. A total of approximately 3.9 million shares of Company common stock were issued to former MVP I stockholders, and former MVP I stockholders, following the Merger, own approximately 59.7% of the Company's common stock. The Company was subsequently renamed "The Parking REIT, Inc." as set forth in the articles of amendment in connection with the Merger.
The Company was subsequently renamed "The Parking REIT, Inc." as set forth in the articles of amendment in connection with the Merger.
Capitalization
As of March 31, 2018, the Company had 6,568,378 shares of common stock issued and outstanding. As of December 31, 2016, the Company ceased all selling efforts for the Common Stock Offering of its common stock. The Company accepted additional subscriptions through March 31, 2017, the last day of the Common Stock Offering. In connection with its formation, the Company sold 8,000 shares of common stock to the Sponsor for $200,000.
On October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock, par value $0.0001 per share (the "Series A"). The Company commenced a 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. No other changesThe Company raised approximately $2.5 million, net of offering costs, in the Series A private placement and has 2,862 Series A shares issued and outstanding.
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock par value $0.0001 per share (the "Series 1"). On April 7, 2017, the Company commenced a private placement of shares of Series 1, together with warrants to acquire the Company's common stock to accredited investors. As of March 31, 2018, the Company had raised approximately $36.0 million, net of offering costs, in the Series 1 private placements and had 39,811 Series 1 shares issued and outstanding. On January 31, 2018, the Company closed the Series 1 preferred offering.
As previously disclosed in its annual report, to comply with the Company's amended credit agreement, the Company will redeem all of the outstanding shares of the Series A preferred stock and Series 1 preferred stock and pay the entire redemption price in the form of shares of the Company common stock, within 30 days after the completion of the listing of the Company's common stock on a national securities exchange. As further described in the section entitled "Management's Discussion And Analysis Of Financial Condition And Results Of Operations – Liquidity and Capital Resources," the Company intends to file a listing application by July 31, 2018 and complete the listing by September 30, 2018, although no assurances can be given that a listing will be completed within such timeframe or at all.
If the Company resumes the payment of distributions, stockholders may elect to reinvest distributions received from the Company in common shares by participating in the Company's DRIP. Stockholders may enroll in the DRIP by completing the distribution change form. Stockholders may also withdraw at any time, without penalty, by delivering written notice to the Company. Initially 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 on May 29, 2018 (the "Valuation Date"), which was 150 days following the second anniversary of the date on which the minimum offering requirement in the Common Stock Offering was satisfied, the purchase price for the DRIP shares will be equal to the Company's net asset value ("NAV") per common share if the DRIP is ongoing. The Company announced an NAV of $24.61 per common share effective as of May 29, 2018. The Company will update the NAV per share at least annually following the Valuation Date, provided the Company is not listed, 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.
On February 7, 2018, the Company filed a Current Report on Form 8-K stating that the board of directors has determined that the Merger and the issuance of the Company's common stock as consideration for the Merger qualifies as an involuntary exigent circumstance under the SRP. As a result, shares of common stock that, when combined with the holding period of the related MVP I Common Stock, have been madeheld for the Two-Year Holding Period (as such term is defined in the SRP), are eligible to participate in the SRP subject to the Form 10-Q. This Amendment No. 1 speaks asother requirements and limitations of the originalSRP. In addition, the issuance date for any shares of MVP I Common Stock issued pursuant to the MVP REIT, Inc. Distribution Reinvestment Plan shall be deemed to be the same date as the issuance of the shares of MVP I Common Stock to which such shares relate.
On May 29, 2018 the Company's Board of Directors suspended its SRP, other than for repurchases in connection with a shareholder's death. In accordance with the SRP, the suspension of the SRP became effective on June 28, 2018, which is 30 days after the filing date of the Form 8-K providing notice of the suspension. The Company plans to utilize the cash savings to further its business operations.
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. Redemption requests other than those made in connection with the death or disability (as defined in 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. The SRP will terminate if the shares of common stock are listed on a national securities exchange.
For the three months ended March 31, 2018, 7,636 shares had been redeemed.
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 months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.
The condensed consolidated balance sheet as of December 31, 2017 contained herein has been derived from the audited financial statements as of December 31, 2017, but does not include all disclosures required by GAAP.
Consolidation
The Company's consolidated financial statements include its accounts, the accounts of the Company's assets that were sold during 2017, 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.
| MVP PF Ft. Lauderdale 2013, LLC | MVP Milwaukee Arena Lot, LLC |
| MVP PF Kansas City 2013, LLC | MVP Clarksburg Lot, LLC |
| MVP PF Memphis Poplar 2013, LLC | MVP Denver Sherman 1935, LLC |
| MVP PF Memphis Court 2013, LLC | MVP Bridgeport Fairfield Garage, LLC |
| MVP PF St. Louis 2013, LLC | West 9th Street Properties II, LLC |
| Mabley Place Garage, LLC | MVP San Jose 88 Garage, LLC |
| MVP Denver Sherman, LLC | MCI 1372 Street, LLC |
| MVP Fort Worth Taylor, LLC | MVP Cincinnati Race Street, LLC |
| MVP Milwaukee Old World, LLC | MVP St. Louis Washington, LLC |
| MVP St. Louis Convention Plaza, LLC | MVP St. Paul Holiday Garage, LLC |
| MVP Houston Saks Garage, LLC | MVP Louisville Station Broadway, LLC |
| MVP St. Louis Lucas, LLC | White Front Garage Partners, LLC |
| MVP Milwaukee Wells, LLC | Cleveland Lincoln Garage, LLC |
| MVP Wildwood NJ Lot, LLC | MVP Houston Preston, LLC |
| MVP Indianapolis City Park, LLC | MVP Houston San Jacinto Lot, LLC |
| MVP KC Cherry Lot, LLC | MVP Detroit Center Garage, LLC |
| MVP Indianapolis WA Street Lot, LLC | St Louis Broadway, LLC |
| Minneapolis City Parking, LLC | St Louis Seventh & Cerre, LLC |
| MVP Minneapolis Venture, LLC | MVP Preferred Parking, LLC |
| MVP Indianapolis Meridian Lot, LLC | MVP Raider Park Garage, LLC |
| MVP Milwaukee Clybourn, LLC | MVP New Orleans Rampart, LLC |
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 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
The Company had fifteen parking tenants as of March 31, 2018 and nine parking tenants as of March 31, 2017. One tenant, SP Plus Corporation (Nasdaq: SP) ("SP+"), represented 55.8% and 47.4% of the Company's base parking rental revenue for the three months ended March 31, 2018 and 2017, respectively.
SP+ is one of the largest providers of parking management in the United States. As of March 31, 2018, SP+ managed approximately 3,600 locations in North America.
Below is a table that summarizes parking rent by tenant:
For The Three Months Ended March 31, | ||||
| Parking Tenant | 2018 | 2017 | ||
| SP + | 55.8% | 47.4% | ||
| iPark Services | 13.6% | 4.3% | ||
| ABM** | 6.1% | 6.0% | ||
| ISOM Mgmt | 4.3% | -- | ||
| Premier Parking | 3.8% | 8.5% | ||
| Interstate Parking | 2.9% | 6.5% | ||
| Denison | 2.5% | -- | ||
| Lanier** | 2.4% | 1.8% | ||
| St. Louis Parking | 2.2% | 3.3% | ||
| 342 N. Rampart | 2.0% | -- | ||
| PCAM, LLC | 1.5% | -- | ||
| BEST PARK | 1.5% | -- | ||
| Riverside Parking | 1.1% | 2.4% | ||
| Denver School | 0.2% | -- | ||
| Secure | 0.1% | -- | ||
| Miller Parking* | -- | 19.8% | ||
* Revenue for Miller parking represents a settlement received by MVP Detroit Center Garage, LLC of approximately $408,000 for the operations of the garage through January 2017, at which time SP+ assumed operations under a longer-term lease agreement.
** Through February 28, 2017, MVP San Jose 88 Garage, LLC was subject to a parking management agreement with ABM and received revenue of $110,000. Starting on March 1, 2017, this property was leased to Lanier Parking Solutions.
In addition, the Company had concentrations in various cities based on parking rental revenue for the three months ended March 31, 2018 and 2017, as well as concentrations in various cities based on the real estate the Company owned as of March 31, 2018 and 2017. The below tables summarize this information by city.
| City Concentration for Parking Rental Revenue | ||||
For The Three Months Ended March 31, | ||||
| 2018 | 2017 | |||
| Detroit | 18.5% | 48.9% | ||
| Houston | 13.6% | 4.3% | ||
| Fort Worth | 8.3% | -- | ||
| Cincinnati | 7.8% | 4.0% | ||
| Indianapolis | 6.6% | -- | ||
| St. Louis | 6.6% | 5.3% | ||
| Cleveland | 5.5% | 12.3% | ||
| Lubbock | 4.3% | -- | ||
| Minneapolis | 4.3% | -- | ||
| Nashville | 3.8% | 8.5% | ||
| Milwaukee | 3.6% | -- | ||
| St Paul | 2.9% | 6.5% | ||
| San Jose | 2.4% | 7.2% | ||
| Bridgeport | 2.1% | -- | ||
| New Orleans | 2.0% | -- | ||
| Canton | 1.8% | 0.6% | ||
| Memphis | 1.6% | -- | ||
| Louisville | 1.1% | 2.4% | ||
| Kansas City | 0.9% | -- | ||
| Denver | 0.8% | -- | ||
| Ft. Lauderdale | 0.8% | -- | ||
| Wildwood | 0.4% | -- | ||
| Clarksburg | 0.3% | -- | ||
| Real Estate Investment Concentration by City | ||||
| As of March 31, | ||||
| 2018 | 2017 | |||
| Detroit | 18.2% | 21.2% | ||
| Houston | 12.4% | 6.3% | ||
| Fort Worth | 9.1% | 10.6% | ||
| Cincinnati | 8.9% | 9.9% | ||
| St Louis | 6.8% | 7.9% | ||
| Indianapolis | 6.0% | 7.0% | ||
| Cleveland | 5.7% | 6.2% | ||
| Minneapolis | 5.4% | 6.3% | ||
| Milwaukee | 3.9% | 4.6% | ||
| Nashville | 3.8% | 4.4% | ||
| Lubbock | 3.6% | 0.0% | ||
| St Paul | 2.8% | 3.1% | ||
| Bridgeport | 2.7% | 3.2% | ||
| New Orleans | 2.7% | 0.0% | ||
| Memphis | 1.6% | 1.9% | ||
| San Jose | 1.3% | 1.4% | ||
| Fort Lauderdale | 1.1% | 1.3% | ||
| Denver | 1.1% | 1.2% | ||
| Louisville | 1.0% | 1.2% | ||
| Kansas City | 0.9% | 1.1% | ||
| Wildwood | 0.6% | 0.6% | ||
| Clarksburg | 0.2% | 0.3% | ||
| Canton | 0.2% | 0.3% | ||
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. 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 within operating expenses in the consolidated statement of operations.
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
The Company maintains the majority of its cash at KeyBank. The balances are insured by the Federal Deposit Insurance Corporation under the same ownership category of $250,000. As of March 31, 2018 and as of December 31, 2017, the Company had $0.8 million and $5.6 million, respectively, in excess of the federally-insured limits. As of March 31, 2018, 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 months ended March 31, 2018 and 2017, 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 Amended and Restated 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 the Company that are directly attributable to a proposed or actual offering, including sales commissions, if any, were charged against the gross proceeds of the Common Stock Offering and recorded as an offset to additional paid-in-capital. All indirect costs will be expensed as incurred.
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 has been organized and conducts its operations to qualify as a REIT under Sections 856 to 860 of the Code. The Company expects to qualify as a REIT commencing with the taxable year ending December 31, 2017. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income, which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed and provided that certain other requirements are met. The Company's REIT taxable income may substantially exceed or be less than the Company's net income as determined based on GAAP because differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses and deferred income.
A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained on audit, including resolutions of any related appeals or litigation process, based on the technical merits. Based on the Company's evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition on the financial statements. The net income tax provision for the year ended December 31, 2017 was approximately zero.
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 months ended March 31, 2018 and 2017.
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 event has occurred). As of March 31, 2018, there were 2,862 shares of the Series A Convertible Redeemable Preferred Stock 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 March 31, 2018, there were 39,811 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 on or prior to the day immediately preceding the first anniversary of the issuance of such share (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.
There is also potential for dilution from the Company's redemption of all of the outstanding shares of the Series A preferred stock and Series 1 preferred stock and payment of the entire redemption price in the form of shares of the Company's common stock, within 30 days after the completion of the listing of the Company's common stock on a national securities exchange, as further described in "Management's Discussion And Analysis Of Financial Condition And Results Of Operations – Liquidity and Capital Resources."
Reportable Segments
The Company currently operates one reportable segment.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Accounting and Auditing Standards Applicable to "Emerging Growth Companies"
The Company is an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 (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 (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 (the "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.
On May 29, 2018, the Company announced that the Company's Board of Directors suspended the SRP, other than for repurchases in connection with a shareholder's death, as further described below.
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 the Company has 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 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. 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, the Company 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. As further described in the section entitled "Management's Discussion And Analysis Of Financial Condition And Results Of Operations – Liquidity and Capital Resources," the Company intends to file a listing application by July 31, 2018 and complete the listing by September 30, 2018, although no assurances can be given that a listing will be completed within such timeframe or at all.
On May 29, 2018, the Company established a NAV equal to $24.61 per common share.
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 Current Report on 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 became effective on November 26, 2016, a preferred stockholder 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, the Company 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. . For the three months ended March 31, 2018, 7,636 shares had been redeemed. Subsequent to March 31, 2018, 18,179 shares were redeemed. Notwithstanding the foregoing, the share repurchase program will terminate if the shares of common stock are listed on a national securities exchange. As further described in the section entitled "Management's Discussion And Analysis Of Financial Condition And Results Of Operations – Liquidity and Capital Resources," the Company intends to file a listing application by July 31, 2018 and complete the listing by September 30, 2018, although no assurances can be given that a listing will be completed within such timeframe or at all.
On February 7, 2018, the Company filed a Current Report on Form 8-K stating that the board of directors has determined that the Merger and the issuance of the Company's common stock as consideration for the Merger qualifies as an involuntary exigent circumstance under the SRP. As a result, shares of common stock that, when combined with the holding period of the related MVP I Common Stock, have been held for the Two-Year Holding Period, are eligible to participate in the SRP subject to the other requirements and limitations of the SRP. In addition, the issuance date for any shares of MVP I Common Stock issued pursuant to the MVP REIT, Inc. Distribution Reinvestment Plan shall be deemed to be the same date as the issuance of the shares of MVP I Common Stock to which such shares relate.
On May 29, 2018, the Company filed a Current Report on Form 8-K stating that the Company's board of directors suspended its SRP, other than for repurchases in connection with a shareholder's death. In accordance with the SRP, the suspension of the SRP took effect on June 28, 2018 which is 30 days after the date of the Form 8-K providing notice of the suspension. The Company plans to utilize the cash savings to further its business operations. The Company's Board of Directors may in the future reinstate the SRP, although there is no assurance as to if or when this will happen.
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 Common Stock 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. The Company has issued a total of 83,437 shares of common stock under the DRIP as of March 31, 2018. The Company suspended payment of distributions on March 22, 2018 and as such there are currently no distributions to invest in the DRIP.
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
The nature of the Company's business exposes its properties, the Company and its 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 is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. During the Company's due diligence of a property, purchased on December 15, 2017 and located in Milwaukee, it was discovered that the soil and ground water at the subject property had been impacted by the site's historical use as a printing press as well as neighboring property uses. As a result, the Company retained a local environmental engineer to seek a closure letter or similar certificate of no further action from the State of Wisconsin due to the Company's use of the property as a parking lot. As of March 31, 2018, management does not anticipate a material adverse effect related to this environmental matter. As of March 31, 2018, the Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations. The Company, however, cannot predict the impact of any unforeseen environmental contingencies or new or changed laws or regulations on properties in which the Company holds an interest, or on properties that may be acquired directly or indirectly in the future.
