IMH Financial Corporation (together with its subsidiaries, the “Company”) is a real estate investment and finance company based in the southwestern United States engaged in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, servicing, enforcement, development, marketing, and disposition. The Company’s focus is to invest in, manage and dispose of commercial real estate mortgage investments, hospitality assets, orand other real estate assets, and to perform all functions reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through acquisition, foreclosure or other means.
All significant intercompany accounts and transactions have been eliminated in consolidation.
LiquidityF-11
As of September 30, 2018, our accumulated deficit aggregated $686.9 million primarily as a result of previous provisions for credit losses recorded relating to the decrease in the fair value of the collateral securing our legacy loan portfolio and impairment charges relating to the value of real estate owned (“REO”) assets acquired primarily through foreclosure, as well as ongoing net operating losses resulting from the lack of income-producing assets, and the high cost of our previous debt financing. Beginning in 2008, we experienced significant defaults and foreclosures in our mortgage loan portfolio due primarily to the erosion of the U.S. and global real estate and credit markets during those periods. As a result, since that time we have been focused on enforcing our rights under our loan documents, working to repossess the collateral properties underlying those loans for purposes of disposing of or developing such assets, and pursuing recovery from guarantors under such loans.
In connection with our acquisition of certain hotel and related assets consisting of 64 luxury guest rooms, indoor and outdoor function space, full-service food and beverage outlet and restaurant operations, and spa operations located in Sonoma, California (“MacArthur Place”), the Company entered into a building loan agreement/disbursement schedule and related agreements (the “MacArthur Loan”) with MidFirst Bank in the amount of $32.3 million, of which approximately $19.4 million was utilized for the purchase of MacArthur Place, $10.0 million of which has been set aside to fund planned hotel improvements, and the balance is to fund interest reserves and operating capital. The Company has begun to undertake a significant renovation project of MacArthur Place which is expected to continue until the first or second quarter of 2019.
IMH FINANCIAL CORPORATION
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NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued
Liquidity
We require liquidity and capital resources for our general working capital needs, including maintenance, development costs and capital expenditures for our operating properties and non-operating REO assets, professional fees, general and administrative operating costs, loan enforcement costs, financing costs, debt service payments, and dividends to our preferred shareholders, as well as to acquire our target assets.
As of June 30, 2019, our accumulated deficit aggregated $702.4 million primarily as a result of previous provisions for credit losses recorded relating to the decrease in the fair value of the collateral securing our legacy loan portfolio and impairment charges relating to the value of real estate owned (“REO”) assets acquired primarily through foreclosure, as well as on-going net operating losses resulting from the lack of income-producing assets.
The Company has taken a number of steps to maintain an adequate level of on-going liquidity over the years. Our liquidity plan has included obtaining additional debt and equityoutside financing, selling mortgage loans, and selling the majority of our legacy real estate assets. We secured various financings between 2011
In 2018, the Company entered into stock subscription agreements with its largest shareholder, JPMorgan Chase Funding Inc., a related party (“Chase Funding”), pursuant to which Chase Funding purchased shares of our Series B-3 Cumulative Convertible Preferred Stock and 2018 which, along withSeries A Senior Redeemable Preferred Stock for a total purchase price of $30.0 million. The Company is using the proceeds from asset sales, have been our primary sourcesthe sale of these shares for general corporate purposes.
In the second quarter of 2019, we conducted a UCC foreclosure on the collateral securing a $7.6 million mezzanine note receivable that was in default. That collateral was 100% of the membership interests in an LLC that owns a commercial real estate building and operations in St. Louis, Missouri. In connection with this foreclosure, a subsidiary of the Company purchased the $13.2 million first mortgage note secured by this property. The purchase of the first mortgage note was funded partially with an $11.0 million loan (under a master repurchase agreement) from Chase Funding (related party) and the balance using Company funds. The master repurchase agreement has an initial maturity date of May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved. We are working capital. As partwith Chase funding to restructure and extend the maturity date of our investment strategy to acquire income-producing assets, we acquiredthis facility.
In addition, in connection with the acquisition and renovation of MacArthur Place, the Company entered into a building loan agreement and maderelated agreements (the “MacArthur Loan”) in October 2017 with MidFirst Bank in the amount of $32.3 million. As described in Note 9, the MacArthur Loan was modified during the first quarter of 2019 to increase the loan facility to $37.0 million and to establish certain mortgage investments during fiscal 2017 and 2018.additional reserve accounts in the amount of $2.0 million. The renovation of MacArthur Place is scheduled to be completed in the third quarter of 2019.
The modified MacArthur Loan requiredrequires the Company to fund minimum equity of $17.4$27.7 million, all of which has been funded.funded as of June 30, 2019. The Company was required to providehas provided a loan repayment guaranty equal to 50% of the original principal amount of the MacArthur Loan principal along with a guaranty of interest and operating deficits, as well as other customary non-recourse carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum Tangible Net Worth, as defined, of $50.0 million and minimum liquidity of $5.0 million throughout the term of the MacArthur Loan. The Company was in compliance with such financial covenants as of June 30, 2019. The loan includes a provision requiring substantial completion of the project by June 30, 2019, which the lender agreed to waive and extend to September 30, 2018.1, 2019. In addition, the MacArthur Loan requiredrequires MacArthur Place to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.
While the Company initially utilized its own equity (along with debtand proceeds as described above)from the MacArthur Loan to fund the purchase of MacArthur Place, the Company formed L’Auberge Fund Manager, LLC, a wholly-owned subsidiary of the Company, whichsponsored and commenced an offering in November 2017 of up to $25.0 million of preferred limited liability company interests (the “Preferred Interests”) inof the L’Auberge de Sonoma Resort Fund, LLC (the “Hotel Fund”) pursuant to Regulation D and Regulation S promulgated under the Securities Act.. The net proceeds of the Offeringthis offering are being used primarily to (i) reimburse the Company’s for its initial $17.8 million common investment in the Hotel Fund and (ii) fund certain renovations to MacArthur Place. The Company is expected to retain a 10.0% Preferred Interest inand operating losses at the hotel. As of June 30, 2019, the Hotel Fund. The Hotel Fund hashad sold Preferred Interests to unrelated investors in the aggregate amount of $10.5 million through September 30, 2018. The amount of Preferred Interests raised reduced the Company’s common member interests by a corresponding amount. At September 30, 2018, the Company’s common member interest in the Hotel Fund totaled $14.1 million and it held a preferred interest of $1.2$22.5 million. Since the Company is deemed the primary beneficiary of and controls the Hotel Fund, we have consolidated this entity in the accompanying unaudited consolidated financial statements.entity.
As of SeptemberJune 30, 2018,2019, we had cash and cash equivalents of $36.2$12.2 million, REO assets held for sale with a carrying value of $8.0$7.4 million and other REO assets with a carrying value of $33.7 million that we seek to dispose of within the next 12 months. We
IMH FINANCIAL CORPORATION
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NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued
continue to evaluate potential disposition strategies for our remaining REO assets and to seek additional sources of debt and equity for investment and working capital purposes. During the second quarter of 2019, a court-ordered stay was issued which prevents the sale of certain assets, pending the outcome of a related hearing in September 2019.
As further described in Note 11, on February 9, 2018,At any time after July 24, 2020, each holder of our Series B-1 and B-2 Preferred Stock may require the Company entered intoto redeem, out of legally available funds, the shares held by such holder at a Series B-3 Cumulative Convertible Preferred Stock Subscription Agreement with its largest shareholder, JPMorgan Chase Funding Inc. (“Chase Funding”price (the “Redemption Price”), pursuant equal to which Chase Funding agreed to purchase 2,352,941 sharesthe greater of Series B-3 Cumulative Convertible Preferred Stock, $0.01 par(i) 150% of the sum of the original price per share plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock and all accrued and unpaid dividends as of the Company (the “Series B-3 Preferred Stock”), at a purchase pricedate of $3.40 per share, for a total purchase priceredemption. At any time after February 9, 2023, the holder of $8.0 million. The Company uses the proceeds from the sale of these shares for general corporate purposes. Dividends on theour Series B-3 Preferred Stock accruemay require the Company to redeem, out of legally available funds, at a Redemption Price equal to the rategreater of 5.65%(i) 145% of the issuesum of the original price per year,share plus all accrued and are payable quarterly in arrears. In connection with this transaction,unpaid dividends or (ii) the sum of the tangible book value of the Company issuedper share of voting Common Stock and all accrued and unpaid dividends as of the date of redemption. While the Preferred Shareholders have indicated their willingness to potentially extend the redemption period beyond July 24, 2020, a warrantcash payment in the aggregate amount of $2.6 million is due and payable to Chase Funding to acquire an additional 600,000 sharesthe holders of our common stock that is exercisable at any time on or after February 9, 2021 for a two (2) year period at an exercise price of $2.25 per share.
In addition, on May 31, 2018, the Company entered into a Series A Senior PerpetualB-1 and B-2 Preferred Stock Subscription Agreement with Chase Funding, pursuant to which Chase Funding agreed to purchase 22,000 shareson July 24, 2020 whether or not a redemption is requested. The current holders of our Series A Senior Perpetual Preferred Stock, (the “Series A Preferred Stock”), at a purchase price of $1,000 per share, for a total purchase price of $22.0 million. The Company uses the proceeds from the sale of these shares for general corporate purposes and to pursue its investment strategy. Dividends on the Series AB Preferred Stock are cumulative and accrue fromcollectively referred to herein as the issue date at the rate of 7.5% of the issue price per year, payable quarterly“Series B Investors”.
As described in arrears on or before the last day of each calendar quarter. The Series A Preferred Stock shall, with respect to dividend and redemption rights and rights upon liquidation, dissolution or winding up of the Corporation, rank senior to all other classes or series of shares ofNote 9, the Company’s preferredunsecured exchange offering notes (“EO Notes”) with a face value of $10.2 million matured on April 29, 2019 and common stock and to all other equity securities issued by the Company from time to time. See Note 11 for additional information relating to the Series B-3 Preferred Stock and Series A Perpetual Preferred Stock.were repaid in full.
We require liquidity and capital resources for our general working capital needs, including maintenance, development costs and capital expenditures for our operating properties and non-operating REO assets, professional fees, general and administrative operating costs, loan enforcement costs, financing costs, debt service payments, including the $10.2 million Exchange Notes debt
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - continued
maturing in April 2019 (see Note 9 for additional information), dividends to our preferred shareholders, as well as to acquire our target assets. We expect our primary sources of liquidity over the next twelve months to consist of our current cash, mezzanine and mortgage loan interest income, revenues from ownership or management of hotels, proceeds from borrowings and equity issuances, and proceeds from the disposition of our existing REO assets held for sale. Wesale (assuming that the court-order stay is lifted within that time frame), proceeds from borrowings and equity issuances, current cash, mezzanine and mortgage loan interest income, and revenues from ownership or management of MacArthur Place. If we are able to resolve these matters favorably, we believe that our cash and cash equivalents coupled with our operating and investing revenues, as well as proceeds that we anticipate receiving from the disposition of our real estate held for sale and debt and equity financing efforts will be sufficient to allow us to fund our operations for a period of one year from the date these condensed consolidated financial statements are issued.
While weWe have been successful thus far in securing financing through SeptemberJune 30, 20182019 to provide adequate funding and funding commitments for working capital purposes, which has been supplemented by proceeds from the sale of certain REO assets, and receipts of principal and interest on mortgage and related investments,investments. Moreover, we are continuing to negotiate potential extensions or restructuring of our Series B Preferred Stock and/or our outstanding debt obligations. However, there is no assurance that we will be successful in such negotiations, or in selling our remaining REO assets in a timely manner or in obtaining additional or replacement financing, if needed, to sufficiently fund future operations, repay existing debt, or to implement our investment strategy. Our failure to generate sustainable earning assets and to successfully liquidate a sufficient number of our loans and REO assets may have a material adverse effect on our business, results of operations and financial position. In the absence of favorably resolving the matters described above, the collective nature of these uncertainties create substantial doubt about our ability to continue as a going concern for a period beyond one year from the date of issuance of these condensed consolidated financial statements.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are detailed in “Note 2 - Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018.
Redeemable Convertible Preferred StockOperating Properties Acquired Through Foreclosure
During the nine months ended September 30, 2018,Operating properties acquired through foreclosure consist of certain operating assets acquired through foreclosure that the Company issued an additional 2,352,941 shares of redeemable convertible preferred stock. The preferred stock is convertible into common stock on a one-to-one basis,has elected to hold for on-going operations and is redeemable five years from the issuance dateare recorded at fair value at the optiontime of the holder for a redemption price of the greater of 145% of the original purchase price of the preferred stock or tangible net book value per share at redemption. The preferred stock is reported in the mezzanine equity section of the accompanying consolidated balance sheet. Since the preferred stock does not have a mandatory redemption date (rather it is at the option of the holder), under applicable accounting guidance, the Company elected to amortize the redemption premium over the five year redemption period using the effective interest method and recording this as a deemed dividend, rather than recording the entire accretion of the redemption premium as a deemed dividend upon issuance of the preferred stock. The Company is required to assess whether the preferred stock is redeemable at each reporting period.foreclosure.
Perpetual Preferred StockLeases
Lessee Accounting
As described in Note 11,further discussed below, the Company issued 22,000 sharesadopted the provisions of Series A perpetual preferred stock to Chase Funding duringAccounting Standards Update 2016-02, Leases, effective January 1, 2019. We determine if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets are recorded in other assets and operating lease liabilities are recorded in accounts payable and other accrued expenses in the accompanying
IMH FINANCIAL CORPORATION
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NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
nine months ended September 30, 2018. While the Series A Preferred Stock ranks senior to all other classes or seriescondensed consolidated balance sheet. Finance leases, none of shares of preferred or common stock, is does not have voting rights, is not convertible to common stock and has no stated redemption date. After five years, the holder of these shares has call rights to require the Company to redeem all of the shares at the redemption price. However, since the Series A Preferred Stock maintains characteristics of both debt and equitywhich existed as of the reportingadoption of Accounting Standards Codification (“ASC”) 842 or as of June 30, 2019, would be reflected in property and equipment and other liabilities in our condensed consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date ithasbased on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Under the available practical expedient, we account for the lease and non-lease components as a single lease component for all classes of underlying assets. Further, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).
Lessor Accounting
On May 29, 2019, the Company acquired a commercial real estate building through a foreclosure action known as Broadway Tower located in St. Louis, Missouri which leases office space to various tenants. The assumed leases were previously accounted for according to ASC 840 and were classified as operating leases. Upon transitioning these leases from being accounted for according to ASC 840 to being accounted for under ASC 842, the Company did not reassess the lease classification as allowed under the practical expedient package elected by the Company.
New lessor leases are subject to the following policies for lease classification. Pursuant to ASC 842 – 30, the Company will classify a lease as a sales – type lease if: (i) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (ii) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining economic life of the underlying asset, (iv) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all (90% or more) of the fair value of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. As of June 30, 2019, none of our leases, as a lessor, met the above criteria to be classified as a sale – type lease.
Pursuant to ASC 842 – 30, when none of the sales-type lease classification criteria are met, a lessor would classify the lease as a direct financing lease when both of the following criteria are met: (i) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and/or any other third party unrelated to the lessor equals or exceeds substantially all (90% or more) of the fair value of the underlying asset and (ii) it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. As of June 30, 2019, none of our leases, as a lessor, met the above criteria to be classified as a financing lease.
Pursuant to ASC 842 – 30, a lessor would classify a lease as an operating lease when none of the sales-type or direct financing lease classification criteria are met. As of June 30, 2019, all leases of the Company’s rental properties were classified as operating leases.
The Company has lease agreements with lease and non-lease components. The Company has elected to not separate non-lease components from lease components for all classes of underlying assets (primarily real estate assets) and will account for the combined components as commercial real estate rental revenue. Non-lease components included in commercial real estate rental revenue include certain tenant reimbursements for maintenance services, (including common-area maintenance services or “CAM”). Variable consideration for costs that are not contract components (e.g., real estate taxes, utilities) are excluded from total consideration and would be recorded as incurred by the lessee and earned by the lessor. As a lessor, the Company has further determined that this policy will be effective only on a lease that has been classified as an operating lease and the revenue recognition pattern and timing is the same for both types of components. Therefore, Accounting Standards Codification Topic 842, Leases (“ASC 842”), has been applied to these lease contracts for both types of components.
The Company has elected to present sales tax and other tax collections in the condensed consolidated statements of operations on a net basis and, accordingly, such taxes are excluded from reported revenues.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
Commercial Real Estate Rental Revenue
The Company derives revenues from our commercial real estate building in St. Louis, Missouri, known as Broadway Tower, which, as more fully described in Notes 4 and 5, was acquired in a foreclosure action by the Company in May 2019. Rental revenue, which is reflected as operating property revenue in the consolidated statements of operations and is presented in Mortgage and REO Legacy portfolio and other operations segment, represents revenue from the mezzanine equity sectionleasing of commercial office space to tenants, common area maintenance charges and parking space rental. Leases with tenants are classified as operating leases and revenue is recognized on a straight line basis over the term of the respective leases.
The Company regularly reviews receivables related to rent and unbilled rent receivables and determines 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. Upon adoption of ASU 2016-02, effective January 1, 2019, the Company recognizes all changes in the collectability assessment for an operating lease as an adjustment to rental income and does not record an allowance for uncollectible accounts.
The Company recognizes the rental income on a straight-line basis over the terms of the leases. The cumulative differences between rental income recognized in the Company’s condensed unaudited consolidated statements of operations and contractual payment terms have been recorded as deferred rental income and presented on the accompanying condensed consolidated balance sheets.
Funds Held by Lender and Restricted Cash
Funds held by lender and restricted cash includes amounts maintained in escrow or other restricted accounts deposited into reserve accounts held by lenders for contractually specified purposes, which includes property taxes and insurance. The following table provides a reconciliation of cash, cash equivalents, and funds held by lender and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in accordancethe consolidated statement of cash flows as of June 30, 2019 and December 31, 2018 (in thousands):
|
| | | | | | | | |
|
| June 30, | | December 31, |
|
| 2019 |
| 2018 |
| Cash and cash equivalents |
| $ | 12,222 |
|
| $ | 25,452 |
|
| Funds held by lender and restricted cash |
| 5,147 |
|
| 198 |
|
| Total cash, cash equivalents, and restricted cash |
| $ | 17,369 |
|
| $ | 25,650 |
|
This balance includes property tax, insurance and construction related reserves for the MacArthur Loan totaling $2.3 million and $0.2 million at June 30, 2019 and December 31, 2018, respectively. During the six months ended June 30, 2019, we acquired restricted cash reserves totaling $2.8 million in connection with GAAP.our foreclosure and acquisition of a commercial office building in St. Louis, Missouri which is included in the balance above as of June 30, 2019.
Mortgage Investment Revenue Recognition
See Note 3 for the Company’s accounting policy for Mortgage Investment Revenue Recognition.
Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s ASC. The Company considers the applicability and impact of all ASUs.
Adopted Accounting Standards
Derivative InstrumentsIn February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This new standard establishes a ROU model that requires a lessee to record a ROU asset and Hedginga lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to
We occasionally use interest rate derivativesF-15
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
the opening balance of retained earnings in the period of adoption. The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of fiscal year 2019, and using the optional transition method. The Company elected the practical expedient package outlined in ASU No. 2016-02 under which we did not have to mitigatereassess whether an arrangement contains a lease, we carried forward our risks against rising variable interest rate debts. Our interest rate derivativesprevious classification of leases as operating, and we did not have to reassess previously recorded initial direct costs. There was an increase in assets of $1.6 million and liabilities of $1.7 million due to the recognition of the required ROU asset and corresponding liability for all lease obligations that are currently consist of one interest rate cap which is not designatedclassified as a hedge. As such, this derivative is recorded at fair value in accordanceoperating leases with the applicable authoritative accounting guidance. Interest rate derivatives are reported as other assetsdifference of $0.1 million related to existing deferred rent that reduced the ROU asset recorded. The standard did not have an impact in the accompanying condensed consolidated balance sheets. Changes in the fair value of interest rate derivatives are recognized in earnings as unrealized gain (loss) on derivatives in the accompanyingour condensed consolidated statements of operations.
Revenue RecognitionIn August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company has adopted the requirements of this accounting pronouncement in fiscal 2019.
Accounting Standards Not Yet Adopted
In June 2016, the first quarterFASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”). The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of 2018,the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for the interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — REVENUE
Following is a breakdown of revenue by source (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Operating property revenue | | | | | |
| |
|
| Commercial real estate rental revenue | | $ | 398 |
| | $ | — |
| | $ | 398 |
| | $ | — |
|
| Hotel revenues | | | | | | | | |
| Rooms | | 766 |
| | 1,205 |
| | 957 |
| | 1,897 |
|
| Food and beverage | | 536 |
| | 523 |
| | 539 |
| | 1,008 |
|
| Banquet | | 26 |
| | 96 |
| | 30 |
| | 276 |
|
| Spa and fitness center | | 118 |
| | 188 |
| | 212 |
| | 328 |
|
| Other | | 36 |
| | 93 |
| | 57 |
| | 159 |
|
| Total operating property revenue | | 1,880 |
| | 2,105 |
| | 2,193 |
| | 3,668 |
|
| Mortgage loan income, net | | 447 |
| | 641 |
| | 1,098 |
| | 1,266 |
|
| Management fees, investment and other income | | 208 |
| | 255 |
| | 276 |
| | 292 |
|
| Total revenue | | $ | 2,535 |
| | $ | 3,001 |
| | $ | 3,567 |
| | $ | 5,226 |
|
Operating Property Revenue
Commercial Real Estate Rental Revenue
The Company derives revenues from our commercial real estate building in St. Louis, Missouri, known as Broadway Tower, which, as more fully described in Notes 4 and 5, was acquired in a foreclosure action by the Company implemented ASU 2014-09.in May 2019. Rental revenue, which is reflected as operating property revenue in the consolidated statements of operations and is presented in Mortgage and REO Legacy portfolio and other operations segment, which represents revenue from the leasing of commercial office space to tenants, common area maintenance charges and parking space rental. Leases with tenants are classified as operating leases and revenue is recognized on a straight line basis over the term of the respective leases.
Hotel Revenues
The Company derives hotel revenues from our hotel in Sonoma, California, which is reflected as operating property revenue in the consolidated statements of operations. Rooms revenue represents revenue from the occupancy of our hotel rooms and is driven by the occupancy and daily rate charged. Rooms revenue includes revenue for guest no-shows, day use, and early/late departure fees. The contracts for room stays with customers are generally short in duration and revenues are recognized as services are provided over the course of the hotel stay.
Food & Beverage (“F&B”) revenue consists of revenue from the restaurants and lounges at our hotel, in-room dining and mini-bar revenue, and banquet/catering revenue from group and social functions. Other F&B revenue may include revenue from audio-visual equipment/services, rental of function rooms, and other F&B related revenue. Revenue is measured based on consideration specifiedrecognized as the services or products are provided. Our hotel property may employ third parties to provide certain services at the property, for example, audio visual services. We evaluate each of these contracts to determine if the hotel is the principal or the agent in a contract with a customer. The Company recognizesthe transaction, and record the revenue as appropriate (i.e., gross vs. net).
Other revenue consists of ancillary revenue at the property, including attrition and cancellation fees, resort fees, spa and other guest services. Attrition and cancellation fees are recognized for non-cancellable deposits when it satisfies a performance obligation by transferring control over a product or servicethe customer provides notification of cancellation within established management policy time frames. Taxes collected from customers and submitted to a customer. ASU 2014-09 defines a five-step process to achieve this core principle.taxing authorities are not recorded in revenue.
Mortgage Investment Revenue Recognition
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Interest on mortgage loans is recognized as revenue when earned using the interest method based on a 360 or 365 day year, in accordance with the related mortgage loan terms. We do not recognize interest income on loans once they are deemed to be impaired and placed in non-accrual status. Generally, a loan is placed in non-accrual status when (i) it is past its scheduled maturity by more than 90 days; (ii) it becomes delinquent as to interest due by more than 90 days; or (iii) the related fair value of the collateral is less than the total principal, accrued interest and related costs. We may determine that a loan, while delinquent in payment status, should not be placed in non-accrual status in instances where the fair value of the loan collateral significantly exceeds the principal and the accrued interest, as we expect that income recognized in such cases is probable of collection. Unless and until we have determined that the value of underlying collateral is insufficient to recover the total contractual amounts due under the loan term, generally our policy is to continue to accrue interest until the loan is more than 90 days delinquent with respect to accrued, uncollected interest or more than 90 days past scheduled maturity, whichever comes first.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
We defer fees for loan originations, processing and modifications, net of direct origination costs, at origination and amortize such fees as an adjustment to interest income using the effective interest method. Revenue for non-refundable commitment fees is recognized over the remaining life of the loan as an adjustment to the interest income yield.
We defer premiums or discounts arising from acquired loans at acquisition and amortize such premiums or discounts as an adjustment to interest income over the contractual term of the related loan using the effective interest method. We include the unamortized portion of the premium or discount as a part of the net carrying value of the loan in the condensed consolidated balance sheets. Costs not directly paid to the seller of the loan are expensed as incurred and not amortized, except for any fees paid directly to the seller.
The significant accounting policies that have changed as a result of the adoption of ASU 2014-09 are set forth below.
Hotel Revenues
We identified the following performance obligations in connection with our hotel revenues, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:
• Cancellable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
• Noncancellable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
• Material rights for free or discounted goods or services are satisfied at the earlier point in time when the material right expires or the underlying free or discounted good or service is provided to the hotel guest.
• Other ancillary goods and services purchased independently of the room reservation at standalone selling prices are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
• Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.
Hotel revenues primarily consist of hotel room rentals, food and beverage sales, and other ancillary goods and services. Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided.
Although the transaction prices of room rentals, goods and other services are generally fixed and based on the respective room reservation or other agreement, an estimate to reduce the transaction price is required if a discount is expected to be provided to the customer. For corporate customers, the hotel offers discounts on goods and services sold in package reservations, and the corresponding transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component. On occasion, the hotel may also provide the customer with a material right to a free or discounted good or service in conjunction with a room reservation or banquet contract. These material rights are considered separate performance obligations to which a portion of the transaction price is allocated based on the estimated standalone selling prices of the good or service, adjusted for the likelihood the hotel guest will exercise the right.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
Funds Held by Lender and Restricted Cash
Funds held by lender and restricted cash includes amounts maintained in escrow or other restricted accounts deposited into reserve accounts held by lenders for contractually specified purposes, which includes property taxes and insurance. The following table provides a reconciliation of cash, cash equivalents, and funds held by lender and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows as of September 30, 2018 and December 31, 2017 (in thousands):
|
| | | | | | | | |
|
| September 30, |
| December 31, |
|
| 2018 |
| 2017 |
| Cash and cash equivalents |
| $ | 36,196 |
|
| $ | 11,789 |
|
| Funds held by lender and restricted cash |
| 432 |
| 143 |
| Total cash, cash equivalents, and restricted cash |
| $ | 36,628 |
|
| $ | 11,932 |
|
Recent Accounting Pronouncements
Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09. This ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and requires entities to recognize revenue when a customer obtains control of promised goods or services and in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Subsequent to ASU 2014-09, the FASB issued several related ASUs to clarify the application of the new revenue recognition standard, collectively referred to herein as ASU 2014-09. We adopted this standard effective January 1, 2018, under the modified retrospective method, and the adoption of this standard did not have a material impact on our consolidated financial statements. See related disclosures in Note 3.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require 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. In addition, the amendments in this update require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We adopted this standard effective January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to address diversity in practice related to how certain cash receipts and cash payments are presented and classifi
ed in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues as well as application of the predominance principle (dependence on predominant source or use of receipt or payment) and are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. ASU 2016-15 requires retrospective adoption unless it is impracticable to apply, in which case it is to be applied prospectively as of the earliest date practicable. We adopted the requirements of ASU 2016-15 which had no significant impact on the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. In accordance with ASU 2016-18, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts shown on the statements of cash flows. The amendments of ASU 2016-18 are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
the requirements of ASU 2016-18 which resulted in a change in the presentation of the statement of cash flows. The Company’s statement of cash flows for the nine months ended September 30, 2017 has been retroactively restated for the effect of adopting this ASU, adding approximately $2.2 million of cash, cash equivalents, and restricted cash at the beginning of the period and approximately $0.3 million of cash, cash equivalents, and restricted cash to the end of the period. The reclassification resulted in a decrease to cash, cash equivalents, and restricted cash used in operating activities by $1.4 million and a decrease to cash, cash equivalents, and restricted cash provided by investing activities by $0.4 million. The preceding table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statement of cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. We adopted this standard effective January 1, 2018. Under the new standard, certain future acquisitions may be considered asset acquisitions rather than business combinations, which would affect capitalization of acquisitions costs (such costs are expensed for business combinations and capitalized for asset acquisitions).
