Lease Acquired by Security Land
and Development Corporation
Report on Historical Summary
For the period from January 1 through December 19, 2018
and the year ended December 31, 2017
Lease Acquired by Security Land and Development Corporation
Contents
Page | |
Independent Auditor's Report. | 1-2 |
Historical Summary | |
Statements of Revenues and Certain Expenses | 3 |
Notes to Historical Summary | 4-5 |
Independent Auditor's Report
To the Board of Directors and
Stockholders of Security Land and Development Corporation
Augusta, Georgia
Report on the Historical Summary
We have audited the accompanying statements of revenue and certain expenses (the "historical summary") of the lease acquired by Security Land and Development Corporation from USPG Portfolio Two, LLC (the "Property") for the period from January 1 through December 19, 2018 and the year ended December 31, 2017, and the related notes to the historical summary.
Management's Responsibility for the Historical Summary
Management is responsible for the preparation and fair presentation of the historical summary in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of a historical summary that is free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on the historical summary based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the historical summary is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the historical summary. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the historical summary, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the historical summary in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the historical summary.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the historical summary referred to above presents fairly, in all material respects, the revenues and certain expenses described in Note 1 to the historical summary of the lease acquired by Security Land and Development Corporation for the period from January 1 through December 19, 2018 and the year ended December 31, 2017, in accordance with accounting principles generally accepted in the United States of America.
Basis of Presentation
As described in Note 1 to the historical summary, the accompanying historical summary was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in Form 8-K of Registrant) and is not intended to be a complete presentation of the Property's revenues and expenses. Our opinion is not modified with respect to this matter.
Augusta, Georgia
March 7, 2019
2
Lease Acquired by Security Land and Development Corporation
Statements of Revenues and Certain Expenses
For the year ended December 31, 2017 and the period from January 1 through December 19, 2018
Revenues | January 1, | For the |
|
| |
Rental revenue | $ 784,486 | $ 810,636 |
Common area maintenance revenue | 147,194 | 149,685 |
Total revenues | 931,680 | 960,321 |
Certain expenses |
|
|
Management fee | 31,379 | 32,425 |
Property taxes | 147,194 | 149,685 |
Bank fee allocation | 2,887 | 4,063 |
Total certain expenses | 181,460 | 186,173 |
Revenues in excess of expenses | $ 750,220 | $ 774,148 |
See Notes to Financial Statements
3
Lease Acquired by Security Land and Development Corporation
Notes to the Historical Summary
For the period from January 1 through December 19, 2018 and the year ended December 31, 2017
Note 1. Basis of Presentation
The accompanying statements of revenues and certain expenses include the operations of the lease acquired by Security Land and Development Corporation from USPG Portfolio Two, LLC (the "Property"), a ground lease.
The accompanying statements of revenues and certain expenses relate to the Property and have been prepared for the purpose of complying with Rule 3-14 of Regulation S-X promulgated under the Securities Act of 1933, as amended. Accordingly, the statements are not representative of the actual operations for the periods presented as revenues and certain operating expenses, which may not be directly attributable to the revenues and expenses expected to be incurred in the future operations of the Property, have been excluded. Such items include depreciation and amortization.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-2, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases. This ASU significantly changes the accounting for leases by requiring lessees to recognize assets and liabilities for leases greater than 12 months on their balance sheet. The lessor model stays substantially the same; however, there were modifications to conform lessor accounting with the lessee model, eliminate real estate specific guidance, further define certain lease and non-lease components, and change the definition of initial direct costs of leases requiring significantly more leasing related costs to be expensed upfront.
Note 2. Summary of Significant Accounting Policies
Revenue recognition:
The Property recognizes rental revenue from the tenant on a straight-line basis over the lease term when collectability is reasonably assured and the tenant controls the physical use of the leased asset.
Tenant recoveries related to reimbursement of real estate taxes are recognized as revenue in the period the applicable expenses are incurred. The reimbursements are recognized and presented gross, as the Property is the primary obligor with respect to real estate taxes and bears the associated credit risk.