Note D – Investments in Real Estate and Fixed Assets
As of March 31, 2018, the Company had the following Investments in Real Estate that were consolidated on the Company's balance sheet:
| Property Name | Location | Date Acquired | Property Type | # Spaces | Property Size (Acres) | Retail Sq. Ft | Investment Amount | Parking Tenant |
| MVP Cleveland West 9th (1) | Cleveland, OH | 5/11/2016 | Lot | 260 | 2.0 | N/A | $5,823,000 | SP + |
| 33740 Crown Colony (1) | Cleveland, OH | 5/17/2016 | Lot | 82 | 0.54 | N/A | $3,049,000 | SP + |
| MVP San Jose 88 Garage | San Jose, CA | 6/15/2016 | Garage | 328 | 1.33 | N/A | $3,825,000 | Lanier |
| MCI 1372 Street | Canton, OH | 7/8/2016 | Lot | 66 | 0.44 | N/A | $700,000 | ABM |
| MVP Cincinnati Race Street Garage | Cincinnati, OH | 7/8/2016 | Garage | 350 | 0.63 | N/A | $5,558,000 | SP + |
| MVP St. Louis Washington | St Louis, MO | 7/18/2016 | Lot | 63 | 0.39 | N/A | $3,000,000 | SP + |
| MVP St. Paul Holiday Garage | St Paul, MN | 8/12/2016 | Garage | 285 | 0.85 | N/A | $8,396,000 | Interstate Parking |
| MVP Louisville Station Broadway | Louisville, KY | 8/23/2016 | Lot | 165 | 1.25 | N/A | $3,107,000 | Riverside Parking |
| White Front Garage Partners | Nashville, TN | 9/30/2016 | Garage | 155 | 0.26 | N/A | $11,673,000 | Premier Parking |
| Cleveland Lincoln Garage Owners | Cleveland, OH | 10/19/2016 | Garage | 536 | 1.14 | 45,272 | $7,406,000 | SP + |
| MVP Houston Preston Lot | Houston, TX | 11/22/2016 | Lot | 46 | 0.23 | N/A | $2,820,000 | iPark Services |
| MVP Houston San Jacinto Lot | Houston, TX | 11/22/2016 | Lot | 85 | 0.65 | 240 | $3,250,000 | iPark Services |
(Table continued)
| MVP Detroit Center Garage | Detroit, MI | 2/1/2017 | Garage | 1,275 | 1.28 | N/A | $55,307,000 | SP + |
| St. Louis Broadway | St Louis, MO | 5/6/2017 | Lot | 161 | 0.96 | N/A | $2,400,000 | St. Louis Parking |
| St. Louis Seventh & Cerre | St Louis, MO | 5/6/2017 | Lot | 174 | 1.06 | N/A | $3,300,000 | St. Louis Parking |
| MVP Preferred Parking | Houston, TX | 8/1/2017 | Garage | 500 | 0.75 | 784 | $20,500,000 | iPark Services |
| MVP Raider Park Garage | Lubbock, TX | 11/21/2017 | Garage | 1,495 | 2.15 | 20,536 | $11,030,000 | ISOM Management |
| MVP PF Ft. Lauderdale | Ft. Lauderdale, FL | 12/15/2017 | Lot | 66 | 0.75 | 4,017 | $3,423,000 | SP + |
| MVP PF Kansas City | Kansas City, MO | 12/15/2017 | Lot | 164 | 1.18 | N/A | $1,812,000 | SP + |
| MVP PF Memphis Poplar | Memphis, TN | 12/15/2017 | Lot | 125 | 0.86 | N/A | $3,735,000 | Best Park |
| MVP PF Memphis Court | Memphis, TN | 12/15/2017 | Lot | 37 | 0.41 | N/A | $1,208,000 | SP + |
| MVP PF St. Louis | St Louis, MO | 12/15/2017 | Lot | 179 | 1.22 | N/A | $5,145,000 | SP + |
| Mabley Place Garage (2) | Cincinnati, OH | 12/15/2017 | Garage | 775 | 0.9 | 8,400 | $21,182,000 | SP + |
| MVP Denver Sherman | Denver, CO | 12/15/2017 | Lot | 28 | 0.14 | N/A | $705,000 | Denver School |
| MVP Fort Worth Taylor | Fort Worth, TX | 12/15/2017 | Garage | 1,013 | 1.18 | 11,828 | $27,662,000 | SP + |
| MVP Milwaukee Old World | Milwaukee, WI | 12/15/2017 | Lot | 54 | 0.26 | N/A | $2,043,000 | SP + |
| MVP St. Louis Convention Plaza | St. Louis, MO | 12/15/2017 | Lot | 221 | 1.26 | N/A | $3,091,000 | SP + |
| MVP Houston Saks Garage | Houston, TX | 12/15/2017 | Garage | 265 | 0.36 | 5,000 | $10,391,000 | iPark Services |
| MVP St. Louis Lucas | St. Louis, MO | 12/15/2017 | Lot | 202 | 1.07 | N/A | $3,695,000 | SP + |
| MVP Milwaukee Wells | Milwaukee, WI | 12/15/2017 | Lot | 100 | 0.95 | N/A | $4,873,000 | PCAM, LLC |
| MVP Wildwood NJ Lot 1 (3) | Wildwood, NJ | 12/15/2017 | Lot | 29 | 0.26 | N/A | $745,000 | SP + |
| MVP Wildwood NJ Lot 2 (3) | Wildwood, NJ | 12/15/2017 | Lot | 45 | 0.31 | N/A | $886,000 | SP+ |
| MVP Indianapolis City Park | Indianapolis, IN | 12/15/2017 | Garage | 370 | 0.47 | N/A | $10,813,000 | ABM |
| MVP KC Cherry Lot | Kansas City, MO | 12/15/2017 | Lot | 84 | 0.6 | N/A | $987,000 | SP + |
| MVP Indianapolis WA Street | Indianapolis, IN | 12/15/2017 | Lot | 141 | 1.07 | N/A | $5,749,000 | Denison |
| Minneapolis City Parking | Minneapolis, MN | 12/15/2017 | Lot | 270 | 1.98 | N/A | $9,838,000 | SP + |
| MVP Indianapolis Meridian | Indianapolis, IN | 12/15/2017 | Lot | 36 | 0.24 | N/A | $1,601,000 | Denison |
| MVP Milwaukee Clybourn | Milwaukee, WI | 12/15/2017 | Lot | 15 | 0.06 | N/A | $262,000 | Secure |
| MVP Milwaukee Arena Lot | Milwaukee, WI | 12/15/2017 | Lot | 75 | 1.11 | N/A | $4,632,000 | SP + |
| MVP Clarksburg Lot | Clarksburg, WV | 12/15/2017 | Lot | 94 | 0.81 | N/A | $715,000 | ABM |
| MVP Denver Sherman 1935 | Denver, CO | 12/15/2017 | Lot | 72 | 0.43 | N/A | $2,534,000 | SP + |
| MVP Bridgeport Fairfield | Bridgeport, CT | 12/15/2017 | Garage | 878 | 1.01 | 4,349 | $8,256,000 | SP + |
| MVP New Orleans Rampart | New Orleans, LA | 2/1/2018 | Lot | 78 | 0.44 | N/A | $8,105,000 | 342 N. Rampart |
| Construction in progress | $2,004,000 | |||||||
| Software | $63,000 | |||||||
| Total Investment in real estate and fixed assets | $297,299,000 | |||||||
| (1) | These properties are held by West 9th St. Properties II, LLC. |
| (2) | The Company holds an 83.3% undivided interest in the Mabley Place Garage pursuant to a tenancy-in-common agreement and is the Managing Co-Owner of the property. |
| (3) | These properties are held by MVP Wildwood NJ Lot, LLC. |
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 the Company's common stock from third party investors in exchange for various trust deed investments. During the three months ending March 31, 2018 and 2017, VRM II received approximately $33,000 and $8,000, respectively, in distributions in accordance with the Company's DRIP program.
During November 2017, Corporate Center Sunset Holdings, an entity owned by VRM I and VRM II, acquired 1,039,620 shares pursuant to a membership purchase agreement unrelated to the Company. As of March 31, 2018 Corporate Center Sunset Holdings had distributed all acquired shares to VRM I and VRM II.
As of March 31, 2018, the Sponsor owned 9,108 shares, VRM I owned 136,834 shares and VRM II owned 364,960 shares of the Company's outstanding common stock.
Ownership of MVP I
Prior to the Merger, the Company held 476,784 shares of MVP I common stock. Upon completion of the Merger, these shares were retired. During the the three months ended March 31, 2017, MVP I paid the Company approximately $52,000 in stock distributions. In addition, the Company received 5,674 shares of MVP I Common Stock in accordance with its DRIP program.
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 agreed 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.
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 months ended March 31, 2018, the Company paid approximately $0.8 million in selling commissions, of which $0.2 million 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, LLC ("AMS") 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 months ended March 31, 2018, the Company paid approximately $0.2 million to AMS as compensation.
Fees Paid in Connection with the Operations of the Company
Starting on December 15, 2017, in connection with the Merger, all of the following fees were terminated except for a 1.1% asset management fee.
Prior to the Merger, the Advisor or its affiliates received an acquisition fee of 2.25% of the purchase price of any real estate provided, however, the Company did not pay any fees when acquiring loans from affiliates. In accordance with the amended and restated advisory agreement there were zero acquisition fees for the three months ended March 31, 2018. During the three months ended March 31, 2017, approximately $1.1 million in acquisition fees had been earned by the Advisor.
The Advisor or its affiliates were entitled to be reimbursed for actual expenses paid or incurred in the investment. During the three months ended March 31, 2018, approximately $0.9 million in reimbursable expenses were incurred by the advisor. During the three months ended March 31, 2017, no such expenses were incurred.
Prior to the merger, the Advisor or its affiliates received a monthly asset management fee at an annual rate equal to 1.0% of the cost of all the assets then held by the Company. Currently, the Advisor or its affiliates receives a rate equal to 1.1% of the cost of all assets 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. Prior to the Merger, the Company was to determine the Company's NAV on a date not later than the Valuation Date. Following the Valuation Date, the asset management fee was based on the value of the Company's assets rather than their historical cost. Asset management fees for the three months ended March 31, 2018 and 2017 were approximately $0.8 million and $0.2 million, respectively.
The Company was to reimburse the Advisor or its affiliates for costs of providing administrative services, subject to the limitation that it 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 the Company made its 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. The Company was not to reimburse the Advisor for personnel costs in connection with services for which the Advisor received 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, the Company was not to reimburse the Advisor for rent or depreciation, utilities, capital equipment or other costs of its own administrative items. During the three months ended March 31, 2018, approximately $0.8 million in operating expenses were incurred by the Company reimbursable to the Advisor. During the three months ended March 31, 2017 no operating expenses had been reimbursed to the Advisor.
In connection with the Merger, the previous Advisory Agreement with the Advisor was amended effective upon the consummation 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 combined company:
| · | holds assets with an Appraised Value equal to or in excess of $500,000,000 or, |
| · | the Company reports AFFO per share of 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 and pursuant to the Termination Agreement, at the effective time of the Merger, the previous Advisory Agreement, dated September 25, 2012, as amended, among MVP I and the Advisor was terminated and the Company paid the Advisor an Advisor Acquisition Payment (as such term is defined in the Termination Agreement) of approximately $3.6 million, which was the only fee paid to the Advisor in connection with the Merger.
Fees Paid in Connection with the Liquidation or Listing of the Company's Real Estate Assets
Starting on December 15, 2017, in connection with the Merger, all of the following fees were terminated except for a 1.1% asset management fee.
For substantial assistance in connection with the sale of investments, as determined by the independent directors, the Company was to 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, was not to exceed either the customary commission or an amount equal to 6.0% of the contract sales price. The disposition fee was to be paid concurrently with the closing of any such disposition of all or any portion of any asset. During the three months ended March 31, 2018 and 2017, no disposition fees have been earned by the Advisor.
After the Company's stockholders had received a return of their net capital invested and a 6.0% annual cumulative, non-compounded return, then the Advisor was entitled to receive 15.0% of the remaining proceeds. The Company was to pay this subordinated performance fee only upon one of the following events: (i) if the Company's shares were listed on a national securities exchange; (ii) if the Company's assets were 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 months ended March 31, 2018 and 2017, no subordinated performance fees have been earned by the Advisor.
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 issuance, as well as other administrative responsibilities for the Company, including accounting services and investor relations. In addition, the Sponsor paid selling commissions in connection with the sale of the Company's shares in the Common Stock Offering and the Advisor paid 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 may 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 the Company may 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. The Company currently anticipates that it will not issue awards under the Company's long-term incentive plan, although it 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 the Company's 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 the Company's 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 the Company's common stock on the date of grant.
The Company's board of directors or a committee appointed by its 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 the Company's status as a REIT under the Code or otherwise violate the ownership and transfer restrictions imposed under its charter. Unless otherwise determined by the Company's board of directors, no award granted under the long-term incentive plan will be transferable except through the laws of descent and distribution.
The Company has 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 the Company and its stockholders that causes the per-share value of the Company's 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.
The Company's 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 the board of directors and stockholders, unless extended or earlier terminated by the board of directors. The Company's 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. The 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 the Company's stockholders if such approval is required by any law, regulation or rule applicable to the long-term incentive plan. During the three months ended March 31, 2018 and the year ended December 31, 2017, no grants have been made under the long-term incentive plan.
Note H – Recent Accounting Pronouncements
In May 2014, Financial Accounting Standards Board ("FASB") issued ASU 2014-09, 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 relevant facts and circumstances. The standard requires expanded disclosure surrounding revenue recognition. Early application is not permitted. The standard was initially to be effective for fiscal periods beginning after December 15, 2016 and allows 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 one year to fiscal periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and the effective date is the same as requirements in ASU 2015-14. The Company adopted ASU 2014-09 using the modified retrospective transition method in the first quarter of 2018 and such adoption did not have a material impact on the condensed consolidated financial statements. The adoption of this standard did not require any adjustments to the opening balance of retained earnings as of January 1, 2018.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes in fair value recognized in net income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet has been eliminated by this ASU. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 in the first quarter of 2018 and such adoption did not have a material impact on the condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases – (Topic 842). This update will require lessees to recognize all leases with terms greater than 12 months on 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. The Company has 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. The standard permits the use of either the retrospective or cumulative effect transition method. 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 adopted ASU 2016-18 in the first quarter of 2018 and such adoption had no material impact on the condensed consolidated financial statements.
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 adopted ASU 2016-18 beginning in the first quarter of 2018. The effect of ASU 2017-01 on the Company's consolidated financial statements is dependant upon the value and quantitiy of acquisitions duriing the year.
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, including adoption in any interim period. The Company adopted ASU 2017-09 and such adoption did not have a material impact on the condensed 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 for 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 currently evaluating the impact that the implementation of ASU 2017-12 will have on the Company's consolidated financial statements.
Note I – Acquisitions
The following table is a summary of the acquisitions for the three months ended March 31, 2018.
| Property | Location | Date Acquired | Property Type | # Spaces | Size / Acreage | Retail Sq. Ft. | Property Purchase Price |
| MVP New Orleans Rampart, LLC | New Orleans, LA | 2/1/2018 | Lot | 78 | 0.44 | N/A | $8,105,000 |
The following table is a summary of the allocated acquisition value of all properties acquired by the Company for the three months ended March 31, 2018.
| Assets | ||||||||||||
| Land and Improvements | Building and improvements | Total assets acquired | ||||||||||
| MVP New Orleans | $ | 8,105,000 | $ | -- | $ | 8,105,000 | * | |||||
| $ | 8,105,000 | -- | $ | 8,105,000 | ||||||||
*Includes acquisition and closing costs
The following table presents the results of operations of the acquired properties for the three months ended March 31, 2018:
For The Three Months Ended March 31, 2018 | ||||||||
| Total Revenues | Net Income | |||||||
| 2018 acquisitions | $ | 93,000 | $ | 93,000 | ||||
Pro forma results of the Company
The following table of pro forma consolidated results of operations of the Company for the three months ended March 31, 2018 and 2017 and assumes that the acquisitions were completed as of January 1, 2017.
| For The Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Revenues from continuing operations | $ | 5,138,000 | $ | 2,164,000 | ||||
| Net income (loss) from continuing operations | $ | (2,975,000 | ) | $ | (2,960,000 | ) | ||
| Net income (loss) from continuing operations per share – basic | $ | (0.45 | ) | $ | (1.22 | ) | ||
| Net income (loss) from continuing operations per share – diluted | $ | (0.45 | ) | $ | (1.22 | ) | ||
Note J — Line of Credit
Credit Agreement
On December 29, 2017, the Operating Partnership entered into a Credit Agreement (the "Credit Agreement") with the lenders party thereto (the "Lenders"), KeyBank as administrative agent (the "Administrative Agent"), and KeyBanc Capital Markets as lead arranger. The Credit Agreement provides for a $50 million senior secured revolving credit facility (the "Revolving Credit Facility"), which consists of a borrowing base revolving credit facility (the "BB Revolving Credit Facility") and a working capital revolving credit facility (the "WC Revolving Credit Facility"). The Credit Agreement also provides the Operating Partnership with the option to increase the size of the Revolving Credit Facility and/or establish one or more new pari passu term loan facilities (each, a "Term Loan Facility") up to an aggregate commitment or principal amount of up to $350 million, subject to certain limitations. The BB Revolving Credit Facility and any Term Loan Facility mature on January 3, 2021, with two twelve-month extension options subject to certain conditions set forth in the Credit Agreement, which, if exercised by the Operating Partnership, would extend the maturity date to January 3, 2023. The WC Revolving Credit Facility matures on January 4, 2019, unless earlier terminated by the Operating Partnership.