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets(Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (ASU “2017-05”), which clarifies the scope of ASC Subtopic 610-20, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets and adds guidance for partial sales of nonfinancial assets. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. An entity may elect to apply ASU 2017-05 under a retrospective or modified retrospective method. We adopted this standard effective January 1, 2018, under the modified retrospective method. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718). The ASU provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. ASU 2017-09 does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted this standard effective January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU codifies existing SEC guidance contained in SEC Staff Accounting Bulletin No. 118 (SAB 118), which expresses the view of the staff regarding application of existing guidance for the accounting for income taxes as it relates to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) which was signed into law in the fourth quarter of 2017. In accordance with ASU 2018-05, the Company has recorded provisional estimates for the accounting impacts of the Tax Act, including the transition tax, deferred tax remeasurements, and other items, due to the uncertainty regarding how these provisions are to be implemented and additional anticipated forthcoming guidance. Management has completed the analysis of the impacts of the Tax Act and we adopted ASU 2018-05, which had no impact to the consolidated financial statements during 2018.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (“ASU 2017-11”). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
15, 2018. We adopted this standard effective January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases. This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt the requirements of ASU 2016-02 effective January 1, 2019, the first day of fiscal year 2019, and will use the cumulative-effect transition method. The Company anticipates taking advantage of the practical expedient options, which allows an entity not to reassess whether any existing or expired contracts contain leases, and lease classifications for existing or expired leases, and initial direct costs for existing leases, and the Company is further evaluating other optional practical expedients. Based upon a preliminary assessment, the Company expects that substantially all of the operations lease commitments will be subject to the new guidance. We are currently performing an assessment of the revised standard and assessing our existing lease portfolio in order to determine the impact to our accounting systems, processes and internal control over financial reporting.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. We have not yet determined the impact the adoption of ASU 2016-13 will have on the Company’s consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for the interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07, Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which intended to simplify nonemployee share-based payment accounting. This new guidance will more closely align the accounting for share-based payment awards issued to employees and nonemployees. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption
permitted. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company anticipates its first presentation of changes in shareholders' equity will be included in its Form 10-Q for the first quarter of fiscal year 2019.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — REVENUE
On January 1, 2018, we adopted Topic 606 using the modified retrospective method. The adoption of this standard did not have a material impact on our consolidated financial statements, thus no adjustments to opening retained earnings were made as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605-Revenue Recognition.
The Company derives hotel revenues from our hotel in Sonoma, California. Rooms revenue represents revenue from the occupancy of our hotel rooms and is driven by the occupancy and average daily rate charged. Rooms revenue includes revenue for guest no-shows, day use, and early/late departure fees. The contracts for room stays with customers are generally short in duration and revenues are recognized as services are provided over the course of the hotel stay.
Food & Beverage (“F&B”) revenue consists of revenue from the restaurants and lounges at our hotel properties, In-room dining and mini-bar revenue, and banquet/catering revenue from group and social functions. Other F&B revenue may include revenue from audio-visual equipment/services, rental of function rooms, and other F&B related revenue. Revenue is recognized as the services or products are provided. Our hotel properties may employ third parties to provide certain services at the property, for example, audio visual services. We evaluate each of these contracts to determine if the hotel is the principal or the agent in the transaction, and record the revenue as appropriate (i.e., gross vs. net).
Other revenue consists of ancillary revenue at the property, including attrition and cancellation fees, resort fees, spa and other guest services. Attrition and cancellation fees are recognized for non-cancellable deposits when the customer provides notification of cancellation within established management policy time frames. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue. Interest income is recognized when earned.
Following is a breakdown of revenue by source (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Operating property revenue | | | | | | | | |
| Rooms | | $ | 1,311 |
| | $ | — |
| | $ | 3,207 |
| | $ | — |
|
| Golf range fees | | — |
| | — |
| | — |
| | 820 |
|
| Banquet | | 175 |
| | — |
| | 333 |
| | 114 |
|
| Food and beverage | | 314 |
| | — |
| | 1,440 |
| | 352 |
|
| Spa and fitness center | | 194 |
| | — |
| | 522 |
| | 240 |
|
| Other | | 91 |
| | — |
| | 251 |
| | 156 |
|
| Total operating property revenue | | 2,085 |
| | — |
| | 5,753 |
| | 1,682 |
|
| Mortgage loan income, net | | 709 |
| | 350 |
| | 1,976 |
| | 402 |
|
| Management fees, investment and other income | | 32 |
| | 300 |
| | 323 |
| | 808 |
|
| Total revenue | | $ | 2,826 |
| | $ | 650 |
| | $ | 8,052 |
| | $ | 2,892 |
|
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 — MORTGAGE LOANS, NET
Lending Activities
As of SeptemberJune 30, 2018,2019, the Company had sixheld four portfolio loans with an outstandinga balance of $23.0$13.3 million, net of valuation allowances, two of which were performing loans bearing a weighted-average interest rate of 9.7% as of June 30, 2019. As of December 31, 2018, the Company held six portfolio loans with a balance of $23.2 million, net of valuation allowances, three of which were performing loans bearing a weighted-average interest rate of 8.84% as of September 30, 20189.4%. As of June 30, 2019 and December 31, 2017,2018, the Company had four loans with an outstanding balance of $19.7 million,held two of which were performing loans bearing a weighted-average interest rate of 9.69%. During the nine months ended September 30, 2018 and 2017, we recorded mortgage interest income of $2.0 million and $0.4 million, respectively.
During the three months ended September 30, 2018, one of our loans with an outstanding balance of $7.6 million entered default status upon its maturity, although it was not considered impaired since the fair value of the underlying collateral was deemed to exceed the carrying value of the loan. As of September 30, 2018, the Company had three non-performing portfolio loans, respectively, two of which have been fully reserved and have a zero carrying value andas of June 30, 2019. During the remaining non-performingthree months ended June 30, 2019, one performing loan haswith a principal balance of $3.0 million was repaid in full. In addition, during the three months ended June 30, 2019, we foreclosed on one of the Company’s mezzanine loan investments that had a carrying value of $7.63 million. As$8.2 million as of the date of foreclosure, which had been in default since September 2018. In May 2019, we foreclosed on the loan collateral consisting of 100% of the membership interests in the limited liability company owning the underlying property. We recorded the acquired assets and assumed liabilities at fair value and consolidated the operations commencing on the foreclosure date. See additional discussion in Notes 5 and 8.
During the three months ended June 30, 2019, and 2018, we recorded mortgage interest income of $0.4 million and $0.6 million, respectively. During the six months ended June 30, 2019 and 2018, we recorded mortgage interest income of $1.1 million and $1.3 million, respectively. The valuation allowance was $12.7 million as of June 30, 2019 and $13.1 million as of December 31, 2017, the2018. The Company had two non-performing loans, respectively, which have been fully reserved and have a zero carrying value. As of September 30, 2018 and December 31, 2017, the valuation allowance was $13.1 million and 12.7 million, respectively.
During the nine months ended September 30, 2018 ,the Company originated two new loans. The first loan is a $13.1 million construction loan bearing annual interest at 8.5% plus one-month LIBOR, with an original maturity date of July 18, 2020 and a six-month extension option. As of September 30, 2018, the Company had not yet advanced any loan funds pending the borrower’s obligation to meet certain minimum equity requirements. The loan is collateralized by a first lien security interest in certain real and personal property and related improvements thereon located in Phoenix, Arizona. The second loan origination was a mortgage loan for $3.0 million bearing annual interest rate of 6% plus one-month LIBOR (subject to an 8% interest rate floor), and an exit fee equal to 1% of the principal balance. The loan is collateralized by a first lien security interest in a residential unit located in New York, NY. The loan provides for interest only payments payable monthly during the initial 12 month term with a balloon payment due upon maturity. The borrower has an option to extend the loan by six months. We did not originate or sellinvest in any mortgagenew loans during the ninethree or six months ended SeptemberJune 30, 2017.2019. During the ninethree and six months ended SeptemberJune 30, 2017,2018, the Company purchasedoriginated one new mezzanineconstruction loan from a related party (as described in Note 14) at a discount for $7.0the principal amount of $13.1 million, with a face value of $7.6which we funded $0.9 million and incurred and expensed costs related to underwritingof construction loan draws during the loan of $0.2 million.six months ended June 30, 2019.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — OPERATING PROPERTIES, REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED AND OPERATING PROPERTIES
As of SeptemberJune 30, 2018,2019, we held total REO assets of $67.5$104.8 million, of which $8.0$7.4 million were classified as held for sale, $25.8$63.7 million were held as operating properties, and $33.7 million were classified as other real estate owned. AtAs of December 31, 2017,2018, we held total REO assets of $64.6$75.0 million, of which $5.9$7.4 million were classified as held for sale, $20.5$33.9 million were held as operating properties and $38.3$33.7 million were classified as other real estate owned.
As described in Note 4, on May 29, 2019, we foreclosed on the membership interests of a limited liability company that was pledged as collateral on a defaulted mezzanine note receivable. The entity owns and operates a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we acquired the membership interests in the limited liability company that owns the office building and related assets, and assumed related liabilities of Broadway Tower, all of which were recorded at fair value in accordance with GAAP. The acquired assets consist of a building, land, furniture and fixtures, operating
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — OPERATING PROPERTIES, REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED – continued
and reserve cash, and tenant receivables totaling approximately $26.0 million. Liabilities assumed consist of trade accounts payable and accrued liabilities, and accrued interest and principal on the first mortgage loan totaling approximately $16.0 million. In accordance with ASC 842, we recorded a right of use asset and related lease liability of $0.6 million, see Note 14. As described in Note 9, we purchased the Broadway Tower first mortgage note and accrued interest.
During the ninethree and six months ended SeptemberJune 30, 2019, the Company sold one REO asset for $39.0 thousand resulting in a gain on sale of $20.0 thousand. During the three and six months ended June 30, 2018, wethe Company sold three REO assets (or portions thereof) for $8.7$0.2 million and $0.5 million (net of transaction costs and other adjustments)costs) resulting in a total net gain on sale of $3.9$0.1 million less allocated gains to non-controlling interests of $1.9 million. During the nine months ended September 30, 2017, the Company sold REO from seven projects (in whole or portions thereof), for $98.3and $0.4 million, (net of transaction costs and other non-cash adjustments) resulting in a total net gain on sale of $8.9 million, of which $6.8 million is included as a component of discontinued operations in the condensed consolidated statement of operations.respectively.
REO Planned Development and Operations
Costs and expenses related to operating, holding and maintaining our operating properties and REO assets are expensed as incurred and included in operating property direct expenses and as expenses for non-operating real estate owned in the accompanying condensed consolidated statements of operations. For the three months ended SeptemberJune 30, 20182019 and 2017,2018, these costs and expenses were $2.5$3.7 million and $0.3$2.3 million, ($16.0 thousand of which is included in income from discontinued operations), respectively. For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, these costs and expenses were $7.2$6.2 million and $6.0$4.7 million, ($4.0 million of which is included in loss from discontinued operations), respectively. Costs related to the development, renovation or improvements of the Company’s real estate assets are generally capitalized, and costs relating to holding the assets are generally charged to expense. Cash outlays for capitalized developmentrenovation costs totaled $7.2$9.8 million and $1.4$3.2 million forduring the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -— VARIABLE INTEREST ENTITIES
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, we consolidated multiple variable interest entities (“VIE’s”) relating to threetwo projects: two areone is comprised of real estate holdings and one isthe Hotel Fund that owns an operating hotel, property.restaurant and spa. We are deemed to be the primary beneficiaries of these consolidated VIE’s as we have the power to direct the activities that most significantly affect their economic performance and we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our consolidated VIE’s are only available to settle the obligations of the respective entities. Our
The following table summarizes the carrying amounts of the above referenced entities’ assets and liabilities included in the Company’s condensed consolidated balance sheets included the assetsat June 30, 2019 and liabilities of these VIE’s. Our condensed consolidated statement of operations includes net loss for the nine months ended September 30, 2018 and year ended December 31, 2017. These are primarily comprised2018, net of the followingintercompany eliminations (in thousands):
|
| | | | | | | | |
| Assets, Liabilities, and Losses of Consolidated VIE's | | September 30, 2018 | | * 12/31/2017 |
| Total assets | | $ | 81,950 |
| | $ | 69,480 |
|
| Total liabilities | | 34,960 |
| | 30,240 |
|
| Net loss | | (70 | ) | | (1,480 | ) |
* As Restated |
| | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Total assets | | $ | 97,730 |
| | $ | 85,240 |
|
| Total liabilities | | 57,640 |
| | 37,770 |
|
DuringThe following table summarizes the nineresults of operations for the three and six months ended SeptemberJune 30, 2019 and 2018, thenet of intercompany eliminations (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Net loss | | $ | (2,890 | ) | | $ | (833 | ) | | $ | (6,040 | ) | | $ | (2,333 | ) |
The Company’s maximum exposure to loss consists of its combined equity in those entities which totaled $25.1 million as of June 30, 2019. The Hotel Fund raised $9.8made a preferred distribution, payable monthly, accruing at a rate of 7.0% per annum on invested capital, cumulative and non-compounding (the “Preferred Distribution”) of $0.3 million in Preferred Interests and made distributions of earnings to holders of those Preferred Interests of $0.2 million.$0.6 million and during the three and six months ended June 30, 2019, and $0.1 million during the three and six months ended June 30, 2018.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Interest Rate Derivative
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We are exposed to risks arising from rising interest rates on our variable rate debt instruments. To manage these risks, we primarilyperiodically use interest rate derivatives, which currently consistconsists of onean interest rate cap. To mitigate the nonperformance risk, we routinely use a third party’s analysis of the creditworthiness of the counterparties, which supports our belief that the counterparties’ nonperformance risk is limited. All derivatives are recorded at fair value.
During the nine months ended September 30, 2018, we entered into an interest rate cap with a notional amount of $36.0 million and a rate cap of 2.2%. The interest rate cap had an effective date of March 21, 2018 and terminates on March 1, 2021. This instrument was not designated as a cash flow hedge. During the three and nine months ended September 30, 2018, there was no adjustment of the fair value on the interest rate cap. The estimated fair value of the interest rate cap at September 30, 2018 approximated $0.5 million.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — FAIR VALUE
Valuation Allowance and Fair Value Measurement of Loans, and Real Estate Held for Sale, Other REO, and Derivative Instruments
Our valuation analysis process and procedures are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018. We perform a valuation analysis of our loans, REO held for sale, other REO, and derivative instruments on a quarterly basis. We consider all relevant, material circumstances to determine if, and the extent to which, a valuation allowance is required.
Impairment for collateral dependent loans is measured at the balance sheet date based on the then fair value of the collateral in relation to contractual amounts due under the terms of the applicable loan if foreclosure is probable. Substantially all of our loans in default are deemed to be collateral dependent.
REO assets that are classified as held for sale and other REO are measured at the lower of carrying amount or fair value, less estimated cost to sell. If an asset is considered impaired, an impairment loss is recognized for the difference between the asset’s carrying amount and its fair value, less estimated cost to sell. If we elect to change the disposition strategy for our other REO, and such assets were deemed to be held for sale, we may record additional impairment charges, and the amounts could be significant.
Selection of Single Best Estimate of Value
The results of our valuation efforts generally provide a range of values for the collateral valued or REO assets rather than a single point estimate because of variances in the potential value indicated from the available sources of market participant information.value. The selection of a value from within a range of values depends upon general overall market conditions as well as specific market conditions for each property valued and its stage of entitlement or development. In selecting the single best estimate of value, we consider the information in theany relevant valuation reports, credible purchase offers received and agreements executed, as well as multiple observable and unobservable inputs.
Fair Value Measurements of Derivative InstrumentOperating Properties Acquired Through Foreclosure
As described in Note 7, during4, on May 29, 2019, we foreclosed on the nine months ended September 30, 2018,membership interests of a limited liability company that was pledged as collateral on a defaulted mezzanine note receivable. The limited liability company owns and operates a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we purchasedacquired the membership interests in the limited liability company that owns the office building and related assets, and assumed related liabilities of Broadway Tower, all of which were recorded at fair value in accordance with GAAP. The valuation methodology used to conclude our position on the fair value was based on the income approach using a discounted cash flow methodology.
Fair Value Measurements of Derivative Instrument
The Company acquired an interest rate cap in order2018 to mitigate ourits risk on certain variable debt against rising interest rates. In order to estimate the fair value of this derivative instrument, we use valuation reports from the third party broker who issued the derivative instrument. The report contemplatescalculates fair value by using inputs, including market-observable data such as U.S dollar and foreign-denominated interest rate curves, foreign exchange rates, volatilities, and information derived from or corroborated by that market-observable data which are classified as Level 2 inputs in the fair value hierarchy. The fair value method does not contemplate credit valuation adjustments (“CVA”) which would be a Level 3 input as the CVA uses credit spreads which are generally unobservable to the market. The fair value used in theseour financial statements approximate fair value without the CVA. As of SeptemberJune 30, 2018,2019, the fair value of the interest rate cap was $0.5approximated $39 thousand and we recorded an unrealized loss on derivative instruments of $0.1 million and there were no gains or losses on the instrument$0.3 million during the three or nineand six months ended SeptemberJune 30, 2019, respectively, and none during the three and six months ended June 30, 2018.
Fair Value Measurements of Equity SecuritiesF-20
As described elsewhere in this Form 10-Q, during the nine months ended September 30, 2018, we issued 2,352,941 shares of Series B-3 Preferred Stock and a detachable common stock warrant to purchase 600,000 shares. We also issued 22,000 shares of Series A Preferred Stock. In order to estimate the fair value of the securities issued in these transactions pursuant to applicable accounting guidance, we engaged a third party valuation firm to assist us in our fair value assessment as our securities are not traded on an open exchange. In estimating fair value, the valuation firm considered the negotiated terms of these transactions, utilized certain current and prospective financial and operational data provided by management, obtained financial and other data from various public, financial and industry sources, and evaluated applicable economic and industry conditions as of the valuation date and their effects on the Company. Based on this valuation assessment, management estimated the fair value of the equity securities issued or granted in connection with the transaction completed February 9, 2018 for the Series B-3 Preferred Stock and May 31, 2018 for the Series A Preferred Stock as follows:
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — FAIR VALUE – continued
|
| | | | |
| Subject securities | | Estimated Fair Value per Share |
| Series B-3 | | $ | 4.12 |
|
| Series A Preferred Stock | | $ | 1,000 |
|
| JPM Warrants | | $ | 1.52 |
|
We accounted for the issuance of the Series B-3 Preferred Stock and common stock warrants in accordance with applicable accounting guidance, under which we allocated the $8.0 million investment amount in proportion to the relative fair value of the the Series B-3 Preferred Stock and common stock warrants. As described below, the fair value of the common stock warrants was estimated at $0.9 million at date of issuance however, the allocated relative fair value of the warrants of $0.7 million was recorded as additional paid-in capital with an offsetting discount to the Series B-3 Preferred Stock during the nine months ended September 30, 2018. The common stock warrants have an exercise price of $2.25, a contractual term of 2 years and are not exercisable until February 9, 2021.
The fair value of the common stock warrants was estimated at $0.9 million on the date of issuance using the Black-Scholes valuation model based on the exercise price of the award and other assumptions relating to expected dividend yield, expected stock price volatility, risk-free interest rate, and expected life of options granted. Expected volatility is based on the historical volatility of our peer companies’ stock for the length of time corresponding to the expected term of the warrants. The expected dividend yield is based on our historical and projected dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option or warrant. A summary of these applicable factors used in the valuation follows:
|
| | | |
Expected stock price volatility | | 40 | % |
Risk-free interest rate | | 2 | % |
Expected life of warrants (in years) | | 3 |
|
Expected dividend yield | | — |
|
Common Stock value discount for lack of marketability | | 25 | % |
Valuation Conclusions
Based on the results of our evaluation and analysis, we recorded nodid not record any non-cash provision for credit losses on our loan portfolio or impairment of REO during the three and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. We recorded other net recoveries of investment and credit losses of $0 and $0.2totaling $1.1 million during the three and ninesix months ended SeptemberJune 30, 2018, respectively. We recorded net recoveries of $6.12019, and $0.2 million and $6.4 million in net recoveries of investment and credit losses for the three and ninesix months ended SeptemberJune 30, 2017, respectively. These recoveries resulted2018, resulting from the collection of cash and/or other assets recovered from certain guarantors on certain legacy loans and insurance recoveries received during the respective period. We recorded no impairment losses during the three and nine months ended September 30, 2018 and $0.3 million during the three and nine months ended September 30, 2017.
As of SeptemberJune 30, 20182019, the valuation allowance on our mortgage loans totaled $12.7 million, representing 49.9% of the total outstanding loan principal and accrued interest balances. As of December 31, 2017,2018, the valuation allowance on our mortgage loans totaled $13.1 million, representing 37.1% and 39.2%, respectively, of the total outstanding loan principal and accrued interest balances. With the existing valuation allowance recorded as of SeptemberJune 30, 2018,2019, we believe that, as of that date, the fair value of our loans, REO assets held for sale, and other REO is adequate in relation to the net carrying value of the related assets and that no additional valuation allowance or impairment is considered necessary. While the above results reflect management’s assessment of estimated fair value as of SeptemberJune 30, 20182019 based on currently available data, we will continue to evaluate our loans and REO assets to determine the appropriateness of the carrying value of such assets. Depending on market conditions, such updates may yield materially different values and potentially increase or decrease the valuation allowance for loans or impairment charges for REO assets.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, our debt, notes payable and special assessment obligations consisted of the following (in thousands):
|
| | | | | | | | |
| | | September 30, | | December 31, |
| | | 2018 | | 2017 |
| Note Payables, Net | | | | |
| $32.3 million note payable to MidFirst Bank secured by a first lien on an operating hotel property, interest-only payments due monthly at the 30-day Libor (2.26% and 1.56% at September 30, 2018 and December 31, 2017, respectively) plus 3.25% to 3.75% depending on compensating balances and meeting certain financial thresholds and terms (5.41% and 5.31% effective rate at September 30, 2018 and December 31, 2017, respectively) , matures October 1, 2020 with possibility of two one-year extensions, with construction completion and repayment guarantee provide by the Company | | $ | 20,368 |
| | $ | 19,557 |
|
| $5.9 million note payable secured by real estate in New Mexico, annual interest only payments based on annual interest rates of prime plus 2.0% through December 31, 2017, and prime plus 3.0% thereafter (8.25% and 5.75% at September 30, 2018 and December 31, 2017, respectively), matures December 31, 2019 | | 5,940 |
| | 5,940 |
|
| Unsecured note payable under class action settlement, face amount of $10.2 million, net discount of $0.8 million and $1.2 million at September 30, 2018 and December 31, 2017, respectively, 4% annual coupon interest rate (14.6% effective yield), interest payable quarterly, matures April 28, 2019 | | 9,643 |
| | 8,938 |
|
| $2.3 million special assessment bonds dated between 2002 and 2007, secured by the residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022 (classified as held for sale as of March 31, 2018) | | 103 |
| | 116 |
|
| Total notes payable | | 36,054 |
| | 34,551 |
|
| Less: deferred financing costs of notes payable | | (360 | ) | | (446 | ) |
| Total notes payable, net | | $ | 35,694 |
| | $ | 34,105 |
|
|
| | | | | | | | |
| | | June 30, | | December 31, |
| | | 2019 | | 2018 |
| $37.0 million note payable, as amended, to MidFirst Bank secured by a first lien on an operating hotel property, interest-only payments due monthly at the 30-day Libor (2.40% and 2.50% at June 30, 2019 and December 31, 2018, respectively) plus 3.54% to 3.75% depending on compensating balances and meeting certain financial thresholds and terms (5.94% and 5.84% effective rate at June 30, 2019 and December 31, 2018, respectively), matures October 1, 2020 with two one-year extension options, with construction completion and repayment guarantees provided by the Company. | | $ | 32,589 |
| | $ | 20,669 |
|
| $11.0 million note payable to JPMorgan Chase Funding Inc. (a related party), is secured by the $13.2 million first mortgage note on the property known as Broadway Tower, bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved. | | 11,000 |
| | — |
|
| $5.9 million note payable secured by real estate in New Mexico, annual interest only payments based on annual interest rates of prime plus 3.0% through maturity date of December 31, 2019. 8.5% and 8.25% as of June 30, 2019 and December 31, 2018, respectively. | | 5,940 |
| | 5,940 |
|
| Unsecured note payable under class action settlement, face amount of $10.2 million, net of discount of $30 thousand and $0.3 million at June 30, 2019 and December 31, 2018, respectively, 4% annual coupon interest rate (14.6% effective yield), interest payable quarterly, matured and paid in full on April 28, 2019. | | — |
| | 9,899 |
|
| Special assessment bonds dated between 2002 and 2007, secured by the residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022 (classified as held for sale as of March 31, 2018). | | 75 |
| | 90 |
|
| Total notes payable | | 49,604 |
| | 36,598 |
|
| Less: deferred financing costs of notes payable | | (346 | ) | | (284 | ) |
| Total notes payable | | $ | 49,258 |
| | $ | 36,314 |
|
Interest expense for the three months ended SeptemberJune 30, 20182019 and 20172018 was $0.8$0.3 million and $0.4$0.8 million, respectively. Interest expense for the ninesix months ended SeptemberJune 30, 2019 and 2018 and 2017 was $2.3$0.8 million and $2.4$1.5 million, respectively. Interest expenseThe Company capitalized
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued
interest relating to the MacArthur Loan in the amount of $0.3 million and $0.8 million for the ninethree and six months ended SeptemberJune 30, 2017 includes $1.1 million which is included in income from discontinued operations in the accompanying condensed consolidated statements of operations.2019. There was no capitalized interest during 2018.
Senior Indebtedness
MacArthur Place
In October 2017, we borrowedclosed on a $32.3 million acquisition and construction loan from MidFirst Bank in connection with our purchase of MacArthur Place (the “MacArthur Loan”), of which (i) $19.4 million was utilized for the purchase of MacArthur Place, (ii) approximately $10.0 million of which was being set aside to fund planned hotel improvements, and (iii) the balance is to fund interest reserves and operating capital. TheDuring the six months ended June 30, 2019, the MacArthur Loan was modified to, among other things, increase the total loan facility to $37.0 million, thereby increase the Company’s equity commitment to $27.7 million due to projected increased renovation costs, and to establish certain additional reserve accounts in the amount of $2.0 million for the completion of certain aspects of the renovation project. The principal balance of the loan was $32.6 million and $20.7 million at June 30, 2019 and December 31, 2018, respectively. The loan bears floating interest equal to the 30-day LIBOR rate (2.26% and 1.56%(2.40% at SeptemberJune 30, 2018 and December 31, 2017, respectively)2019) plus 3.75%3.54%, which may be reduced by up to 0.50% if certain conditions are met.met, which were met as of June 30, 2019. The loan has an initial term of three years subject to the right of the Company to extend the maturity date for two one-year periods, provided that the loan is in good standing and upon satisfaction of certain other conditions, including payment of an extension fee equal to 0.35% of outstanding principal per extension. The Company is required to make interest-only payments during the initial three year term. During the three and ninesix months ended SeptemberJune 30, 2018,2019, the Company made interestloan draws totaling $0.3$11.9 million, of which $11.2 million represented renovation cost and operating draws and $0.8 million respectivelyrepresented draws against the interest reserve on the loan. The Company incurred deferred financing fees of $0.5 million which are being amortized over the term of the loan using the effective interest method.
The MacArthur Loan is secured by a deed of trust on all MacArthur Place real property and improvements, and a security interest in all furniture, fixtures and equipment, licenses and permits, and MacArthur Place related revenues. The Company agreed to provide a construction completion guaranty with respect to the planned improvement project which shall be released upon payment of all project costs and receipt of a certificate of occupancy. In addition, the Company provided a loan repayment guaranty equal to 50% of the loan principal along with a guaranty of interest and operating deficits, as well as other customary carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum tangible
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued
net worth as defined, of $50.0 million and minimum liquidity of $5.0 million throughout the term of the loan. Preferred equity is included as a component of equity with respect to the minimum tangible net worth covenant. The Company was in compliance with these covenants and guarantees at June 30, 2019. The loan includes a provision requiring substantial completion of the project by June 30, 2019 which the lender agreed to waive and extend to September 30, 2018 and December 31, 2017.1, 2019. In addition, the Company is required to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.
Exchange Notes
In April 2014, we completed an offering of a five-year, 4%, unsecured notes to certain of our shareholders in exchange for common stock held by such shareholders at an exchange price of $8.02 per share (“Exchange Offering”). Upon completion of the 2014 Exchange Offering, we issued Exchange Offering notes (“EO Notes”) with a face value of $10.2 million,million. which were recorded by the Company at fair value of $6.4 million based on the fair value and the imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an initial debt discount on the EO Notes of $3.8 million with a balance of $0.4 million at September 30, 2018. This amount is reflected as a debt discount in the accompanying financial statements and is beingwhich was amortized as an adjustment to interest expense using the effective interest method over the term of the EO Notes. Interest is payable quarterly in arrears each January, April, July, and October. The EO Notes mature on April 28, 2019, and may be prepaid in whole or in part without penalty atamortized discount added to the option of the Company. Had the Company met certain minimum cash and profitability conditions, the Company would have been required to prepay fifty percent (50%) of the outstanding principal balance of the EO Notes during the six months ended June 30, 2019 totaled $0.3 million. The EO Notes matured and all outstanding principal and interest were paid on April 29, 2018. Such conditions were not met and no prepayment was required.2019.