Use of estimates:
Management has made estimates and assumptions relating to the reporting and disclosure of revenues and certain expenses during the reporting periods to present the statements of revenues and certain expenses in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). Actual results could differ from those estimates.
4
Lease Acquired by Security Land and Development Corporation
Notes to the Historical Summary
For the period from January 1 through December 19, 2018 and the year ended December 31, 2017
Note 3. Minimum Future Lease Rentals
There is a lease agreement in place with the tenant to lease space in the Property. The current lease term expires in 2028; however, the lease allows for sixteen five year extensions. As of December 19, 2018, the minimum future cash rents receivable under the ground lease in each of the next five years and thereafter are as follows (unaudited):
2019 | $ 810,636 |
2020 | 810,636 |
2021 | 810,636 |
2022 | 810,636 |
2023 | 810,636 |
Thereafter | 3,512,756 |
| $ 7,565,936 |
The lease requires the tenant to pay all real estate taxes, insurance, and other operating expenses related to the property.
Note 4. Tenant Concentrations
For the period from December 1 through December 19, 2018 and the year ended December 31, 2017, one tenant represented 100%, of the Property's rental revenues.
Note 5. Commitments and Contingencies
The Property is subject to various legal proceedings and claims that arise in the ordinary course of business. Management is not currently aware of any legal proceedings.
Note 6. Subsequent Events
Management evaluated subsequent events through March 7, 2019, the date the financial statements were available to be issued.
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Lease Acquired by Security Land
and Development Corporation
Unaudited Pro Forma Combined Financial Information
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined consolidated financial information and accompanying notes showing the impact on the historical financial conditions and results of operations of Security Land and Development Corporation and the property and lease acquired by Security Land and Development Corporation and sale of the property and lease been prepared to illustrate the effects of the these transactions.
The unaudited pro forma combined statement of operations for the year ended September 30, 2018 is presented as if the acquisition and disposition had occurred on October 1, 2017 and the pro forma statement of operations for the three months ended December 31, 2018 is presented as if the acquisition and disposition had occurred on October 1, 2017. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the acquisition and disposition and, with respect to the income statement only, expected to have a continuing impact on consolidated results of operations, as such, one-time acquisition costs are not included.
The unaudited pro forma combined consolidated financial statement is provided for informational purposes only. The unaudited pro forma combined consolidated financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the acquisition and disposition been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma combined consolidated financial statement and related adjustments required management to make certain assumptions and estimates. The unaudited pro forma combined consolidated financial statements should be read together with:
the accompanying notes to the unaudited pro forma combined consolidated financial statement;
the Company's audited financial statements and accompanying notes as of and for the twelve months ended September 30, 2018;
the Company's Quarterly Report on Form 10-Q for the three months ended December 31, 2018;
the Report on Historical Summary of the Lease acquired by Security Land and Development Corporation for the period from January 1 through December 19, 2018 and the year ended December 31, 2017.