Borrowings under the Credit Agreement bear interest at a rate equal to the sum of a Margin (as such term is defined below) plus either a rate based on LIBOR for 1, 2 or 3 months or a base rate determined by reference to the highest of (1) the Administrative Agent's prime lending rate, (2) the federal funds effective rate plus 50 basis points and (3) the LIBOR rate that would be payable on such day for a LIBOR rate loan with a one-month interest period plus 1.00%. For the BB Revolving Credit Facility and any Term Loan Facility, the Margin is determined by the consolidated leverage ratio until Operating Partnership achieves a senior unsecured credit rating of BBB-/Baa3 from S&P or Moody's at which time Borrower may elect to use an alternative pricing grid. The Margin for the BB Revolving Credit Facility ranges from 0.75% to 1.50% in the case of base rate loans, and 1.75% to 2.50%, in the case of LIBOR rate loans. The Margin for the Term Loan Facility ranges from 0.70% to 1.45%, in the case of base rate loans, and 1.70% to 2.450%, in the case of LIBOR rate loans. The Margin as of the date of effectiveness of the Credit Agreement is (1) in respect of BB Revolving Credit Facility, 1.50%, in the case of base rate loans, and 2.50%, in the case of LIBOR rate loans, and (2) in respect of any Term Loan Facility, 1.45%, in the case of base rate loans, and 2.45%, in the case of LIBOR rate loans. For the WC Revolving Credit Facility, the Margin is 3.00% in the case of base rate loans, and 4.00% in the case of LIBOR rate loans.
The Operating Partnership is also required to pay an unused commitment fee to the Lenders in respect of the unutilized commitments with respect to the Revolving Credit Facility at a rate of either 0.25% or 0.20% per annum, depending on the level of usage. Upon converting to a credit rating pricing-based grid, the unused facility fee will no longer apply and the Operating Partnership will be required to pay a facility fee with respect to the Revolving Credit Facility ranging from 0.125% to 0.300% depending on the Operating Partnership's credit rating. The Operating Partnership must also pay customary letter of credit fees.
On June 19, 2018, the Company (as "Guarantor"), the Borrowers and the Lenders entered into an amendment and waiver to the Credit Agreement. Pursuant to the amendment and waiver, the Lenders agreed to waive the Borrowers' breach of the fixed charge coverage ratio for the period ended March 31, 2018, and the Borrowers' requirement to comply with the fixed charge coverage ratio for the period ended June 30, 2018 and September 30, 2018, and the Guarantor's breach of the financial reporting obligations under the credit agreement for the periods ended December 31, 2017 and March 31, 2018. Pursuant to the amendment and waiver, the Lenders, the Borrowers and the Company (as Guarantor) also agreed to the following, among other changes:
| · | the Fixed Charge Coverage Ratio shall not be less than (i) at any time on or prior to June 30, 2019, 1.35:1.00, and (ii) at any time thereafter, 1.60:1.00; |
| · | the Lenders shall advance approximately $27.4 million to fund the Borrowers' acquisition costs of pending property purchases; |
| · | the Borrowers shall make mandatory principal payments on the WC Revolving Credit Facility in the amounts and at the times scheduled therein; |
| · | the WC Revolving Credit Facility shall be reduced to $16.1 million and the Lenders' obligations to make WC Revolving Loans shall be terminated; |
| · | the Company shall file to list and register its common stock on a recognized exchange in the United States by no later than July 31, 2018, obtain approval of such listing application by August 31, 2018 and complete the listing by September 30, 2018; |
| · | the Company shall redeem all of its outstanding Series A and Series 1 preferred stock and pay the entire redemption price in the form of shares of the Company's common stock (as is permitted by the articles supplementary governing each series of preferred stock), within 30 days after the completion of the listing of its common stock on a national securities exchange; |
| · | the Company shall make no cash distributions to its preferred shareholders after the earlier of (i) 30 days after the completion of the public listing or (ii) September 30, 2018; |
| · | the collateral under the existing credit facility shall include certain recently purchased properties and Borrowers shall not be entitled to release any collateral prior to the retirement in full of the WC Revolving Credit Facility; and |
| · | prior to the retirement of the WC Revolving Credit Facility, management fees paid by the Company to the Advisor shall not exceed $200,000 per quarter. |
Note K — Notes Payable
As of March 31, 2018, the principal balances on notes payable are as follows:
| Property | Original Debt Amount | Monthly Payment | Balance as of 3/31/2018 | Lender | Term | Interest Rate | Loan Maturity |
West 9th Properties II, LLC | $5,300,000 | $30,000 | $5,132,000 | American National Insurance Co. | 10 year | 4.50% | 11/1/2026 |
| MVP Detroit Center Garage, LLC | $31,500,000 | $194,000 | $30,814,000 | Bank of America | 10 year | 5.52% | 2/1/2027 |
| MVP St Louis Washington, LLC (2) | $1,380,000 | Interest Only | $1,380,000 | KeyBank | 10 year * | 4.90% | 5/1/2027 |
| St Paul Holiday Garage, LLC (1) | $4,132,000 | Interest Only | $4,132,000 | KeyBank | 10 year * | 4.90% | 5/1/2027 |
| Cleveland Lincoln Garage, LLC (1) | $3,999,000 | Interest Only | $3,999,000 | KeyBank | 10 year * | 4.90% | 5/1/2027 |
| Louisville Broadway Station, LLC (5) | $1,682,000 | Interest Only | $1,682,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| Whitefront Garage, LLC (2) | $6,454,000 | Interest Only | $6,454,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| MVP Houston Preston Lot, LLC (2) | $1,627,000 | Interest Only | $1,627,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| MVP Houston San Jacinto Lot, LLC (2) | $1,820,000 | Interest Only | $1,820,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| St. Louis Broadway, LLC (2) | $1,671,000 | Interest Only | $1,671,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| St. Louis Seventh & Cerre, LLC (2) | $2,057,000 | Interest Only | $2,057,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| MVP Preferred Parking, LLC (1) | $11,330,000 | Interest Only | $11,330,000 | Key Bank | 10 year ** | 5.02% | 8/1/2027 |
| Ft. Lauderdale loan pool (3) | $4,300,000 | $25,000 | 3,909,000 | KeyBank | 5 Year | 4.94% | 2/1/2019 |
| Mabley Place | $9,000,000 | $44,000 | 8,487,000 | Barclays | 10 year | 4.25% | 12/6/2024 |
| Denver Sherman (1) | $286,000 | Interest Only | 286,000 | KeyBank | 10 year ** | 4.90% | 5/1/2027 |
| Ft. Worth | $13,150,000 | $73,000 | 12,759,000 | American National Insurance, of NY | 10 year | 4.50% | 12/1/2026 |
| Houston Saks Garage | $3,650,000 | $20,000 | 3,425,000 | Barclays Bank PLC | 10 year | 4.25% | 8/6/2025 |
| St. Louis Lucas (4) | $3,490,000 | $20,000 | 3,325,000 | Key Bank | 10 year | 4.59% | 2/1/2026 |
| Indianapolis Garage (5) | $8,200,000 | $46,000 | 7,811,000 | Key Bank | 10 year | 4.59% | 2/1/2026 |
| Indianapolis Meridian (2) | $938,000 | Interest Only | 938,000 | Cantor Commercial Real Estate | 10 year ** | 5.03% | 5/6/2027 |
| MVP Milwaukee Arena Lot, LLC (1) | $2,142,000 | Interest Only | 2,142,000 | KeyBank | 10 year ** | 4.90% | 5/1/2027 |
| MVP Denver Sherman 1935, LLC (1) | $762,000 | Interest Only | 762,000 | KeyBank | 10 year ** | 4.90% | 5/1/2027 |
| Minneapolis City Parking | $5,250,000 | $29,000 | 5,022,000 | American National Insurance, of NY | 10 year | 4.50% | 5/1/2026 |
| Bridgeport Fairfield | $4,400,000 | $23,000 | 4,223,000 | FBL Financial Group, Inc. | 10 year | 4.00% | 8/1/2026 |
| Less unamortized loan issuance costs | (1,814,000) | ||||||
| $123,373,000 |
| (1) | The Company issued a promissory note to KeyBank for $12.7 million secured by a pool of properties, including (i) MVP Denver Sherman, LLC, (ii) MVP Denver Sherman 1935, LLC, (iii) MVP Milwaukee Arena, LLC, (iv) MVP St. Louis Washington, LLC, (v) MVP Louisville Station Broadway, LLC and (vi) Cleveland Lincoln Garage Owners, LLC. |
| (2) | The Company issued a promissory note to Cantor Commercial Real Estate Lending, L.P. ("CCRE") for $16.25 million secured by a pool of properties, including (i) MVP Indianapolis Meridian Lot, LLC, (ii) MVP Louisville Station Broadway, LLC, (iii) White Front Garage Partners, LLC, (iv) MVP Houston Preston Lot, LLC, (v) MVP Houston San Jacinto Lot, LLC, (vi) St. Louis Broadway Group, LLC, and (vii) St. Louis Seventh & Cerre, LLC. |
| (3) | Secured by four properties facilities, including (i) MVP PF Ft. Lauderdale 2013, LLC, (ii) MVP PF Memphis Court 2013, LLC, (iii) MVP PF Memphis Poplar 2013, LLC and (iv) MVP PF St. Louis 2013, LLC). |
| (4) | Secured by three properties, including (i) MVP St. Louis Convention, (ii) MVP St. Louis Lucas and (iii) MVP KC Cherry. |
| (5) | Secured by two properties, including (i) MVP Indy City Park and (ii) MVP Indy WA Street. |
* 2 Year Interest Only
** 10 Year Interest Only
Total interest expense incurred for three months ended March 31, 2018, was approximately $1.8 million. Total loan amortization cost for the three months ended March 31, 2018, was approximately $0.1 million.
As of March 31, 2018, future principal payments on the notes payable are as follows:
| 2018 | $ | 1,446,000 | ||
| 2019 | 5,901,000 | |||
| 2020 | 2,259,000 | |||
| 2021 | 2,378,000 | |||
| 2022 | 2,586,000 | |||
| Thereafter | 110,617,000 | |||
| Less unamortized loan issuance costs | (1,814,000 | ) | ||
| Total | $ | 123,373,000 |
Note L — Fair Value
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value are as follows:
| 1. | Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| 2. | Level 2 – Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable. |
| 3. | Level 3 – Model-derived valuations with unobservable inputs. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The Company's financial instruments include cash and cash equivalents, restricted cash, accounts payable and accrued expenses. Due to their short maturities, the carrying amounts of these assets and liabilities approximate fair value.
Assets and liabilities measured at fair value level 3 on a non-recurring basis may include Assets Held for Sale.
Note M – Investment In DST
On May 31, 2017, the Company, through a wholly-owned subsidiary of its Operating Partnership, purchased a 51.0% beneficial interest in MVP St. Louis Cardinal Lot, DST, a Delaware statutory trust ("MVP St. Louis"), for approximately $2.8 million. MVP St. Louis is the owner of a 2.56-acre, 376-vehicle commercial parking lot located at 500 South Broadway, St. Louis, Missouri 63103, known as the Cardinal Lot (the "Property"), which is adjacent to Busch Stadium, the home of the St. Louis Cardinals major league baseball team. The Property was purchased by MVP St. Louis from an unaffiliated seller for a purchase price of $11,350,000, plus payment of closing costs, financing costs, and related transactional costs.
Concurrently with the acquisition of the Property, MVP St. Louis obtained a first mortgage loan from Cantor Commercial Real Estate Lending, L.P ("St. Louis Lender"), in the principal amount of $6,000,000, with a 10-year, interest-only term at a fixed interest rate of 5.25%, resulting in an annual debt service payment of $315,000 (the "St. Louis Loan"). MVP St. Louis used the Company's investment to fund a portion of the purchase price for the Property. The remaining equity portion was funded through short-term investments by VRM II, an affiliate of the Advisor, pending the private placements of additional beneficial interest in MVP St. Louis exempt from registration under the Securities Act. VRM II and Michael V. Shustek, the Company's Chairman and Chief Executive Officer, provided non-recourse carveout guaranties of the loan and environmental indemnities of St. Louis Lender.
Also, concurrently with the acquisition of the Property, MVP St. Louis, as landlord, entered into a 10-year master lease (the "St. Louis Master Lease"), with MVP St. Louis Cardinal Lot Master Tenant, LLC, an affiliate of MVP Realty, as tenant, (the "St. Louis Master Tenant"). St. Louis Master Tenant, in turn, concurrently entered into a 10-year sublease with Premier Parking of Missouri, LLC. The St. Louis Master Lease provides for annual rent payable monthly to MVP St. Louis, consisting of base rent in an amount to pay debt service on the St. Louis Loan, stated rent of $414,000 and potential bonus rent equal to a share of the revenues payable under the sublease in excess of a threshold. The Company will be entitled to its proportionate share of the rent payments based on its ownership interest. Under the St. Louis Master Lease, MVP St. Louis is responsible for capital expenditures and the St. Louis Master Tenant is responsible for taxes, insurance and operating expenses. Distributions to the Company for the three months ended March 31, 2018 totaled approximately $52,000.
The Company conducted an analysis to conclude that the 51% investment in the DST should not be consolidated. As a DST, the entity is subject to the Variable Interest Entity ("VIE") Model under ASC 810-10.
As stated in ASC 810: "A controlling financial interest in the VIE model requires both of the following:
a. The power to direct the activities that most significantly impact the VIE's economic performance
b. The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE."
As a VIE, the DST is governed in a manner similar to a limited partnership (i.e., there are trustees and there is no board) and the Company, as a beneficial owner, lacks the power though voting rights or otherwise to direct the activities of the DST that most significantly impact the entity's economic performance. Specifically, the beneficial interest owners do not have the rights set forth in ASC 810-10-15-14(b)(1)(ii) – the beneficial owners can only remove the trustees if the trustees have engaged in fraud or gross negligence with respect to the trust and the beneficial owners have no substantive participating rights over the trustees.
The Advisor is the advisor to the Company pursuant to the Amended and Restated Advisory Agreement. The Company is controlled by its independent board of directors and its shareholders. As noted in the Amended and Restated Advisory Agreement, the agreement is effective for one year to be renewed for an unlimited number of successive one-year terms, as approved by the board of directors. The Amended and Restated Advisory Agreement may be terminated by the board of directors at any time upon a written 60-day notice.
In addition, MVP RA is the 100% direct/indirect owner of the MVP Parking DST, LLC ("DST Sponsor"), the MVP St. Louis Cardinal Lot Signature Trustee, LLC ("Signature Trustee") and MVP St. Louis Cardinal Lot Master Tenant, LLC (the "Master Tenant"), who have no direct or indirect ownership in the Company. The Signature Trustee and the Master Tenant have the ability to direct the most significant activities of the DST.
MVP RA controls and consolidates the Signature Trustee, the Master Tenant, and the DST Sponsor. The Company concluded the Master Tenant/property management agreement exposes the Master Tenant to funding operating losses of the Property. As such, that agreement should be considered a variable interest in DST (ASC 810-10-55-37 and 810-10-55-37C). Accordingly, Advisor has a variable interest in the DST (through the master tenant/property manager) and has power over the significant activities of the DST (through the Signature Trustee and the master tenant/property manager). Accordingly, the Company believes that the Master Tenant is the primary beneficiary of the DST, which is ultimately owned and controlled by the MVP RA. As such, the Company accounts for its investment under the equity method and does not consolidate its investment in the DST.
Summarized Balance Sheets—Unconsolidated Real Estate Affiliates—Equity Method Investments
| March 31, 2018 | ||||
| (Unaudited) | ||||
| ASSETS | ||||
| Investments in real estate and fixed assets | $ | 11,512,000 | ||
| Cash | 41,000 | |||
| Cash - restricted | 8,000 | |||
| Prepaid expenses | 5,000 | |||
| Total assets | $ | 11,566,000 | ||
| LIABILITIES AND EQUITY | ||||
| Liabilities | ||||
| Notes payable, net of unamortized loan issuance cost of $62,123 | $ | 5,938,000 | ||
| Accounts payable and accrued liabilities | 62,000 | |||
| Due to related party | 28,000 | |||
| Total liabilities | 6,028,000 | |||
| Equity | ||||
| Member's equity | 6,129,000 | |||
| Offering costs | (574,000 | ) | ||
| Accumulated earnings | 323,000 | |||
| Distributions to members | (340,000 | ) | ||
| Total equity | 5,538,000 | |||
| Total liabilities and equity | $ | 11,566,000 | ||
Summarized Statements of Operations—Unconsolidated Real Estate Affiliates—Equity Method Investments
| For The Three Months Ended March 31, 2018 | ||||
| Revenue | $ | 182,000 | ||
| Expenses | (84,000 | ) | ||
| Net income | $ | 98,000 | ||
Note N —Preferred Stock and Warrants
The Company reviewed the relevant ASC's, specifically ASC 480 – Distinguishing Liabilities From Equity and ASC 815 – Derivatives and Hedging, in connection with the presentation of the Series A and Series 1 preferred stock. Below is a summary of the Company's Preferred Stock offerings.