As describedJPMorgan Chase Funding Inc. Master Repurchase Agreement (related party)
In the second quarter of 2019, we conducted a UCC foreclosure on the collateral securing a defaulted mezzanine note receivable That collateral was 100% of the membership interests in Note 15, subsequent to September 30, 2018,a limited liability company that owns a commercial real estate building and operations in St. Louis, Missouri, known as Broadway Tower, thereby assuming its assets and liabilities, including $13.2 million mortgage note payable secured by Broadway Tower. In a related transaction, a subsidiary of the Company commencedpurchased the $13.2 million first mortgage note secured by Broadway Tower. Since we own both the entity that owns the first mortgage note, as well as the entity that owes this obligation, the first mortgage loan and related interest has been eliminated in consolidation.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued
The purchase of the first mortgage note was funded partially with an offering to existing noteholders$11.0 million loan (under a master repurchase agreement) from Chase Funding and the balance using Company funds. The Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend the maturity date of the EO Notes to December 15,May 2021 if, among other conditions, certain debt yield and increase the interest rate from 4%occupancy percentages are achieved. The master purchase agreement is subject to 7%.a third party loan servicing agreement.
Our notes payable and special assessment obligations have the following scheduled maturities as of SeptemberJune 30, 20182019 (in thousands):
| | | Year | | Amount | | Amount |
| 2018 | | $ | 14 |
| |
| 2019 | | 15,612 |
| | $ | 16,954 |
|
| 2020 | | 20,394 |
| | 32,616 |
|
| 2021 | | 26 |
| | 26 |
|
| 2022 | | 8 |
| | 8 |
|
| Less: deferred financing costs of notes payable | | (360 | ) | | (346 | ) |
| Total | | $ | 35,694 |
| | $ | 49,258 |
|
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 –— SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision makers in deciding how to allocate resources and in assessing performance.
The information presented in our reportable segments tables that follow are based in part on internal allocations which involve management judgment. Substantially all revenues recorded are from external customers. There is no material intersegment activity.
Our operating segments reflect the distinct business activities from which revenues are earned and expenses incurred that are evaluated regularly by our executive management team in assessing performance and in deciding how to allocate resources. As of and for the three and six months ended June 30, 2019 and 2018, the Company’s reportable segments consisted of the following:
Hospitality and Entertainment Operations — Consists of revenues less direct operating expenses, depreciation and amortization relating to our hotel, spa, and food & beverage operations. This segment also reflects the carrying value of such assets and the related financing and operating obligations.
Mortgage and REO - Legacy Portfolio and Other Operations — Consists of the collection, workout and sale of new and legacy loans and REO assets, including financing of such asset sales, as well as the operating expenses (if any), carrying costs and other related expenses of such assets. This segment also includes operating properties that do not represent a strategic operating objective of the Company, such as Broadway Tower, and their rental revenue and tenant recoveries less direct property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses), depreciation and amortization from commercial real estate leasing operations, and the carrying value of such assets and the related financing and operating obligations.
Corporate and Other — Consists of our centralized general and administrative and corporate treasury activities. This segment also includes reclassifications and eliminations between the reportable operating segments and reflects the carrying value of corporate fixed assets and the related financing and operating obligations.
Condensed consolidated financial information for our reportable operating segments as of SeptemberJune 30, 20182019 and December 31, 20172018 and for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 is summarized as follows (in thousands):
|
| | | | | | | | |
| | | September 30, | | December 31, |
| Balance Sheet Items | | 2018 | | 2017 |
| Total Assets | | | | |
| Mortgage and REO - Legacy portfolio and other options | | $ | 67,112 |
| | $ | 66,577 |
|
| Hospitality and entertainment operations | | 44,877 |
| | 39,337 |
|
| Corporate and other | | 33,770 |
| | 8,544 |
|
| Consolidated total | | $ | 145,759 |
| | $ | 114,458 |
|
| | | | | |
| | | |
|
| Nine months ended September 30, |
| Cash Flow Items |
| 2018 |
| 2017 |
| Expenditures for additions to long-lived assets |
|
|
|
|
| Mortgage and REO - Legacy portfolio and other options |
| $ | 2,321 |
|
| $ | 733 |
|
| Hospitality and entertainment operations |
| 4,887 |
|
| 650 |
|
| Corporate and other |
| 23 |
|
| 388 |
|
| Consolidated total |
| $ | 7,231 |
|
| $ | 1,771 |
|
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – SEGMENT INFORMATION - continued
|
| | | | | | | | | | | | | | | | |
| | | Three months ended September 30, 2018 |
| Income Statement Items | | Mortgage and REO Legacy Portfolio and Other Operations | | Hospitality and Entertainment Operations | | Corporate and Other | | Consolidated |
| | | | | | | | | |
| Revenues | | | | | | | | |
| Mortgage loan income | | $ | 709 |
| | $ | — |
| | $ | — |
| | $ | 709 |
|
| Operating property, management fees, and other | | 3 |
| | 2,082 |
| | 32 |
| | 2,117 |
|
| Total Revenue | | 712 |
| | 2,082 |
| | 32 |
| | 2,826 |
|
| | | | | | | | | |
| Total Operating Expenses | | 843 |
| | 3,228 |
| | 2,413 |
| | 6,484 |
|
| | | | | | | | | |
| Other (income) expense | | | | | | | | |
| Gain on disposal of assets, net | | (3,543 | ) | | — |
| | — |
| | (3,543 | ) |
| Recovery of credit losses | | — |
| | — |
| | — |
| | — |
|
| Total Other (income) | | (3,543 | ) | | — |
| | — |
| | (3,543 | ) |
| | | | | | | | | |
| Total Costs and expense, net | | (2,700 | ) | | 3,228 |
| | 2,413 |
| | 2,941 |
|
| Net Income (loss) | | $ | 3,412 |
| | $ | (1,146 | ) | | $ | (2,381 | ) | | $ | (115 | ) |
|
| | | | | | | | |
| | | June 30, | | December 31, |
| Balance Sheet Items | | 2019 | | 2018 |
| Total Assets | | | | |
| Mortgage and REO Legacy portfolio and other operations | | $ | 81,744 |
| | $ | 67,658 |
|
| Hospitality and entertainment operations | | 64,075 |
| | 52,753 |
|
| Corporate and other | | 11,219 |
| | 23,228 |
|
| Consolidated total | | $ | 157,038 |
| | $ | 143,639 |
|
| | | | | |
| | | Six Months Ended June 30, |
| Cash Flow Items | | 2019 | | 2018 |
| Expenditures for additions to long-lived assets | | | | |
| Mortgage and REO Legacy portfolio and other operations | | $ | — |
| | $ | 1,421 |
|
| Hospitality and entertainment operations | | 9,804 |
| | 1,736 |
|
| Corporate and other | | 23 |
| | 24 |
|
| Consolidated total | | $ | 9,827 |
| | $ | 3,181 |
|
|
| | | | | | | | | | | | | | | | |
|
| Three months ended September 30, 2017 |
| Income Statement Items |
| Mortgage and REO Legacy Portfolio and Other Operations |
| Hospitality and Entertainment Operations |
| Corporate and Other |
| Consolidated |
|
|
|
|
|
|
|
|
|
| Revenues |
|
|
|
|
|
|
|
|
| Mortgage loan income |
| $ | 350 |
|
| $ | — |
|
| $ | — |
|
| $ | 350 |
|
| Operating property, management fees, and other |
| 37 |
|
| 176 |
|
| 87 |
|
| 300 |
|
| Total Revenue |
| 387 |
|
| 176 |
|
| 87 |
|
| 650 |
|
|
|
|
|
|
|
|
|
|
| Total Operating Expenses |
| 901 |
|
| 197 |
|
| 2,507 |
|
| 3,605 |
|
|
|
|
|
|
|
|
|
|
| Other (income) expense |
|
|
|
|
|
|
|
|
| Gain on disposal of assets, net |
| (321 | ) |
| — |
|
| — |
|
| (321 | ) |
| Recovery of credit losses |
| (6,070 | ) |
| — |
|
| — |
|
| (6,070 | ) |
| Impairment of Real Estate Owned |
| 344 |
|
| — |
|
| — |
|
| 344 |
|
| Equity loss from unconsolidated entities, net |
| 68 |
|
| — |
|
| — |
|
| 68 |
|
| Total Other (income) |
| (5,979 | ) |
| — |
|
| — |
|
| (5,979 | ) |
|
|
|
|
|
|
|
|
|
| Total Costs and expense, net |
| (5,078 | ) |
| 197 |
|
| 2,507 |
|
| (2,374 | ) |
| Income (loss) from continuing operations, before income taxes |
| 5,465 |
|
| (21 | ) |
| (2,420 | ) |
| 3,024 |
|
| Income (loss) from discontinued operations, net of tax |
| — |
|
| 30 |
|
| — |
|
| 30 |
|
| Net Income (loss) |
| $ | 5,465 |
|
| $ | 9 |
|
| $ | (2,420 | ) |
| $ | 3,054 |
|
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, 2019 |
| Income Statement Items | | Mortgage and REO Legacy Portfolio and Other Operations | | Hospitality and Entertainment Operations | | Corporate and Other | | Consolidated |
| | | | | | | | | |
| Revenues | | | | | | | | |
| Operating property revenue | | $ | 398 |
| | $ | 1,482 |
| | $ | — |
| | $ | 1,880 |
|
| Mortgage loan income | | 447 |
| | — |
| | — |
| | 447 |
|
| Management fees, investment and other income | | 3 |
| | — |
| | 205 |
| | 208 |
|
| Total revenue | | 848 |
| | 1,482 |
| | 205 |
| | 2,535 |
|
| | | | | | | | | |
| Total operating expenses | | 1,134 |
| | 4,355 |
| | 2,147 |
| | 7,636 |
|
| | | | | | | | | |
| Other (income) expense | | | | | | | | |
| Gain on disposal of assets | | (20 | ) | | — |
| | — |
| | (20 | ) |
| Recovery of credit losses | | (1,135 | ) | | — |
| | — |
| | (1,135 | ) |
| Unrealized loss on derivatives | | — |
| | 124 |
| | — |
| | 124 |
|
| Total other (income) expense | | (1,155 | ) | | 124 |
| | — |
| | (1,031 | ) |
| | | | | | | | | |
| Total costs and expense, net | | (21 | ) | | 4,479 |
| | 2,147 |
| | 6,605 |
|
| Income (loss) before income taxes | | 869 |
| | (2,997 | ) | | (1,942 | ) | | (4,070 | ) |
| (Provision for) benefit from income taxes | | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | | $ | 869 |
| | $ | (2,997 | ) | | $ | (1,942 | ) | | $ | (4,070 | ) |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – SEGMENT INFORMATION - continued
|
| | | | | | | | | | | | | | | | |
|
| Nine months ended September 30, 2018 |
| Income Statement Items |
| Mortgage and REO Legacy Portfolio and Other Operations |
| Hospitality and Entertainment Operations |
| Corporate and Other |
| Consolidated |
|
|
|
|
|
|
|
|
|
| Revenues |
|
|
|
|
|
|
|
|
| Mortgage loan income |
| $ | 1,976 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,976 |
|
| Operating property, management fees, and other |
| 2 |
|
| 5,993 |
|
| 81 |
|
| 6,076 |
|
| Total Revenue |
| 1,978 |
|
| 5,993 |
|
| 81 |
|
| 8,052 |
|
|
|
|
|
|
|
|
|
|
| Total Operating Expenses |
| 2,256 |
|
| 9,440 |
|
| 6,877 |
|
| 18,573 |
|
|
|
|
|
|
|
|
|
|
| Other (income) expense |
|
|
|
|
|
|
|
|
| Gain on disposal of assets, net |
| (3,938 | ) |
| — |
|
| — |
|
| (3,938 | ) |
| Recovery of credit losses |
| (175 | ) |
| — |
|
| — |
|
| (175 | ) |
| Total Other (income) |
| (4,113 | ) |
| — |
|
| — |
|
| (4,113 | ) |
|
|
|
|
|
|
|
|
|
| Total Costs and expense, net |
| (1,857 | ) |
| 9,440 |
|
| 6,877 |
|
| 14,460 |
|
| Net Income (loss) |
| $ | 3,835 |
|
| $ | (3,447 | ) |
| $ | (6,796 | ) |
| $ | (6,408 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Nine months ended September 30, 2017 |
| Income Statement Items | | Mortgage and REO Legacy Portfolio and Other Operations | | Hospitality and Entertainment Operations | | Corporate and Other | | Consolidated |
| | | | | | | | | |
| Revenues | | | | | | | | |
| Mortgage loan income | | $ | 402 |
| | $ | — |
| | $ | — |
| | $ | 402 |
|
| Operating property, management fees, and other | | 114 |
| | 2,170 |
| | 206 |
| | 2,490 |
|
| Total Revenue | | 516 |
| | 2,170 |
| | 206 |
| | 2,892 |
|
| | | | | | | | | |
| Total Operating Expenses | | 3,302 |
| | 1,700 |
| | 7,824 |
| | 12,826 |
|
| | | | | | | | | |
| Other (income) expense | | | | | | | | |
| Gain on disposal of assets, net | | (1,867 | ) | | (169 | ) | | — |
| | (2,036 | ) |
| Recovery of credit losses | | (6,348 | ) | | — |
| | (60 | ) | | (6,408 | ) |
| Impairment of Real Estate Owned, Net | | 344 |
| | — |
| | — |
| | 344 |
|
| Equity loss from unconsolidated entities, net | | 239 |
| | — |
| | — |
| | 239 |
|
| Total Other Income | | (7,632 | ) | | (169 | ) | | (60 | ) | | (7,861 | ) |
| | | | | | | | | |
| Total Costs and expense, net | | (4,330 | ) | | 1,531 |
| | 7,764 |
| | 4,965 |
|
| Income (loss) from continuing operations, before income taxes | | 4,846 |
| | 639 |
| | (7,558 | ) | | (2,073 | ) |
| Income from discontinued operations, net of tax | | — |
| | 4,766 |
| | — |
| | 4,766 |
|
| Net Income (loss) | | $ | 4,846 |
| | $ | 5,405 |
| | $ | (7,558 | ) | | $ | 2,693 |
|
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, 2018 |
| Income Statement Items | | Mortgage and REO Legacy Portfolio and Other Operations | | Hospitality and Entertainment Operations | | Corporate and Other | | Consolidated |
| | | | | | | | | |
| Revenues | | | | | | | | |
| Operating property revenue | | $ | — |
| | $ | 2,105 |
| | $ | — |
| | $ | 2,105 |
|
| Mortgage loan income | | 641 |
| | — |
| | — |
| | 641 |
|
| Management fees, investment and other income | | — |
| | 242 |
| | 13 |
| | 255 |
|
| Total revenue | | 641 |
| | 2,347 |
| | 13 |
| | 3,001 |
|
| | | | | | | | | |
| Total operating expenses | | 556 |
| | 3,019 |
| | 2,240 |
| | 5,815 |
|
| | | | | | | | | |
| Other (income) expense | | | | | | | | |
| Gain on disposal of assets, net | | (142 | ) | | — |
| | — |
| | (142 | ) |
| Recovery of credit losses | | (175 | ) | | — |
| | — |
| | (175 | ) |
| Total other income | | (317 | ) | | — |
| | — |
| | (317 | ) |
| | | | | | | | | |
| Total costs and expense, net | | 239 |
| | 3,019 |
| | 2,240 |
| | 5,498 |
|
| Income (loss) from continuing operations, before income taxes | | 402 |
| | (672 | ) | | (2,227 | ) | | (2,497 | ) |
| (Provision for) benefit from income taxes | | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | | $ | 402 |
| | $ | (672 | ) | | $ | (2,227 | ) | | $ | (2,497 | ) |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – SEGMENT INFORMATION - continued
|
| | | | | | | | | | | | | | | | |
|
| Six Months Ended June 30, 2019 |
| Income Statement Items |
| Mortgage and REO Legacy Portfolio and Other Operations |
| Hospitality and Entertainment Operations |
| Corporate and Other |
| Consolidated |
|
|
|
|
|
|
|
|
|
| Revenues |
|
|
|
|
|
|
|
|
| Operating property revenue | | $ | 398 |
|
| $ | 1,795 |
|
| $ | — |
| | $ | 2,193 |
|
| Mortgage loan income |
| 1,098 |
|
| — |
|
| — |
|
| 1,098 |
|
| Management fees, investment and other income |
| 5 |
|
| — |
|
| 271 |
|
| 276 |
|
| Total revenue |
| 1,501 |
|
| 1,795 |
|
| 271 |
|
| 3,567 |
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
| 1,625 |
|
| 7,404 |
|
| 4,485 |
|
| 13,514 |
|
|
|
|
|
|
|
|
|
|
| Other (income) expense |
|
|
|
|
|
|
|
|
| Gain on Disposal of Assets, Net |
| (20 | ) |
| — |
|
| — |
|
| (20 | ) |
| Recovery of credit losses |
| (1,135 | ) |
| — |
|
| — |
|
| (1,135 | ) |
| Unrealized loss on derivatives |
| — |
|
| 291 |
|
| — |
|
| 291 |
|
| Total other (income) expense |
| (1,155 | ) |
| 291 |
|
| — |
|
| (864 | ) |
|
|
|
|
|
|
|
|
|
| Total costs and expense, net |
| 470 |
|
| 7,695 |
|
| 4,485 |
|
| 12,650 |
|
| Income (loss) before income taxes |
| 1,031 |
|
| (5,900 | ) |
| (4,214 | ) |
| (9,083 | ) |
| (Provision for) benefit from income taxes |
| — |
|
| — |
|
| — |
|
| — |
|
| Net income (loss) |
| $ | 1,031 |
|
| $ | (5,900 | ) |
| $ | (4,214 | ) |
| $ | (9,083 | ) |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – SEGMENT INFORMATION - continued
|
| | | | | | | | | | | | | | | | |
|
| Six Months Ended June 30, 2018 |
| Income Statement Items |
| Mortgage and REO Legacy Portfolio and Other Operations |
| Hospitality and Entertainment Operations |
| Corporate and Other |
| Consolidated |
|
|
|
|
|
|
|
|
|
| Revenues |
|
|
|
|
|
|
|
|
| Operating property revenue | | $ | — |
| | $ | 3,668 |
| | $ | — |
| | $ | 3,668 |
|
| Mortgage loan income |
| 1,266 |
|
| — |
|
| — |
|
| 1,266 |
|
| Management fees, investment and other income |
| — |
|
| 243 |
|
| 49 |
|
| 292 |
|
| Total revenue |
| 1,266 |
|
| 3,911 |
|
| 49 |
|
| 5,226 |
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
| 1,412 |
|
| 6,212 |
|
| 4,463 |
|
| 12,087 |
|
|
|
|
|
|
|
|
|
|
| Other (income) expense |
|
|
|
|
|
|
|
|
| Gain on disposal of assets, net |
| (395 | ) |
| — |
|
| — |
|
| (395 | ) |
| Recovery of credit losses |
| (175 | ) |
| — |
|
| — |
|
| (175 | ) |
| Total other income |
| (570 | ) |
| — |
|
| — |
|
| (570 | ) |
|
|
|
|
|
|
|
|
|
| Total costs and expense, net |
| 842 |
|
| 6,212 |
|
| 4,463 |
|
| 11,517 |
|
| Income (loss) from continuing operations, before income taxes |
| 424 |
|
| (2,301 | ) |
| (4,414 | ) |
| (6,291 | ) |
| (Provision for) benefit from income taxes |
| — |
|
| — |
|
| — |
|
| — |
|
| Net income (loss) |
| $ | 424 |
|
| $ | (2,301 | ) |
| $ | (4,414 | ) |
| $ | (6,291 | ) |
NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE
Common Stock
Shares of Common Stock, Class B Common Stock, Class C Common Stock, and Class D Common Stock share proportionately in our earnings and losses attributable to common shareholders. During the nine months ended September 30, 2018, a shareholder
voluntarily surrendered and relinquished its entire ownership interest in the Company representing 44,068 shares of Class C common stock. Such shares have been recorded as treasury stock. There are no shares of Class D Common Stock outstanding as of SeptemberJune 30, 20182019 or December 31, 2017.2018.
Preferred Stock
In July 2014, the Company issued a total of 8.2 million shares of the Company’s Series B-1 and B-2 Cumulative Convertible Preferred Stock to certain investor groups in exchange for $26.4 million. Except for certain voting and transfer rights, the rights and obligations of the Series B-1 Preferred Stock and Series B-2 Preferred Stock are substantially the same. On April 11, 2017, Chase Funding, an affiliate of JPMorgan Chase & Co., purchased all of the Company’s outstanding Series B-2 Preferred Shares.Shares directly from the initial purchaser of such shares.
On February 9, 2018, Chase Funding purchased 2,352,941 shares of ourthe Company’s Series B Preferred Stock (the “Series B-3 Preferred Stock”), and together with our Series B-1 Cumulative Convertible Preferred Stock (the “Series(“Series B-3 Preferred Stock,” and collectively with the Series B-1 Preferred Stock”)Stock and our Series B-2 Cumulative Convertible Preferred Stock, $0.01 par value per share, of the Company (the “Series B-2 Preferred Stock”), referred to herein as the (“Series B Preferred Stock”), at a purchase price of $3.40 per share, for a total purchase price of $8.0 million. Dividends on the Series B-3 Preferred Stock are cumulative and accrue from the issue date and compound quarterly at the rate of 5.65% of the issue price per year, and are payable quarterly in arrears. Holders of the Series B-3 Preferred Stock are entitled to receive a liquidation preference of 145% of the sum of the original price per share of Series B-3 Preferred Stock plus all accrued and unpaid dividends. The Series B-3 Preferred Stock contains redemption features similar in all material respects to those of all Series BB-1 and B-2 Cumulative Convertible Preferred, stock, which are disclosed in IMH’s annual 10-K for the year ended December 31, 2017.2018.
On February 9, 2018,July 23, 2019 with an effective date of April 1, 2019, we entered into a Deferral and Consent agreement with the holders of our Series B Preferred Stock pursuant to which they agreed to extend the redemption date for one (1) year. A cash payment in the
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued
aggregate amount of $2.6 million is due and payable to the holders of the Series B-1 and B-2 Preferred Stock on July 24, 2020 whether or not a redemption is requested.
Concurrent with Chase Funding’s purchase of our Series B-3 Cumulative Convertible Preferred Stock, the Company issued to Chase Funding a warrant to acquire up to 600,000 shares of the Company’s common stock (the “JPM Warrant”). The JPM Warrant is exercisable at any time on or after February 9, 2021 for a two (2) year period, and has an exercise price of $2.25 per share. The JPM Warrant provides for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to customary anti-dilution provisions based on future corporate events. The JPM Warrant is exercisable in cash, and subject to certain conditions may also be exercised on a cashless basis. The warrant is classified in stockholders’ equity under the applicable guidance and were recorded at relative fair value at issuance.
Series A Redeemable Preferred Perpetual Stock IssuanceIssuance
On May 31, 2018, Chase Funding purchased 22,000 shares of ourthe Company’s Series A Senior Redeemable Preferred Stock (the “Series A Preferred Stock”) at a purchase price of $1,000 per share, for a purchasedtotal purchase price of $22.0 million.
The Series A Preferred Stock ranks senior with respect to dividend and redemption rights and rights upon liquidation, dissolution or winding up of the CorporationCompany to all other classes or series of shares of the Company’s preferred and common stock and to all other equity securities issued by the Company from time to time. The Series A Preferred Stock is non-voting stock. Holders of the Series A Preferred Stock are entitled to receive a liquidation preference equal to the sum of the Face Valueinitial purchase price of the Series A Preferred Stock plus all accrued and unpaid dividends. Dividends on the Series A Preferred Stock are cumulative and accrue from the issue date at the rate of 7.5% of the issue price per year, payable quarterly in arrears on or before the last day of each calendar quarter. The Company has certain call rights with respect to the Series A Preferred Stock and the holders of Series A Preferred Stock have certain put rights which includes an acceleration of the holder’s put right on redemption ofif the Company is required to redeem any shares of junior securities in the resultevent of a Noncompliance Redemption Demand.certain non-compliance events as described in the Company’s Series B Preferred Certificate of Designation.
Our Series B Preferred Stock and Series A Preferred stockStock are classified as mezzanine equity onin the accompanying condensed consolidated balance sheets at September 30, 2018 and December 31, 2017.sheets.
AdditionalTreasury Stock Related Issuances
Our First AmendedOn January 11, 2019, the Company concluded a tender offer to purchase up to 477,170 shares of Class B Common Stock and Restated 2010 IMH Financial Corporation Employee Stock Incentive Plan (“Equity Incentive Plan”) provides22,830 shares of Class C common stock for awards /.of$2.00 per share. The tender offer was over-subscribed and the 500,000 shares were purchased on a pro rata basis among the participating shareholders. The repurchase of these shares was treated as a treasury stock options, stock appreciation rights, restricted stock units and other performance based awards to our
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
repurchase as reflected in the condensed consolidated balance sheet.
NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued
officers, employees, directors and certain consultants. The maximum number of shares of common stock available to be issued under such awards was not to exceed 2,700,000 common shares, subject to increase to 3,300,000 shares after an initial public offering.Share-Based Compensation
During the ninesix months ended SeptemberJune 30, 2018,2019, the Company issued 517,252,167,984 shares of common stock pursuant to previous restricted stock awards. We granted 110,979 options to employees pursuant to our Equity Incentive Plan during the nine months ended September 30, 2018. 30,000 of those options have an exercise price of $1.81 per share and have an estimated fair value of $0.73 per option. 80,979 of those options have an exercise price of $2.65 and have an estimated fair value of $1.06 per option and all options vest over a three year term. During the nine months ended September 30, 2018, approximately 64,000 options and approximately 20,000 unvested restricted shares were forfeited as a result of employment terminations.
In addition, during the nine months ended September 30, 2018, theThe Company issued a total of 74,136did not grant shares of restricted common stock to our non-employee independent directors pursuant toor stock options during the 2014 Non-Employee Director Compensation Plan for fiscal year 2017. 44,132 of those shares of a fair value of $1.81three and vested on June 29, 2018. 30,004 shares had a fair value on issuance of $2.67 and vest onsix months ended June 30, 2019.2019, nor were any stock options or warrants exercised or forfeited during that period.
As of SeptemberJune 30, 2018,2019, there were (i) 1,112,6271,102,627 stock options outstanding, of which 852,327983,429 shares were fully vested, (ii) 2,600,000 fully-vested stock warrants outstanding; and (iii) 509,092172,800 shares of unvested restricted stock grants outstanding. Vested restricted stock grants have been issued and are included in outstanding common stock.
Net stock-based compensation expense relating to the stock-based awards was $0.2 million and $0.4$0.1 million for each of the three and nine months ended SeptemberJune 30, 2019 and 2018, respectively, and $0.2 million and $0.6 million for each of the three and ninesix months ended SeptemberJune 30, 2017, respectively. No stock options or warrants were exercised2019 and we2018. We did not receive any cash from option or warrant exercises during the ninethree or six months ended SeptemberJune 30, 20182019 or 2017.2018. As of SeptemberJune 30, 2018,2019, there was $0.6$0.4 million of unrecognized compensation cost related to the time-based restricted stock that is expected to be recognized as a charge to earnings over a weighted-average vesting period of 1.331.63 years.
Net Income (Loss) Per Share
The Company has adopted the two-class computation method, and thus includes all participating securities in the computation of basic shares for the periods in which the Company has net income available to common shareholders. A participating security is
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued
defined as an unvested share-based payment award containing non-forfeitable rights to dividends regardless of whether or not the awards ultimately vest or expire. Net losses are not allocated to participating securities unless the holder has a contractual obligation to share in the losses.