Security Land and Development Corporation
Unaudited Pro Forma Balance Sheet
As of December 31, 2018
Current assets | December 31, |
| |
Cash | $ 3,030,268 |
Receivables from tenants, net | 261,403 |
Total current assets | 3,291,671 |
Investment properties |
|
Investment properties for lease, net of accumulated depreciation | 19,226,807 |
Land and improvements held for investment or development | 3,478,868 |
Total investment properties | 22,705,675 |
Total assets | $ 25,997,346 |
Current liabilities |
|
Accounts payable and accrued expenses | $ 244,554 |
Income taxes payable | 1,587,250 |
Current maturities of notes payable | 134,987 |
Total current liabilities | 1,966,791 |
Long-term liabilities |
|
Notes payable, less current portion and deferred financing cost | 1,260,692 |
Deferred income taxes | 4,071,161 |
Total long-term liabilities | 5,331,853 |
Total liabilities | 7,298,644 |
Stockholders' equity |
|
Common stock | 376,629 |
Retained earnings | 18,322,073 |
Total stockholders' equity | 18,698,702 |
Total liabilities and stockholders' equity | $ 25,997,346 |
See Notes to Financial Statements
2
Security Land and Development Corporation
Unaudited Pro Forma Statements of Operations
For the year ended September 30, 2018
Operating Revenue | Security Land | WSQ, LLC | USPG | Adjustments | Notes | Pro Forma |
|
|
|
|
|
| |
Rent revenue | $�� 1,758,920 | $ 938,352 | $ 960,321 | $ - | (a) | $ 1,780,889 |
Operating Expenses |
|
|
|
|
|
|
Depreciation and amortization | 198,665 | 169,563 | - | - | (b) | 29,102 |
Property taxes | 282,651 | 89,339 | 149,685 | - | (c) | 342,997 |
Payroll and related costs | 141,455 | - | - | - |
| 141,455 |
Insurance and utilities | 67,776 | 40,266 | - | - | (d) | 27,510 |
Repairs and maintenance | 51,579 | 48,009 | - | - | (e) | 3,570 |
Professional services | 80,073 | 981 | - | - |
| 79,092 |
Bad debt expense | 1,960 | 1,960 | - | - | (f) | - |
Other | 6,314 | - | - | - |
| 6,314 |
Total operating expenses | 830,473 | 350,118 | 149,685 | - |
| 630,040 |
Interest expense | 222,504 | 133,765 | - | - | (g) | 88,739 |
Income tax provision (benefit) |
|
|
|
|
|
|
Income tax expense | 241,522 | - | - | 66,008 | (h) | 307,530 |
Income tax deferred expense (benefit) | (356,991) | - | - | (1,111,192) | (h) | (1,468,183) |
Total income tax expense (benefit) | (115,469) | - | - | (1,045,184) |
| (1,160,653) |
Net income | $ 821,412 | $ 454,469 | $ 810,636 | $ 1,045,184 |
| $ 2,222,763 |
See Notes to Financial Statements
3
Security Land and Development Corporation
Unaudited Pro Forma Statements of Operations
For the three months ended December 31, 2018
Operating Revenue | Security Land | WSQ, LLC | USPG | Adjustments | Notes | Pro Forma |
|
|
|
|
|
| |
Rent revenue | $ 393,886 | $ 155,255 | $ 240,080 | $ - | (a) | $ 478,711 |
Operating Expenses |
|
|
|
|
|
|
Depreciation and amortization | 78,987 | 33,760 | - | - | (b) | 45,227 |
Property taxes | 58,281 | 22,335 | 37,421 | - | (c) | 73,367 |
Payroll and related costs | 828,296 | 787,500 | - | - | (i) | 40,796 |
Insurance and utilities | (4,120) | (8,287) | - | - | (d) | 4,167 |
Repairs and maintenance | 8,552 | 7,252 | - | - | (e) | 1,300 |
Professional services | 78,643 | 30,643 | - | - | (k) | 48,000 |
Bad debt expense | 1,949 | 1,949 | - | - | (f) | - |
Other | 41,909 | 41,000 | - | - | (l) | 909 |
Total operating expenses | 1,092,497 | 916,152 | 37,421 | - |
| 213,766 |
Interest expense | (46,090) | (27,801) | - | - | (g) | (18,289) |
Gain on Sale | 18,367,269 | 18,367,269 | - | - | (j) | - |
Income tax provision (benefit) |
|
|
|
|
|
|
Income tax expense | 1,511,620 | - | - | (1,432,455) | (h) | 79,165 |
Income tax deferred expense (benefit) | 3,064,910 | - | - | (3,557,947) | (h) | (493,037) |
Total income tax expense (benefit) | 4,576,530 | - | - | (4,990,402) |
| (413,872) |
Net income | $ 13,046,038 | $ 17,578,571 | $ 202,659 | $ 4,990,402 |
| $ 660,528 |
See Notes to Financial Statements
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Security Land and Development Corporation Pro Forma Financial Statements
Notes to the Pro Forma Financial Statements (unaudited)
For the quarter ended December 31, 2018 and the year ended September 30, 2018
Note 1. Basis of Presentation
The unaudited pro forma condensed combined financial statements are based on Security Land and Development Corporation's (the "Company") historical consolidated financial statements as adjusted to give effect to the acquisition of a property and ground lease from USPG Portfolio Two, LLC and the disposition of a property to WSQ, LLC. The unaudited pro forma combined statements of operations for the three months ended December 31, 2018 and the 12 months ended September 30, 2018 give effect to the USPG Portfolio Two, LLC acquisition and WSQ, LLC disposition as if they had occurred on October 1, 2017. The unaudited pro forma combined balance sheet as of December 31, 2018 gives effect to the USPG Portfolio Two, LLC acquisition and WSQ, LLC disposition which occurred prior to the balance sheet date.