Series A Preferred Stock
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, on October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock. The Company commenced the private placement of the Shares to accredited investors on November 1, 2016 and closed the offering on March 24, 2017. As of March 31, 2018, the Company raised approximately $2.5 million, net of offering costs, in the Series A private placements.
The holders of the Series A Preferred Stock shall be entitled to receive, when and as authorized by the board of directors and declared by the Company out of funds legally available for the payment of dividends, cash dividends at the rate of 5.75% per annum of the initial stated value of $1,000 per share. If a Listing Event, as defined in the offering, has not occurred by March 31, 2017, the cash dividend rate shall increase to 7.50%, until a Listing Event has occurred. Based on the number of Series A shares outstanding at March 31, 2018, the increased dividend rate would cost the Company approximately $13,000 more per quarter in Series A dividends.
Subject to the Company's redemption rights as described below, each Share will be convertible into shares of the Company's common stock, at the election of the holder thereof by written notice to the Company (each, a "Conversion Notice") containing the information required by the charter, 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 this Offering (whether or not a Listing Event has occurred). Each Share will convert into a number of shares of the Company's common stock determined by dividing (i) the sum of (A) 100% of the Stated Value, initially $1,000, plus (B) any accrued but unpaid dividends to, but not including, the date of conversion, by (ii) the conversion price for each share of the Company's common stock (the "Conversion Price") determined as follows:
| · | Provided there has been a Listing Event, if a Conversion Notice with respect to any Share is received on or prior to the day immediately preceding the first anniversary of the issuance of such Share, the Conversion Price for such Share will be equal to 110% of the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the delivery date of the Conversion Notice. |
| · | Provided there has been a Listing Event, if a Conversion Notice with respect to any Share is received on or after the first anniversary of the issuance of such Share, the Conversion Price for such Share will be equal to the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the delivery date of the Conversion Notice. |
| · | If a Conversion Notice with respect to any Share is received on or after the second anniversary of the final Closing of this Offering, and at the time of receipt of such Conversion Notice, a Listing Event has not occurred, the Conversion Price for such Share will be equal to 100% of the Company's net asset value per share, or NAV per share, if then established, and until the Company establishes a NAV per share, the Conversion Price will be equal to $25.00, or the initial offering price per share of the Company's common stock in the Common Stock Offering. |
If and when the Amended Charter becomes effective, the date by which holders of Series A must provide notice of conversion will be changed from the day immediately preceding the first anniversary of the issuance of such share to December 31, 2017. This change will conform the terms of the Series A with the terms of the Series 1 with respect to conversions.
At any time, from time to time, after the 20th trading day after the date of a Listing Event, the Company (or its successor) will have the right (but not the obligation) to redeem, in whole or in part, the Series A at the redemption price equal to 100% of the Stated Value, initially $1,000 per share, plus any accrued but unpaid dividends if any, to and including the date fixed for redemption. If the Company (or its successor) chooses to redeem any Shares, the Company (or its successor) has the right, in its sole discretion, to pay the redemption price in cash or in equal value of common stock of the Company (or its successor), based on the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the redemption, in exchange for the Series A. The Company (or its successor) also will have the right (but not the obligation) to redeem all or any portion of the Series A subject to a Conversion Notice for a cash payment to the holder thereof equal to the applicable redemption price, by delivering a redemption notice to the holder of such Shares on or prior to 10th trading day prior to the close of trading on the applicable Conversion Date.
Each investor in the Series A received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 30 shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of March 31, 2018, there were detachable warrants that may be exercised for 84,510 shares of the Company's common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at March 31, 2018 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, gross proceeds to the Company would be approximately $2.1 million and the Company would as a result issue an additional 84,510 shares of common stock. As of March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017 and March 31, 2018 the Company had an estimated fair market value of potential warrants that was immaterial.
Series 1 Preferred Stock
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017, the Company commenced the Regulation D 506(b) private placement of shares of Series 1, together with warrants to acquire the Company's common stock, to accredited investors. On January 31, 2018 the Company closed this offering.
The holders of the Series 1 Preferred Stock are entitled to receive, when and as authorized by the Company's board of directors and declared by us out of legally available funds, cumulative, cash dividends on each Share at an annual rate of 5.50% of the Stated Value pari passu with the dividend preference of the Series A Preferred Stock and in preference to any payment of any dividend on the Company's common stock; provided, however, that Qualified Purchasers (who purchased $1.0 million or more in a single closing) are entitled to receive, when and as authorized by the Company's board of directors and declared by us out of legally available funds, cumulative, cash dividends on each Share held by such Qualified Purchaser at an annual rate of 5.75% of the Stated Value (instead of the annual rate of 5.50% for all other holders of the Shares) until April 7, 2018, at which time, the annual dividend rate will be reduced to 5.50% of Stated Value; provided further, however, that if a Listing Event has not occurred by April 7, 2018, the annual dividend rate on all Shares (without regard to Qualified Purchaser status) will be increased to 7.00% of the Stated Value until the occurrence of a Listing Event, at which time, the annual dividend rate will be reduced to 5.50% of the Stated Value. Based on the number of Series 1 shares outstanding at March 31, 2018, the increased dividend rate would cost the Company approximately $150,000 more per quarter in Series 1 dividends.
Subject to the Company's redemption rights as described below, each Share will be convertible into shares of the Company's common stock, at the election of the holder thereof by written notice to the Company (each, a "Conversion Notice") containing the information required by the charter, 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). Each Share will convert into a number of shares of the Company's common stock determined by dividing (i) the sum of (A) 100% of the Stated Value, initially $1,000, plus (B) any accrued but unpaid dividends to, but not including, the date of conversion, by (ii) the conversion price for each share of the Company's common stock (the "Conversion Price") determined as follows:
| · | Provided there has been a Listing Event, if a Conversion Notice with respect to any Share is received prior to December 1, 2017, the Conversion Price for such Share will be equal to 110% of the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the delivery date of the Conversion Notice. |
| · | Provided there has been a Listing Event, if a Conversion Notice with respect to any Share is received on or after December 1, 2017, the Conversion Price for such Share will be equal to the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the delivery date of the Conversion Notice. |
| · | If a Conversion Notice with respect to any Share is received on or after April 7, 2019, and at the time of receipt of such Conversion Notice, a Listing Event has not occurred, the Conversion Price for such Share will be equal to 100% of the Company's net asset value per share, or NAV per share, if then established, and it establishes a NAV per share, the Conversion Price will be equal to $25.00, or the initial offering price per share of the Company's common stock in the Common Stock Offering. |
At any time, from time to time, on and after the later of (i) the 20th trading day after the date of a Listing Event, if any, or (ii) April 7, 2018, the Company (or its successor) will have the right (but not the obligation) to redeem, in whole or in part, the Series A Preferred Stock at the redemption price equal to 100% of the Stated Value, initially $1,000 per share, plus any accrued but unpaid dividends if any, to and including the date fixed for redemption. In case of any redemption of less than all of the shares by the Company, the shares to be redeemed will be selected either pro rata or in such other manner as the board of directors may determine. If the Company (or its successor) chooses to redeem any shares, the Company (or its successor) has the right, in its sole discretion, to pay the redemption price in cash or in equal value of common stock of the Company (or its successor), based on the volume weighted average price per share of the common stock of the Company (or its successor) for the 20 trading days prior to the redemption, in exchange for the shares. The Company (or its successor) also will have the right (but not the obligation) to redeem all or any portion of the Series A Preferred Stock subject to a Conversion Notice for a cash payment to the holder thereof equal to the applicable Redemption Price set forth in the section entitled "Conversion" above, by delivering a Redemption Notice to the holder of such Shares on or prior to the 10th trading day prior to the close of trading on the Conversion Date for such Shares.
Each investor in the Series 1 received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 35 shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of March 31, 2018, there were detachable warrants that may be exercised for 1,382,675 shares of the Company's common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at March 31, 2018 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, gross proceeds to the Company would be approximately $34.6 million and as a result the Company would issue an additional 1,382,675 shares of common stock. As of March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017 and March 31, 2018 the Company had an estimated fair market value of potential warrants that was immaterial.
Redemption of Series A and Series 1
To comply with its amended credit agreement, the Company will redeem all of its outstanding Series A and Series 1 preferred stock and pay the entire redemption price in the form of shares of the Company's common stock, within 30 days after the completion of the listing of its common stock on a national securities exchange. The Company will file an application to list its common stock on a national securities exchange on or prior to July 31, 2018 and will seek to complete the listing by September 30, 2018. To comply with its amended credit agreement, the Company also will make no cash distributions to the holders of the Series A Preferred Stock and Series 1 Preferred Stock after the earlier of (i) 30 days after the completion of the listing of its common stock on a national securities exchange or (ii) September 30, 2018. There can be no assurance, however, that the Company will cause a listing to occur within such time frame or at all.
Note O — Subsequent Events
The following subsequent events have been evaluated through the date of this filing with the SEC.
On April 27, 2018, the Audit Committee concluded its internal investigation, and the Company filed a report on Form 8-K regarding the Audit Committee's investigation on May 3, 2018.
On April 29, 2018, the board of directors of the Company received a letter from Allen Wolff pursuant to which he resigned as an independent director from the board, effective immediately. Prior to his resignation, Mr. Wolff was a member of the Audit Committee.
On April 29, 2018, the Company dismissed RSM US LLP, ("RSM") as the Company's independent registered public accounting firm. The dismissal of RSM was approved by a majority of the members of the Audit Committee of the Company's Board of Directors.
On May 14, 2018, the Advisor informed Edwin Bentzen IV, the Company's Chief Financial Officer, that it does not intend to renew Mr. Bentzen's employment agreement which expires on June 13, 2018. Non-renewal of Mr. Bentzen's employment agreement as the Company's Chief Financial Officer was subject to the approval of the Company's board of directors.
On May 29, 2018, the Company's board of directors suspended the Company's share repurchase program, other than for repurchases in connection with a shareholder's death.
On May 29, 2018, the Company established a NAV equal to $24.61 per common share.
On May 31, 2018 the board of directors of the Company approved the non-renewal of Mr. Bentzen's employment agreement. Mr. Bentzen and the Company agreed that June 1, 2018 was Mr. Bentzen's last day as Chief Financial Officer of the Company. The Company and Mr. Bentzen entered into a Separation Agreement dated June 1, 2018 which provided for a revocation period by Mr. Bentzen of seven (7) days. The seven (7) day period has now expired and the Separation Agreement is in full force and effect. The Separation Agreement covers Mr. Bentzen's positions with The Parking REIT, Inc., MVP Realty Advisors and various of their affiliates. Pursuant to the Separation Agreement, Mr. Bentzen received severance in the collective amount of $50,000 and there was a mutual release of all claims between the parties. The foregoing description of the Separation Agreement is only a summary and is qualified in its entirety by the full text of the Separation Agreement, a copy of which is attached hereto as Exhibit 10.03.
On May 31, 2018, Brandon Welch was appointed as the Interim Chief Financial Officer ("CFO"). Mr. Welch has been employed with MVP Realty Advisors since the inception in 2012 of MVP REIT, a predecessor to the Company.
On June 14, 2018 the Company, through entities wholly owned by the Company, sold two surface parking lots in St. Louis for $8.5 million to the Land Clearance For Redevelopment Authority of the City of St. Louis, a public body corporate and politic of the State of Missouri. Additionally, the purchaser agreed to pay 50% of the premium associated with defeasance of two CMBS loans which were cross-collateralized. The loans encumbered the following properties: MVP St. Louis Convention Plaza, MVP St. Louis Lucas, MVP KC Cherry Lot, MVP Indianapolis City Park Garage, and MVP Indianapolis Washington Street Lot. Subsequent to the defeasance of the loan that encumbered MVP Indianapolis City Park Garage and MVP Indianapolis Washington Street Lot, the Company added the two Indianapolis properties to the KeyBank Borrowing Base revolving credit facility, drawing approximately $8.7 million, of which approximately $1.6 million was used to pay down the KeyBank Working Capital revolving credit facility.
On June 19, 2018, the Company, the Borrowers and the Lenders entered into an amendment and waiver to the Company's existing credit agreement, as further described in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources."
On June 21, 2018, the Company through MVP Hawaii Marks Garage, LLC ("MVP Marks Garage"), an entity owned by the Company, acquired a multi-level parking garage consisting of approximately 308 parking spaces and 16,205 square feet of retail space located in Honolulu, Hawaii, for a purchase price of $20.4 million, plus acquisition and financing-related transaction costs. The Company owns a 100% equity interest in the MVP Marks Garage. The parking garage will be operated by SP Plus Corporation ("SP+") under a long-term lease, where SP will be responsible for annual base rent of $946,000 and 75% of all gross revenue above $1,250,000. The purchase price was funded through the Company's Borrowing Base revolving credit facility from KeyBank in the amount of approximately $11.2 million, the Company's working capital revolving credit facility from KeyBank in the amount of approximately $7.5 million and the remaining $1.7 million was funded from the Company's available cash.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a financial review and analysis of our financial condition and results of operations for the three months ended March 31, 2018 and 2017. This discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Conditions and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2017. As used herein, the terms "we," "our" and "us" refer to The Parking REIT, Inc., and, as required by context, MVP REIT II Operating Partnership, LP, which we refer to as our "operating limited partnership," and to their subsidiaries.
Forward-Looking Statements
Certain statements included in this quarterly report on Form 10-Q (this "Quarterly Report") that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements. Forward-looking statements are typically identified by the use of terms such as "may," "should," "expect," "could," "intend," "plan," "anticipate," "estimate," "believe," "continue," "predict," "potential" or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
| · | the fact that we have a limited operating history, as our property operations began in 2016; |
| · | the fact that we have experienced net losses since inception and may continue to experience additional losses; |
| · | our ability to effectively raise and deploy the proceeds raised in our offerings; |
| · | the performance of properties the Company has acquired or may acquire or loans the Company has made or may make that are secured by real property; |
| · | changes in economic conditions generally and the real estate and debt markets specifically; |
| · | legislative or regulatory changes (including changes to the laws governing the taxation of real estate investment trusts, or REITs); |
| · | potential damage and costs arising from natural disasters, terrorism and other extraordinary events, including extraordinary events affecting parking facilities included in our portfolio; |
| · | risks inherent in the real estate business, including ability to secure leases or parking management contracts at favorable terms, tenant defaults, potential liability relating to environmental matters and the lack of liquidity of real estate investments; |
| · | competitive factors that may limit our ability to make investments or attract and retain tenants; |
| · | our ability to generate sufficient cash flows to pay distributions to our stockholders; |
| · | our failure to maintain our status as a REIT; |
| · | our ability and the timing to obtain third party consents required to consummate the Merger; |
| · | the risk that the Merger or the other transactions contemplated by the Merger Agreement may not be completed in the time frame expected by the parties or at all; |
| · | our ability to successfully integrate pending transactions and implement our operating strategy, including the Merger; |
| · | our ability to list our shares of common stock on a national securities exchange; |
| · | the availability of capital and debt financing generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt; |
| · | interest rates; |
| · | changes to generally accepted accounting principles, or GAAP, and |
| · | potential adverse impacts from the recent changes to the U.S. tax laws. |
Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward – looking statements made after the date of this Quarterly Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward – looking statements included in this Quarterly Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved.
This report may include market data and forecasts with respect to the REIT industry. Although we are responsible for all of the disclosure contained in this report, in some cases we rely on and refer to market data and certain industry forecasts that were obtained from third party surveys, market research, consultant surveys, publicly available information and industry publications and surveys that we believe to be reliable.
Overview
The Parking REIT, Inc., formerly known as MVP REIT II, Inc., is a Maryland corporation formed on May 4, 2015 and intends to qualify as a REIT for U.S. federal income tax purposes upon the filing of the federal tax return for the year ended December 31, 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, the Company 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 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 (No. 333-205893) filed with the SEC under the Securities Act. The Company accepted additional subscriptions through March 31, 2017, the last day of the Common Stock Offering.
On October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock. The Company commenced the private placement of the shares of Series A, together with warrants to acquire the Company's common stock, to accredited investors on November 1, 2016 and closed the offering on March 24, 2017. As of March 31, 2018, the Company had raised approximately $2.5 million, net of offering costs, in the Series A private placements and had 2,862 shares of Series A issued and outstanding.
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. The Company commenced the private placement of the shares of Series 1, together with warrants to acquire the Company's common stock, to accredited investors on April 7, 2017 and closed the offering on January 31, 2018. As of March 31, 2018, the Company raised had approximately $36.0 million, net of offering costs, in the Series 1 private placements and had 39,811 shares of Series 1 issued and outstanding.