The following table presents a reconciliation of net loss to net loss attributable to common shareholders used in the basic and diluted earnings per share calculations for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 (amounts in thousands, except for per share data):
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE – continued
|
| | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Earnings allocable to common shares: | | | | | | | | |
| Numerator - Loss Attributable to Common Shareholders: | | | | | | | | |
| Net Loss from continuing operations | | $ | (115 | ) | | $ | 3,024 |
| | $ | (6,408 | ) | | $ | (2,073 | ) |
| Loss attributable to noncontrolling interest loss allocation | | (1,105 | ) | | 1,224 |
| | (990 | ) | | 490 |
|
| Preferred dividends - cash and deemed | | (1,997 | ) | | (1,224 | ) | | (5,114 | ) | | (3,616 | ) |
| Net Loss from continuing operations attributable to common shareholders | | (3,217 | ) | | 3,024 |
| | (12,512 | ) | | (5,199 | ) |
| Net Income from discontinued operations attributable to common shareholders | | — |
| | 30 |
| | — |
| | 4,766 |
|
| Net (Income) Loss attributable to common shareholders | | $ | (3,217 | ) | | $ | 3,054 |
| | $ | (12,512 | ) | | $ | (433 | ) |
| | | | | | | | | |
| Denominator - Weighted average shares: |
|
|
|
|
|
|
|
|
| Weighted average number of common shares - Basic |
| 16,726,610 |
|
| 16,253,427 |
|
| 16,696,201 |
|
| 16,166,285 |
|
| Weighted average number of common shares assuming dilution |
| 16,726,610 |
|
| 25,091,821 |
|
| 16,696,201 |
|
| 16,166,285 |
|
| Basic earnings per common share: |
|
|
|
|
|
|
|
|
| Net income (loss) per share, Continuing Operations |
| $ | (0.07 | ) |
| $ | 0.26 |
|
| $ | (0.44 | ) |
| $ | (0.10 | ) |
| Preferred dividends per share |
| (0.12 | ) |
| (0.07 | ) |
| (0.31 | ) |
| (0.22 | ) |
| Net income (loss) per share, Continuing Operations, net |
| (0.19 | ) |
| 0.19 |
|
| (0.75 | ) |
| (0.32 | ) |
| Net income (loss) per share, Discontinued Operations |
| — |
|
| — |
|
| — |
|
| 0.29 |
|
| Net income (loss) attributable to common shareholders per share |
| $ | (0.19 | ) |
| $ | 0.19 |
|
| $ | (0.75 | ) |
| $ | (0.03 | ) |
| Diluted earnings per common share: |
|
|
|
|
| Net income (loss) per share, Continuing Operations |
| $ | (0.07 | ) |
| $ | 0.17 |
|
| $ | (0.44 | ) |
| $ | (0.10 | ) |
| Preferred dividends per share |
| (0.12 | ) |
| (0.05 | ) |
| (0.31 | ) |
| (0.22 | ) |
| Net income (loss) per share, Continuing Operations, net |
| (0.19 | ) |
| 0.12 |
|
| (0.75 | ) |
| (0.32 | ) |
| Net income (loss) per share, Discontinued Operations |
| — |
|
| — |
|
| — |
|
| 0.29 |
|
| Net income (loss) attributable to common shareholders per share |
| $ | (0.19 | ) |
| $ | 0.12 |
|
| $ | (0.75 | ) |
| $ | (0.03 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Earnings allocable to common shares: | | | | | |
| |
|
| Numerator - Loss Attributable to Common Shareholders: | | | | | |
| |
|
| Net loss | | $ | (4,070 | ) | | $ | (2,497 | ) | | $ | (9,083 | ) | | $ | (6,291 | ) |
| Net (income) loss attributable to non-controlling interest | | (318 | ) | | 25 |
| | (441 | ) | | 115 |
|
| Preferred dividends | | (2,019 | ) | | (1,704 | ) | | (4,007 | ) | | (3,112 | ) |
| Net loss attributable to common shareholders | | $ | (6,407 | ) | | $ | (4,176 | ) | | $ | (13,531 | ) | | $ | (9,288 | ) |
| | | | | |
|
| |
|
|
| Denominator - Weighted average shares: | | | | | |
|
| |
|
|
| Weighted average common shares outstanding for basic and diluted earnings per common share | | 16,375,649 | | 16,696,684 | | 16,383,921 |
| | 16,680,988 |
|
| | | | | |
|
| |
|
|
| Basic and diluted earnings per common share: | | | | | |
|
| |
|
|
| Net loss per common share | | $ | (0.27 | ) | | $ | (0.15 | ) | | $ | (0.58 | ) | | $ | (0.37 | ) |
| Preferred dividends per share | | (0.12 | ) | | (0.10 | ) | | (0.24 | ) | | (0.19 | ) |
| Net loss attributable to common shareholder per share | | $ | (0.39 | ) | | $ | (0.25 | ) | | $ | (0.83 | ) | | $ | (0.56 | ) |
The following securities were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive (presented ason a weighted average balances)balance):
| |
|
| Three months ended September 30, |
| Nine months ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
| Options to purchase common stock |
| 1,085,497 |
|
| 1,038,988 |
|
| 1,080,442 |
|
| 972,475 |
| | 1,085,497 |
| | 1,062,807 |
| | 1,085,497 |
| | 1,066,465 |
|
| Restricted stock |
| 318,390 |
|
| 61,128 |
|
| 362,829 |
|
| 589,835 |
| | 249,486 |
| | 372,815 |
| | 230,134 |
| | 382,638 |
|
| Warrants to purchase common stock |
| 2,541,286 |
|
| 2,000,000 |
|
| 2,600,000 |
|
| 2,000,000 |
| | 2,600,000 |
| | 2,600,000 |
| | 2,600,000 |
| | 2,470,718 |
|
| Convertible preferred stock |
| 10,216,807 |
|
| — |
|
| 10,552,941 |
|
| 8,200,000 |
| | 10,552,941 |
| | 10,552,941 |
| | 10,552,941 |
| | 10,045,954 |
|
| Total |
| 14,161,980 |
|
| 3,100,116 |
|
| 14,596,212 |
|
| 11,762,310 |
| | 14,487,924 |
| | 14,588,563 |
| | 14,468,572 |
| | 13,965,775 |
|
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — INTANGIBLE ASSETS AND GOODWILL
In connection with the purchase of MacArthur Place, we allocated a portion of the total purchase price to certain intangible assets and goodwill. Of the total $16.3 million allocated to purchased intangibles, $0.1 million, $0.8 million, and $15.4 million were allocated to trade name and other, customer relationships, and goodwill, respectively.
The changes in the carrying amount of intangibles and goodwill allocated to our Hospitality and Entertainment Operations segment for the six months ended June 30, 2019 is as follows (in thousands):
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — INTANGIBLE ASSETS AND GOODWILL - continued
|
| | | | | | | |
| Goodwill | | Other intangibles, net |
| Balance at December 31, 2018 | $ | 15,357 |
| | $ | 641 |
|
| Reductions: |
| |
|
| Amortization expense | — |
| | (140 | ) |
| Balance at June 30, 2019 | $ | 15,357 |
| | $ | 501 |
|
A summary of our intangible assets and goodwill as of SeptemberJune 30, 20182019 and December 31, 20172018 is as follows (in thousands):
| | | | | | | | | | | | | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | June 30, | December 31, |
| June 30, | December 31, |
| June 30, | December 31, |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | 2019 | 2018 | | 2019 | 2018 | | 2019 | 2018 |
| Amortizing intangible assets: | | | | | | | | | | | | | | | | | |
| Trade name and other | | $ | 90 |
| $ | 90 |
| | $ | (22 | ) | $ | (16 | ) | | $ | 68 |
| $ | 74 |
|
| Customer relationships | | $ | 800 |
| | $ | 800 |
| | $ | (267 | ) | | $ | (29 | ) | | $ | 533 |
| | $ | 771 |
| 800 |
| 800 |
| | (467 | ) | (333 | ) | | 333 |
| 467 |
|
| Trade name and other | | 90 |
| | 90 |
| | (13 | ) | | (3 | ) | | 77 |
| | 87 |
| |
| Non-amortizing intangible assets: | | | | | | |
| Liquor license | | 100 |
| 100 |
| | — |
| — |
| | 100 |
| 100 |
|
| Goodwill | | 15,357 |
| 15,357 |
| | — |
| — |
| | 15,357 |
| 15,357 |
|
| | | 890 |
| | 890 |
| | (280 | ) | | (32 | ) | | 610 |
| | 858 |
| $ | 16,347 |
| $ | 16,347 |
| | $ | (489 | ) | $ | (349 | ) | | $ | 15,858 |
| $ | 15,998 |
|
| Non-Amortizing intangible assets: | | | | | | | | | | | | | |
| Goodwill | | 15,357 |
| | 15,380 |
| | — |
| | — |
| | 15,357 |
| | 15,380 |
| |
| Liquor license | | 100 |
| | 100 |
| | — |
| | — |
| | 100 |
| | 100 |
| |
| Total intangible assets | | $ | 16,347 |
| | $ | 16,370 |
| | $ | (280 | ) | | $ | (32 | ) | | $ | 16,067 |
| | $ | 16,338 |
| |
Trade name and other, and customer relationships have weighted-average useful lives from the date of purchase of 7.0 years and 3.0 years, respectively. Goodwill and our liquor license are not subject to amortization due to the indeterminable life of such assets. Amortization expense relating to our purchased intangible assets was $0.1 million for each of the three and six months ended June 30, 2019. Amortization expense relating to our purchased intangible assets was $0.1 million and $0.3$0.2 million for the three and ninesix months ended SeptemberJune 30, 2018, respectively. We performed an impairment assessment on goodwill and intangible assets and based on this assessment, no impairment charges were recorded forannually in the three and nine months ended September 30, 2018.fourth quarter of each year.
As of SeptemberJune 30, 2018,2019, expected amortization expense for our purchased amortizing intangible assets for each of the next five years and thereafter is as follows (in thousands):
|
| | | | |
| Year | | Amount |
| 2018 | | $ | 70 |
|
| 2019 | | 280 |
|
| 2020 | | 213 |
|
| 2021 | | 13 |
|
| 2022 | | 13 |
|
| Thereafter | | 21 |
|
| Total |
| $ | 610 |
|
IMH FINANCIAL CORPORATION |
| | | | |
| Year | | Amount |
| 2019 | | $ | 140 |
|
| 2020 | | 213 |
|
| 2021 | | 13 |
|
| 2022 | | 13 |
|
| 2023 | | 13 |
|
| Thereafter | | 9 |
|
| Total | | $ | 401 |
|
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Construction and Related Guarantees
As described in Note 9, the Company agreed to provide MidFirst Bank with a loan repayment guaranty equal to 50% of the outstanding principal amount ofand accrued, unpaid interest on the MacArthur Loan, plus a 50% guaranty of hotel operating expenses, and a construction completion guaranty with respect to the planned renovations of MacArthur Place. The construction completion guaranty will be released upon payment of all project costs and receipt of a certificate of occupancy. The MidFirst Bank loan documents also require that the loan remain “in balance” throughout its term such that the sum of all remaining undisbursed loan
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued
funds and the amounts expended by the borrowerCompany will be sufficient to completemeet the approved construction budget and pay the loan interest. If the loan becomes out“out of balance,balance”, the Company must fund the differencedifference. Management expects that any excess costs not funded by loan funds will be funded using offering proceeds from its own equity.
Well Repair Commitment
Certainthe Hotel Fund in excess of the New Mexico Partnerships hold ownershipreimbursement of rightsour initial investment, and to develop water on various parcels in Sandoval County, New Mexico. In order to preserve those rights, the related partnerships have agreed with the relevant New Mexico governmental authorities to undertake a remediation plan to replace the infrastructure of two existing deep well groundwater wells on one of the parcels as a more permanent solution. Under the terms of certain secured promissory notes with the related entities, theextent necessary, Company agreed to fund the infrastructure development costs under certain secured note agreements. The balance of remaining well repair work was completed during the third quarter of 2018. Related costs totaled approximately $2.8 million of which $2.1 million was incurred during the nine months ended September 30, 2018.
Loan Origination
During the nine months ended September 30, 2018, the Company originated a construction loan for up to $13.1 million, bearing interest at 8.5% plus one month LIBOR with an initial maturity date of July 18, 2020. Funding of the loan has not commenced as of September 30, 2018 and will not commence until the borrower meets its equity requirement in the project of $9.7 million, which is expected to be met in the fourth quarter of 2018.funds.
Guarantor Recovery
As more fully described in our Form 10-K for the year ended December 31, 2017, weWe have pursued and periodically receive favorable judgments against guarantors in connection with their personal guarantees of certain legacy loans on which we previously foreclosed. Similarly, we have filed claims against certain insurance providers orand other parties for reimbursement of amounts we believe are due to the Company under such policies. Due to the uncertainty of the nature and extent of the available assets of these guarantors to pay the judgment amounts or amounts collectible under insurance claims, we do not record recoveries for any amounts due under such judgments or claims, except to the extent we have received assets without contingencies. Nevertheless, these matters may be subject to appeal.
During the three and nine months ended September 30, 2018, we recorded cash, receivables and/or other asset recoveries of $0 and $0.2 million from guarantor settlements, insurance recoveries and other settlements. During the three and nine months ended September 30, 2017 we recorded cash, receivables and/or other asset recoveries of $6.1 million and $6.4 million, respectively from guarantor settlement, insurance recoveries and other settlements.
We continue to pursue, investigate and evaluate the assets available of guarantors to collect all amounts due under judgments received in our favor. However, to the extent that such amounts are not determinable, they have not been recognized as recovery income in the accompanying consolidated statements of operations. Further recoveries under this and other judgments received in our favor will be recognized when realization of the recovery is deemed probable and when all contingencies relating to recovery have been resolved. We recorded recoveries during the three and six months ended June 30, 2019 of $1.1 million relating to cash collected on a guarantor claim. We recorded recoveries during the three and six months ended June 30, 2018 of $0.2 million.
IMH FINANCIAL CORPORATIONEmployee Benefit Plan
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued
The Company, through its human resource provider, participates in a 401(k) retirement savings plan that allows for eligible participants to defer compensation, subject to certain limitations imposed by the Code. The Company may provide a discretionary matching contribution of up to 4% of each participant’s eligible compensation. During each of the three months ended June 30, 2019 and 2018, the Company’s matching contribution was $0.1 million, which is included in general and administrative expenses in the accompanying consolidated statement of operations.
Legal Matters
We may be a party to litigation as the plaintiff or defendant in the ordinary course of business. While various asserted and unasserted claims may exist, resolution of these matters cannot be predicted with certainty. We establish reserves for legal claims when payments associated with the claims become probable and the payments can be reasonably estimated. Given the uncertainty of predicting the outcome of litigation and regulatory matters, it is generally difficult to predict what the eventual outcome will be, and when the matter will be resolved. The actual costs of resolving legal claims may be materially higher or lower than any amounts reserved for the claims.
Partnership Claims
In August 2016, a limited liability company member of Carinos Properties, LLC (“Carinos”) and Unit 6 Partners, LLC (“UP6”), filed a complaint in the United States District Court for the District of Arizona (“Federal Court”) generally alleging the Company breached its fiduciary duty to plaintiff under ERISA with respect to certain property we own in New Mexico. Damages were not specified. In April 2018, the court denied the Company’s motion for summary judgment in the case, but stayed any further action in the case pending the results of related litigation before the state trial court (“State Court”) described below. Management believes plaintiff’s claims are without merit and intends to vigorously defend againstDamages were not specified in the Federal Court. A settlement in this claim.
On April 20, 2017, a subsidiarymatter was reached in July 2019. Terms of the settlement include the dismissal of the Federal Court litigation. The Company filed an action againstis seeking necessary court approvals for the approval of this settlement and the dismissal of the lawsuit. No loss was incurred by the Company as a limited partner inresult of the settlement.
In the first fiscal quarter of 2017, Recorp-New Mexico Limited Partnership LLC (“RNMA I”) withconducted a capital call pursuant to its organizational documents. As a result of the United States Districtcapital call, certain limited partnership interests in RNMA I were transferred to one or more subsidiaries of the Company. One of the limited partners in RNMA I whose limited partnership interests were transferred challenged the effectiveness of the transfer and forfeiture of his limited partnership interests in State Court. On January 4, 2019, the State Court District of Arizona (“USDC”) seeking declaratory reliefissued a minute entry, finding, among other things, that the limited partner’s limited partnership interest in RNMA I has been properly conveyed towas not forfeited. On January 22, 2019, the IMH subsidiary. The USDC dismissed the action andsubsidiary of the Company subsidiary appealed to the United States Court of Appeals, Ninth Circuit (“Ninth Circuit”). The limited partner had disputed the effectivenessfiled a motion for reconsideration of the transfer of his limited partnership interest and the similar transfer of other limited partnership interests in RNMA I to the Company. This limited partner has initiated litigation inminute entry finding. On March 21, 2019, the State Court seeking to resolve this disputeissued an order staying the court’s January 4, 2019 minute entry ruling. An evidentiary
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued
hearing was held in another forum. This matterearly August 2019 in Arizona state trial court on certain factual questions and the court has been stayed at the Ninth Circuit level pending the litigation described below.requested a post trial briefing in September 2019. Based on the advice of counsel, management believes (a) the State Court’s January 4, 2019 minute entry finding was incorrect as to matters of both fact and law, and (b) the transfer of the limited partnership interests by the then-acting general partner was done in accordance with the rights granted to the general partner under the relevant organizational documents, and we believe that it is more likely than notprobable that the court in the above referenced matterSeptember 2019 post trial briefing will ultimately agree with that conclusion.those conclusions. However, if the State Court were to rule that the limited partner interest transfers were ineffective, this could result in the recording of noncontrollingnon-controlling interests in that partnership of approximately $3.1 million as of September 30,December 31, 2018. The ultimate outcome of this litigation cannot presently be determined with certaintyManagement does not believe that loss is probable and, accordingly, no amounts have been accrued for this matter in the accompanying condensed consolidated financial statements.
In September 2017, the State Court ordered the termination of the receivership over Stockholder, LLC, a wholly-owned subsidiary of the Company (“Stockholder”). Stockholder is the owner of all of the shares of stock in certain corporations that act as the general partner / limited liability company manager of several entities that own land and/or certain water interests in New Mexico.
In December 2017, the State Court entered an interim “stay” order in the Company’s case against judgment debtor David P. Maniatis and his affiliates (“Maniatis”) enjoining the Company from taking any further collection action against Maniatis, pending an accounting of all previous debt collection activities and a trial on certain limited issues involving the calculation of interest and penalties on the original defaulted debt guaranteed by Maniatis. The stay order also temporarily inhibitsinhibited the Company from effecting the sale or transfer of all or any part of the property previously acquired by the Company through litigation involving Maniatis, including approximately 7,000 acres of land and related water interests in New Mexico, and 111 acres of land in Texas.
Subsequent to March 31, 2019, the State Court lifted the stay on all property previously acquired by the Company through litigation involving Maniatis except for the ownership interests in, and property held by, RNMA I. The potential rangeownership interests in, and property of, RNMA I remain subject to the stay until the date that is 30 days after the resolution of the above-described RNMA I dispute. Management does not believe that loss in this matter, if any, is indeterminable. The ultimate outcome of this litigation cannot presently be determinedprobable and, accordingly, no amounts have been accrued for this matter in thesethe accompanying condensed consolidated financial statements.
In April 2019, the New Mexico state trial court amended an order enjoining certain individuals from taking any action with regard to certain real property in the Rio West/Albuquerque project. The amendment expanded the injunction to include Recorp/IMH from transferring any partnership ownership interests (or assets owned by these partnerships) until further order of the court. A hearing to dismiss that injunction and the underlying case is set for September 4, 2019.
Intercreditor Agreement Claim
The Company and certain of our subsidiaries are defendants in a case that is in the Arizona District Court.federal district court. The case arose from claims by anothera creditor of receivership overthe Justin Ranch 123 LLP,receivership alleging breach of contract and other related claims stemming from a Partial Settlement and Intercreditor Agreement entered into among the major creditors, including the claimant and certain of our subsidiaries.subsidiaries the a receiving proceeding. The suit seeks damages totalingof $0.3 million, plus attorney fees and punitive damages. The suit has been stayed pending the outcome of other litigation. The Company believes that the claims are without merit and intends to vigorously defend its position. The ultimate outcome of this litigation cannot presently be determined. TheManagement does not believe that loss is probable and the Company believes that any liability it may ultimately incur would not have a material adverse effect on its financial condition or its result of operations.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — COMMITMENTS AND CONTINGENCIES - continued
11333, Inc. Claim
In 2008, a subsidiary of the Company suffered a loss due to hurricane damage sustained to a property it owned in Galveston, Texas. This property did not have insurance coverage at the time of loss. In March of 2011, the subsidiary filed a claim under an errors and omissions policy with its insurer, Lloyd’s of London (“Lloyd’s”), for failure to maintain adequate insurance on the property. The claim which was denied by Lloyd’s and the Company filed a lawsuit with respect to this policy in the United States District Court of Arizona (the “Court”) against Lloyd’s and the Company’s insurance broker, HUB International Insurance Co. (“HUB”). On April 5, 2017, the Court denied the Company’s motion for summary judgment and granted the defendants’ motions for summary judgment, which the Company has appealed. Lloyd’s and HUB also filed motions seeking reimbursement of attorney fees in the amount of up to $1.2 million and the Company has filed opposing motions. During the nine months ended September 30, 2018, the Court entered judgments against its subsidiary awarding Lloyd’s attorney’s fees in the amount of $1.2 million and awarding HUB attorney’s fees in the amount of $0.1 million. IMH has filed an amended notice of appeal to include the Court’s rulings on the attorney’s fee awards. Its subsidiary does not have the ability to satisfy these judgments. HUB settled its judgments for attorney’s fees and costs in exchange for a dismissal of 11333, Inc.’s appeal against HUB, which has now been finalized, which results in no payment by 11333, Inc.. Similarly, 11333, Inc. has also made an offer to settle its appeal against Lloyd’s in exchange for a release as to its judgment for attorney’s fees and costs, with 11333, Inc. paying no amounts, which Lloyd’s has tentatively accepted pending review of certain 11333, Inc. financial documentation. IMH is awaiting a response from Lloyd’s. IMH’s appellate brief in the Ninth Circuit appeal was due November 15, 2018, but the parties agreed to an extension of time to finalize the settlement. Based upon the advice of its counsel in this matter, management believes that IMH will not be required to satisfy these judgments on behalf of its subsidiary and as such considers it is more likely than not that the Company will not suffer a loss on this matter. Accordingly, no adjustment relating to this claim has been recorded in the accompanying condensed consolidated financial statements.
Hotel Fund Obligations
As more fully described in our Form 10-K for the year ended December 31, 2017, ifIf the Hotel Fund has insufficient operating cash flow to pay the Preferred Distribution in a given month, the Company has agreedis obligated to provide the funds necessary to pay the Preferred Distribution for such month. Such payments arepayment will be treated as an additional capital contribution andto the Company’s capital account will be increasedHotel Fund by such amount. Moreover, we, as the sponsor, haveCompany. During the six months ended June 30, 2019, the Company funded $0.6 million of Preferred Distributions. The Company also has agreed to fund, in the form of common capital contributions, up to 6.0% of the Hotel Fund offering’s gross proceeds as selling commissions and up to 1.0% of the gross proceeds raised in the offering as nonaccountable expense reimbursements to broker-dealers based on the capital raised by them for the Hotel Fund. These portions of our common equity inDuring the six months ended June 30, 2019, the Company paid $0.1 million to the Hotel Fund are subordinatepursuant to the distribution of capital to Preferred Investors in the event of a capital transaction. During the three and nine months ended September 30, 2018, the Company contributed $0.1 million and $0.2 million, respectively and paid commissions of less than $0.1 million under these provisions for each respective period. The ultimate timing and amount of such required shortfall funding is indeterminable and could be material to the Company’s operations and liquidity.
Property Tax Increment Financing (TIF) Receivable
In connection with the sale of certain of our real estate assets in September 2018, the Company negotiated with the buyer that the Company will retain a 50% interest, if any, in the proceeds generated from a long-term TIF development subsidy provided by the sponsoring governmental agency. The TIF was approved by resolution of the applicable governmental agency in August 2018, subject to the finalization of a certain land contribution by one of the unrelated developers in the overall development project, which had not been completed as of September 30, 2018. The Company did not record the effects of this TIF receivable in the accompanying condensed consolidated financial statements.
obligations.
Other
We are subject to oversight by various state and federal regulatory authorities, including, but not limited to, the Arizona Corporation Commission, the Arizona Department of Financial Institutions (Banking), and the SEC. Our income tax returns have not been examined by taxing authorities and all statutorily open years remain subject to examination.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 — LEASES
Lessor
On May 29, 2019, we foreclosed on the loan collateral consisting of 100% of the membership interests in the limited liability company owning the underlying property of Hertz Broadway Tower, LLC, a private company, in full satisfaction of the outstanding defaulted loan. As a result, we acquired the Broadway Tower, LLC’s building, related assets and business operations and assumed related liabilities. The Company assumed 51 commercial office leases where the Company is the lessor in lease arrangements for the building’s floor space and parking spaces. (See Note 4 for further discussion of this transaction).
Prior to the foreclosure transaction, Hertz Broadway Tower, LLC accounted for the leases under ASC 840 - Leases. Upon our acquisition on May 29, 2019, the Company adopted the requirements of ASU 2016-02 for such leases. The lessor accounting model under ASU 2016-02 is similar to existing guidance, however, it limits the capitalization of initial direct leasing costs, such as internally generated costs. The adoption of ASU 2016-02 for this lease did not have an impact in our consolidated financial statements. The Company elected the practical expedient package outlined in ASU No. 2016-02 under which we were not required to reassess whether the arrangements contain a lease, and we carried forward the previous classification of the leases as operating, and we did not have to reassess previously recorded initial direct costs.
These lease arrangements have been recorded in revenue for approximately one month during the three months ended June 30, 2019. The Company’s operating leases have non-cancelable lease terms of 0.9 years to 10.1 years as of June 30, 2019. Certain leases with tenants include options to extend or terminate the lease agreements. The Company believes the residual value risk is not a primary risk because of the long-lived nature of the asset.
The following table presents minimum lease revenues and variable lease revenue for the three and six months ended June 30, 2019 (in thousands).
|
| | | | | | | |
| | Three and Six Months Ended June 30, |
| | 2019 | | 2018 |
| Lease revenue | | | |
| Fixed rent - Minimum lease revenue | $ | 377 |
| | $ | — |
|
| Variable lease revenue | 21 |
| | — |
|
| Total lease revenue | $ | 398 |
| | $ | — |
|
Variable rent includes costs reimbursed related to property operating expenses, common area maintenance, insurance and property taxes.
The following table presents future minimum operating lease payments due to the Company over the next five years and thereafter (in thousands).
|
| | | | |
| Years ending | | Amount |
| Remainder of 2019 | | $ | 1,808 |
|
| 2020 | | 3,748 |
|
| 2021 | | 3,800 |
|
| 2022 | | 3,420 |
|
| 2023 | | 2,311 |
|
| Thereafter | | 3,643 |
|
| Total | | $ | 18,730 |
|
Lessee
We have operating leases for corporate headquarters office space and certain equipment. Our leases have remaining lease terms of one year to four, one of which includes an option to extend the lease for up to five years. The option to extend the lease relates to our corporate office lease and is not included in the calculation of the ROU assets and lease liabilities because the Company is
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 — LEASES - continued
not reasonably certain that it will exercise the option. Lease expense was $0.1 million and for the three months ended June 30, 2019 and 2018, respectively, and $0.2 million for the six months ended June 30, 2019 and 2018, respectively, which is included in general and administrative expenses in the accompanying condensed consolidated statement of operations. Variable lease payments are not included in the calculation of the right-of-use asset and lease liability due to uncertainty of the payment amount and were $0.1 million and $0.1 million for the three months ended June 30, 2019 and 2018, respectively, and $0.1 million and $0.1 million for the six months ended June 30, 2019 and 2018, respectively.
Supplemental cash flow information related to leases for the six months ended June 30, 2019 (in thousands):
|
| | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows from operating lease | | $ | 181 |
|
| | | |
| Non-cash investing and financing activities: | | |
| Right-of-use assets and lease liabilities recorded upon adoption of ASC 842 | | |
| Right-of-use assets | | $ | 1,574 |
|
| Lease liabilities | | $ | 1,693 |
|
Supplemental balance sheet information related to leases as of June 30, 2019 was as follows (thousands, except lease term and discount rate):
|
| | | | |
| Operating leases | | |
| Operating lease right-of-use assets in other assets | | $ | 1,440 |
|
| | | |
| Operating lease liabilities in accounts payable and other accrued expenses | | $ | 1,548 |
|
| | | |
| Weighted average remaining lease term | | 3.0 years |
|
| Operating leases - Weighted average discount rate | | 7.1% |
The following represents future payments on operating leases as of June 30, 2019 (in thousands):
|
| | | | |
| Years ending | | Amount |
| Remainder of 2019 | | $ | 287 |
|
| 2020 | | 575 |
|
| 2021 | | 577 |
|
| 2022 | | 304 |
|
| Total lease payments | | 1,743 |
|
| Less imputed interest | | (195 | ) |
| Total | | $ | 1,548 |
|
As of December 31, 2018, future minimum lease payments required under these various lease agreements are as follows (in thousands):
|
| | | | |
| Years ending | | Amount |
| 2019 | | $ | 305 |
|
| 2020 | | 307 |
|
| 2021 | | 308 |
|
| 2022 | | 233 |
|
| Total | | $ | 1,153 |
|
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 — RELATED PARTY TRANSACTIONS AND COMMITMENTS
Contractual Agreements
CEO Legacy Fees
Under the terms of his employment agreement that expired on July 24, 2019, our CEO is entitled to, among other things, legacy fee payments derived from the value of the disposition of certain legacy assets held by the Company as of December 31, 2010, if such assets are sold at values in excess of 110% of their carrying value as of December 31, 2010. Our CEO earned legacy fees of $0.1 million during the three and six months ended June 30, 2019, and $34.6 thousand during the three and ninesix months ended SeptemberJune 30, 2018 and $19.7 thousand and $0.6 million during the three and nine months ended September 30, 2017, respectively.(see Note 16).