Note 2. Preliminary Purchase Price Allocation
Disposition:
On June 27, 2018, the Company entered into an agreement with WSQ, LLC, a Georgia Limited Liability Company, for the sale of a retail strip center along with two adjoining outparcels, located on Washington Road in Augusta, Georgia for a combined total sales price of $21,000,000. The closing of the sale occurred on December 13, 2018, and the Company recognized a gain on the sale of $18,367,269.
Acquisiton:
On December 20, 2018, the Company purchased a tract of land, consisting of 19.32 acres, and a ground lease with a major discount retailer and building owned by the retailer for $15,044,916 using proceeds from the sale of the above noted disposition to fund the purchase, including $44,916 in transaction costs. The ground lease commenced on November 21, 2005 and the initial term expires on May 1, 2028. The Company's management has made an estimated allocation of the purchase price, assigning $4,358,453 to land and $10,686,463 to the ground lease until an appraisal can be completed during the quarter ended March 31, 2019. Once the independent appraisal is completed the asset allocations may be adjusted based on the appraised allocations and adjustments could be material. The Company's management has preliminarily assumed the useful life of the lease should coincide with the remaining lease term, which is approximately 112 months, and has recorded amortization expense accordingly. The useful life and accumulated amortization will be adjusted accordingly per the appraisal, once complete, if necessary.
Note 3. Pro Forma Adjustments
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:
Adjustments to the pro forma condensed statements of operations
(a) Reflects the rent revenue and common area maintenance revenue from the disposed and acquired properties based on the respective lease agreements.
(b) Reflects depreciation on the building sold and amortization of loan costs associated with debt retired as part of the disposition. No such expense on the acquired property as it is a ground lease and no debt was taken out as part of the acquisition.
5
Security Land and Development Corporation Pro Forma Financial Statements
Notes to the Pro Forma Financial Statements (unaudited)
For the quarter ended December 31, 2018 and the year ended September 30, 2018
Note 3. Pro Forma Adjustments, Continued
(c) Reflects property taxes paid on the respective properties.
(d) Reflects insurance paid on the property as well as utilities and other expenses paid. No adjustment was made to general insurance and no specific insurance taken out for the acquired property as it is a ground lease.
(e) Reflects repairs and maintenance expense on the property. No such expense on the acquired property as it is a ground lease.
(f) Bad debt expense related to tenants in the property that was sold.
(g) Debt on this property was retired with funds from the disposition.
(h) The tax adjustment related to deferred tax liabilities as a result of the transaction. During the periods reported, enacted tax reform favorably impacted the future tax rate of the reversal of the deferred tax liability resulted in a deferred income tax benefit for the company in both periods.
(i) Bonuses paid as a result of the property disposition were removed.
(j) Gain on sale was removed.
(k) Professional fees for due diligence and closing of acquisition and disposition were removed.
(l) Expenses related to the sale closing were removed.
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