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. The Company currently has no investments in Canada. To a lesser extent, the Company may also invest in properties other than parking facilities.
The Company is the sole general partner of 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 Code, which classification could result in the Operating Partnership being taxed as a corporation.
The Company utilizes an UPREIT structure to enable the Company 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 the Company in exchange for shares of the Company's common stock or cash.
As part of the Company's initial capitalization, 8,000 shares of common stock were sold for $200,000 to the Sponsor. The Sponsor is owned 60% by VRM II and 40% by VRM I, which were both managed by Vestin Mortgage prior to being internalized in January 2018.
The Company's Advisor 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 the Amended and Restated Advisory Agreement. As of July 13, 2018, the Company had no paid employees.
The following table is a summary of the acquisitions for the three months ended March 31, 2018:
| Property | Location | Date Acquired | Property Type | # Spaces | Size / Acreage | Retail Sq. Ft. | Property Purchase Price | % Owned |
| MVP New Orleans Rampart | New Orleans, LA | 2/01/2018 | Lot | 78 | 0.44 | N/A | $8,000,000 | 100% |
As of March 31, 2018, the Company had investments in the following facilities:
| Parking Facility | Date Acquired | Type | Zoning | Height Restriction | The Parking REIT % Owned | 3rd Party % Owned | Property Purchase Price |
| MVP Cleveland West 9th | 5/11/2016 | Lot | CBD LLR-B4 | 175 Feet | 100% | 0% | $5,675,000 |
| 33740 Crown Colony | 5/17/2016 | Lot | LLR-D5 | 250 Feet | 100% | 0% | $3,030,000 |
| MVP San Jose 88 Garage | 6/15/2016 | Garage | DC | N/A | 100% | 0% | $3,576,000 |
| MCI 1372 Street | 7/8/2016 | Lot | B-5 | 375 Feet | 100% | 0% | $700,000 |
| MVP Cincinnati Race Street Garage | 7/8/2016 | Garage | DD-A | 500 Feet | 100% | 0% | $4,500,000 |
| MVP St. Louis Washington | 7/18/2016 | Lot | CBD I | 100 Feet | 100% | 0% | $3,000,000 |
| MVP St. Paul Holiday Garage | 8/12/2016 | Garage | B-5 | Unlimited | 100% | 0% | $8,200,000 |
| MVP Louisville Station Broadway | 8/23/2016 | Lot | CBD I | Unlimited | 100% | 0% | $3,050,000 |
| White Front Garage Partners | 9/30/2016 | Garage | CBD I | Unlimited | 100% | 0% | $11,496,000 |
| Cleveland Lincoln Garage Owners | 10/19/2016 | Garage | SI / GR-E5 | 250 Feet | 100% | 0% | $7,317,000 |
| MVP Houston Preston Lot | 11/22/2016 | Lot | NONE | Unlimited | 100% | 0% | $2,800,000 |
| MVP Houston San Jacinto Lot | 11/22/2016 | Lot | NONE | Unlimited | 100% | 0% | $3,200,000 |
| MVP Detroit Center Garage | 1/10/2017 | Garage | PD | Unlimited | 100% | 0% | $55,000,000 |
| St. Louis Broadway Group | 2/1/2017 | Lot | CBD I | 200 Feet | 100% | 0% | $2,400,000 |
| St. Louis Seventh & Cerre | 2/1/2017 | Lot | CBD I | 200 Feet | 100% | 0% | $3,300,000 |
| MVP St. Louis Cardinal Lot, DST * | 5/31/2017 | Lot | L | 200 Feet | 51% | 49% | $11,350,000 |
| MVP Preferred Parking (Preston) | 6/29/2017 | Garage | NONE | Unlimited | 100% | 0% | $16,500,000 |
| MVP Preferred Parking (Congress) | 6/29/2017 | Lot | NONE | Unlimited | 100% | 0% | $4,000,000 |
| MVP Raider Park Garage | 11/21/2017 | Garage | IHC | 40 Feet | 100% | 0% | $11,000,000 |
| MVP PF Ft. Lauderdale 2013 | 12/15/2017 | Lot | RAC-CC | 150 Feet | 100% | 0% | $3,423,000 |
| MVP PF Memphis Court 2013 | 12/15/2017 | Lot | CBD | Unlimited | 100% | 0% | $1,208,000 |
| MVP PF Memphis Poplar 2013 | 12/15/2017 | Lot | CBD | Unlimited | 100% | 0% | $3,735,000 |
| MVP PF Kansas City 2013 | 12/15/2017 | Lot | B4-5 | Unlimited | 100% | 0% | $1,812,000 |
| MVP PF St. Louis 2013 | 12/15/2017 | Lot | I (CBD) | 200 Feet | 100% | 0% | $5,145,000 |
| Mabley Place Garage | 12/15/2017 | Garage | DD-A | 510 Feet | 83% | 17% | $21,142,000 |
| MVP Denver Sherman | 12/15/2017 | Lot | CMX-16 | 200 Feet | 100% | 0% | $705,000 |
| MVP Fort Worth Taylor | 12/15/2017 | Garage | CBD-H | Unlimited | 100% | 0% | $27,658,000 |
| MVP Milwaukee Old World | 12/15/2017 | Lot | C9-E | 40 Feet | 100% | 0% | $2,044,000 |
| MVP St. Louis Convention Plaza | 12/15/2017 | Lot | I (CBD) | 200 Feet | 100% | 0% | $3,091,000 |
| MVP Houston Saks Garage | 12/15/2017 | Garage | N/A | Unlimited | 100% | 0% | $10,391,000 |
| MVP St. Louis Lucas | 12/15/2017 | Lot | I (CBD) | 200 Feet | 100% | 0% | $3,695,000 |
| MVP Milwaukee Wells | 12/15/2017 | Lot | C9-E | 40 Feet | 100% | 0% | $4,873,000 |
| MVP Wildwood NJ Lot 1 | 12/15/2017 | Lot | T/E | 35 Feet | 100% | 0% | $745,000 |
| MVP Wildwood NJ Lot 2 | 12/15/2017 | Lot | T/E | 35 Feet | 100% | 0% | $886,000 |
| MVP Indianapolis City Park | 12/15/2017 | Garage | CBD-1 RC | Unlimited | 100% | 0% | $10,813,000 |
| MVP KC Cherry Lot | 12/15/2017 | Lot | UR | Per Plan | 100% | 0% | $987,000 |
| MVP Indianapolis WA Street Lot | 12/15/2017 | Lot | CBD-2 | Unlimited | 100% | 0% | $5,749,000 |
| MVP Minneapolis Venture | 12/15/2017 | Lot | B4C-1 | Unlimited | 100% | 0% | $6,543,000 |
| MVP Indianapolis Meridian Lot | 12/15/2017 | Lot | CBD-2/RC | Unlimited | 100% | 0% | $1,601,000 |
| MVP Milwaukee Clybourn | 12/15/2017 | Lot | C9F(A) | 30 Feet | 100% | 0% | $262,000 |
| MVP Milwaukee Arena | 12/15/2017 | Lot | RED | 40 Feet | 100% | 0% | $4,632,000 |
| MVP Clarksburg Lot | 12/15/2017 | Lot | BPO | 60 Feet | 100% | 0% | $715,000 |
| MVP Denver Sherman 1935 | 12/15/2017 | Lot | CMX-16 | 200 Feet | 100% | 0% | $2,534,000 |
(Table continued)
| MVP Bridgeport Fairfield Garage | 12/15/2017 | Garage | DVD-CORE | 65 Feet | 100% | 0% | $8,256,000 |
| Minneapolis City Parking | 12/15/2017 | Lot | B4C-1 | Unlimited | 100% | 0% | $9,838,000 |
| MVP New Orleans Rampart | 2/1/2018 | Lot | VCC-2 | 50 Feet | 100% | 0% | $8,000,000 |
* The Company has a 51.0% interest in MVP St. Louis Cardinal Lot. For additional information see Note M – Investment in DST in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 - Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
The Company believes that it operated in a manner necessary for qualification as a REIT for the year ended December 31, 2017. The Company is neither a mutual fund nor an investment company within the meaning of the Investment Company Act nor subject to any regulation thereunder. As a REIT, the Company is required to have a December 31 fiscal year end. As a REIT, the Company will generally not be subject to federal income tax on that portion of its REIT taxable income that is distributed to stockholders. Among other requirements, REITs are required to satisfy certain gross income and asset tests, which may affect the composition of assets the Company acquires with the proceeds of the Common Stock Offering. In addition, REITs are required to distribute to stockholders at least 90% of their annual REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain).
If the Company does not qualify as a REIT for the tax year ended December 31, 2017, the Company will continue to file as a C corporation, and deferred tax assets and liabilities will be established for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for the deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on the available evidence at the time the determination is made. For the tax year ended December 31, 2017, the Company concluded that, due to our cumulative book losses, a valuation allowance should be recorded against our net deferred tax assets.
The Company's board of directors will at all times have ultimate oversight and policy-making authority over the Company, including responsibility for governance, financial controls, compliance and disclosure. Pursuant to the Company's Amended and Restated Advisory Agreement, however, the Company's board of directors has delegated to the Advisor the authority to manage the Company's day-to-day business, in accordance with the Company's investment objectives, strategy, guidelines, policies and limitations. VRM II owns 60% of the Advisor, and the remaining 40% is owned by VRM I; both were managed by Vestin Mortgage until such entity was internalized in January 2018. The Company's Sponsor is owned 60% by VRM II and 40% by VRM I, which were both managed by Vestin Mortgage prior to being internalized in January 2018. The Company also sold 5,000 shares of common stock directly to VRM II.
VRM I and VRM II are engaged primarily in the business of investing in commercial real estate and loans secured by commercial real estate. As the owners of the Advisor, VRM I and VRM II may benefit from any fees and other compensation that the Company pays to the Advisor under the Amended and Restated Advisory Agreement. In this regard, the Company notes that the Advisor has agreed to waive certain fees and expenses it otherwise would be entitled under the Amended and Restated Advisory Agreement. Please refer to Note E – Related Party Transactions and Arrangements – Fees Paid in Connection With the Operations of the Company in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for more information. If the owners of the Advisor determine that such waivers are no longer in the best interests of their stockholders or otherwise refuse to grant future waivers of fees or expenses if requested by the Company, then the Company's operating expenses could increase significantly, which could adversely affect the Company's results of operations and the amount of distributions to stockholders.
In addition, the Company may compete against VRM I and VRM II, both of which are managed by affiliates of the Company's Sponsor, for the acquisition of investments. The Company believes this potential conflict is mitigated, in part, by the Company's focus on parking facilities as its core investments, while the investment strategy of VRM I and VRM II focuses on acquiring office buildings and other commercial real estate and loans secured by commercial real estate.
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 I.
On May 26, 2017, the Company, MVI I, Merger Sub and the Advisor entered into the Merger Agreement. Subject to the terms and conditions of the Merger Agreement, MVP I merged with and into Merger Sub on December 15, 2017, with Merger Sub surviving the Merger such that following the Merger, Merger Sub continued as a wholly owned subsidiary of the Company. The Merger is intended to qualify as a "reorganization" under, and within the meaning of, Section 368(a) of the Code. The combined company was subsequently renamed "The Parking REIT, Inc."
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of MVP I Common Stock was automatically cancelled and retired, and converted into the right to receive 0.365 shares of common stock of the Company. Holders of shares of MVP I Common Stock received cash in lieu of fractional shares.
At the effective time of the Merger, each share of MVP I Common Stock, if any, then held by any wholly owned subsidiary of MVP I or by the Company or any of its wholly owned subsidiaries became no longer outstanding and was automatically retired and ceased to exist, and no consideration was paid, nor will any other payment or right inure or be made with respect to such shares of MVP I Common Stock in connection with or as a consequence of the Merger. In addition, each share of MVP I's Non-Participating, Non-Voting Convertible Stock, $0.001 par value per share ("MVP I Convertible Stock"), all 1,000 of which were held by the Advisor, were automatically retired and ceased to exist, and no consideration was paid, nor will any other payment or right inure or be made with respect to such shares of MVP I Convertible Stock in connection with or as a consequence of the Merger.
Pursuant to the Merger Agreement, the Company's board of directors increased the number of directors to eight from five prior to the Merger, and Nicholas Nilsen, Robert J. Aalberts and Shawn Nelson, previous directors of MVP I, were elected to the board of directors.
Amended and Restated Advisory Agreement
Concurrently with the entry into the Merger Agreement, on May 26, 2017, the Company, the Operating Partnership and the Advisor entered into the Amended and Restated Advisory Agreement, which became effective at the effective time of the Merger. The Amended and Restated Advisory Agreement sets forth the terms and conditions upon which we appoint the Advisor to serve as our advisor. The Amended and Restated Advisory Agreement amended the Company's existing advisory agreement, dated October 5, 2015, to provide for, among other amendments, (i) elimination of acquisition fees, disposition fees and subordinated performance fees and (ii) the payment of an asset management fee by the Company to the Advisor calculated and paid monthly in an amount equal to one-twelfth of 1.1% of the (a) cost of each asset then held by the Company, without deduction for depreciation, bad debts or other non-cash reserves, or (b) the Company's proportionate share thereof in the case of an investment made through a joint venture or other co-ownership arrangement excluding (only for clause (b)) debt financing on the investment. Pursuant to the Amended and Restated Advisory Agreement, the asset management fee may not exceed the Asset Management Fee Cap until the earlier of such time, if ever, that (i) the Company holds assets with an Appraised Value (as defined Amended and Restated Advisory Agreement) equal to or in excess of $500,000,000 or (ii) the Company reports AFFO (as defined in the Amended and Restated Advisory Agreement) equal to or greater than $0.3125 per share of Company Common Stock (an amount intended to reflect a 5% or greater annualized return on $25.00 per share of the Company's common stock) (the "Per Share Amount") for two consecutive quarters, on a fully diluted basis. All amounts of the asset management fee in excess of the Asset Management Fee Cap, plus interest thereon at a rate of 3.5% per annum, will be due and payable by the Company no later than ninety (90) days after the earlier of the date that (i) the Company holds assets with an Appraised Value equal to or in excess of $500,000,000 or (ii) the Company reports AFFO per share of the Company's common stock equal to or greater than the Per Share Amount for two consecutive quarters, on a fully diluted basis.
In addition, the Amended and Restated Advisory Agreement contains customary indemnification provisions for the Advisor and its affiliates for all liabilities, claims, damages or losses arising in the performance of their duties under the Amended and Restated Advisory Agreement, as well as related expenses, including reasonable attorneys' fees. Further, in the event that the Amended and Restated Advisory Agreement is terminated for any reason, the Company is prohibited under the Amended and Restated Advisory Agreement from directly or indirectly soliciting or hiring the employees of the Advisor or any of its affiliates for one year after such termination, and the Company may need to pay the Advisor significant amounts to waive such prohibition. The Company is also prohibited from intentionally interfering with, or enticing away, the relationship of the Advisor or its affiliates with any person who, during the term of the Amended and Restated Advisory Agreement or the preceding one-year period, was a tenant, co-investor, co-developer, joint venture or other customer of the Advisor or its affiliates. The Amended and Restated Advisory Agreement have an initial term of one year from the effective date, and may be renewed for an unlimited number of successive one-year terms upon the parties' mutual consent.
Termination Agreement
Concurrently with the entry into the Merger Agreement, on May 26, 2017, the Company, MVP I, the Advisor and the Operating Partnership entered into a termination and fee agreement (the "Termination Agreement"). Pursuant to the Termination Agreement, at the effective time of the Merger, the Advisory Agreement, dated September 25, 2012, as amended, among MVP I and the Advisor was terminated, and the Company paid the Advisor an Advisor Acquisition Payment (as such term is defined in the Termination Agreement) of approximately $3.6 million, which was the only fee payable to the Advisor in connection with the Merger.
The foregoing description of the Merger Agreement, the Amended and Restated Advisory Agreement and the Termination Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the applicable agreements, each of which is filed with as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on May 31, 2017.
Amended Charter
In connection with the Merger, at the Company's annual stockholders' meeting held on September 27, 2017, the Company's stockholders approved, among other matters, the amendment and restatement of its charter (the "Amended Charter"). As described in more detail in the final proxy statement distributed to our stockholders for the annual meeting, the Amended Charter is primarily intended to accomplish two objectives in connection with the possible listing of the Company's common stock after the closing of the Merger: (1) to remove provisions of our charter that the Company believes may unnecessarily restrict our ability to take advantage of further opportunities for liquidity events or are redundant with or otherwise addressed or permitted to be addressed under Maryland law and (2) to amend certain provisions in a manner that the Company believes would be more suitable for becoming a publicly-traded REIT.