Juniper Capital Partners, LLC and Related Entities
In July 2014, the Company and JCP Realty entered into a consulting services agreement (the “Consulting Agreement”) with JCP Realty Advisors, LLC (“JCP”), an affiliate of Juniper Capital Partners, LLC (“Juniper Capital”), one of the Series B Investors, pursuant to which JCP Realty agreed to perform various services for the Company, including, but not limited to, (a) advising the Company with respect to identifying, structuring, and analyzing investment opportunities, and (b) assisting the Company in managing and liquidating assets, including non-performing assets. Our director, Jay Wolf, is the Managing Member of Juniper Capital Partners, the parent company of JCP Realty. The initial term of the Consulting Agreement was three years and was automatically renewable for an additional two years unless notice of termination was provided by either party. Pursuant to an amendment to the Consulting Agreement, theThe Company and JCP agreed to extend the termentered into an amendment of the Consulting Agreement dated October 17, 2017 pursuant to which: (i) the term was extended for successive one year periods with antwo years that ended on July 24, 2019; (ii) the annual base consulting fee ofwas reduced from $0.6 million to $0.5 million (subject to possible upward adjustment based on an annual review by our board of directors).; and (iii) JCP is entitled to receive a maximum 1.25%an origination fee of up to 1.25% on any loans or investments in real estate, preferred equity or mezzanine securities that are originated or identified by JCP subject(subject to a reduced fee based on the increasing size of the loan or investment. Under the terms of the Consulting Agreement,investment). JCP is also entitled to legacy fee payments derived from the disposition of certain assets held by the Company as of December 31, 2010 to persons or opportunities arising through the efforts of JCP equal to 5.5% of the positive difference derived by subtracting (i) 110% of our December 31, 2010 valuation mark of that asset from the (ii) the gross sales proceeds from the sale of that asset (on a legacy asset by asset basis without any offset for losses realized on any individual asset sales).
The consulting services agreement terminated on July 24, 2019 (see Note 16). During each of the threesix months ended SeptemberJune 30, 20182019 and 2017,2018, we incurred base consulting fees to JCP of $0.1 million and $0.1 million, respectively. During the nine months ended September 30, 2018 and 2017, we incurred base consulting fees to JCP of $0.3 million and $0.4 million, respectively.$0.2 million. JCP earned legacy fees of $63.5 thousand during the three and nine months ended September 30, 2018 and $36.2 thousand and $1.1$0.1 million during the three and ninesix months ended SeptemberJune 30, 2017, respectively.2019 and $0.1 million during the three and six months ended June 30, 2018.
Notes Receivable from Certain Partnerships
During the year ended December 31, 2017, aA subsidiary of the Company executed promissory notes and related agreementshas entered into a lending facility with certain of the previously unconsolidatedconsolidated partnerships (which the Company began consolidating beginning September 2017) to loanlend up to collectivelya maximum of $5.0 million to cover the partnerships’ anticipated operating and capital expenditures. As of SeptemberJune 30, 2018 and December 31, 2017,2019, the total principal advanced was $5.0 million. The loans earn interest at rates ranging from the JP Morgan Chase Prime rate plus 2.0% (7.50% at June 30, 2019) to 8.0% and have maturity dates which are the earliest to occur of: (1) the date of transfer of the partnership’s real estate assets; (2) the date on which the current general partner resigns, withdraws or is removed as general partner; or (3) July 31, 2018. The promissory notes received under thesethis lending facility are presently in default and the Company is exploring its enforcement options. The promissory notes was $4.4 millionare cross collateralized and $1.9 million, respectively.secured by real estate and other assets owned by such partnerships. These promissory notes and allthe related accrued interest receivable have been eliminated in consolidation.
Preferred StockJPMorgan Chase Funding Inc. Master Repurchase Agreement
On FebruaryAs described in Note 9, 2018,a subsidiary of the Company purchased the $13.2 million first mortgage note secured by Broadway Tower. The purchase of the first mortgage note was funded partially with an $11.0 million loan (under a master repurchase agreement) from Chase Funding and the balance using Company funds. The Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved.
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 — SUBSEQUENT EVENTS
CEO Termination Agreement
The Employment Agreement between the Company and Mr. Bain, the Company’s Chairman of the Board and Chief Executive Officer, expired on July 24, 2019 (the “Expiration Date”). The Company and Mr. Bain have mutually agreed not to renew or extend Mr. Bain’s employment agreement. Accordingly, on April 11, 2019, the Company entered into an agreementa Termination of Employment Agreement, Release and Additional Compensation Agreement with Chase FundingMr. Bain (the “Bain Termination Agreement”), and subsequent to purchase 2,352,941 shares of our Series B-3 Preferred Stock at a purchase price of $3.40 per share, for a total purchase price of $8.0 million. Additionally, the Company issued to Chase Funding a warrant to acquire up to 600,000 shares of the Company’s common stock. See Note 11 for additional information.
On May 31, 2018,June 30, 2019, the Company entered into an agreementcertain consulting agreements with Chase Funding to purchase 22,000 sharesMr. Bain. The material terms of our Series A Preferred Stock at a purchase price of $1,000 per share, for a total purchase price of $22.0 million. See Note 11 for additional information.these agreements are summarized below.
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| 1) | The Company and Mr. Bain agree that, effective on the Expiration Date, Mr. Bain’s employment with the Company will terminate and he will resign as an officer and director of the Company. On July 30, 2019, the Company entered into a Consulting Services Agreement (the “Interim-CEO Consulting Services Agreement”) with ITH Partners, LLC, a Nevada limited liability company (“ITH”), pursuant to which ITH agreed to provide certain consulting services to the Company for a ninety (90) day period commencing effective as of July 25, 2019, subject to automatic thirty (30) day renewals unless earlier terminated by the parties as provided therein. Mr. Bain is the Managing Director of ITH. Mr. Bain had served as the Company’s Chairman of the Board and Chief Executive Officer from July 24, 2014 until July 24, 2019, at which time his employment terminated. Pursuant to the Interim-CEO Consulting Services Agreement, Mr. Bain has been appointed to fill a vacancy on the Board of Directors of the Company (created when Mr. Bain’s employment terminated and he stepped down from the Board of Directors) and will serve as interim Co-Chairman and Chief Executive Officer of the Company until his service as such is terminated by the Board of Directors of the Company for any or no reason. During such period, Mr. Bain will report to the Board of Directors of the Company. Mr. Bain also will serve as the interim chairman of the Investment Committee of the Board of Directors during this period. The Interim-CEO Consulting Services Agreement imposes certain limitations on the authority of Mr. Bain to act on behalf of the Company. In exchange for ITH’s services under this agreement, the Company has agreed to pay ITH a monthly consulting fee of $30,000 commencing August 1, 2019. The agreement also contains various representations, protective covenants, termination provisions and other obligations and terms that are commonly contained in an agreement of this nature; |
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| 2) | Since Mr. Bain remained employed by the Company through the Expiration Date, he is entitled to receive a cash bonus of $0.6 million for his 2018 services (which have been recorded in the accompanying consolidated financial statements and was paid during the six months ended June 30, 2019) and $0.35 million for his 2019 services, to be paid no later than April 30, 2019 and March 31, 2020, respectively; |
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| 3) | The Company has agreed to pay Mr. Bain two payments of $0.25 million each by no later than January 31, 2020 and January 31, 2021, respectively; |
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| 4) | Mr. Bain will be entitled to receive a Legacy Asset Performance Fee (“LAPF”), as calculated in accordance with his current employment agreement, in connection with the disposition of the Company’s interests in the assets of the New Mexico Partnerships (the “New Mexico Assets”) provided that such disposition occurs prior to December 31, 2022. The parties agree that these are the only assets as to which Mr. Bain may be entitled to receive a LAPF following the Expiration Date; |
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| 5) | On July 30, 2019, the Company and ITH also entered into a Consulting Services Agreement (the “New Mexico Asset Consulting Agreement”) pursuant to which ITH agreed to provide certain consulting services to the Company with respect to certain real property located in Sandoval County, New Mexico (the “New Mexico Asset”) for a period expiring on the earlier to occur of (a) consummation of the sale of all or substantially all of the New Mexico Asset and (b) December 31, 2022, unless such agreement is earlier terminated by the parties as provided therein. This agreement was entered into pursuant to the Termination of Employment Agreement, Release and Additional Compensation Agreement between Mr. Bain and the Company, dated as of April 11, 2019. During the term of the New Mexico Asset Consulting Agreement, Mr. Bain is obligated to report to the Company’s Board of Directors and will serve as president of various corporations that serve as general partner of those entities that own the New Mexico Asset. The agreement also imposes certain limitations on the authority of Mr. Bain to act on behalf of the Company. In exchange for ITH’s services under this agreement, the Company has agreed to pay ITH a base monthly consulting fee of $5,000 commencing August 1, 2019, and an incentive bonus in the event that the Net Cash received from the sale of the New Mexico Asset exceeds certain minimum thresholds, after the payment of various reimbursements and expenses. The agreement also contains various representations, protective |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1416 — SUBSEQUENT EVENTS - continued
NOTE 15 — SUBSEQUENT EVENTS - OPENcovenants, termination provisions and other obligations and terms that are commonly contained in an agreement of this nature;
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| 6) | All unvested equity awards and deferred compensation benefits granted to Mr. Bain were vested on the Expiration Date; and |
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| 7) | Mr. Bain has agreed to certain noncompetition and nonsolicitation covenants, cooperation covenants and certain other requirements. |
Asset Management Agreement
On August 14, 2019, the Company entered into a non-discretionary investment advisory agreement (the “Advisory Agreement”) with Juniper Investment Advisors, LLC, a Delaware limited liability company (“JIA”), with an effective commencement date of August 1, 2019, pursuant to which JIA will manage certain assets of the Company, including the Company’s loan portfolio and certain of its legacy real-estate owned properties. Under the terms of the Advisory Agreement, the Company will pay JIA a management fees ranging from 1.0% to 1.5% of the net asset value of certain assets under management, as well as a performance fee equal to 20% of the net profits from those assets upon disposition after the Company has received an annualized 7% return on its investment from those assets and recovery of the Company’s basis in such assets. In connection with the Advisory Agreement, certain employees of the Company have transitioned to become employees of JIA, and JIA will also sublet a portion of the Company’s office space.
Jay Wolf and Alejandro Krys together own 50% of JIA. Messrs. Wolf and Krys are also the owners of Juniper Capital Partners, LLC, a Delaware limited liability company, the sole member of Juniper NVM, LLC, a Delaware limited liability company (“JNVM”) and the manager of JCP Realty Partners, LLC, a Delaware limited liability company (“JCP Realty”). JCP Realty and JNVM are the collective holders of all the Series B-1 Cumulative Convertible Preferred Stock in the Company. Mr. Wolf is also a member of the board of directors of the Company and its investment committee.
New Exchange Note OfferingLoan Investment
Subsequent to SeptemberJune 30, 2018,2019, the Company commencedentered into an offeringinvestment agreement with Juniper New Mexico, LLC (a related party of upa preferred shareholder) to $10.2participate in a $15 million mezzanine loan to a unrelated hotel owner and operator for the renovation of a 96-key luxury resort located in new notes (“Sante Fe, New EO Notes”)Mexico. The mezzanine loan is secondary to existing noteholdersa senior mortgage loan funded by a unrelated party. The Company’s total commitment under this investment is $3.9 million, of its current EO Noteswhich $2.1 million was funded subsequent to 1) extend the maturity date of the EO Notes from April 29, 2019 to December 15, 2021 and 2) to increase the coupon interest rate from 4% to 7%. The New EO Notes are to be unsecured obligations of the Company, have no conversion rights, have no prepayment requirements, and will not be guaranteed by the Company. The New EO Notes will rank pari passu with the EO Notes and senior to all other existing unsecured indebtedness of the Company and to our shareholders, but subordinate to secured indebtedness of the Company. The offering is expected to close on November 21, 2018, unless extended or earlier terminated by the Company.June 30, 2019.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONSOPERATIONS. |
The following discussion should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and accompanying notes as of and for the year ended December 31, 20172018 included in our Annual Report on FormForms 10-K and 10-K/A (“Form 10-K”), and with the unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”).
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “will,” “plan,” “potential,” “should” and “would” or the negative of these terms or other comparable terminology. Forward-looking statements in this Form 10-Q include: our business strategy and liquidity plan, including our intention to dispose of a majority of the balance of real estate assets in the next 12 months, and our goals and plans to invest in different real estate platforms, including consideration of opportunities to act as a sponsor and co-investor in real estate mortgages, hospitality assets, and other real estate-based vehicles, diversify our investments geographically and expand our investment capital base and pursue development activities with certain REO properties; the outcome of actions we may take, or fail to take, that result in defaults of obligations that have liens or collateral interest in our commercial mortgage loan and REO properties, including our ability to cure such defaults; our plans and the anticipated timing and results relating to our actions to foreclose on defaulted mortgage loans; trends and expectations relating to the real estate and lending markets we operate in; expected amortization period of unrecognized compensation costs; that future mortgage income will remain at minimal levels; that property taxes, costs and expenses relating to REO assets and other operating expenses may increase; that we may modify existing loans and/or subordinate our first lien position on our mortgage loans to protect our collateral and maximize our opportunity for recovery; that the concentration of our current loan portfolio will not materially change until we resume significant lending activities; our sources and the sufficiency of liquidity in the next twelve months; that our financial assets do not give rise to significant interest rate risk; that we may sell whole loans or participations in loans to increase our liquidity; expectations about future derivative investments; recent trends and expectations relating to rental and hospitality and entertainment activities; that changes in our disposition strategy and related changes in classifications of such assets under GAAP could result in material impairment charges; our future liability relating to CFD and special assessment obligations; that the fair value of the collateral underlying our mortgage loans is sufficient in relation to the current carrying value of the related loans; and that we may further increase our leverage.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance. These beliefs, assumptions and expectations can change, and actual results and events may differ materially, as a result of many possible events or factors, not all of which are known to us or are within our control. These risk factors and uncertainties should be carefully considered by current and potential investors. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include:
that we may continue to record losses;
that we may incur increased operating expenses;
that a substantial portion of our loan portfolio is comprised of non-performing and distressed assets;
the concentration of credit risk to a particular borrower or borrower group;
our inability to sell our current mortgage loan and REO assets and execute our business and liquidity strategy;
our inability to resume significant mortgage loan lending activities or implement our investment strategy and grow our business;
risks of owning real property obtained through foreclosure or other means;
the supply of commercial mortgage loans and the resulting impact on our strategy;
litigation;
our inability to retain and hire consultants and employees necessary to execute our business strategy;
the lack of a secondary market for our loans that impairs our ability to diversify our portfolio;
lack of access to public and private capital markets;
the inability to control the administration of mortgage loans where we hold only a participation interest;
the short-term nature of the loans we originate;
risks of holding subordinated loans;
lender due diligence risks;
recent legislative initiatives;
government regulation;
failure to maintain our exemption from registration under the Investment Company Act of 1940, as amended;
lender loan covenants that restrict our liquidity;
our ability to secure joint venture partners on development projects;
risks related to additional borrowings;
that our liquidity is subject to a cash management agreement or other controlled accounts;
restrictive covenants that are contained in debt agreements;
the risks our borrowers are exposed to that could impair their ability to repay our loans;
inability of our commercial borrowers to generate sufficient income from their operating properties to repay our loans;
declines in value of our real estate collateral arising from inaccurate estimates of value due to management or appraisal errors or subsequent events;
failure of our underwriting standards;
that the guarantors of our mortgage loans will have insufficient assets or resources to support their guarantees;
a decline in the fair value of our assets;
uncertainty relating to assets valued at fair value;
reductions in income resulting from our borrowers’ refinancing their loans at lower interest rates;
the adverse effects on our business of increasing interest rates;
competition;
the inability of our borrowers to complete construction or development of the projects securing our loans;
cost-overruns and non-completion of renovation of properties underlying rehabilitation loans we make;
geographic concentration in our loan portfolio;
protection of our rights as a secured lender;
exposure to liability under lender liability laws;
inadequate insurance coverage on the REO properties we acquire;
hazardous substances on the REO properties we acquire;
our inability to utilize our tax net operating losses;
a decline in economic conditions;
reliance on key personnel;
conflicts of interest relating to existing contractual agreements;
complex accounting rules;
our failure to maintain adequate internal controls;
our ability to change our business, leverage and financing strategies without stockholder consent;
use of liquidity to pay required preferred dividends;
covenants relating to the issuance of preferred stock that restrict our ability to take certain actions;
restrictions on the payment of dividends to common stockholders;
dilution resulting from future issuances of debt and equity securities;
provisions in our certificate of incorporation, bylaws and Delaware law that could impede or delay an acquisition of the Company;
the ability of JIA to successfully manage those assets described in the Advisory Agreement;
the ability to find a new permanent CEO; and
other factors listed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017. 2018;
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which it was made. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. The factors described within this Form 10-Q could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to such future periods. Except to the extent required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this cautionary note in mind as you read this Form 10-Q and the documents incorporated by reference into this Form 10-Q.
Overview of the Business
We are a real estate investment and finance company focusing on investments inthe commercial, hospitality, industrial and residential real estate and mortgages secured by such assets. We are engaged in developing, managing, and either holding for investment or disposing of real property acquired through investment, foreclosure or other means.markets. The Company seeks opportunities to invest in real estate-related platforms or projects in partnership with other experienced real estate investment firms, and to sponsor and co-invest in real estate mortgages and other real estate-based investment vehicles. The Company intends to continue to expand its hospitality footprint through the acquisition or management of other luxury boutique hotels. We believe that our well-established hospitality management team can replicate the success we achieved at our Sedona hotels through the strategic expansion of our hospitality business model.
Our current business strategyfocus is designed to re-establish the Company’s access to significant investment capital for investment purposes, whether through debt or equity issuance, in order to improve the performance of our portfolio. By increasing the level and quality of the assets in our portfolio, we believe that the Company can grow and ultimately provide its shareholders with favorable risk-adjusted returns on its investments and ultimately provide enhanced opportunity for liquidity.
As of SeptemberJune 30, 2018,2019, we held mortgage and real estate assets with a carrying value of $90.5$118.1 million. Our REO held for sale and other REO with a carrying value $67.5 million are being marketed for disposition within the next twelve months.
During the nine months ended September 30, 2018, the Company raised $30.0 million in equity capital from Chase Funding through the issuance of Series B-3 Preferred Stock and Series A Preferred Stock. Dividends on the Series B-3 Preferred Stock accrue at the rate of 5.65% of the issue price per year, and are payable quarterly in arrears and dividends on the Series A Preferred Stock are cumulative and accrue from the issue date at the rate of 7.5% of the issue price per year, payable quarterly in arrears on or before the last day of each calendar quarter. The Company intends to use the proceeds from the issuance of these securities for general corporate purposes and pursuing its investment strategy.
With cash and cash equivalents of $36.2$12.2 million at SeptemberJune 30, 2018,2019 and anticipated proceeds from asset sales and financing, our objective is to redeploy available amounts into income-producing investments, such as mortgage loans, joint ventures or other attractive investments, and acquisitions of hospitality, or other real estate assets.
During the ninethree months ended SeptemberJune 30, 2018, the Company originated 2 new loans. The first2019, one performing loan iswith a $13.1 million construction loan bearing annual interest at 8.5% plus one- month LIBOR, with an original maturity dateprincipal balance of July 18, 2020 and a six-month extension option. As of September 30, 2018, the Company had not yet advanced any loan funds agreement pending the borrower meeting certain equity requirements.. The loan is collateralized by a first lien security interest in certain real and personal property and related improvements thereon located in Phoenix, Arizona. The second loan was a mortgage loan for $3.0 million bearing annual interest rate of 6% plus one-month LIBOR (subject to an 8% interest rate floor), and an exit fee equal to 1% of the principal balance. The loan is collateralized by a first lien security interestwas repaid in a residential unit located in New York, NY. The loan provides for interest only payments payable monthlyfull. In addition, during the initial 12 month term with a balloon payment due upon maturity. During the three months ended SeptemberJune 30, 2018, one of our loans with an outstanding balance of $7.6 million entered default status upon its maturity, although it was not considered impaired since the fair value of the underlying2019, we conducted a UCC foreclosure on collateral was deemed to exceed thesecuring a mezzanine loan investments that had a carrying value of $8.2 million as of the loan.
date of foreclosure, which had been in default since September 2018. In May 2019, we foreclosed on the fourth quartermezzanine loan collateral consisting of 2017,100% of the membership interests in the entity owning the underlying property, consisting of a commercial office building known as Broadway Tower, located in St. Louis, Missouri. Upon foreclosure, we acquired certain hotel andthe membership interests in the limited liability company that owns the office building, related assets consisting of 64 luxury guest rooms, indoor and outdoor function space, full-service foodcash with a value totaling approximately $26 million, and beverage outlet and restaurant operations, and spa operations located in Sonoma, California (the “MacArthur Hotel”, aka “MacArthur Place”) for a purchase price $36.0 million. In connection with the acquisition of the MacArthur Hotel, the Company entered into a building loan agreement/disbursement schedule andassumed related agreements (the “MacArthur Loan”) with MidFirst Bank (“MidFirst”) in the amount of $32.3 million, of whichliabilities totaling approximately $19.4 million was utilized for the purchase of the MacArthur Hotel, approximately $10.0 million of which was being set aside to fund planned hotel improvements, and the balance is to fund interest reserves and operating capital. The MacArthur Loan requires us to fund minimum equity of $17.4$16.0 million, all of which has been funded aswere recorded at estimated fair value in accordance with GAAP. The Company intends to operate the commercial office building to increase occupancy and improve the value of September 30, 2018.the asset.
Key Operational Aspects
As a result of the issuance of the Series B-3 Preferred Stock and Series A Preferred Stock, the Company’s total assets increased to $145.8 million as of September 30, 2018 compared to $114.5 million as of December 31, 2017.
The Company’s net loss for the three and six months ended SeptemberJune 30, 20182019 was $0.1$4.1 million and $9.1 million, respectively, compared to net income of $3.1 millionloss for the three and six months ended SeptemberJune 30, 2017.2018 which was $2.5 million and $6.3 million, respectively. The Company continues to realize net losses related its Hospitality and Entertainment Operations segment due to ongoing losses at MacArthur place during its renovation as well as expenditures for professional fees related to guarantor recovery and enforcement actions.
The Company’s total revenue from continuing operations totaled $2.8$2.5 million and $3.6 million for the three and six months ended SeptemberJune 30, 2019, respectively, compared to $3.0 million and $5.2 million and for the three and six months ended June 30, 2018, comparedrespectively. The main driver in the reduction of revenues period over period is attributable to $0.7 million for the corresponding period in 2017.Hospitality and Entertainment Operations segment as revenues are down due to the renovation of MacArthur place.
The Company’s basic and diluted net loss from continuing operations per common share for the threesix months ended SeptemberJune 30, 2019 and 2018 was $(0.19) compared to basic net income from continuing operations per common share of $0.19,$(0.83) and diluted net income from continuing operations per common share of $0.12, respectively, for the three months ended September 30, 2017.$(0.56), respectively.
Results of Operations for the Threethree and Nine Months Ended Septembersix months ended June 30, 2018 compared to the Three2019 and Nine Months Ended September 30, 20172018
RevenueThe following discussion compares historical results of operations on a GAAP basis for three and six months ended June 30, 2019 and 2018. Unless otherwise noted, all comparative performance data included below reflects year-over-year comparisons.
| | | Revenues (in thousands) | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| Revenues | | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change | |
| Revenues: | | | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
| Operating property revenue | | $ | 2,085 |
| | $ | — |
| | 2,085 |
| | 100 | % | | $ | 5,753 |
| | $ | 1,682 |
| | $ | 4,071 |
| | 242 | % | | $ | 1,880 |
| | $ | 2,105 |
| | $ | (225 | ) | | (10.7 | )% | | $ | 2,193 |
| | $ | 3,668 |
| | $ | (1,475 | ) | | (40.2 | )% |
| Mortgage loan income, net | | 709 |
| | 350 |
| | 359 |
| | 103 | % | | 1,976 |
| | 402 |
| | 1,574 |
| | 100 | % | | 447 |
| | 641 |
| | (194 | ) | | (30.3 | )% | | 1,098 |
| | 1,266 |
| | (168 | ) | | (13.3 | )% |
| Management fees, investment and other income | | 32 |
| | 300 |
| | (268 | ) | | (89 | )% | | 323 |
| | 808 |
| | (485 | ) | | (60 | )% | | 208 |
| | 255 |
| | (47 | ) | | (18.4 | )% | | 276 |
| | 292 |
| | (16 | ) | | (5.5 | )% |
| Total Revenue | | $ | 2,826 |
| | $ | 650 |
| | $ | 2,176 |
| | 335 | % | | $ | 8,052 |
| | $ | 2,892 |
| | $ | 5,160 |
| | 178 | % | | $ | 2,535 |
| | $ | 3,001 |
| | $ | (466 | ) | | (15.5 | )% | | $ | 3,567 |
| | $ | 5,226 |
| | $ | (1,659 | ) | | (31.7 | )% |
Operating Property Revenue. For the three months ended SeptemberJune 30, 2018,2019, operating property revenue was $2.1$1.9 million as compared to$0to $2.1 million during the three months ended SeptemberJune 30, 2017, an increase2018, a decrease of $2.1 million.$0.2 million. During the ninesix months ended SeptemberJune 30, 2018,2019, we recorded $2.2 million in operating property revenue was $5.8 millionas compared to $1.7$3.7 million for the ninesix months ended SeptemberJune 30, 2017, an increase2018, a decrease of $4.1$1.5 million or 242%40.2%. The year-over-year increasedecrease in operating property revenue is primarily attributable to the purchaserenovation of our hotel, restaurant, and spa operation known as MacArthur Place, which substantially began during the second quarter of 2018 and is expected to be completed in the third quarter of 2019. We expect operating property revenue to increase following the completion of the MacArthur Place hotelrenovation. This overall decrease was partially offset by $0.3 million recognized in the fourth quarterQ2 of 2017.2019 from commercial real estate rental income.
Mortgage Loan Income. For the three months ended SeptemberJune 30, 2018,2019, income from mortgage loans was $0.7$0.4 million an increase, a decrease of $0.4$0.2 million from the three months ended SeptemberJune 30, 2017.2018. For the six months ended June 30, 2019, income from mortgage loans was $1.1 million, a decrease of $0.2 million or 13.3% over the six months ended June 30, 2018. Mortgage loan income was $2.0decreased period over period due to the defaulted Broadway Tower mortgage, and maturity of the $3.0 million loan which repaid during the ninethree months ended SeptemberJune 30, 2018, compared to $0.4 million during the corresponding period in 2017, an increase of $1.6 million. The year-over-year increase in2019. Our performing mortgage loan income is primarily attributable to the increase in performing loan investments beginning in mid-2017. At September 30, 2018, we had performing loans with an outstanding balance of $15.3 million andhave a weighted average interest rate of 8.84%. At September 30, 217 we had a performing loan with an outstanding balance of $7.7 million and a weighted average interest rate of 10.98%9.7%.
Management Fees, Investment and Other Income. For the three months ended SeptemberJune 30, 2019 and 2018, management fees, investment and other income was $32 thousand compared to $0.3 million in the corresponding period in 2017, a decrease of $0.3 million or (89)%.relatively consistent at $0.2 million. For the ninesix months ended SeptemberJune 30, 2018,2019, management fees, investment and other income was $0.3 million, compared to $0.8 million during the corresponding period in 2017, a decrease of $0.5$0.0 million, or 60%.5.5%, from the six months ended June 30, 2018. The 2018 balance consists primarily of an insurance recovery and the year-over-year decrease is primarily attributable to the termination of ourasset management agreement for the Sedona hotelsfees earned on a Hotel in December 2017.Nyack, NY.
Costs and Expenses
| | | Expenses (in thousands) | | | | | | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Nine months ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| Expenses: |
| 2018 |
| 2017 |
| $ Change |
| % Change |
| 2018 |
| 2017 |
| $ Change |
| % Change | | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | $ Change | | % Change |
Operating property direct expenses (exclusive of interest and
depreciation) |
| $ | 2,364 |
|
| $ | 105 |
|
| $ | 2,259 |
|
| 2151 | % |
| $ | 6,699 |
|
| $ | 1,544 |
|
| $ | 5,155 |
|
| 334 | % | | $ | 3,657 |
| | $ | 2,099 |
| | $ | 1,558 |
| | 74.2 | % | | $ | 6,007 |
| | $ | 4,334 |
| | $ | 1,673 |
| | 38.6 | % |
| Expenses for non-operating real estate owned |
| 151 |
|
| 153 |
|
| (2 | ) |
| (1 | )% |
| 519 |
|
| 485 |
|
| 34 |
|
| 7 | % | | 83 |
| | 171 |
| | (88 | ) | | (51.5 | )% | | 174 |
| | 367 |
| | (193 | ) | | (52.6 | )% |
| Professional fees |
| 1,125 |
|
| 1,059 |
|
| 66 |
|
| 6 | % |
| 2,754 |
|
| 3,181 |
|
| (427 | ) |
| (13 | )% | | 1,680 |
| | 754 |
| | 926 |
| | 122.8 | % | | 2,486 |
| | 1,629 |
| | 857 |
| | 52.6 | % |
| General and administrative expenses |
| 1,788 |
|
| 1,793 |
|
| (5 | ) |
| — | % |
| 5,376 |
|
| 6,154 |
|
| (778 | ) |
| (13 | )% | | 1,560 |
| | 1,708 |
| | (148 | ) | | (8.7 | )% | | 3,465 |
| | 3,588 |
| | (123 | ) | | (3.4 | )% |
| Interest expense |
| 775 |
|
| 449 |
|
| 326 |
|
| 73 | % |
| 2,300 |
|
| 1,323 |
|
| 977 |
|
| 74 | % | | 335 |
| | 780 |
| | (445 | ) | | (57.1 | )% | | 791 |
| | 1,525 |
| | (734 | ) | | (48.1 | )% |
| Depreciation and amortization expense |
| 281 |
|
| 46 |
|
| 235 |
|
| 511 | % |
| 925 |
|
| 139 |
|
| 786 |
|
| 565 | % | | 321 |
| | 303 |
| | 18 |
| | 5.9 | % | | 591 |
| | 644 |
| | (53 | ) | | (8.2 | )% |
| Gain on disposal of assets, net |
| (3,543 | ) |
| (321 | ) |
| (3,222 | ) |
| 1004 | % |
| (3,938 | ) |
| (2,036 | ) |
| (1,902 | ) |
| 93 | % | |
| Recovery of investment and credit losses, net |
| — |
|
| (6,070 | ) |
| 6,070 |
|
| (100 | )% |
| (175 | ) |
| (6,408 | ) |
| 6,233 |
|
| (97 | )% | |
| Impairment of Real Estate Owned |
| — |
|
| 344 |
|
| (344 | ) |
| (100 | )% |
| — |
|
| 344 |
|
| (344 | ) |
| (100 | )% | |
| Equity method loss from unconsolidated entities |
| — |
|
| 68 |
|
| (68 | ) |
| (100 | )% |
| — |
|
| 239 |
|
| (239 | ) |
| (100 | )% | |
| Gain on disposal of assets | | | (20 | ) | | (142 | ) | | 122 |
| | (85.9 | )% | | (20 | ) | | (395 | ) | | 375 |
| | (94.9 | )% |
| Recovery of credit losses | | | (1,135 | ) | | (175 | ) | | (960 | ) | | 548.6 | % | | (1,135 | ) | | (175 | ) | | (960 | ) | | 548.6 | % |
| Unrealized loss on derivatives | | | 124 |
| | — |
| | 124 |
| | 100.0 | % | | 291 |
| | — |
| | 291 |
| | 100.0 | % |
| Total Costs and Expenses |
| $ | 2,941 |
|
| $ | (2,374 | ) |
| $ | 5,315 |
|
| (224 | )% |
| $ | 14,460 |
|
| $ | 4,965 |
|
| $ | 9,495 |
|
| 191 | % | | $ | 6,605 |
| | $ | 5,498 |
| | $ | 1,107 |
| | 20.1 | % | | $ | 12,650 |
| | $ | 11,517 |
| | $ | 1,133 |
| | 9.8 | % |
Operating Property Direct Expenses (exclusive of Interest and Depreciation). For the three months ended SeptemberJune 30, 2018,2019, operating property direct expenses were $2.4$3.7 million, an increase of $2.3$1.6 million, or 2151%74.2%, from $0.1$2.1 million for the three months ended SeptemberJune 30, 2017.2018. For the ninesix months ended SeptemberJune 30, 2018,2019, operating property direct expenses were $6.7$6.0 million, an increase of $5.2$1.7 million, or 334%38.6%, from $1.5$4.3 million for the ninesix months ended SeptemberJune 30, 2017. The year-over-year increase in operating property2018. Such amounts are primarily related to the direct expenses is primarily attributed to higher operating costs of MacArthur Place, and non-capitalizable renovation coststo a lesser extent beginning in June 2019, to Broadway Tower which we acquired through a foreclosure action in May of 2019. While revenues were negatively impacted during the MacArthur Place hotel over those ofrenovation period, operating expenses remained relatively consistent as the Company was required to retain personnel to avoid employee turnover while simultaneously incurring significant temporary operating golf course property that was sold incosts during the renovation period. Broadway Tower contributed operating expenses totaling $0.3 million during the second quarter of 2017.2019.
Expenses for Non-Operating Real Estate Owned. Expenses for non-operating real estate owned assets was consistent at 0.2decreased 51.5% to $0.1 million for the three months ended SeptemberJune 30, 20182019 and 2017. Similarly,compared to $0.2 million for the corresponding period for 2018. For the six months ended June 30, 2019, expenses for non-operating real estate owned assets was consistent at $0.5were $0.2 million, a decrease of $0.2 million or 52.6%, from $0.4 million for each of the ninesix months ended SeptemberJune 30, 2018 and 2017.2018. The slight year-over-year increasedecrease in period-over-period expense is primarily attributableattributed to an increase inthe disposition non-operating real estate taxesowned in prior years and asset repair and maintenancelower costs relating to the New Mexico assets.incurred on currently held non-operating real estate owned.
Professional Fees.For the three months ended SeptemberJune 30, 2018,2019, professional fees expense was $1.1$1.7 million, an increase of $0.1$0.9 million, or 6%122.8%, from $1$0.8 million incurred during the same period in 2017.2018. For the ninesix months ended SeptemberJune 30, 2019 and 2018, professional fees expense was $2.8were $2.5 million a decreaseand $1.6 million, respectively, an increase of $0.4$0.9 million incurred during the same period in 2017.or 52.6%. The year-over-year decreaseincrease in professional fees is primarily attributed to a decrease incontinued litigation surrounding the New Mexico assets, greater enforcement and recovery efforts over defaulted loans, the recording of Hotel Fund organizational costs, related to our guarantor enforcement activities.and other corporate matters.
General and Administrative Expenses. General and administrative expenses were consistent at $1.8$1.6 million for each of the three months ended SeptemberJune 30, 2018 and 2017. During the nine months ended September 30, 2018, general and administrative expenses were $5.4 million,2019 compared to 6.2$1.7 million for the corresponding period in 2017, 2018, a decrease of 0.8 million$148 thousand or 13%8.7%. The year-over-year decrease inFor the six months ended June 30, 2019, general and administrative costs is primarily attributedexpenses were relatively consistent at $3.5 million compared to decreased employee compensation expense, coupled with a one-time $0.3$3.6 million expense reimbursement incurred in 2017 in connection with Chase Funding’s purchase of our Series B-2 Preferred Stock.for the six months ended June 30, 2018.
Interest Expense. Interest expense was $0.8$0.3 million for the three months ended SeptemberJune 30, 2018,2019, compared to $0.4$0.8 million for the corresponding period in 2017, an increase2018, a decrease of $0.3$0.4 million, or 73%57.1%. InterestFor the six months ended June 30, 2019, interest expense
was $2.3$0.8 million as compared to $1.5 million for the ninesix months ended SeptemberJune 30, 2018, compareda decrease of $0.7 million, or 48.1%. The year-over-year decrease is attributed primarily to $1.3the capitalization of interest costs during the renovation period of MacArthur Place in the amount of $0.8 million for the corresponding period in, 2017, an increase of $1.0 million, or 74%. The year-over-year increase is primarily attributed to interest incurred on the MacArthur acquisition and construction loan.six months ended June 30, 2019.
Depreciation and Amortization Expense.For the three months ended SeptemberJune 30, 2019 and 2018, depreciation and amortization expense was consistent at $0.3 million compared to $46.0 thousandfor each period. Similarly, for the threesix months ended SeptemberJune 30, 2017, an increase of $0.2 million, or 511%. For the nine months ended September 30,2019 and 2018, depreciation and amortization expense was $0.9 million compared to $0.1 million for the nine months ended September 30, 2017, an increase of $0.8 million, or 565%. The year-over-year increase is due primarily to depreciation and amortization relating to MacArthur Place assets which were acquired in the fourth quarter of 2017.relatively consistent at $0.6 million.
Gain(Gain) Loss on Disposal of Assets. We recognized gains on disposal of $3.5 million and $3.9 million forDuring the three and ninesix months ended SeptemberJune 30, 2018, respectively,2019, we sold a REO asset for $39.0 thousand and $0.3 million and $2.0 million duringrecognized a gain of $20.0 thousand. During the three and ninesix months ended September 30, 2017, respectively. During the nine months ended SeptemberJune 30, 2018, we sold threetwo REO assets (or portions thereof) for $8.7$0.5 million, (net of transaction costs and other adjustments) resulting in a total net gain on sale of $3.9recorded gains totaling $0.4 million. During the nine months ended September 30, 2017, we sold seven REO assets (or portions thereof) for $98.3 million (net of transaction costs and other adjustments), resulting in a total net gain of $8.9 million, of which $6.8 million was included as a component of discontinued operations in the unaudited condensed consolidated statement of operations.
Recovery of Investment and Credit Losses. For each of the three and ninesix months ended SeptemberJune 30, 2019 and 2018, we recorded recoveries of investment and credit losses of $0totaling $1.1 million and $0.2 million, respectively. For the three and nine months ended September 30, 2017, we recorded recoveries of investment and credit losses of $6.1 million and $6.4 million, respectively. In 2018, such recoveries primarily resulted fromrespectfully, relating to cash and other assets recovered from guarantorsrecoveries obtained in connection with our enforcement activities.
Unrealized Loss on certain legacy loans. In 2017, such recoveries primarily resulted from cash, other assets recovered from guarantorsDerivatives. During the six months ended June 30, 2019, the Company recorded an unrealized loss of $0.3 million on certain legacy loans, and froman interest rate cap we acquired to mitigate the consolidationrisk of the New Mexico partnerships.rising interest rates based on a fair value analysis of this derivative instrument. There were no unrealized losses on this derivative during 2018.
Discontinued Operations. We sold our Sedona hotel assets on February 28, 2017 and, in accordance with GAAP, have presented the results of operations for such assets in net income from discontinued operations for the three and nine months ended September 30, 2017. Our Sedona hotels contributed no net income or loss for the three months ended September 30, 2017 and net income of $4.7 million for the nine months ended September 30, 2017 (including a gain on sale of $6.8 million).
Operating Segments
Our operating segments reflect the distinct business activities from which revenues are earned and expenses incurred that isare evaluated regularly by our executive management team in assessing performance and in deciding how to allocate resources. As of and for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, the Company’s reportable segments consisted of the following:
Hospitality and Entertainment Operations — Consists of revenues less direct operating expenses, depreciation and amortization relating to our hotel, golf, spa, and food & beverage operations. This segment also reflects the carrying value of such assets and the related financing and operating obligations. As described elsewhere in this Form 10-Q, we sold our Sedona hotels in February 2017 and, in accordance with GAAP, have presented the results of operations for such assets in net income (loss) from discontinued operations for the nine months ended September 30, 2017. While the Sedona hotels have been presented as discontinued operations in the accompanying condensed consolidated financial statements, the Company intends to continue its active engagement in the Hospitality and Entertainment Operations segment through our hotel management group. In this regard, the Company acquired MacArthur Place in the fourth quarter of 2017 and is actively evaluating other hospitality assets for purchase or management.
Mortgage and REO –- Legacy Portfolio and Other Operations — Consists of the collection, workout and sale of new and legacy loans and REO assets, including financing of such asset sales. This also encompassessales, as well as the operating expenses (if any), carrying costs of such assets and other related expenses.expenses of such assets. This segment also reflectsincludes operating properties that do not represent a strategic operating objective of the carrying value ofCompany, such assetsas Broadway Tower, and the related financingtheir rental revenue and operating obligations. This segment has also historically included rental revenue,tenant recoveries less direct property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses), depreciation and amortization from commercial and residential real estate leasing operations, and the carrying value of such assets and the related financing and operating obligations.
Corporate and Other — — Consists of our centralized general and administrative and corporate treasury activities. This segment also includes reclassifications and eliminations between the reportable operating segments and reflects the carrying value of corporate fixed assets and the related financing and operating obligations.
A summary of the financial results for each of our operating segments during the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 follows (in thousands):
Hospitality and Entertainment Operations
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| | | 2018 | | % of Consolidated Total | | 2017 | | % of Consolidated Total | | 2018 | | % of Consolidated Total | | 2017 | | % of Consolidated Total |
| | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 2,082 |
| | 73.7 | % | | $ | 176 |
| | 27.1 | % | | $ | 5,993 |
| | 74.4 | % | | $ | 2,170 |
| | 75.0 | % |
| Expenses: | | | | | | | | | | | | | | | | |
Operating property expenses (exclusive of interest and
depreciation) | | 2,365 |
| | 100.0 | % | | 105 |
| | 100.0 | % | | 6,699 |
| | 100.0 | % | | 1,544 |
| | 100.0 | % |
| Professional fees | | 82 |
| | 7.3 | % | | 13 |
| | 1.2 | % | | 183 |
| | 6.6 | % | | 39 |
| | 1.2 | % |
| General and administrative expenses | | 231 |
| | 12.9 | % | | 79 |
| | 4.4 | % | | 856 |
| | 15.9 | % | | 117 |
| | 1.9 | % |
| Interest expense | | 309 |
| | 39.9 | % | | — |
| | — | % | | 941 |
| | 40.9 | % | | — |
| | — | % |
| Depreciation and amortization expense | | 241 |
| | 85.8 | % | | — |
| | — | % | | 761 |
| | 82.3 | % | | — |
| | — | % |
| Total operating expenses | | 3,228 |
| | | | 197 |
| | | | 9,440 |
| | | | 1,700 |
| | |
| Other Expenses: | | | | | | | | | | | | | | | | |
| Gain on disposal of assets, net | | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | | (169 | ) | | 8.3 | % |
| Other expenses | | — |
| | | | — |
| | | | — |
| | | | (169 | ) | | |
| Total expenses | | 3,228 |
| | 109.8 | % | | 197 |
| | (8.3 | )% | | 9,440 |
| | 65.3 | % | | 1,531 |
| | 30.8 | % |
| Net Income (Loss) from Continuing Operations | | (1,146 | ) | | 996.5 | % | | (21 | ) | | (0.7 | )% | | (3,447 | ) | | 53.8 | % | | 639 |
| | (30.8 | )% |
| Net income from discontinued operations, net of tax | | — |
| | — | % | | 30 |
| | 100.0 | % | | — |
| | — | % | | 4,766 |
| | 100.0 | % |
| Net Income (Loss) Attributable to Non-Controlling Interest | | (132 | ) | | 11.9 | % | | — |
| | — | % | | (261 | ) | | 26.4 | % | | — |
| | — | % |
| Net Income (Loss) Attributable to Common Shareholders | | $ | (1,278 | ) | | 39.7 | % | | $ | 9 |
| | 0.3 | % | | $ | (3,708 | ) | | 29.6 | % | | $ | 5,405 |
| | (1248.3 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, |
| | 2019 | | % of Consolidated Total | | 2018 | | % of Consolidated Total |
| 2019 |
| % of Consolidated Total |
| 2018 |
| % of Consolidated Total |
| Total revenues | | $ | 1,482 |
| | 58.5 | % | | $ | 2,347 |
| | 78.2 | % |
| $ | 1,795 |
|
| 50.3 | % |
| $ | 3,911 |
|
| 74.8 | % |
| Operating expenses | | | | | | | | |
|
|
|
|
|
|
|
|
| Operating property direct expenses | | 3,434 |
| | 91.6 | % | | 2,099 |
| | 100.0 | % |
| 5,783 |
|
| 94.9 | % |
| 4,334 |
|
| 100.0 | % |
| Professional fees | | 275 |
| | 17.3 | % | | 43 |
| | 5.7 | % |
| 356 |
|
| 14.9 | % |
| 102 |
|
| 6.3 | % |
| General & administrative | | 265 |
| | 16.4 | % | | 309 |
| | 18.1 | % |
| 641 |
|
| 18.2 | % |
| 624 |
|
| 17.4 | % |
| Interest expense | | 139 |
| | 41.5 | % | | 327 |
| | 41.9 | % |
| 139 |
|
| 17.6 | % |
| 632 |
|
| 41.4 | % |
| Depreciation & amortization expense | | 242 |
| | 75.4 | % | | 241 |
| | 79.5 | % |
| 485 |
|
| 82.1 | % |
| 520 |
|
| 80.7 | % |
| Total operating expenses | | 4,355 |
| | | | 3,019 |
| | |
| 7,404 |
|
|
|
| 6,212 |
|
|
|
| Other expenses | | | | | | | | |
|
|
|
|
|
|
|
|
| Unrealized loss on derivatives | | 124 |
| | 100.0 | % | | — |
| | — | % |
| 291 |
|
| 100.0 | % |
| — |
|
| — | % |
| Total other expenses | | 124 |
| | (12.0 | )% | | — |
| | |
| 291 |
|
| (33.7 | )% |
| — |
|
|
|
| Total costs and expenses, net | | 4,479 |
| | 67.8 | % | | 3,019 |
| | 54.9 | % |
| 7,695 |
|
| 60.8 | % |
| 6,212 |
|
| 53.9 | % |
| Loss before income taxes | | (2,997 | ) | | 73.6 | % | | (672 | ) | | 26.9 | % |
| (5,900 | ) |
| 65.0 | % |
| (2,301 | ) |
| 36.6 | % |
| Provision (expense) for income taxes | | — |
| | | | — |
| | — | % |
| — |
|
|
|
| — |
|
| — | % |
| Net loss | | (2,997 | ) | | 73.6 | % | | (672 | ) | | 26.9 | % |
| (5,900 | ) |
| 65.0 | % |
| (2,301 | ) |
| 36.6 | % |
| Net loss attributable to non-controlling interest | | (368 | ) | | 115.7 | % | | (88 | ) | | (352.0 | )% |
| (653 | ) |
| 147.7 | % |
| (129 | ) |
| (112.2 | )% |
| Net loss attributable to common shareholders | | $ | (3,365 | ) | | 52.5 | % | | $ | (760 | ) | | 18.2 | % |
| $ | (6,553 | ) |
| 48.4 | % |
| $ | (2,430 | ) |
| 26.2 | % |
For the three months ended SeptemberJune 30, 20182019 and 2017,2018, the hospitality and entertainment operations segment revenues were $2.1$1.5 million and $176 thousand, respectively.$2.3 million, respectively which contributed 58.5% and 78.2%, respectively, of total consolidated revenues. For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, the hospitality and entertainment operations segment revenues were $6.0$1.8 million and $2.2$3.9 million, respectively. Net income from discontinued operations for the nine months ended September 30, 2017 includes gain on the sale of the Sedona hotels of $6.8 million.
For the three months ended September 30, 2018respectively which contributed 50.3% and 2017, the hospitality and entertainment operations segment contributed 73.7% and 27.1%74.8%, respectively, of total consolidated revenues. For the nine months ended September 30, 2018 and 2017, theThe year-over-year decrease in hospitality and entertainment operations segment contributed 74.4% and 75.0%, respectively,revenues as a percentage of total consolidated revenues.revenues is attributable to the lack of revenues resulting from the renovation at MacArthur Place. During the three and six months ended June 30, 2019, our results were based on 31.4% and 22.9% occupancy, respectively, with an ADR of $418 and $361, respectively, and REVPAR of $131 and $82, respectively. For the three and six months ended June 30, 2018, our results were based on 57.5% and 58.8% occupancy, respectively, with an ADR of $359 and $307, respectively, and REVPAR of $207 and $164, respectively. However, since our hospitality rooms were under construction during the majority of 2019, the adjusted results based on actual rooms available during the construction period for the six months ended June 30, 2019 reflected occupancy of 52.2% occupancy, an ADR of $361, and REVPAR of $189.
Similarly, duringDuring the three and six months ended SeptemberJune 30, 20182019 and 2017,2018, the hospitality and entertainment operations segment constituted the majority of our consolidated operating property direct expenses.expenses (prior to the acquisition of Broadway Tower in May 2019). The decrease in net operating income percentages for the three and six months ended June 30, 2019, as compared to the same period in 2018, was primarily attributed to high operating property direct expenses, which was caused by rooms out of service during the renovation project while operating expenses remained consistent year over year.
After interest expense, depreciation and amortization, the hospitality and entertainment operations segment contributed losses of $1.15$3.0 million and $3.45$5.9 million of the total consolidated net loss for the three and six months ended June 30, 2019, respectively. The hospitality and entertainment operations segment contributed net loss of $0.7 million and net income of $2.3 million of the total consolidated net loss from continuing operations for the three and ninesix months ended SeptemberJune 30, 2018, respectively. The hospitality and entertainment operations segment contributed net loss of $0.02 million and net income of $0.6 million of the total consolidated net loss from continuing operations for the three and nine months ended September 30, 2017, respectively.
Mortgage and REO –- Legacy Portfolio and Other Operations
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| | | 2018 | | % of Consolidated Total | | 2017 | | % of Consolidated Total | | 2018 | | % of Consolidated Total | | 2017 | | % of Consolidated Total |
| | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 712 |
| | 25.2 | % | | $ | 387 |
| | 59.5 | % | | $ | 1,978 |
| | 24.6 | % | | $ | 516 |
| | 17.8 | % |
| Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expenses for non-operating real estate owned |
| 151 |
|
| 100.0 | % |
| 153 |
|
| 100.0 | % |
| 519 |
|
| 100.0 | % |
| 485 |
|
| 100.0 | % |
| Professional fees |
| 574 |
|
| 51.0 | % |
| 616 |
|
| 58.2 | % |
| 1,391 |
|
| 50.5 | % |
| 2,305 |
|
| 72.5 | % |
| General and administrative expense |
| 2 |
|
| 0.1 | % |
| — |
|
| — | % |
| 2 |
|
| — | % |
| 115 |
|
| 1.9 | % |
| Interest expense |
| 116 |
|
| 15.0 | % |
| 132 |
|
| 29.4 | % |
| 344 |
|
| 15.0 | % |
| 397 |
|
| 30.0 | % |
| Total operating expenses |
| 843 |
|
|
|
| 901 |
|
|
|
| 2,256 |
|
|
|
| 3,302 |
|
|
|
| Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain on disposal of assets, net |
| (3,543 | ) |
| 100.0 | % |
| (321 | ) |
| 100.0 | % |
| (3,938 | ) |
| 100.0 | % |
| (1,867 | ) |
| 91.7 | % |
| Recovery of investment and credit losses, net |
| — |
|
| — | % |
| (6,070 | ) |
| 100.0 | % |
| (175 | ) |
| 100.0 | % |
| (6,348 | ) |
| 99.1 | % |
| Impairment of Real Estate Owned |
| — |
|
| — | % |
| 344 |
|
| 100.0 | % |
|
|
| — | % |
| 344 |
|
| 100.0 | % |
| Earnings in unconsolidated subsidiaries |
| — |
|
| — | % |
| 68 |
|
| 100.0 | % |
| — |
|
| — | % |
| 239 |
|
| 100.0 | % |
| Other income |
| (3,543 | ) |
| 100.0 | % |
| (5,979 | ) |
| 100.0 | % |
| (4,113 | ) |
| 100.0 | % |
| (7,632 | ) |
| 97.1 | % |
| Total expenses, net of gains |
| (2,700 | ) |
| (91.8 | )% |
| (5,078 | ) |
| 213.9 | % |
| (1,857 | ) |
| (12.8 | )% |
| (4,330 | ) |
| (87.2 | )% |
| Net Income (Loss) |
| 3,412 |
|
| (2967.0 | )% |
| 5,465 |
|
| 178.9 | % |
| 3,835 |
|
| (59.8 | )% |
| 4,846 |
|
| 179.9 | % |
| Net loss attributable to noncontrolling interests |
| (973 | ) |
| 88.1 | % |
| 1,224 |
|
| 100.0 | % |
| (729 | ) |
| 73.6 | % |
| 490 |
|
| 100.0 | % |
| Net Income (Loss) Attributable to Common Shareholders |
| $ | 2,439 |
|
| (75.8 | )% |
| $ | 6,689 |
|
| 219.0 | % |
| $ | 3,106 |
|
| (24.8 | )% |
| $ | 5,336 |
|
| (1232.3 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | % of Consolidated Total | | 2018 | | % of Consolidated Total |
| 2019 |
| % of Consolidated Total |
| 2018 |
| % of Consolidated Total |
| Total revenues | | $ | 848 |
| | 33.5 | % | | $ | 641 |
| | 21.4 | % |
| $ | 1,501 |
|
| 42.1 | % |
| $ | 1,266 |
|
| 24.2 | % |
| Operating expenses | | | | | | | | | | | | | | | | |
| Operating property direct expenses | | 313 |
| | 8.4 | % | | — |
| | — | % | | 313 |
| | 5.1 | % | | — |
| | — | % |
| Expenses for non-operating REO | | 32 |
| | 100.0 | % | | 171 |
| | 100.0 | % |
| 123 |
|
| 100.0 | % |
| 367 |
|
| 100.0 | % |
| Professional fees | | 610 |
| | 38.4 | % | | 269 |
| | 35.7 | % |
| 882 |
|
| 36.8 | % |
| 816 |
|
| 50.1 | % |
| Interest expense | | 129 |
| | 38.5 | % | | 116 |
| | 14.9 | % |
| 257 |
|
| 32.5 | % |
| 229 |
|
| 15.0 | % |
| Depreciation & amortization expense | | 50 |
| | 15.6 | % | | — |
| | — | % |
| 50 |
|
| 8.5 | % |
| — |
|
| — | % |
| Total operating expenses | | 1,134 |
| | | | 556 |
| | |
| 1,625 |
|
|
|
|
| 1,412 |
|
|
|
|
| Other expenses | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
| Gain on disposal of assets, net | | (20 | ) | | 100.0 | % | | (142 | ) | | 100.0 | % |
| (20 | ) |
| — | % |
| (395 | ) |
| 100.0 | % |
| Recovery of credit losses, net | | (1,135 | ) | | 100.0 | % | | (175 | ) | | — | % |
| (1,135 | ) |
| — | % |
| (175 | ) |
| — | % |
| Total other expenses | | (1,155 | ) | | 112.0 | % | | (317 | ) | | |
| (1,155 | ) |
| 133.7 | % |
| (570 | ) |
|
|
|
| Total costs and expenses, net | | (21 | ) | | (0.3 | )% | | 239 |
| | 4.3 | % |
| 470 |
|
| 3.7 | % |
| 842 |
|
| 7.3 | % |
| Income before income taxes | | 869 |
| | (21.4 | )% | | 402 |
| | (16.1 | )% |
| 1,031 |
|
| (11.4 | )% |
| 424 |
|
| (6.7 | )% |
| Provision (expense) for income taxes | | — |
| | | | — |
| | — | % |
| — |
|
|
|
|
| — |
|
| — | % |
| Net income | | 869 |
| | (21.4 | )% | | 402 |
| | (16.1 | )% |
| 1,031 |
|
| (11.4 | )% |
| 424 |
|
| (6.7 | )% |
| Net income attributable to non-controlling interest | | 50 |
| | (15.7 | )% | | 113 |
| | 452.0 | % |
| 211 |
|
| (47.7 | )% |
| 244 |
|
| 212.2 | % |
| Net income attributable to common shareholders | | $ | 919 |
| | (14.3 | )% | | $ | 515 |
| | (12.3 | )% |
| $ | 1,242 |
|
| (9.2 | )% |
| $ | 668 |
|
| (7.2 | )% |
For the three months ended SeptemberJune 30, 20182019 and 2017,2018, the Mortgage and REO - Legacy Portfolio and Other Operations segment revenues were $0.8 million and $0.6 million, respectively which contributed 25.2%33.5% and 59.5%21.4%, respectively, of total consolidated revenues. For the ninethree and six months ended SeptemberJune 30, 2019 and 2018 segment revenues were $1.5 million and 2017, the Mortgage$1.3 million which contributed 42.1% and REO - Legacy Portfolio and Other Operations segment contributed 24.6% and 17.8%24.2%, respectively, of total consolidated revenues. The year-over-year increase in this segment revenuethe dollar amount of total revenues on a year-over-year basis, and as a percentage of total revenues, is attributed to the Company’s totalcontribution of operating revenue resulted primarily from Broadway Tower acquired during the second quarter of 2019, offset by reduced mortgage investments made beginning in mid-2017.income.