The Amended Charter will become effective upon its filing with the State Department of Assessments and Taxation of Maryland. The Company expects to file the proposed Amended Charter immediately before the Company's common stock becomes listed for trading on a national securities exchange. This means that the changes to the charter will not be effective unless and until we complete an exchange listing.
Review of the Company's Policies
The Company's board of directors, including the independent directors, have reviewed the policies described in this Quarterly Report and determined that they are in the best interest of the Company's stockholders because: (1) they increase the likelihood that the Company will be able to acquire a diversified portfolio of income producing properties, thereby reducing risk in its portfolio; (2) the Company's executive officers, directors and affiliates of the Advisor have expertise with the type of real estate investments the Company seeks; and (3) borrowings should enable the Company to purchase assets and earn rental income more quickly, thereby increasing the likelihood of generating income for the Company's stockholders and preserving stockholder capital.
Results of Operations for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.
The Company began purchasing properties in May 2016 and the results of operations below reflect start-up costs as well as acquisition expenses incurred in connection with purchasing properties as the Company seeks to deploy the Company's proceeds from the Common Stock Offering. The Company expects that income and expenses related to the Company's portfolio will increase in future years as a result of owning the properties acquired for a full year and as a result of anticipated future acquisitions of real estate and real estate-related assets. The results of operations described below may not be indicative of future results of operations.
For The Three Months Ended March 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| Revenue | ||||||||||||||||
| Parking base rent | $ | 4,609,000 | 90.5 | % | $ | 1,502,000 | 74.2 | % | ||||||||
| Retail rent | 107,000 | 2.1 | % | 4,000 | 0.2 | % | ||||||||||
| Management Agreement (a) | -- | -- | 518,000 | 25.6 | % | |||||||||||
| Percentage rent (b) | 375,000 | 7.4 | % | -- | -- | |||||||||||
| Total revenues | $ | 5,091,000 | 100 | % | $ | 2,024,000 | 100 | % | ||||||||
| a) | During January 2017, MVP Detroit Center Garage, LLC ("MVP Detroit") received a settlement amount from the previous operator of approximately $408,000 for the operations of the garage until SP+ assumed operations under a longer-term lease agreement. Through February 28, 2017, the San Jose 88 Garage was subject to a parking management agreement and the rental income of $110,000 represents the gross revenues generated by the property. Operating expenses for this property are included in Operations and Maintenance. Starting on March 1, 2017, this property was leased to a national parking operator, with an annual base rent of $450,000 per year. |
| b) | During the three months ended March 31, 2018 the following properties received percentage rent totaling approximately $375,000: |
| · | MVP Ft. Worth received approximately $22,000 |
| · | MVP St Louis Convention received approximately $47,000 |
| · | MVP St Louis Lucas received approximately $9,000 |
| · | MVP Milwaukee Arena received approximately $25,000 |
| · | MVP Denver 1935 Sherman received approximately $6,000 |
| · | MVP San Jose 88 Garage received approximately $24,000 |
| · | MVP Detroit Center Garage received approximately $242,000 |
Total rental revenue earned, including percentage rent, from our consolidated parking facilities which have continued operations, totaled approximately $5.1 million for the three months ended March 31, 2018, compared to total revenues of $2.0 million from our consolidated properties for the three months ended March 31, 2017. The increase in rental revenues and the number of properties held is a result of the Company's planned and continued growth through acquisitions of new properties and the Merger of the Company and MVP I. The 25 consolidated parking facilities that were acquired through the Merger with MVP I accounted for a large portion of the increase, generating approximately $2.2 million in rental income to the Company during the three months ended March 31, 2018.
For additional information see Note I - Acquisitions in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 - Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
Since a majority of the Company's property leases call for additional percentage rent, the Company monitors the gross revenue generated by each property on a monthly basis. The higher the property's gross revenue the higher the Company's potential percentage rent. The graph below shows the comparison of the Company's monthly rental income to the gross revenue generated by the properties.
| For The Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Operating expenses | ||||||||
| Property taxes | $ | 636,000 | $ | 92,000 | ||||
| Property operating expense | 308,000 | 275,000 | ||||||
| Asset management expense-related party | 832,000 | 237,000 | ||||||
| General and administrative | 3,028,000 | 328,000 | ||||||
| Merger costs | -- | 125,000 | ||||||
| Acquisition expenses | 217,000 | 1,766,000 | ||||||
| Acquisition expenses – related party | -- | 1,118,000 | ||||||
| Depreciation | 1,194,000 | 425,000 | ||||||
| Total operating expenses | $ | 6,215,000 | $ | 4,366,000 | ||||
Operating expenses for the three months ended March 31, 2018 increased by approximately $1.8 million, as compared to the three months ended March 31, 2017. A significant portion of this increase ($1.2 million) was attributable to costs relating to the internal investigation conducted by the Audit Committee. The balance of the increase in expenses is primarily attributable to the Company's growth in investments in parking facilities. The increase in acquisitions through the merger resulted in increased property taxes, other property operating expense, asset management fees, acquisitions expenses and depreciation. As the Company continues to acquire new properties, by means of the equity raises and debt financing, the Company expects to see operations and maintenance and depreciation expenses grow.
For The Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Other income (expense) | ||||||||
| Interest expense | $ | (1,948,000 | ) | $ | (796,000 | ) | ||
| Distribution income – related party | -- | 52,000 | ||||||
| Income from DST | 52,000 | -- | ||||||
| Income from investment in equity method investee | -- | 14,000 | ||||||
| Total other expense | $ | (1,896,000 | ) | $ | (730,000 | ) | ||
The increase in interest expense for the three months ended March 31, 2018, as compared to 2017, is related to the Company's increased use of debt to acquire properties as well as loans assumed through the merger. To maximize the use of cash, the Company will continue to look for opportunities to utilize financing on future acquisitions, including with the use of the line of credit with KeyBank or permanent debt at the time of acquisitions. The interest expense will vary based on the amount of our borrowings and current interest rates at the time of financing. The Company will seek to secure appropriate leverage with the lowest interest rate available. The terms of the loans will greatly depend on the quality of the property, the credit worthiness of the tenant and the amount of income the property is able to generate through parking leases. There is no assurance, however, that the Company will be able to secure additional financing on favorable terms or at all. Interest expense recorded for the three months ended March 31, 2018 includes loan amortization costs. Total loan amortization cost for the three months ended March 31, 2018 and 2017 was approximately $130,000 and $60,000, respectively.
For additional information see Note J – Line of Credit and Note K – Notes Payable in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 - Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
Funds from Operations and Modified Funds from Operations
The Advisor believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, the Company believes that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.
In order to provide a more complete understanding of the operating performance of a REIT, NAREIT promulgated a measure known as FFO. FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, the Company believes that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of the Company's performance relative to the Company's competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than the Company does, making comparisons less meaningful.
The Investment Program Association ("IPA") issued Practice Guideline 2010-01 (the "IPA MFFO Guideline") on November 2, 2010, which extended financial measures to include modified funds from operations ("MFFO"). In computing MFFO, FFO is adjusted for certain non-operating cash items such as acquisition fees and expenses and certain non-cash items such as straight-line rent, amortization of in-place lease valuations, amortization of discounts and premiums on debt investments, nonrecurring impairments of real estate-related investments, mark-to-market adjustments included in net income (loss), and nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Management is responsible for managing interest rate, hedge and foreign exchange risk. To achieve the Company's objectives, the Company may borrow at fixed rates or variable rates. In order to mitigate the Company's interest rate risk on certain financial instruments, if any, the Company may enter into interest rate cap agreements and in order to mitigate the Company's risk to foreign currency exposure, if any, the Company may enter into foreign currency hedges. The Company views fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. Additionally, the Company believes it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations, assessments regarding general market conditions, and the specific performance of properties owned, which can change over time.
No less frequently than annually, the Company evaluates events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present, the Company assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) expected from the use of the assets and the eventual disposition. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of MFFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of the Company's operations, it could be difficult to recover any impairment charges through operational net revenues or cash flows prior to any liquidity event. The Company adopted the IPA MFFO Guideline as management believes that MFFO is a helpful indicator of the Company's on-going portfolio performance. More specifically, MFFO isolates the financial results of the REIT's operations. MFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, MFFO for the period presented may not be indicative of future results or the Company's future ability to pay the Company's dividends. By providing FFO and MFFO, the Company presents information that assists investors in aligning their analysis with management's analysis of long-term operating activities. MFFO also allows for a comparison of the performance of the Company's portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of the Company's performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and the Company believe often used by analysts and investors for comparison purposes. As explained below, management's evaluation of the Company's operating performance excludes items considered in the calculation of MFFO based on the following economic considerations:
| · | Straight-line rent. Most of the Company's leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company's portfolio. |
| · | Amortization of in-place lease valuation. As this item is a cash flow adjustment made to net income in calculating the cash flows provided by (used in) operating activities, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company's portfolio. |
| · | Acquisition-related costs. The Company was organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to the Company's stockholders. In the process, the Company incurs non-reimbursable affiliated and non-affiliated acquisition-related costs, which in accordance with GAAP, are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss). These costs have been and will continue to be funded with cash proceeds from the Offering or included as a component of the amount borrowed to acquire such real estate. If the Company acquires a property after all offering proceeds from the Offering have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, unless the Advisor determines to waive the payment of any then-outstanding acquisition-related costs otherwise payable to the Advisor, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. In evaluating the performance of the Company's portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments' revenues and expenses. Acquisition-related costs may negatively affect the Company's operating results, cash flows from operating activities and cash available to fund distributions during periods in which properties are acquired, as the proceeds to fund these costs would otherwise be invested in other real estate related assets. By excluding acquisition-related costs, MFFO may not provide an accurate indicator of the Company's operating performance during periods in which acquisitions are made. However, it can provide an indication of the Company's on-going ability to generate cash flow from operations and continue as a going concern after the Company ceases to acquire properties on a frequent and regular basis, which can be compared to the MFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to the Company. Management believes that excluding these costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management. |
For all of these reasons, the Company believes the non-GAAP measures of FFO and MFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of the Company's real estate portfolio. However, a material limitation associated with FFO and MFFO is that they are not indicative of the Company's cash available to fund distributions since other uses of cash, such as capital expenditures at the Company's properties and principal payments of debt, are not deducted when calculating FFO and MFFO. Additionally, MFFO has limitations as a performance measure in an offering such as the Company's where the price of a share of common stock is a stated value. The use of MFFO as a measure of long-term operating performance on value is also limited if the Company does not continue to operate under the Company's current business plan as noted above. MFFO is useful in assisting management and investors in assessing the Company's ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods, and in particular, after the Common Stock Offering and acquisition stages are complete and NAV is disclosed. However, MFFO is not a useful measure in evaluating NAV because impairments are taken into account in determining NAV but not in determining MFFO. Therefore, FFO and MFFO should not be viewed as more prominent a measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
None of the SEC, NAREIT or any other organization has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and the Company may have to adjust the calculation and characterization of this non-GAAP measure.
The Company's calculation of FFO and MFFO attributable to common shareholders is presented in the following table for the three months ended March 31, 2018 and 2017:
For The Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss attributable to The Parking REIT, Inc. Common Shareholders | $ | (3,588,000 | ) | $ | (3,119,000 | ) | ||
| Add (Subtract): | ||||||||
| Gain on Sale of real estate | -- | -- | ||||||
| Depreciation and Amortization of real estate assets | 1,194,000 | 425,000 | ||||||
| FFO | $ | (2,394,000 | ) | $ | (2,694,000 | ) | ||
| Add: | ||||||||
| Acquisition fees and expenses to non-affiliates | 217,000 | 1,766,000 | ||||||
| Acquisition fees and expenses to affiliates | -- | 1,118,000 | ||||||
| Acquisition / Merger costs | -- | 125,00 | ||||||
| MFFO attributable to The Parking REIT, Inc. Common Shareholders | $ | (2,177,000 | ) | $ | 315,000 | |||
| Distributions paid to Common Shareholders | $ | 817,000 | $ | 451,000 | ||||
Liquidity and Capital Resources
The Company commenced operations on December 30, 2015.
The Company's principal demand for funds is for the acquisition of real estate assets, the payment of operating expenses, capital expenditures, interest on the Company's outstanding indebtedness and the payment of distributions to the Company's stockholders. Over time, the Company intends to generally fund its operating expenses from its cash flow from operations. The cash required for acquisitions and investments in real estate is funded primarily from the sale of shares of the Company's preferred stock and common stock, including those offered for sale through the Company's distribution reinvestment plan, dispositions of properties in the Company's portfolio and through third party financing and the assumption of debt on acquired properties.
The Company may seek to raise additional funds through equity financings, such as private placements of its preferred stock, as well as through additional debt financing. As of March 31, 2018, the Company had raised approximately $2.5 million, net of offering costs, in funds from the private placements of Series A Convertible Redeemable Preferred Stock and approximately $36.0 million, net of offering costs, in funds from the private placements of Series 1 Convertible Redeemable Preferred Stock. The Company continued to raise additional funds through private placements of Series 1 Convertible Redeemable Preferred Stock until January 31, 2018, at which time the Preferred Series 1 offering was closed.
As of March 31, 2018, the Company's debt consisted of approximately $123.4 million in fixed rate debt and $23.1 million in variable rate debt, net of loan issuance costs.
Our cash and cash equivalents and restricted cash were approximately $11.8 million as of March 31, 2018, which was an approxiamte decrease of $5.0 million from the balance at December 31, 2017.
Net cash used in operating activities for the three months ended March 31, 2018 totaled approximately $1.0 million. Operating cash flows were used for the payment of normal operating expenses such as management fees, insurance, accounting fees and legal bills. Net cash used in investing activities totaled approximately $12.2 million and mainly consisted of purchase of investments in real estate totaling $8.1 million, building improvements of approximately $1.4 million and deposits applied to investments in real estate of approximately $2.7 million. Net cash provided by financing activities totaled approximately $8.3 million and consisted of proceeds from issuance of preferred stock of approximately $9.1 million and proceeds from the Company's KeyBank line of credit of approximately $4.4 million, netted with payments on the KeyBank line of credit of approximately $3.4 million, payments on notes payable of approximately $0.5 million, share redemptions of $0.2 million and distributions to stockholders of approximately $1.1 million.
Net cash used in operating activities for the three months ended March 31, 2017 totaled approximately $2.6 million. Operating cash flows were used for the payment of normal operating expenses. Net cash used in investing activities totaled approximately $51.9 million and consisted of payments made for future acquisitions of $0.2 million, payments made for investments in real estate of approximately $56.7 million, offset by proceeds received from non-controlling interest of $5.1 million. Net cash provided by financing activities totaled approximately $55.3 million and mainly consisted of proceeds from issuance of common stock of approximately $5.0 million and issuance of preferred stock of approximately $2.6 million. In addition, financing activity included proceeds from notes payable of approximately $36.4 million, proceeds from the Company's KeyBank line of credit of approximately $12.0 million, payments on notes payable of approximately $0.2 million, payments on line of credit of $0.3 million and cash distributions of approximately $161,000, $5,000 and $50,000 made to common stockholders, preferred stockholders and non-controlling interest, respectively.
On October 5, 2016, the Company, through its Operating Partnership, and MVP I (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 could be increased up to $100 million, in minimum increments of $10 million. The Unsecured Credit Facility had an initial term of two years, maturing on October 5, 2018, and could be extended for a one-year period if certain conditions were met and upon payment of an extension fee. The Unsecured Credit Facility had 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 was 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 were interest only and were due on the first day of each quarter. The obligations of the Borrowers of the Unsecured Credit Agreement were joint and several. The REITs entered into cross-indemnification provisions with respect to their joint and several obligations under the Unsecured Credit Agreement.
On June 26, 2017, the REITs, each through a wholly owned subsidiary, the Operating Partnership and MVP Real Estate Holdings, LLC (together, the "Borrowers"), entered into a credit agreement (the "Working Capital Credit Agreement") with KeyBank as the administrative agent and 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 could 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, the term was extended to March 31, 2018. The Working Capital Credit Agreement had 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 was 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 five business days of receipt. The obligations of the Borrowers of the Unsecured Credit Agreement were joint and several. The REITs entered into cross-indemnification provisions with respect to their joint and several obligations under the Unsecured Credit Agreement.
On December 29, 2017, in connection with entering into the New Credit Agreement (as such term is defined below), the Operating Partnership and the Company terminated the existing credit facilities. The Operating Partnership repaid in full all amounts outstanding under the existing credit facilities with the proceeds from the New Credit Agreement. No prepayments fees or early termination penalties were incurred in connection with terminating the existing credit facilities.