For the three months ended SeptemberJune 30, 20182019 and 2017,2018, the Mortgage and REO - Legacy Portfolio and Other Operations segment recorded total consolidated expenses, net of (gains)gains (loss), of $(2.7) million$(21.0) thousand and $(5.1)$0.2 million, respectively. For the ninesix months ended SeptemberJune 30, 20182019 and 2017 ,2018, the Mortgage and REO - Legacy Portfolio and Other Operations segment recorded total consolidated expenses, net loss, net of (gains),gain, of $(1.9)$0.5 million and $(4.3)$0.8 million, respectively. The year-over-year increasedecrease in net expenses for the threesix months ended SeptemberJune 30, 2018,2019, as compared to the same period in 2017,2018, was primarily due to (i) increased recoveries in fiscal 2019, (ii) increases in professional fees relating to enforcement activities, and (iii) increases in operating expenses from Broadway Tower, offset by (iv) decreased gains from the sale of REO assets (or portions thereof), (iii) decreases in professional fees, and (iv) increases in mortgage revenue due to the mortgage investments made beginning in mid-2017.assets.
After revenues, less interest, recoveries of investmentdepreciation and amortization expenses, and (recoveries of) provision for credit losses, the Mortgage and REO - Legacy Portfolio and Other Operations segment contributed net income of $3.4$0.9 million and $5.5$0.4 million for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. The Mortgage and REO - Legacy Portfolio and Other Operations segment contributed net income of $3.8$1.0 million and $4.8$0.4 million for the ninesix months ended SeptemberJune 30, 2019 and 2018, respectively. We expect our lending activities and 2017, respectively.related income to increase as available liquidity allows us to acquire our target assets.
See “Note 4 –- Mortgage Loans, Net” and “Note 5 –- Real Estate Held for Sale, Other Real Estate Owned, and Operating Properties” in the accompanying consolidated financial statements and Item 2. - “Real Estate Owned, Lending Activities, and Loan and Borrower Attributes” for additional information regarding our loan and REO portfolio.
Corporate and Other
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| | | 2018 | | % of Consolidated Total | | 2017 | | % of Consolidated Total | | 2018 | | % of Consolidated Total | | 2017 | | % of Consolidated Total |
| | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 32 |
| | 1.1 | % | | $ | 87 |
| | 13.4 | % | | $ | 81 |
| | 1.0 | % | | $ | 206 |
| | 7.1 | % |
| Expenses: | | | | | | | | | | | | | | | | |
| Professional fees | | 469 |
| | 41.7 | % | | 430 |
| | 40.6 | % | | 1,180 |
| | 42.8 | % | | 837 |
| | 26.3 | % |
| General and administrative expense | | 1,554 |
| | 86.9 | % | | 1,714 |
| | 95.6 | % | | 4,518 |
| | 84.0 | % | | 5,922 |
| | 96.2 | % |
| Interest expense | | 350 |
| | 45.2 | % | | 317 |
| | 70.6 | % | | 1,015 |
| | 44.1 | % | | 926 |
| | 70.0 | % |
| Depreciation & amortization expense | | 40 |
| | 14.2 | % | | 46 |
| | 100.0 | % | | 164 |
| | 17.7 | % | | 139 |
| | 100.0 | % |
| Total operating expenses | | 2,413 |
| | | | 2,507 |
| | | | 6,877 |
| | | | 7,824 |
| | |
| Other expenses | | | | | | | | | | | | | | | | |
| Recovery of investment and credit losses, net | | — |
| | | | — |
| | — | % | | — |
| | | | (60 | ) | | 0.9 | % |
| Other expenses | | — |
| | | | — |
| | | | — |
| | | | (60 | ) | | |
| Total expenses | | 2,413 |
| | 82.0 | % | | 2,507 |
| | (105.6 | )% | | 6,877 |
| | 47.6 | % | | 7,764 |
| | 156.4 | % |
| Net Loss | | (2,381 | ) | | 2070.4 | % | | (2,420 | ) | | (79.2 | )% | | (6,796 | ) | | 106.1 | % | | (7,558 | ) | | (280.7 | )% |
| Cash dividend on redeemable convertible preferred stock | | (655 | ) | | 100.0 | % | | (539 | ) | | 100.0 | % | | (1,894 | ) | | 100.0 | % | | (1,600 | ) | | 100.0 | % |
| Deemed dividend on redeemable convertible preferred stock | | (920 | ) | | 100.0 | % | | (685 | ) | | 100.0 | % | | (2,651 | ) | | 100.0 | % | | (2,016 | ) | | 100.0 | % |
| Cash dividend on perpetual preferred stock | | (422 | ) | | 100.0 | % | | — |
| | — | % | | (569 | ) | | 100.0 | % | | — |
| | — | % |
| Net Loss Attributable to Common Shareholders | | $ | (4,378 | ) | | 136.1 | % | | $ | (3,644 | ) | | (119.3 | )% | | $ | (11,910 | ) | | 95.2 | % | | $ | (11,174 | ) | | 2580.6 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | % of Consolidated Total | | 2018 | | % of Consolidated Total | | 2019 | | % of Consolidated Total | | 2018 | | % of Consolidated Total |
| Total revenues | | $ | 205 |
| | 8.1 | % | | $ | 13 |
| | 0.4 | % |
| $ | 271 |
|
| 7.6 | % |
| $ | 49 |
|
| 0.9 | % |
| Operating expenses | | | | | | | | |
|
|
|
|
|
|
|
|
| Professional fees | | 705 |
| | 44.3 | % | | 442 |
| | 58.6 | % |
| 1,161 |
|
| 48.4 | % |
| 711 |
|
| 43.6 | % |
| General & administrative | | 1,346 |
| | 83.6 | % | | 1,399 |
| | 81.9 | % |
| 2,873 |
|
| 81.7 | % |
| 2,964 |
|
| 82.6 | % |
| Interest expense | | 67 |
| | 20.0 | % | | 337 |
| | 43.2 | % |
| 395 |
|
| 49.9 | % |
| 664 |
|
| 43.5 | % |
| Depreciation & amortization expense | | 29 |
| | 9.0 | % | | 62 |
| | 20.5 | % |
| 56 |
|
| 9.5 | % |
| 124 |
|
| 19.3 | % |
| Total operating expenses | | 2,147 |
| |
| | 2,240 |
| | |
| 4,485 |
|
| 33.2 | % |
| 4,463 |
|
|
|
| Other expenses | | | | | | | | |
|
|
|
|
|
|
|
|
| Total costs and expenses, net | | 2,147 |
| | 32.5 | % | | 2,240 |
| | 40.7 | % |
| 4,485 |
|
| 35.5 | % |
| 4,463 |
|
| 38.8 | % |
| Income (loss) before income taxes | | (1,942 | ) | | 47.7 | % | | (2,227 | ) | | 89.2 | % |
| (4,214 | ) |
| 46.4 | % |
| (4,414 | ) |
| 70.2 | % |
| Provision (expense) for income taxes | | — |
| | | | — |
| | — | % |
| — |
|
|
|
| — |
|
| — | % |
| Net loss | | (1,942 | ) | | 47.7 | % | | (2,227 | ) | | 89.2 | % |
| (4,214 | ) |
| 46.4 | % |
| (4,414 | ) |
| 70.2 | % |
| Cash dividends on series B-1 and B-2 preferred stock | | (648 | ) | | 100.0 | % | | (647 | ) | | 100.0 | % |
| (1,288 | ) |
| 100.0 | % |
| (1,239 | ) |
| 100.0 | % |
| Imputed dividends on series B-1 and B-2 preferred stock | | (954 | ) | | 100.0 | % | | (915 | ) | | 100.0 | % |
| (1,889 | ) |
| 100.0 | % |
| (1,731 | ) |
| 100.0 | % |
| Imputed dividends on series A preferred stock | | (417 | ) | | 100.0 | % | | (142 | ) | | 100.0 | % |
| (830 | ) |
| 100.0 | % |
| (142 | ) |
| 100.0 | % |
| Net loss attributable to common shareholders | | $ | (3,961 | ) | | 61.8 | % | | $ | (3,931 | ) | | 94.1 | % |
| $ | (8,221 | ) |
| 60.8 | % |
| $ | (7,526 | ) |
| 81.0 | % |
Other than occasional, non-recurring miscellaneous revenue and management fee income, the Corporate and Other segment did not generate any other material revenues for the Company for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017.2018.
For the three months ended SeptemberJune 30, 20182019 and 2017,2018, the Corporate and Other segment contributed $2.4$2.1 million and $2.5$2.2 million, respectively, or 82.0%32.5% and (105.6)%40.7%, to total consolidated expenses (net of total recovery of investment and credit losses, gain on disposal, and equity method loss from unconsolidated entities). For the six months ended June 30, 2019 and 2018, the Corporate and Other segment contributed $4.5 million to total consolidated expenses during each period. The decrease in expenses remained relatively flat for this segment is primarily attributable to (i) decreased professional fees and (ii) decreased interest expense.segment.
Real Estate Owned, Lending Activities, Loan and Borrower Attributes
Lending Activities
As of SeptemberJune 30, 2018,2019, our loan portfolio consisted of six firstfour mortgage loans with a carrying value of $23.0$13.3 million. No new loans were originated during the three and six months ended June 30, 2019. Two of our loans were performing loans with an average outstanding principal and accrued interest balance of $6.6 million. As of June 30, 2019 and December 31, 2017, our loan portfolio consisted of four first mortgage loans with a carrying value of $19.7 million. During the three months ended September 30, 2018, one of our loans entered default status upon its maturity, although it was not considered impaired since the fair value of the underlying collateral was deemed to exceed the carrying value of the loan. As of September 30, 2018, the Company hadheld two and three non-performing portfolio loans, respectively, two of which have been fully reserved and have a zero carrying value. value as of June 30, 2019. During three months ended June 30, 2019, one performing loan with a principal balance of $3.0 million was repaid in full. In the second quarter of 2019, we conducted a UCC foreclosure on the collateral securing a defaulted mezzanine note receivable that had a carrying value of $8.2 million. That collateral consisted of 100% of the membership interests in a limited liability company that owns a commercial real estate building and operations in St. Louis, Missouri, known as Broadway Tower that has been recorded as an operating property following the foreclosure.
As of June 30, 2019 and December 31, 2017,2018, the Company had two non-performing loans,valuation allowance was $12.7 million and $13.1 million for each period, respectively which have been fully reserved and have a zero carrying value.represented 49.9% and 37.1%, respectively, of the total outstanding loan principal and interest balances.
We made mortgage loan investment and/or fundings the amount of $0.9 million and $2.9 million during the six months ended June 30, 2019 and 2018, respectfully. During the ninethree and six months ended SeptemberJune 30, 20182019, we recorded mortgage interest income
of $0.4 million and $1.1 million, respectively and during the Company originated 2 new loans. The first loan is a $13.1three and six months ended June 30, 2018,$0.6 million construction loan bearing annual interest at 8.5% plus one- month LIBOR, with an original maturity date of July 18, 2020 and a six-month extension option. As of September 30, 2018, the Company had not yet advanced any proceeds due under the loan pending the borrower meeting certain equity requirements. The second loan was a mortgage loan for $3.0$1.3 million, bearing annual interest of 6% plus one-month LIBOR (subject to an 8% interest rate floor), and an exit fee equal to 1% of the principal balance.respectively.
Geographic Diversification
As of SeptemberJune 30, 2018,2019, the collateral underlying our loan portfolio was located in California, Missouri, Texas, New York, and Arizona. Unless and until we resume meaningful lending activities, our ability to diversify the geographic aspect of our loan portfolio remains significantly limited. The change in the geographic diversification of our loans is primarily attributed to loan purchases and originations.
While our lending activities have historically been focused primarily in the southwestern United States, we remain open to further diversifyhave no geographic limitations in our investments geographically if attractive opportunities arise.investment policy.
Interest Rate Information
Our loan portfolio includes loans that carry variable and fixed interest rates. All variable interest rate loans are indexed to either the Prime rateRate or LIBOR Rate with interest rate floors. At SeptemberLIBOR. As of June 30, 20182019 and December 31, 2017,2018, the Prime Rate was 5.25% and 4.50%, respectively. At September5.5%. As of June 30, 20182019 and December 31, 2017,2018, the one-month LIBOR rate was 2.26%2.4% and 1.56%2.0%, respectively.
As of SeptemberJune 30, 2018, three of our six2019, we had four loans were performing, had a weighted averagewith principal balance $5.1and interest balances totaling $25.4 million and interest rates ranging from 9.6% to 12.0%. Of this total, two loans with principal and interest balances totaling $12.3 million and a weighted average interest rate of 8.84%. At12.1% were non-performing loans, both of which were fully reserved, while two loans with principal and interest balances totaling $13.3 million and a weighted average interest rate of 9.7% were performing. As of December 31, 2017, two2018, three of our foursix loans were performing and had a weighted average principal balance of $10.0$7.7 million and a weighted average interest rate of 9.69%9.44%.
See “Note 4 –- Mortgage Loans, Net” in the accompanying condensed consolidated financial statements for additional information regarding interest rates for our loan portfolio.
Loan and Borrower Attributes
The collateral supporting our loans historically have consisted of fee simple real estate zoned for residential, commercial or industrial use. The real estate may be in any stage of development from unimproved land to finished buildings with occupants or tenants. From a collateral standpoint, we believe the level of risk decreases as the borrower obtains governmental approvals (i.e., entitlements) for development. When the ultimate goal is to build an existing structure that can be sold or rented, in general, fully entitled land that is already approved for construction is more valuable than a comparable piece of land that has received no entitlement approvals. Each municipality or other governmental agency has its own variation of the entitlement process; however, in general, the functions tend to be relatively similar. In general, the closer to completion a construction project may be, the lower the level of risk that construction will be delayed.
We also generally classify loans into categories based on the underlying collateral’s projected end-use for purposes of identifying and managing loan concentration and associated risks. As of SeptemberJune 30, 2019, the original projected end-use of the collateral under our loans was classified as 52.4% residential and 47.6% commercial. As of December 31, 2018, the original projected end-use of the collateral under our loans was classified as 38.9%36.0% residential and 61.1% commercial. As of December 31, 2017, the original projected end-use of the collateral under our loans was classified as 39.2% residential and 60.8% commercial.
See “Note 4 – Mortgage Loans, Net” in the accompanying condensed consolidated financial statements for additional information regarding the classification of our loan portfolio.
64.0% mixed-use.
Changes in the Portfolio Profile — Scheduled Maturities
The outstanding principal and interest balance of our mortgage loan portfolio, net of the valuation allowance, as of SeptemberJune 30, 2018,2019, has scheduled maturity dates as follows:follows (dollar amounts in thousands):
|
| | | | | | | | | | |
| Quarter |
| Principal and Interest Balance |
| Percent |
| # |
| Matured |
| $ | 20,764 |
|
| 57.61 | % |
| 3 |
|
| Q2 2019 |
| 3,000 |
|
| 8.32 | % |
| 1 |
|
| Q4 2019 |
| 12,279 |
|
| 34.07 | % |
| 1 |
|
| Total principal and interest |
| 36,043 |
|
| 100 | % |
| 6 |
|
| Less: valuation allowance |
| (13,064 | ) |
|
|
|
|
| Net carrying value |
| $ | 22,979 |
|
|
|
|
|
See “Note 4 – Mortgage Loans, Net” in the accompanying condensed consolidated financial statements for additional information regarding loan modifications. |
| | | | | | | | | |
| Quarter | | Principal and Interest Balance | | Percent | | # |
| Matured | | $ | 12,682 |
| | 49 | % | | 2 |
| Q4 2019 | | 13,270 |
| | 51 | % | | 2 |
| Total principal and interest | | 25,952 |
| | 100 | % | | 4 |
| Less: valuation allowance | | (12,682 | ) | | | | |
| Mortgage loans, net | | $ | 13,270 |
| | | | |
Operating Properties, Real Estate Held for Sale and Other Real Estate Owned
At SeptemberAs of June 30, 2018,2019, we held total REO assets of $67.5$104.8 million, of which $8.0$7.4 million were held for sale, $25.8$63.7 million were held as operating properties, and $33.7 million were classified as other real estate owned. At December 31, 2017,2018, we held total REO assets of $64.6$75.0 million, of which $5.9$7.4 million werewas held for sale, $20.5$33.9 million were held as operating properties and $38.3$33.7 million were classified as other real estate owned. All our REO assets are located in California, Texas, Missouri, Arizona, Minnesota, Utah, and New Mexico.
As described above, we foreclosed on one mezzanine note during the three months ended June 30, 2019 and therefore acquired the office building and related assets and assumed related liabilities of Broadway Tower due to all of which were recorded at
estimated fair value in accordance with GAAP. The acquired assets consist of a building, land, furniture and fixtures, operating and reserve cash, and tenant receivables totaling approximately $26.0 million. Liabilities assumed consist of trade accounts payable and accrued liabilities, and accrued interest and principal on the first mortgage loan totaling approximately $16.0 million.
In addition, during the three and six months ended June 30, 2019 we disposed of one REO asset for $39 thousand (net of transaction costs and other adjustments) resulting in a net gain on sale of for a net gain of $20 thousand. During the ninethree and six months ended SeptemberJune 30, 2018 we sold threedisposed of one and two REO assets (or portions thereof) for $8.7$0.3 million and $0.5 million (net of transaction costs and other adjustments) resulting in a total net gain on sale of $3.9 million less gains due to non-controlling interests of $1.9 million. During the nine months ended September 30, 2017, the Company sold REO from seven projects (in whole or portions thereof), for $98.3 million (net of transaction costs and other non-cash adjustments) resulting in a total net gain on sale of $8.9$0.3 million of which $6.8and $(0.4) million, is included as a component of discontinued operations in the unaudited condensed consolidated statement of operations.
In connection with the sale of certain of our real estate assets in September 2018, the Company negotiated with the buyer that the Company will retain a 50% interest in the proceeds generated from a long-term TIF development subsidy provided by the sponsoring governmental agency. Based on projections by an independent municipal financial consulting firm, the sold parcel is expected to receive nearly $24 million in gross property tax increments over the next 30 years, the current fair value of which equates to $9.8 million net present value as of the sale date. As such, the Company’s portion of such proceeds would equal $4.9 million on a net present value basis. The TIF was approved by resolution of the applicable governmental agency in August 2018, subject to the finalization of a certain land contribution by one of the unrelated developers in the overall development project, which had not been completed as of September 30, 2018. As a result of this contingency, the Company did not record the effects of this TIF receivable in the accompanying condensed consolidated financial statements.respectively.
Costs and expenses related to operating, holding and maintaining our operating properties and REO assets are expensed as incurred and included in operating property direct expenses and expenses for non-operating real estate owned in the accompanying condensed consolidated statements of operations. For the three and six months ended SeptemberJune 30, 2018 and 2017,2019, these costs and expenses were $2.5$3.7 million and $0.3$6.2 million, ($16.0 thousand of which is included in income from discontinued operations), respectively. For the ninethree and six months ended SeptemberJune 30, 2018, and 2017, these costs and expenses were $7.2$2.3 million and $6.7$4.7 million, ($5.8 million of which is included in loss from discontinued operations), respectively. Costs related to the development or improvements of the Company’s real estate assets are generally capitalized and costs relating to holding the assets are generally charged to expense. Cash outlays for capitalized development costs and real estate investments totaled $8.1$9.8 million and $1.4$3.2 million forduring the ninesix months ended SeptemberJune 30, 2019 and 2018, respectively, which related primarily to the MacArthur Place renovation and 2017, respectively.the acquisition of Broadway Tower.
The nature and extent of future costs for our REO properties depends on the holding period of such assets, the level of development undertaken, our projected return on such holdings, our ability to raise funds required to develop such properties, the number of additional foreclosures, and other factors. While substantially all our assets are generally available for sale, we continue to evaluate
various alternatives for the ultimate disposition of these investments, including partial or complete development of the properties prior to sale or disposal of the properties on an as-is basis.
See “Note 5 – Real Estate Held for Sale, Other Real Estate Owned, and Operating Properties”Variable Interest Entities
L’Auberge de Sonoma Hotel Fund
As of June 30, 2019, the Hotel Fund has sold Preferred Interests totaling $25 million, of which $22.5 million is included in non-controlling interests in the accompanying condensedconsolidated balance sheets, and $2.5 million represents the Company’s preferred interest in the Hotel Fund. The Hotel Fund made Preferred Distributions of $0.6 million during the six months ended June 30, 2019. Based on (i) the structure of the Hotel Fund, (ii) our ability to direct the activities that most significantly impact the economic performance of the Hotel Fund, and (iii) the risk of absorbing losses or rights to receive benefits that could be potentially significant to the Hotel Fund, the Company is deemed to be the primary beneficiary of the Hotel Fund, and accordingly we have consolidated and expect to continue to consolidate the Hotel Fund in our consolidated financial statements for additional information.statements.
Important Relationships between Capital Resources and Results of Operations
Summary of Existing Loans in Default
Our loans in default at September 30, 2018 consisted of a mezzanine loan and two impaired legacy mortgage loans. Our loans in default at December 31, 2017 consisted of two impaired legacy mortgage loans. At September 30, 2018 and December 31, 2017, three and two, respectively, of our outstanding loans were in default, all of which were past their respective scheduled maturity dates and two that are fully reserved. We are in the process of pursuing certain enforcement action which could lead to foreclosure or other disposition of assets serving as collateral for our other portfolio loans in default. The timing of foreclosure on the remaining loan collateral is dependent on several factors, including applicable state statutes, other existing liens, potential bankruptcy filings by the borrowers, and our ability to negotiate a deed-in-lieu of foreclosure.
See “Note 4 – Mortgage Loans, Net” in the accompanying condensed consolidated financial statements for additional information regarding loans in default.
Valuation Allowance and Fair Value Measurement of Loans and Real Estate Held for Sale and Other REO
A discussionWe perform a valuation analysis of our valuation allowance,loans, REO held for sale, other REO, and equity investments not less frequently than on a quarterly basis.
In determining fair value, we have adopted applicable accounting guidance which establishes a framework for measuring fair value in accordance with GAAP, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. This accounting guidance applies whenever other accounting standards require or permit fair value measurement.
Our fair value measurement is based on the highest and summariesbest use of each property which is generally consistent with our current use for each property subject to valuation. In addition, our assumptions are established based on assumptions that we believe market participants for those assets would also use. During the proceduresthree and six months ended June 30, 2019 and 2018, we performed in connection withboth a macro analysis of market trends and economic estimates as well as a detailed analysis on selected significant loan and REO assets. In addition, our fair value analysis asincludes a consideration of September 30, 2018 is presentedmanagement’s pricing strategy in Note 8disposing of the accompanying condensed consolidated financial statements.such assets.
Valuation Conclusions
Based on the results of our evaluation and analysis, we recorded nodid not record any non-cash provision for credit losses on our loan portfolio or REO assets during the three and ninesix months ended SeptemberJune 30, 20182019 and 2017.2018. We recorded $0 and $0.2a loss of $0.1 million in net recoveries of investment and credit losses during the three and nine months ended September 30, 2018, respectively. We recorded $6.1 million and $6.4 million for the three and nine months ended September 30, 2017, respectively. These recoveries resulted from the collection of cash and/or other assets recovered from certain guarantors on certain legacy loans and insurance recoveries received during the period. We recorded no impairment losses during the three and nine months ended September 30, 2018 and $0.3 million during the three and ninesix months ended SeptemberJune 30, 2017.2019, respectively, pertaining to a fair value adjustment for an interest rate cap. There
was no loss recorded during the three and six months ended June 30, 2018. The Company recorded cash recoveries of credit losses of $1.1 million for each of the three and six months ended June 30, 2019 and $0.2 million for each of the three and six months ended June 30, 2018.
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, the valuation allowance was $12.7 million and $13.1 million, respectively, and represented 37.1%49.9% and 39.2%37.1%, respectively, of the total outstanding loan principal and accrued interest balances.balances as of such dates.
LeverageWith the existing valuation allowance recorded on our loans and impairments recorded on our REO assets as of June 30, 2019, we believe that, as of that date, the fair value of our loans and REO is adequate in relation to Enhance Portfolio Yieldsthe net carrying value of the related assets and that no additional valuation allowance or impairment is considered necessary. We will continue to evaluate our loan and REO assets to determine the adequacy and appropriateness of the valuation allowance and impairment balances. Depending on market conditions, such evaluations may yield materially different values and potentially increase or decrease the valuation allowance for loans or impairment charges for REO assets.
We have not historically employed a significant amount of leverage to enhance our investment yield. However, we have secured financing when deemed beneficial, if not necessary, and may employ additional leverage in the future as deemed appropriate.
Current and Anticipated Borrowings
Broadway Tower Note
As described above, in the second quarter of 2019, we foreclosed on the collateral securing a defaulted mezzanine note receivable and acquired 100% of the membership interests in a limited liability company that owns a commercial real estate building and operations in St. Louis, Missouri, known as Broadway Tower, thereby assuming its assets and liabilities, including $13.2 million mortgage note payable secured by Broadway Tower. In a related transaction, a subsidiary of the Company purchased the $13.2 million first mortgage note secured by Broadway Tower. Since we own both the entity that owns the first mortgage note, as well as the entity that owes this obligation, the first mortgage loan and related interest has been eliminated in consolidation in the accompanying consolidated financial statements. The purchase of the first mortgage note was funded partially with an $11.0 million loan under a master repurchase agreement (the “Chase Funding master repurchase agreement”), from JPMorgan Chase Funding Inc. (“Chase Funding”), a related party, and the balance using Company funds. The Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved.
Exchange Notes
In April 2014, we completed an offering of a five-year, 4%, unsecured notes to certain of our shareholders in exchange for common stock held by such shareholders at an exchange price of $8.02 per share (“2014 Exchange Offering”). Upon completion of the 2014 Exchange Offering, we issued 2014 Exchange Offering notes (“2014 EO Notes”) with a face value of $10.2 million, which were recorded by the Company at fair value of $6.4 million based on the fair value and the imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an initial debt discount on the 2014million. The EO Notes of $3.8 million, with a remaining balance of $0.5 million at September 30, 2018. This amount is reflected as a debt discountmatured and were repaid in the accompanying financial statements, and is being amortized as an adjustment to interest expense using the effective interest method over the term of the 2014 EO Notes. The amortized discount added to the principal balance of the 2014 EO Notes during the nine months ended September 30, 2018 totaled $0.2 million. Interest is payable quarterly in arrears each January, April, July, and October. The 2014 EO Notes maturefull on April 28, 2019, and may be prepaid in whole or in part without penalty at the option of the Company. Had the Company met certain minimum cash and profitability conditions, the Company would have been required to prepay fifty percent (50%) of the outstanding principal balance of the 2014 EO Notes on April 29, 2018. Such conditions were not met and no prepayment was required.2019.
Subsequent to September 30, 2018, the Company commenced an offering of up to $10.2 million in new notes (“New EO Notes”) to existing noteholders of its current EO Notes to 1) extend the maturity date of the EO Notes from April 29, 2019 to December 15, 2021 and 2) to increase the coupon interest rate from 4% to 7%.
Mexico Land Purchase Financing
During 2015,As of June 30, 2019, the Company obtained seller-financinghad an outstanding note payable in the amount of $5.9 million in connection with the purchase ofsecured by certain real estate located in New Mexico atwith a purchase pricecarrying value of $6.8 million. The note bears interest at the WSJ Prime Rate as of December 31, 2015 (recalculated annually) plus 2% through December 31, 2017, and the WSJ Prime Rate plus 3% thereafter. Interestand required interest only payments are due annually on December 31 of each year with the principal balance and any accrued unpaid interest due at maturity onupon the earlier of 1) December 31, 2019.2019, or 2) sale of the underlying collateral property. The note may be prepaid in whole or in part without penalty.
Special Assessment Obligations
As of September 30, 2018 and December 31, 2017, obligations arising from our allocated share of certain community facilities district special revenue bonds and special assessments had a remaining balance of $0.1 million and $0.1 million, respectively. This special assessment obligation has amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5% and is secured by certain real estate classified as REO held for sale consisting of 1.5 acres of unentitled land located in Dakota County, Minnesota which had a carrying value of $0.1 million at September 30, 2018. We made principal payments of $14 thousand on this special assessment obligation during the nine months ended September 30, 2018.
The responsibility for the repayment of each of the foregoing special assessment obligations rests with the owner of the property and will transfer to the buyer of the related real estate upon sale. Accordingly, if the assets to which these obligations arise from are sold before the full amortization period of such obligations, the Company would be relieved of any further liability since the buyer would assume the remaining obligations. Nevertheless, these special assessment obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time.