On December 29, 2017, the Operating Partnership entered into a Credit Agreement (the "New Credit Agreement") with the lenders party thereto (the "Lenders"), KeyBank as administrative agent (the "Administrative Agent"), and KeyBanc Capital Markets as lead arranger. The New Credit Agreement provides for a $50 million senior secured revolving credit facility (the "Revolving Credit Facility"), which consists of a borrowing base revolving credit facility (the "BB Revolving Credit Facility") and a working capital revolving credit facility (the "WC Revolving Credit Facility"). The New Credit Agreement also provides the Operating Partnership with the option to increase the size of the Revolving Credit Facility and/or establish one or more new pari passu term loan facilities (each, a "Term Loan Facility") up to an aggregate commitment or principal amount of up to $350 million, subject to certain limitations. The BB Revolving Credit Facility and any Term Loan Facility mature on January 3, 2021, with two twelve-month extension options subject to certain conditions set forth in the New Credit Agreement, which, if exercised by the Operating Partnership, would extend the maturity date to January 3, 2023. The WC Revolving Credit Facility matures on January 4, 2019, unless earlier terminated by the Operating Partnership.
In connection with our Unsecured Credit Agreement, the Borrowers were required to maintain a minimum liquidity requirement of $2.0 million. The Company maintained compliance to this lender requirement through December 29, 2017, when the amount outstanding under the Unsecured Credit Agreement was paid in full.
In addition, the loan with Bank of America for the MVP Detroit garage requires the Company to maintain $2.3 million in liquidity at all times, which is defined as unencumbered cash and cash equivalents. As of June 21, 2018, the Company was in compliance with this lender requirement.
Borrowings under the New Credit Agreement bear interest at a rate equal to the sum of a Margin (as such term is defined below) plus either a rate based on LIBOR for 1, 2 or 3 months or a base rate determined by reference to the highest of (1) the Administrative Agent's prime lending rate, (2) the federal funds effective rate plus 0.50% and (3) the LIBOR rate that would be payable on such day for a LIBOR rate loan with a one-month interest period plus 1.00%. For the BB Revolving Credit Facility and any Term Loan Facility, the Margin is determined by the consolidated leverage ratio until the Operating Partnership achieves a senior unsecured credit rating of BBB-/Baa3 from S&P or Moody's at which time the Operating Partnership may elect to use an alternative pricing grid. The Margin for the BB Revolving Credit Facility ranges from 0.75% to 1.50% in the case of base rate loans, and 1.75% to 2.50%, in the case of LIBOR rate loans. The Margin for the Term Loan Facility ranges from 0.70% to 1.45%, in the case of base rate loans, and 1.70% to 2.450%, in the case of LIBOR rate loans. The Margin as of the date of effectiveness of the New Credit Agreement is (1) in respect of BB Revolving Credit Facility, 1.50%, in the case of base rate loans, and 2.50%, in the case of LIBOR rate loans, and (2) in respect of any Term Loan Facility, 1.45%, in the case of base rate loans, and 2.45%, in the case of LIBOR rate loans. For the WC Revolving Credit Facility, the Margin is 3.00% in the case of base rate loans, and 4.00% in the case of LIBOR rate loans.
The Company will experience a relative decrease in liquidity as proceeds from its debt or equity financings are used to acquire and operate assets and may experience a temporary, relative increase in liquidity if and when investments are sold, to the extent such sales generate proceeds that are available for additional investments. The Advisor may, but is not required to, establish working capital reserves from proceeds from the Common Stock Offering of cash flow generated by the Company's investments or out of proceeds from the sale of investments. The Company does not anticipate establishing a general working capital reserve; however, the Company may establish capital reserves with respect to particular investments. The Company also may, but is not required to, establish reserves out of cash flow generated by investments or out of net sale proceeds in non-liquidating sale transactions. Working capital reserves are typically utilized to fund tenant improvements, leasing commissions and major capital expenditures. The Company's lenders also may require working capital reserves.
In connection with the Company's New Credit Agreement, the Borrowers are required to maintain a minimum liquidity requirement of $2.0 million or 1.0% of the parking asset value, which was defined as the sum of unencumbered cash and cash equivalents of the Borrowers and their Subsidiaries.
The Company's existing credit agreement also requires the Company to comply with various financial and other covenants. In addition, the failure of Mr. Shustek to be a non-member manager of the Advisor or for the Advisor to continue to manage the Company is an event of default under approximately $71 million of the Company's secured mortgage debt. Please see, for more information, "Risk Factors – Risks Related to Our Financing Strategy – If we breach covenants under our existing credit facility and other indebtedness, we could be held in default under such loans, which could accelerate our repayment date and materially adversely affect our financial condition, results of operations and cash flows."
On June 19, 2018, the Company (as "Guarantor"), the Borrowers and the Lenders entered into an amendment and waiver to the New Credit Agreement. Pursuant to the amendment and waiver, the Lenders agreed to waive the Borrowers' breach of the fixed charge coverage ratio for the period ended March 31, 2018, and the Borrowers' requirement to comply with the fixed charge coverage ratio for the period ended June 30, 2018 and September 30, 2018, and the Guarantor's breach of the financial reporting obligations under the credit agreement for the periods ended December 31, 2017 and March 31, 2018. Pursuant to the amendment and waiver, the Lenders, the Borrowers and the Company (as Guarantor) also agreed to the following, among other changes:
| · | the Fixed Charge Coverage Ratio shall not be less than (i) at any time on or prior to June 30, 2019, 1.35:1.00, and (ii) at any time thereafter, 1.60:1.00; |
| · | the Lenders shall advance approximately $27.4 million to fund the Borrowers' acquisition costs of pending property purchases; |
| · | the Borrowers shall make mandatory principal payments on the WC Revolving Credit Facility in the amounts and at the times scheduled therein; |
| · | the WC Revolving Credit Facility shall be reduced to $16.1 million and the Lenders' obligations to make WC Revolving Loans shall be terminated; |
| · | the Company shall file to list and register its common stock on the New York Stock Exchange or other recognized exchange in the United States by no later than July 31, 2018, obtain approval of such listing application by August 31, 2018 and complete the listing by September 30, 2018; |
| · | the Company shall redeem all of its outstanding Series A and Series 1 preferred stock and pay the entire redemption price in the form of shares of the Company's common stock (as is permitted by the articles supplementary governing each series of preferred stock), within 30 days after the completion of the listing of its common stock on a national securities exchange; |
| · | the Company shall make no cash distributions to its preferred shareholders after the earlier of (i) 30 days after the completion of the public listing or (ii) September 30, 2018; |
| · | the collateral under the existing credit facility shall include certain recently purchased properties and Borrowers shall not be entitled to release any collateral prior to the retirement in full of the WC Revolving Credit Facility; and |
| · | prior to the retirement of the WC Revolving Credit Facility, management fees paid by the Company to the Advisor shall not exceed $200,000 per quarter. |
To the extent that the working capital reserve is insufficient to satisfy the Company's cash requirements, additional funds may be provided from cash generated from operations or through short-term borrowing. In addition, subject to certain exceptions and limitations, the Company may incur indebtedness in connection with the acquisition of any real estate asset, refinance the debt thereon, arrange for the leveraging of any previously unfinanced property or reinvest the proceeds of financing or refinancing in additional properties.
Going Concern Evaluation
In connection with preparing condensed consolidated financial statements for the three months ended March 31, 2018, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company's ability to continue as a going concern within one year from the date that the financial statements are issued.
The Company considered the following:
| · | Net losses of approximately $3.6 million for the three months ended March 31, 2018 and approximately $11.4 million and $4.3 million for the years ended December 31, 2017 and 2016, respectively. |
| · | Negative cash flow from operating activities for 2018, 2017 and 2016. |
Ordinarily, conditions or events that raise substantial doubt about an entity's ability to continue as a going concern relate to the entity's ability to meet its obligations as they become due.
The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements issued by considering the following:
| · | The Company raised approximately $4.4 million and $9.4 million of debt and equity financing, respectively, during the three months ended March 31, 2018 and $142 million and $34 million of debt and equity financing, respectively, during the year ended December 31, 2017. |
| · | The Company has historically raised funds from debt and equity financings. |
| · | As a result of the Company's restructurings that were implemented during the year ended December 31, 2017, the Company's cost structure is now in line with its future revenue projections. |
In addition to the recent capital raised, management also believes that the Company will generate enough cash from operations to satisfy its obligations for the next twelve months from the issuance date.
The Company will take one or more of the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:
| · | Implement additional restructuring and cost reductions. |
| · | Raise additional capital through short-term loans. |
| · | Raise additional capital by placing secured mortgage debt on unencumbered assets. |
| · | Raise additional capital through a private placement. |
| · | Dispose of one or more assets. |
At March 31, 2018, the Company had $4.9 million in cash and cash equivalents.
Management is not aware of any additional material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting the Company's targeted portfolio, the U.S. parking facility industry, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of the Company's assets.
In addition to making investments in accordance with the Company's investment objectives, the Company expects to use its capital resources to make certain payments to the Advisor and the selling agent(s). During the acquisition and development stage, the Company expects to make payments to the Advisor in connection with the selection or purchase of investments, the management of the Company's assets and costs incurred by the Advisor in providing services to us. For a discussion of the compensation to be paid to the Advisor, see"Fees Paid in Connection with the Operations of the Company", included in Note E – Related Party Transactions and Arrangements – Fees Paid in Connection With the Operations of the Company in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for more information. The Amended and Restated Advisory Agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and the Company's board of directors.
Management Compensation Summary
The following table summarizes all compensation and fees incurred by us and paid or payable to the Advisor and its affiliates in connection with the Company's organization operations for the three months ended March 31, 2018 and 2017.
For The Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Acquisition Fees | $ | -- | $ | 1,118,000 | ||||
| Asset Management Fees | 832,000 | 237,000 | ||||||
| Merger Fees | -- | -- | ||||||
| Total | $ | 832,000 | $ | 1,355,000 | ||||
Distributions and Stock Dividends
The Company intends to make regular cash and stock distributions to its common stockholders and cash distributions to its Series A preferred stock and Series 1 preferred stock, typically on a monthly basis. The actual amount and timing of distributions will be determined by the Company's board of directors in its discretion and typically will depend on the amount of funds available for distribution, which is impacted by current and projected cash requirements, tax considerations and other factors. As a result, the Company's distribution rate and payment frequency may vary from time to time and could be reduced from current levels. However, to qualify as a REIT for federal income tax purposes, the Company must make distributions equal to at least 90% of its REIT taxable income each year.
Common Stock
On October 23, 2015, the Company announced that its board of directors has approved a plan for payment of initial monthly cash distributions of $0.0625 per share and monthly stock dividends $0.0625 per share, based on a purchase price of $25.00 per common share, commencing after the Company breaks escrow upon receiving subscriptions for the minimum offering amount of $2 million. The initial cash distribution and stock dividend were paid on February 10, 2016 to stockholders of record as of January 24, 2016. The initial cash distributions were paid from offering proceeds rather than funds from operations and therefore may represent a return of capital. There can be no assurance that distributions and dividends will continue to be paid at this rate. The Company's board of directors may at any time change the distribution and dividend rate or suspend payment of distributions and dividends if it determines that such action is in the best interest of the Company and its stockholders. The Company expects that its board of directors will continue to authorize, and it will declare, distributions based on a record date on the 24th of each month, and it expects to continue to pay distributions on the 10th day of the following month (or the next business day if the 10th is not a business day), monthly in arrears. The Company has not established a minimum distribution level, and its charter does not require that it make distributions to its stockholders; however, the Company anticipates the payment of monthly distributions. The Company may also make special stock dividends.
From inception through March 31, 2018, the Company had paid approximately $1.8 million in cash, issued 83,437 shares of its common stock as DRIP and issued 153,827 shares of its common stock as dividend in distributions to the Company's stockholders. All of the cash distributions were paid from offering proceeds and constituted a return of capital. The Company's total distributions paid for the period presented, the sources of such distributions, the cash flows provided by (used in) operations and the number of shares of common stock issued pursuant to the Company's DRIP are detailed below. On March 22, 2018 the Company suspended payment of distributions and as such there are currently no distributions to invest in the DRIP.
To date, all distributions were paid from offering proceeds and therefore may represent a return of capital.
| Distributions Paid in Cash | Distributions Paid through DRIP | Total Distributions Paid | Cash Flows Used in Operations (GAAP basis) | |||||||||||||
1st Quarter, 2018 | $ | 806,000 | $ | 418,000 | $ | 1,224,000 | $ | (1,015,000 | ) | |||||||
| Total 2018 | $ | 806,000 | $ | 418,000 | $ | 1,224,000 | $ | (1,015,000 | ) | |||||||
| Distributions Paid in Cash | Distributions Paid through DRIP | Total Distributions Paid | Cash Flows Used in Operations (GAAP basis) | |||||||||||||
1st Quarter, 2017 | $ | 161,000 | $ | 285,000 | $ | 446,000 | $ | (2,647,000 | ) | |||||||
2nd Quarter, 2017 | 168,000 | 306,000 | 474,000 | (296,000 | ) | |||||||||||
3rd Quarter, 2017 | 172,000 | 309,000 | 481,000 | (1,753,000 | ) | |||||||||||
4th Quarter, 2017 | 178,000 | 310,000 | 488,000 | (6,518,000 | ) | |||||||||||
| Total 2017 | $ | 679,000 | $ | 1,210,000 | $ | 1,889,000 | $ | (11,214,000 | ) | |||||||
Preferred Series A Stock
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, on October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock. The Company commenced the private placement of the Shares to accredited investors on November 1, 2016 and closed the offering on March 24, 2017. The Company raised approximately $2.5 million, net of offering costs, in the Series A private placements.
The offering price was $1,000 per share. In addition, each investor in the Series A received, for every $1,000 in shares subscribed by such investor, 30 detachable warrants to purchase shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of July 13, 2018, there were 84,510 detachable warrants that may be exercised after the 90th day following the occurrence of a listing event. These warrants will expire five years from the 90th day after the occurrence of a listing event.
For additional information see Note N — Preferred Stock and Warrants in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
From inception through March 31, 2018, the Company had declared and paid approximately $185,000 and $170,000, respectively, in distributions for Series A stockholders.
Total Series A Distributions Paid | Cash Flows Used in Operations (GAAP basis) | |||||||
1st Quarter, 2018 | $ | 41,000 | $ | (1,015,000 | ) | |||
| Total 2018 | $ | 41,000 | $ | (1,015,000 | ) | |||
Total Series A Distributions Paid | Cash Flows Used in Operations (GAAP basis) | |||||||
1st Quarter, 2017 | $ | 5,000 | $ | (2,647,000 | ) | |||
2nd Quarter, 2017 | 41,000 | (296,000 | ) | |||||
3rd Quarter, 2017 | 41,000 | (1,753,000 | ) | |||||
4th Quarter, 2017 | 41,000 | (6,518,000 | ) | |||||
| Total 2017 | $ | 128,000 | $ | (11,214,000 | ) | |||
Preferred Series 1 Stock
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017, the Company commenced the Regulation D 506(b) private placement of shares of Series 1, together with warrants to acquire the Company's common stock, to accredited investors. On January 31, 2018, the Company closed this offering. As of July 13, 2018, the Company had raised approximately $36.0 million, net of offering costs, in the Series 1 private placements and had 39,811 shares of Series 1 issued and outstanding.
The offering price is $1,000 per share. In addition, each investor in the Series 1 will receive, for every $1,000 in shares subscribed by such investor, 35 detachable warrants to purchase shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of July 13, 2018, there were 1,382,675 detachable warrants that may be exercised after the 90th day following the occurrence of a listing event. These warrants will expire five years from the 90th day after the occurrence of a listing event.
For additional information see Note N — Preferred Stock and Warrants in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
From inception through March 31, 2018, the Company had declared and paid approximately $1,042,000 and $858,000, respectively, in distributions for Series 1 stockholders.
Total Series 1 Distributions Paid | Cash Flows Used in Operations (GAAP basis) | |||||||
1st Quarter, 2018 | $ | 477,000 | $ | (1,015,000 | ) | |||
| Total 2018 | $ | 477,000 | $ | (1,015,000 | ) | |||
Total Series 1 Distributions Paid | Cash Flows Used in Operations (GAAP basis) | |||||||
1st Quarter, 2017 | $ | -- | $ | (2,647,000 | ) | |||
2nd Quarter, 2017 | 14,000 | (296,000 | ) | |||||
3rd Quarter, 2017 | 98,000 | (1,753,000 | ) | |||||
4th Quarter, 2017 | 268,000 | (6,518,000 | ) | |||||
| Total 2017 | $ | 380,000 | $ | (11,214,000 | ) | |||
The Company may not generate sufficient cash flow from operations to fully fund distributions. All or a portion of the distributions may be paid from other sources, such as cash flows from equity offerings, financing activities, borrowings, cash advances from the Advisor, or by way of waiver or deferral of fees. The Company has not established any limit on the extent to which distributions could be funded from these other sources. Accordingly, the amount of distributions paid may not reflect current cash flow from operations and distributions may include a return of capital, rather than a return on capital. If the Company continues to pay distributions from sources other than cash flow from operations, the funds available to the Company for investments would be reduced and the share value may be diluted. The level of distributions will be determined by the board of directors and depend on a number of factors including current and projected liquidity requirements, anticipated operating cash flows and tax considerations, and other relevant items deemed applicable by the board of directors.
Related-Party Transactions and Arrangements
The Company has entered into agreements with affiliates of its Sponsor, whereby the Company will pay certain fees or reimbursements to the Advisor or its affiliates in connection with, among other things, acquisition and financing activities, asset management services and reimbursement of operating and offering related costs. For additional information see Note E — Related Party Transactions and Arrangements in in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
On November 5, 2016, the Company purchased 338,409 shares of MVP I's common stock from an unrelated third party for $3.0 million or $8.865 per share. During the three months ended March 31, 2017, the Company received approximately $52,000, in stock distributions, related to the Company's ownership of MVP I common stock. At the effective time of the Merger, 174,026 shares of MVP I Common Stock held by the Company was retired.
Inflation
The Company expects to include provisions in its tenant leases designed to protect the Company from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market.
Income Taxes
The Company is organized and conducts operations to qualify as a REIT under Sections 856 to 860 of the Code and to comply with the provisions of the Code with respect thereto. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income, which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed and provided that certain other requirements are met. Our REIT taxable income may substantially exceed or be less than our net income as determined based on GAAP because differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.
If the Company does not qualify as a REIT for the tax year ended December 31, 2017, it 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 the Company believes that it is more likely than not that it 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, 2017, the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets, and thus a valuation allowance should be recorded against its net deferred tax assets.
The Company will be electing to be treated as a REIT for the tax year beginning January 1, 2017 and ending December 31, 2017 and believes that it has been organized and has operated during 2017 in such a manner to meet the qualifications to be treated as a REIT for federal and state income tax purposes. During 2016, the Company was subject to U.S. federal and state income taxes and filed income tax returns as a C corporation. As such, the Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company uses a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. The Company believes that its income tax filing positions and deductions would be sustained upon examination; thus, the Company has not recorded any uncertain tax positions as of December 31, 2017.
A full valuation allowance for deferred tax assets was provided since the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets. A change in circumstances may cause the Company to change its judgment about whether deferred tax assets will more likely than not be realized. The Company would generally report any change in the valuation allowance through its income statement in the period in which such changes in circumstances occur.
As a REIT, the Company will generally not be subject to corporate level federal income taxes on earnings distributed to our stockholders, and therefore may not realize deferred tax assets arising during the Company's pre-2017 periods before the Company became a REIT. The Company intends to distribute at least 100% of its taxable income annually and intends to do so for the tax year ending December 31, 2017 and future periods. The Company owns and rents real estate in various states and municipalities within the United States, and, as a result, the Company or one or more of its subsidiaries may have income or other tax return filing requirements, and may be subject to income or franchise taxes, in state and municipal jurisdictions.
The Company has a net deferred tax asset of $1.6 million which is subject to a full valuation allowance and thus is not recorded on the Company's balance sheet. The deferred tax asset is primarily made up of net operating losses and capitalized acquisition costs which are deducted for book but capitalized for tax purposes. If the Company makes a REIT election, the net operating losses will not be available to offset future income; however, they may be used to offset any built-in gains. Due to the valuation allowance, the Company's effective rate is approximately 0%.
REIT Compliance
The Company intends to qualify as a REIT for federal income tax purposes for the year ended December 31, 2017, and therefore the Company generally will not be subject to federal income tax on income that the Company distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, including and after the taxable year in which the Company initially elects to be taxed as a REIT, the Company will be subject to federal income tax on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is denied. Failing to qualify as a REIT could materially and adversely affect the Company's net income.
To qualify as a REIT for tax purposes, the Company will be required to distribute at least 90% of its REIT taxable income to the Company's stockholders. The Company must also meet certain asset and income tests, as well as other requirements. The Company will monitor the business and transactions that may potentially impact the Company's REIT status. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on the taxable income at regular corporate rates.
Off-Balance Sheet Arrangements
Series A Preferred Stock
Each investor in the Series A received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 30 shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of March 31, 2018, there were detachable warrants that may be exercised for 84,510 shares of the Company's common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at March 31, 2018 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, gross proceeds to us would be approximately $2.1 million and we would as a result issue an additional 84,510 shares of common stock.
For additional information see "— Liquidity and Capital Resources" and "—Preferred Series A Stock" above and Note N — Preferred Stock and Warrants in in Part I, Item 1 - Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
Series 1 Preferred Stock
Each investor in the Series 1 received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 35 shares of the Company's common stock if the Company's common stock is listed on a national securities exchange. The warrants' exercise price is equal to 110% of the volume weighted average closing stock price of the Company's common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of March 31, 2018, there were detachable warrants that may be exercised for approximately 1,382,675 shares of the Company's common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at March 31, 2018 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, we would issue an additional 1,382,675 shares of common stock and would receive gross proceeds of approximately $34.6 million.
For additional information see "— Liquidity and Capital Resources" and "—Preferred Series A Stock" above and Note N — Preferred Stock and Warrants in in Part I, Item 1 - Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
Critical Accounting Policies
The Company's accounting policies have been established in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management's judgment or interpretation of the facts and circumstances relating to various transactions is different, it is possible that different accounting policies will be applied, or different amounts of assets, liabilities, revenues and expenses will be recorded, resulting in a different presentation of the financial statements or different amounts reported in the financial statements.
Additionally, other companies may utilize different estimates that may impact comparability of the Company's results of operations to those of companies in similar businesses. Below is a discussion of the accounting policies that management considers to be most critical once the Company commences significant operations. These policies require complex judgment in their application or estimates about matters that are inherently uncertain.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
The Company is required to make subjective assessments as to the useful lives of the Company's properties for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company's investments in real estate. These assessments have a direct impact on the Company's net income because if the Company were to shorten the expected useful lives of the Company's investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
The Company is required to present the operations related to properties that have been sold, or properties that are intended to be sold, as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as "held for sale" on the balance sheet.
Purchase Price Allocation
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company'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 the Company's 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 pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Deferred Costs
Deferred costs may consist of deferred financing costs, deferred offering costs and deferred leasing costs. Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Contractual Obligations
As of March 31, 2018, our contractual obligations consisted of the mortgage notes secured by our acquired properties and the Revolving Credit Facilities:
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Long-term debt obligations | $ | 125,187,000 | $ | 1,446,000 | $ | 8,160,000 | $ | 4,964,000 | $ | 110,617,000 | ||||||||||
| Lines of credit: | -- | -- | -- | -- | -- | |||||||||||||||
| Interest | -- | -- | -- | -- | -- | |||||||||||||||
| Principal | 23,717,000 | 23,717,000 | -- | -- | -- | |||||||||||||||
| Total | $ | 148,904,000 | $ | 25,163,000 | $ | 8,160,000 | $ | 4,964,000 | $ | 110,617,000 | ||||||||||
Contractual obligations table amount does not reflect events that may have occurred subsequentthe unamortized loan issuance costs of approximately $1.8 million for notes payable and approximately $0.7 million for the line of credit as of March 31, 2018.
Subsequent Events
See Note O — Subsequent Events in Part I, Item 1 - Notes to the originalCondensed Consolidated Financial Statements of this Quarterly Report for a discussion of the various subsequent events.
Not required for a smaller reporting company.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Interim Chief Financial Officer have evaluated the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective, notwithstanding the fact that the Company was late in filing date,its annual report on Form 10-K for the year ended December 31, 2017 and exceptits quarterly report on Form 10-Q for the quarter ended March 31, 2018. The Company attributes the delays in the filing of these reports to the internal investigation conducted by the Audit Committee of the Company's board of directors as provided herein with respect to Exhibits 31.1 and 31.2, does not modify or update in any way disclosures madefurther described in the Form 10-Q.12b-25 and Form 8-K filed by the Company on April 13, 2018 and May 3, 2018, and not to any deficiencies in the Company's disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. As previously disclosed, the Audit Committee's investigation of possible wrongdoing, which concluded on April 27, 2018, did not involve the Company's financial statements or accounting procedures.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the first quarter of 2018, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting.
During the Company's two most recent fiscal years ended December 31, 2016 and 2017 and the period from January 1, 2018 through July 13, 2018, the Company did not consult with RBSM on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company's consolidated financial statements, and RBSM did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) any matter that was the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
None.
From time to time in the ordinary course of business, the Company or its subsidiaries may become subject to legal proceedings, claims or disputes. As of July 13, 2018, neither the Company nor any of its subsidiaries was a party to any material pending legal proceedings.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.
Recent Sales of Unregistered Securities
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017, the Company commenced the private placement of shares of Series 1, and warrants to acquire the Company's common stock, to accredited investors. During the first quarter of 2018, the Company had raised approximately $9.1 million, net of offering costs, in the Series 1 private placements and had issued 10,022 Series 1 shares and warrants to acquire 346,920 shares of its common stock issued and outstanding.
The Series 1 preferred stock and warrants have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Company is relying on the private placement exemption from registration provided by Section 4(a)(2) of the Securities Act and by Rule 506(b) of Regulation D promulgated thereunder by the SEC. The Company has filed file a Form D with the SEC in accordance with the requirements of Regulation D.
On January 31, 2018 the Company closed the Series 1 offering.
Use of Offering Proceeds
On October 22, 2015, the Company's registration statement on Form S-11 (No. 333-205893) registering a public offering of up to $550,000,000 in shares of the Company's common stock was declared effective under the Securities Act, and the Company commenced the Common Stock Offering. The Company offered up to 20,000,000 shares of its common stock to the public in the Common Stock Offering at $25.00 per share and continues to offer up to 2,000,000 shares of its common stock pursuant to the distribution reinvestment plan at $25.00 per share. The Company entered into selling agreements with AMS and other non-affiliated selling agents to distribute shares of the Company's common stock to its clients. As of December 31, 2016, the Company ceased all selling efforts for the Common Stock Offering but accepted additional subscriptions through March 31, 2017.
As of July 13, 2018, the Company had 6,550,200 shares of common stock issued and outstanding, 2,862 shares of preferred Series A stock outstanding and 39,811 shares of preferred Series 1 stock outstanding for total gross proceeds of approximately $202.2 million, less offering costs.
The following is a table of summary of offering proceeds from inception through March 31, 2018:
| Type | Number of Shares Preferred | Number of Shares Common | Value | |||||||||
| Issuance of common stock | -- | 2,451,237 | $ | 61,281,000 | ||||||||
| Redeemed Shares | -- | (7,636 | ) | (191,000 | ) | |||||||
| DRIP shares | -- | 83,437 | 2,062,000 | |||||||||
| Issuance of Series A preferred stock | 2,862 | -- | 2,544,000 | |||||||||
| Issuance of Series 1 preferred stock | 39,811 | -- | 35,982,000 | |||||||||
| Dividend shares | -- | 153,827 | 3,845,000 | |||||||||
| Distributions | -- | -- | (5,071,000 | ) | ||||||||
| Deferred offering costs | -- | -- | (1,086,000 | ) | ||||||||
| Contribution from Advisor | -- | -- | 1,147,000 | |||||||||
| Shares added for Merger | -- | 3,887,513 | 85,701,000 | |||||||||
| Total | 42,673 | 6,568,378 | $ | 186,214,000 | ||||||||
From October 22, 2015 through March 31, 2018, the Company incurred organization and offering costs in connection with the issuance and distribution of the registered securities of approximately $1.1 million, which were paid to unrelated parties by the Sponsor. From October 22, 2015 through March 31, 2018, the net proceeds to the Company from its offerings, after deducting the total expenses and deferred offering costs incurred and paid by the Company as described above, were $186.2 million. A majority of these proceeds were used, along with other sources of debt financing, to make investments in parking facilities, and the Company's portion of the total purchase price for these parking facilities was approximately $299.0 million, which includes its $2.8 million investment in the DST. In addition, a portion of these proceeds were used to make cash distributions of approximately $1.8 million to the Company's stockholders. The ratio of the costs of raising capital to the capital raised is approximately 0.58%.
Share Repurchase Program
On February 7, 2018, the Company filed a Current Report on Form 8-K stating that the board of directors has determined that the Merger and the issuance of the Company's common stock as consideration for the Merger qualifies as an involuntary exigent circumstance under the SRP. As a result, shares of common stock that, when combined with the holding period of the related MVP I Common Stock, have been held for the Two-Year Holding Period (as such term is defined in the SRP), are eligible to participate in the SRP subject to the other requirements and limitations of the SRP. In addition, the issuance date for any shares of MVP I Common Stock issued pursuant to the MVP REIT, Inc. Distribution Reinvestment Plan shall be deemed to be the same date as the issuance of the shares of MVP I Common Stock to which such shares relate.
On May 29, 2018 the Company filed a Current Report on Form 8-K stating that the Company's board of directors suspended its SRP, other than for repurchases in connection with a shareholder's death. In accordance with the SRP, the suspension of the SRP will take effect on June 28, 2018 which is 30 days after the date of the Form 8-K providing notice of the suspension. The Company plans to utilize the cash savings to further its business operations. The Company's Board of Directors may in the future reinstate the SRP, although there is no assurance as to if or when this will happen.
As of the date of this filing, 25,815 shares have been redeemed.
Not applicable
Not applicable
During the first quarter of 2018, the Company is not aware of any information that was required to be disclosed in a report on Form 8-K that was not disclosed in a report on Form 8-K.
| Exhibit No. | Description |
| 3.1(1) | Articles of Amendment and Restatement of MVP REIT II, Inc. |
| 3.2(2) | Articles of Amendment t of MVP REIT II, Inc. |
| 3.3(3) | Bylaws of MVP REIT II, Inc. |
| 3.4(4) | Articles Supplementary of MVP REIT II, Inc., designating 50,000 shares of Series A Convertible Redeemable Preferred Stock |
| 3.4(5) | Articles Supplementary of MVP REIT II, Inc., designating 97,000 shares of Series 1 Convertible Redeemable Preferred Stock |
| 4.1(6) | Form of Subscription Agreement |
| 4.2(7) | Distribution Reinvestment Plan |
| 4.3(8) | Amended and Restated Escrow Agreement, dated October 5, 2015, between MVP REIT II, Inc. and UMB Bank, N.A. |
| 4.4(9) | Second Amended and Restated Escrow Agreement, dated November 30, 2015, by and among MVP REIT II, Inc., MVP American Securities, LLC, and UMB Bank, N.A. |
| 4.5(4) | Form of warrants to acquire the Company's common stock |
| 10.1(10) | First Amendment to Credit Agreement and Omnibus Amendment to Loan Documents, dated as of May 9, 2018, by and among MVP REIT II Operating Partnership, LP, The Parking REIT, Inc., the lenders party thereto, and KeyBank, National Association |
| 10.2(10) | Second Amendment to Credit Agreement and Omnibus Amendment to Loan Documents, dated as of June 21, 2018, by and among MVP REIT II Operating Partnership, LP, The Parking REIT, Inc., the lenders party thereto, and KeyBank, National Association |
| 31.1(*) | Certification of Chief Executive Officer pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2(*) | Certification of Chief Financial Officer pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32(*) | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101(*) | The following materials from the Company's Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language (i) Balance Sheets; (ii) Statements of Operations; (iii) Statement of Stockholder's Equity; (iv) Statements of Cash Flows; and (v) Notes to Financial Statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
| * | Filed concurrently herewith. |
(Exhibits continued)
| (1) | Filed previously with Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 on September 24, 2015, and incorporated herein by reference. |
| (2) | Filed previously on Form 8-K on December 18, 2018 and incorporated herein by reference. |
| (3) | Filed previously with the Registration Statement on Form S-11 on July 28, 2015, and incorporated herein by reference. |
| (4) | Filed previously on Form 8-K on October 27, 2016 and incorporated herein by reference. |
| (5) | Filed previously on Form 8-K on March 30, 2017 and incorporated herein by reference. |
| (6) | Filed previously as Exhibit A to Supplement No. 1 to the Registrant's prospectus filed December 3, 2015, and incorporated herein by reference. |
| (7) | Filed previously as Appendix D to the Registrant's prospectus filed October 23, 2015, and incorporated herein by reference. |
| (8) | Filed previously with Pre-Effective Amendment No. 3 to the Registration Statement on Form S-11 on October 6, 2015, and incorporated herein by reference. |
| (9) | Filed previously on Form 8-K on December 3, 2015, and incorporated herein by reference. |
| (10) | Filed previously on Form 8-K on June 22, 2018 and incorporated herein by reference. |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| By: | /s/ Michael V. Shustek | |
| Michael V. Shustek | ||
| Chief Executive Officer and President | ||
| Date: | ||
| By: | /s/ | |
| Interim Chief Financial Officer | ||
| Date: | ||