Hotel Acquisition and Construction Loan
In connection with the acquisition of the MacArthur Hotel on October 2, 2017,Place, the Company entered into a building loan agreement/disbursement schedule and related agreements with MidFirst, dated as of October 2, 2017, in the amount ofborrowed $32.3 million of which approximately $19.4 million was utilized for the purchase of the MacArthur Hotel, approximately $10.0 million of which is being set aside to fund planned hotel improvements, and the balance is to fund interest reserves and operating capital.from MidFirst Bank. The MacArthur Loan requires the Company to fund minimum equity of $17.4 million, all of which has been funded. The MacArthur Loanloan has an initial term of three years and, subject to certain conditions and the payment of certain fees, may be extended by the Company for two one year periods if the(2) one-year periods. The loan is in good standing and upon satisfaction of certain conditions, and upon payment of a fee of 0.35% of outstanding principal per extension. The MacArthur Loan requires interest-only payments during the initial three-year term and bears floating interest equal to the 30-day LIBOR rate plus 3.75%,3.54% subject to certain adjustments. During the six months ended June 30, 2019, the loan was modified to, among other things, increase the total loan facility to $37.0 million, and increase our equity requirement from $17.4 million to $27.7 million which may be reduced by (a) 0.25% if certain minimum compensating balances are maintained atwas satisfied in the Bank and by (b) 0.50% if certain additional conditions are met.first quarter of 2019.
The MacArthur Loan is secured by a deed of trust on all MacArthur HotelPlace real property and improvements, and a security interest in all furniture, fixtures and equipment, licenses and permits, and MacArthur Hotel and relatedPlace-related revenues. The Company agreed to providehas provided a construction completion guaranty with respect to the planned MacArthur Hotel improvement project which shallwill be released upon payment of all project costs and receipt of a certificate of occupancy. In addition, Thethe Company has provided a loan repayment guaranty of fifty percent (50%)equal to 50% of the MacArthur Loan outstanding principal
along with a guaranty of interest and operating deficits, as well as other customary non-recourse carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum book valuetangible net worth of $50.0 million and minimum liquidity of $5.0 million throughout the term of the MacArthur Loan.loan. The loan includes a provision requiring substantial completion of the project by June 30, 2019 which the lender agreed to waive and extend to September 1, 2019. In addition, the MacArthur Loan requires the MacArthur HotelPlace is required to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.
Hotel Fund Offering
During the fourth quarter ofIn November 2017, L’Auberge Fund Manager, LLC (the “Fund Manager”), a wholly-owned subsidiary of the Company sponsored and commenced anthe offering of up to $25.0 million of preferred limited liability company interests (the “Preferred Interests”) in L’Auberge de Sonoma Resort Fund, LLC (the “Hotel Fund”) pursuant to Regulation D and Regulation S promulgated under the Securities Act (the “Offering”). The Company, through another wholly-owned subsidiary (the “Common Member”), made an initial investment of approximately $17.8 million for common member interestsPreferred Interests in the Hotel Fund. The Common Member’s investment and anCompany made initial advancecontributions of $19.4$17.8 million onfor its common member interest in the MacArthur Loan were used to acquire the MacArthur Hotel (the “Property”) as described above.Fund. The net proceeds of this offering are being used (i) to redeem the Offering, afterCompany’s initial contributions to the payment of certain organizational and offering costs, are to be used to (i) repay the Common Member’s initial investmentHotel Fund and (ii) to partially fund the renovation of the Property.renovations to MacArthur Place.
Purchasers of the Preferred Interests (the “Preferred Members”) will beare entitled to a preferred distribution, payable monthly, accruing at a rate of 7.0% per annum on invested capital, cumulative and non-compounding (the “Preferred Distribution”). The Fund Manager is expected to retain a 10.0% Preferred Interest inIf the Hotel Fund. Prior to the sale or other disposition of the Property, if the Hotel Fund has insufficient operating cash flow to pay any or all of the Preferred Distribution in a given month, the Company through the Common Member, willis obligated to provide the funds necessary to payfund the full payment of the Preferred Distribution for such month. Such payment by the Common Member willmonth, such payments to be treated as an additional capital contribution andby the Common Member’s capital account will be increased by such amount. In addition, on a quarterly basis, the Hotel Fund will distribute ten percent (10.0%) of cash available for distribution, as defined in the Hotel Fund’s LLC Agreement, after payment of the Preferred Distribution, calculated for the most recently completed fiscal quarter to the Preferred Members pro rata in proportion to the weighted average Preferred Interests owned during the applicable quarterly period (the “Quarterly Excess Cash Distribution”). Additionally, uponCompany. Upon the refinance or sale of all or a portion of the Property,hotel, the Preferred Members may be entitled to receive certain additional preferred distributions (the “Additional Preferred Distribution”). The Company that will have no obligationresult in an overall return of up to contribute the funds necessary to pay12.0% on the Preferred Distribution or the Additional Preferred Distribution upon a capital transaction such as the sale or refinancing of the Property. Upon a capital transaction, the Company will distribute 10.0% of any cash available after the payment of the Additional Preferred Distribution to the Preferred Members pro rata in proportion to the Preferred Interests owned. The Hotel Fund hasInterests. We have sold Preferred Interests to unrelated outside investors intotaling $22.5 million, which when coupled with the aggregate amount of $10.5 million through September 30, 2018. The amount ofCompany’s Preferred Interests raised reduced the Company’s common member interests by a corresponding amount. At September 30, 2018, the Company’s common member interest inof $2.5 million, the Hotel Fund totaled $14.1has met its funding goal of $25.0 million and held a preferred interest of $1.2 million. Since the Company is deemed the primary beneficiary of and controls the Hotel Fund, we have consolidated this entity.no longer accepting additional Preferred Interest investments.
Other Potential Borrowings and Borrowing Limitations
Our investment policy, the assets in our portfolio and the decision to utilize leverage are periodically reviewed by our board of directors as part of their oversight of our operations. We may employ leverage, to the extent available and permitted, through borrowings to finance our assets or operations, to fund the origination and acquisition of our target assets and to increase potential returns to our shareholders. Although we are not required to maintain any particular leverage ratio, the amount of leverage we will deploy for particular target assets will depend upon our assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the target assets in our portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial mortgage markets, our outlook for the level, slope, and volatility of interest rates, the credit quality of our target assets, the collateral underlying our target assets, and our outlook for asset spreads relative to the LIBOR curve. Our charter and bylaws do not limit the amount of indebtedness we can incur, and our board of directors has discretion to deviate from or change our indebtedness policy at any time. We intend to use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates.
Under the Second Amended Certificate of Designation, we may not undertake certain actions without the consent of the holders of at least 85% of the shares of Series B Preferred Stock outstanding, including entering into major contracts, entering into new lines of business, or selling REO assets other than within certain defined parameters. Further, certain actions, including breaching any of our material obligations to the holders of Series B Preferred Stock under the Second Amended Certificate of Designation, could require us to redeem the Series B Preferred Stock. In addition, some of our new financing arrangements may include other restrictions that limit our ability to secure additional financing.
The Hotel Fund intendsholders of our Series B Preferred Stock each have considerable influence over our corporate affairs which makes it difficult or impossible to pursueenter into certain transactions without their consent.
Contractual Obligations
In addition to our existing indebtedness described elsewhere in this Form 10-Q, a liquidity event, withsummary of our significant outstanding contractual obligations that existed at June 30, 2019 follows:
Preferred Stock Requirements
During 2014, the Company issued 8.2 million shares of the Company’s Series B-1 and B-2 Preferred Stock to the Series B Investors in exchange for $26.4 million. During 2018, the Company issued 2.35 million shares of the Company’s Series B-3 Preferred Stock
in exchange for $8.0 million. Except for certain voting, transfer, dividend, and redemption rights, the rights and obligations of holders of the Series B Preferred Stock are substantially the same.
In addition to various other rights and preferences belonging to the holders of the Series B Preferred Stock, the following provides a focussummary of certain financial obligations relating to the Series B Preferred Stock:
Dividends. Dividends on the Series B Preferred Stock are cumulative and accrue from the issue date and compound quarterly at the rate of 8% for Series B-1 and B-2 Preferred Stock and 5.65% for the Series B-3 Preferred Stock, payable quarterly in arrears. Subject to certain dividend rights and restrictions, no dividend may be paid on any capital stock of the Company during any fiscal year unless all accrued dividends on the Series B Preferred Stock have been paid in full, except for dividends on shares of voting Common Stock. In the event that any dividends are declared with respect to the voting Common Stock or any junior ranking securities, the holders of the Series B Preferred Stock are entitled to receive as additional dividends the additional dividend amount. For the six months ended June 30, 2019 and 2018, we paid dividends on the Series B Preferred Stock of $1.7 million and $2.0 million, respectively.
Redemption upon Demand. At any time after July 24, 2020 for the Series B-1 and B-2 Preferred Stock and after February 9, 2023 for the Series B-3 Preferred Stock, each holder of Series B Preferred Stock may require the Company to redeem, out of legally available funds, the shares of Series B Preferred Stock held by such holder at the a price (the “Redemption Price”) equal to the greater of (i) 150% of the sum of the original price per share of the Series B-1 and B-2 Preferred Stock, and 145% of the sum of the original price per share of the Series B-3 Preferred Stock, plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock plus all accrued and unpaid dividends, as of the date of redemption. Based on the initial investment of $26.4 million, the Redemption Price for the Series B-1 and B-2 Stock would presently be $39.6 million, resulting in a redemption premium of $13.2 million, and the Redemption Price for the Series B-3 Preferred Stock would be $11.6 million for the Series B-3 Stock, resulting in a redemption premium of $3.6 million. In accordance with applicable accounting standards, we have elected to amortize the redemption premium using the effective interest method as an imputed dividend over the holding term of the preferred stock. During six months ended June 30, 2019 and 2018, we recorded amortization of the redemption premium of $1.9 million and $1.7 million, respectively, as a deemed dividend.
Required Liquidation. Under the Second Amended Certificate of Designation authorizing the Series B Preferred Stock, if at any time we are not in compliance with certain of our obligations to the holders of the Series B Preferred Stock and we fail to pay (i) full dividends on the Series B Preferred Stock for two consecutive fiscal quarters or (ii) the Redemption Price within 180 days following the later of (x) demand therefore resulting from such non-compliance and (y) July 24, 2020 for the Series B-1 and B-2 Preferred Stock and February 9, 2023 for the Series B-3 Preferred Stock, unless a certain percentage of the holders of the Series B Preferred Stock elect otherwise, we will be required to use our best efforts to commence a liquidation of the Company. In addition, the default by the Company or any of its subsidiaries under one or more debt agreements that remains uncured for a period of thirty (30) days entitles the Series B Investors to accelerate repayment of the Redemption Price.
CEO Termination Agreement
The Employment Agreement between the Company and Mr. Bain, the Company’s Chairman of the Board and Chief Executive Officer, expired on July 24, 2019 (the “Expiration Date”). The Company and Mr. Bain have mutually agreed not to renew or extend Mr. Bain’s employment agreement. Accordingly, on April 11, 2019, the Company entered into a Termination of Employment Agreement, Release and Additional Compensation Agreement with Mr. Bain (the “Bain Termination Agreement”), and subsequent to June 30, 2019, the Company entered into certain consulting agreements with Mr. Bain. The material terms of these agreements are summarized below.
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| 1) | The Company and Mr. Bain agree that, effective on the Expiration Date, Mr. Bain’s employment with the Company will terminate and he will resign as an officer and director of the Company. On July 30, 2019, the Company entered into a Consulting Services Agreement (the “Interim-CEO Consulting Services Agreement”) with ITH Partners, LLC, a Nevada limited liability company (“ITH”), pursuant to which ITH agreed to provide certain consulting services to the Company for a ninety (90) day period commencing effective as of July 25, 2019, subject to automatic thirty (30) day renewals unless earlier terminated by the parties as provided therein. Mr. Bain is the Managing Director of ITH. Mr. Bain had served as the Company’s Chairman of the Board and Chief Executive Officer from July 24, 2014 until July 24, 2019, at which time his employment terminated. Pursuant to the Interim-CEO Consulting Services Agreement, Mr. Bain has been appointed to fill a vacancy on the Board of Directors of the Company (created when Mr. Bain’s employment terminated and he stepped down from the Board of Directors) and will serve as interim Co-Chairman and Chief Executive Officer of the Company until his service as such is terminated by the Board of Directors of the Company for any or no reason. |
During such period, Mr. Bain will report to the Board of Directors of the Company. Mr. Bain also will serve as the interim chairman of the Investment Committee of the Board of Directors during this period. The Interim-CEO Consulting Services Agreement imposes certain limitations on the authority of Mr. Bain to act on behalf of the Company. In exchange for ITH’s services under this agreement, the Company has agreed to pay ITH a monthly consulting fee of $30,000 commencing August 1, 2019. The agreement also contains various representations, protective covenants, termination provisions and other obligations and terms that are commonly contained in an agreement of this nature;
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| 2) | Since Mr. Bain remained employed by the Company through the Expiration Date, he is entitled to receive a cash bonus of $0.6 million for his 2018 services (which have been recorded in the accompanying consolidated financial statements and was paid during the six months ended June 30, 2019) and $0.35 million for his 2019 services, to be paid no later than April 30, 2019 and March 31, 2020, respectively; |
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| 3) | The Company has agreed to pay Mr. Bain two payments of $0.25 million each by no later than January 31, 2020 and January 31, 2021, respectively; |
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| 4) | Mr. Bain will be entitled to receive a Legacy Asset Performance Fee (“LAPF”), as calculated in accordance with his current employment agreement, in connection with the disposition of the Company’s interests in the assets of the New Mexico Partnerships (the “New Mexico Assets”) provided that such disposition occurs prior to December 31, 2022. The parties agree that these are the only assets as to which Mr. Bain may be entitled to receive a LAPF following the Expiration Date; |
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| 5) | On July 30, 2019, the Company and ITH also entered into a Consulting Services Agreement (the “New Mexico Asset Consulting Agreement”) pursuant to which ITH agreed to provide certain consulting services to the Company with respect to certain real property located in Sandoval County, New Mexico (the “New Mexico Asset”) for a period expiring on the earlier to occur of (a) consummation of the sale of all or substantially all of the New Mexico Asset and (b) December 31, 2022, unless such agreement is earlier terminated by the parties as provided therein. This agreement was entered into pursuant to the Termination of Employment Agreement, Release and Additional Compensation Agreement between Mr. Bain and the Company, dated as of April 11, 2019. During the term of the New Mexico Asset Consulting Agreement, Mr. Bain is obligated to report to the Company’s Board of Directors and will serve as president of various corporations that serve as general partner of those entities that own the New Mexico Asset. The agreement also imposes certain limitations on the authority of Mr. Bain to act on behalf of the Company. In exchange for ITH’s services under this agreement, the Company has agreed to pay ITH a base monthly consulting fee of $5,000 commencing August 1, 2019, and an incentive bonus in the event that the Net Cash received from the sale of the New Mexico Asset exceeds certain minimum thresholds, after the payment of various reimbursements and expenses. The agreement also contains various representations, protective covenants, termination provisions and other obligations and terms that are commonly contained in an agreement of this nature;; |
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| 6) | All unvested equity awards and deferred compensation benefits granted to Mr. Bain were vested on the Expiration Date; and |
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| 7) | Mr. Bain has agreed to certain noncompetition and nonsolicitation covenants, cooperation covenants and certain other requirements. |
Juniper Consulting Agreements (related party)
Under the terms of the JCP Consulting Agreement, JCP is entitled to receive an annual base consulting fee of $0.5 million (subject to possible upward adjustment based on an annual review by our board of directors) an origination fee up to 1.25% on any loans or investments in real estate, preferred equity or mezzanine securities that are originated or identified by JCP, subject to reduction based on the increasing size of the loan or investment. Under the terms of the JCP Consulting Agreement, JCP is also entitled to legacy fee payments derived from the disposition of certain assets held by the Company as of December 31, 2010 to persons or opportunities arising through the efforts of JCP, equal to 5.5% of the positive difference derived by subtracting (i) 110% of our December 31, 2010 valuation mark of that asset from the (ii) the gross sales proceeds (on a legacy asset by asset basis without any offset for losses realized on any individual asset sales). The JCP Consulting Agreement contract was terminated on July 24, 2019. During each of the six months ended June 30, 2019 and 2018, we incurred base consulting fees to JCP of $0.2 million. JCP earned legacy fees of $0.1 million during the three and six months ended June 30, 2019 and $0.1 million during the three and six months ended June 30, 2018, respectively.
JIA Asset Management Agreement (related party)
Effective August 1, 2019, the Company entered into a non-discretionary investment advisory agreement (the “Advisory Agreement”) with Juniper Investment Advisors, LLC, a Delaware limited liability company (“JIA”), pursuant to which JIA will manage certain assets of the Company, including the Company’s loan portfolio and certain of its legacy real-estate owned properties. Under the terms of the Advisory Agreement, the Company will pay JIA a management fee equal to 1.5% of the net asset value of certain assets under management, as well as a performance fee equal to 20% of the net profits from those assets upon disposition after the Company has received an annualized 7% return on its investment from those assets and recovery of the Company’s basis in such assets. In connection with the Advisory Agreement, certain employees of the Company have transitioned to become employees of JIA, and JIA will also sublet a portion of the Company’s office space.
Jay Wolf and Alejandro Krys together own 50% of JIA. Messrs. Wolf and Krys are also the owners of Juniper Capital Partners, LLC, a Delaware limited liability company, the sole member of Juniper NVM, LLC, a Delaware limited liability company (“JNVM”) and the manager of JCP Realty Partners, LLC, a Delaware limited liability company (“JCP Realty”). JCP Realty and JNVM are the collective holders of all or substantially allthe Series B-1 Cumulative Convertible Preferred Stock in the Company. Mr. Wolf is also a member of the Hotel Fund’s assets, approximately four to six yearsfollowing commencementboard of directors of the Offering.Company and its investment committee.
Off-Balance Sheet Arrangements
General
We have equity interests in a number of consolidated joint ventures and limited partnerships with varying structures.partnerships. Most of the joint ventures and partnerships in which we have an interest are involved in the ownership and/or development of real estate. A venture or partnership will fund capital requirements or operational needs with cash from operations or financing proceeds, if possible. If additional capital is deemed necessary, a venture or partnership may request a contribution from the partners, and we will evaluate such request.
During the year ended December 31, 2017,The Company has entered into a subsidiary of the Company executed promissory notes$5.0 million collective lending facility with certain of the previously unconsolidatedconsolidated partnerships to provide aloan up to $0.7 million, which were subsequently amended to increase the collective lending facility withto a maximum of $5.0 million to cover anticipated operating and capital expenditures. As of SeptemberJune 30, 2018,2019, the total principal advanced under these notesthis facility was $4.4$5.0 million. The promissory notesloans under this facility earn interest at annual rates ranging from the JP Morgan Chase Prime rate plus 2.0% (6.75%(7.50% at SeptemberJune 30, 2018)2019) to 8.0% and have maturity dates which are the earliest to occur of 1) the date of transfer of the partnership’s real estate assets, 2) the date on which the current general partner resigns, withdraws or is removed as general partner, or 3) July 31, 2018. The promissory notes received under this lending facility are presently in default and the Company is exploring its enforcement options. The promissory notes are cross collateralized and secured by real estate and other assets owned by such partnerships. These promissory notes and all related accrued interest receivable have been eliminated in consolidation.
Exceptconsolidation as previously discussed, based on the nature of the activities conducted in these ventures, we cannot estimate with any degree of accuracy amounts that we may be required to fund in the short or long-term. However, we do not believe that additional funding of these ventures or partnerships will have a material adverse effect on our financial condition or results of operations.June 30, 2019.
Debt
At September 30, 2018 and December 31, 2017, certain of our joint ventures and partnerships had outstanding indebtedness to third parties which are generally mortgage loans, all of which are non-recourse to us. Guarantees
In certain instances, we have provided “non-recourse carve-out guarantees” on certain non-recourse loans to our subsidiaries. Certain of these loans had variable interest rates, which created exposure in the form of market risk due to interest rate changes. In connection with the MacArthur Loan executed on October 2, 2017,As of June 30, 2019, we have agreed to provide a construction completion guaranty in connection with the MacArthur Loan with respect to the planned MacArthur Hotelhotel improvement project which shallwill be released upon payment of all project costs and receipt of a certificate of occupancy. In addition, we have provided a loan repayment guaranty of fifty percent (50%)50% of the MacArthur Loan outstanding loan principal along with a guaranty ofand accrued unpaid interest and hotel operating deficits,expenses, as well as other customary carve-out matters such as bankruptcy and environmental matters. Under the guarantees, we arethe Company is required to maintain a minimum book valuetangible net worth of $50.0 million and minimum liquidity of $5.0 million throughout the term of the MacArthur Loan.loan.
Office Lease
The Company’s current office lease term ends on September 30, 2022. The lease commits the Company to rents totaling $1.5 million over the five year term, net of certain concessions granted.
Critical Accounting Policies
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. As of June 30, 2019, there have been no significant changes in our critical accounting policies from December 31, 2018, except as disclosed in Note 2 of the unaudited condensed consolidated financial statements included in this Form 10-Q.
Liquidity and Capital Resources
We require liquidity and capital resources for capitalized costs, expenses and general working capital needs, including maintenance, development costs and capital expenditures for our operating properties and non-operating REO assets, professional fees, general and administrative operating costs, loan enforcement costs, costs on borrowings, debt service payments on borrowings, dividends or distributions to preferred and/or common shareholders, distributions to non-controlling interests, to repurchase treasury stock, other costs and expenses, as well as to acquire our target assets. We expect our primary sources of liquidity over the next twelve months to consist of our current cash, revenues from remaining operating properties, income from anticipated investment activities, proceeds from the disposition of our existing loan and REO assets held for sale, and proceeds from debtborrowings and equity financing initiatives.issuances, current cash, mezzanine and mortgage loan interest income, and revenues from ownership or management of hotels. To the extent there is a shortfall in available cash, we would likely seek to reduce general and administrative costs, scale back projected investing activity costs, sell certain assets below our current asking prices, and/or seek possible additional financing. To the extent that we have excess liquidity at our disposal, we expect to funduse a portion of such proceeds for new investments in our target assets. However, the extent and amount of such investment is contingent on numerous factors outside of our control.
At SeptemberAs of June 30, 2018,2019, we had cash and cash equivalents of $36.2$12.2 million, as well as REO held for sale of $8.0$7.4 million and other REO assets of $33.7 million which, we believewhile not technically classified as held for sale, are sufficient to cover our liquidity needsgenerally available for sale. During the three months ended June 30, 2019, a court-imposed stay over the next twelve months. However,potential sale of certain assets impairs our ability to reasonably estimatedispose of such assets, although we believe that the proceeds fromcourt stay will be resolved and lifted within the end of the fiscal year. During the six months ended June 30, we made construction draws on our MidFirst Loan in the amount $11.9 million, of which $11.2 million represented renovation cost and operating draws and $0.8 million represented draws against the interest reserve on the loan. As of June 30, 2019, we have sold the entire $22.5 million in Preferred Interests to unrelated outside investors in the Hotel Fund, with the Company’s Preferred Interests totaling $2.5 million. With the total Preferred Interest sold of $25.0 million, the Hotel Fund has reached its capital raise threshold and is not seeking additional Preferred Interest investments.
Under the terms of our Second Amended Certificate of Designation, at any time after July 24, 2020, each holder of Series B-1 and B-2 Preferred Stock may require the Company to redeem, out of legally available funds, the shares of Series B-1 and B-2 Preferred Stock held by such holder at the a price (the “Redemption Price”) equal to the greater of (i) 160% of the sum of the original price per share of the Series B-1 and B-2 Preferred Stock plus all accrued and unpaid dividends or (ii) the sum of the tangible book value of the Company per share of voting Common Stock plus all accrued and unpaid dividends, as of the date of redemption. Based on the initial Preferred Investment amount, the Redemption Price would presently be approximately $42.2 million. We intend to negotiate a restructuring of these asset salesinstruments including an extension of the redemption period, although there is dependent on several factors that are outside our control including, but not limited to, real estate and credit market conditions, the actual timing ofno assurance we will be successful in such sales and ultimate proceeds from the sale of assets, our ability to sell such assets at our asking pricesnegotiations or at prices in excessterms favorable to us.
As previously described, during the three months ended June 30, 2019, a subsidiary of the current carrying valueCompany purchased the $13.2 million first mortgage note secured by Broadway Tower. The purchase of the first mortgage note was funded partially with an $11.0 million loan (under a master repurchase agreement) from Chase Funding and the balance using Company funds. The Chase Funding master repurchase agreement is secured by the $13.2 million first mortgage note and bears interest at one month LIBOR plus 3.81%, requires interest only payments and a balloon payment of unpaid principal and interest upon maturity. The initial maturity date is May 22, 2020 with the potential to extend to May 2021 if, among other conditions, certain debt yield and occupancy percentages are achieved, although there is no assurance that such real estate.an extension will be granted.
When our required cash uses are met, we expect to redeploy excess proceeds, if any, to acquire our target assets, subject to approval of the investment committee, which we expect will generate periodic liquidity from mortgage loan interest payments and cash flows from dispositions of these assets through sales. If we are unable to achieve our projected sources of liquidity from the sources anticipated above, we would be unable to purchase the desired level of target assets and it is unlikely that we would be able to meet our investment income projections.
Our requirements for and sources of liquidity and capital resources are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2017. There2018. Aside from the new JPM master repurchase agreement that matures in May 2020, there have been no material changes to our requirements for liquidity as of and for the ninesix months ended SeptemberJune 30, 2018, except that our $10.2 million EO Notes have2019. However, given the court-imposed stay over the sale of certain assets, coupled with the maturity dates of certain indebtedness through June 2020, and the potential redemption of the Series B-1 and B-2 Preferred Stock in July 2020, the combination of these factors give rise to substantial doubt about the Company’s ability to continue as a maturitygoing concern for a period beyond 12 months from the date of April 28, 2019. As described elsewhere in this Form 10-Q, subsequent to September 30, 2018,filing. Nevertheless, as discussed above, we are pursuing a restructuring and or extension of our debt, as well as the Company commenced an offering to existing noteholders to extend the maturityredemption date of the EO Notes to December 15, 2021our Series B-1 and increase the coupon interest rate from 4% to 7%.B-2 Preferred Stock and are hopeful that we will be successful in our negotiations.
Cash Flows
Cash Used In Operating Activities.
Cash used in operating activities was $10.4$5.6 million and $14.3$7.7 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. Cash from operating activities includes the cash generated from hospitality income, management fees, mortgage interest and investment and other income, offset by amounts paid for operating expenses for operating properties, real estate owned, professional fees, general and administrative costs, funding of other receivables, interest on borrowings and litigation settlement payments and related costs. The decrease in cash used in operating activities from 2018 to 2019 is primarily attributed to various changes in operating assets and liabilities.
Cash Provided By (Used In)Used In Investing Activities.
Net cash provided by (used in)used in investing activities was $(1.5)$7.7 million and $87.7$5.6 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. The decreaseincrease in cash fromused in investing activities is attributed primarily to reducedincreased investments in operating properties and capitalized REO sales and their resulting proceeds from the disposal of assets, offset by increased investment in real estate owned.costs. Proceeds received from the sale of REO assets and mortgage loans totaled $8.7 million$39.0 thousand and $98.3$0.5 million for the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively. Mortgage loan fundingInvestments in operating properties totaled $3.0 million and $7.0$9.8 million during the ninesix months ended SeptemberJune 30, 2018 and 2017, respectively. Additionally, capital investments2019 compared to $3.2 million for the same period in real estate owned increased year over year totaling $7.2 million and $1.4 million during the nine months ended September 30, 2018 and 2017, respectively.2018.
Cash Provided By (Used In) Financing Activities.
Net cash provided by (used in) financing activities was $36.6$5.0 million and $52.3$31.8 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. During the ninesix months ended SeptemberJune 30, 2019, we received proceeds from debt issuance of $11.2 million. During six months ended June 30, 2019 and 2018, proceeds from Hotel Fund contributions of $7.5 million and 2017$4.8 million. During the six months ended June 30, 2019, we repaid notes payable of $14 thousand and $50.4 million, respectively. We received $30.0used $1.0 million for the purchase of treasury stock and repaid $10.2 million in notes payable. During the six months ended June 30, 2018, we received proceeds from Hotel Fund contributions of $4.8 million and raised proceeds from preferred equity issuance of preferred equity instruments and $9.8 million for
the issuance of preferred equity in the Hotel Fund during the nine months ended September 30, 2018.$30.0 million. We also made dividend payments of $1.9$1.7 million and $1.6$2.0 million forduring the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively.
Critical Accounting Policies
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. As of September 30, 2018, there have been no significant changes in our critical accounting policies from December 31, 2017, except as disclosed in Note 2 of the unaudited condensed consolidated financial statements included in this Form 10-Q.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements that are applicable to us, see Note 2 to our unaudited condensed financial statements included with this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
The registrant is a Smaller Reporting Company and, therefore, is not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES.
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| ITEM 4. | CONTROLS AND PROCEDURES. |
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of SeptemberJune 30, 2018.2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of these disclosure controls and procedures were effective as of SeptemberJune 30, 2018.2019. That evaluation did not identify any changes in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, beginning January 1, 2019, we implemented ASC 842 and related changes to our processes related to identification of leases, calculation of right-of-use assets and lease liabilities and processes for gathering information for disclosures.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Also, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. ManagementUnder the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management assessed the effectiveness of our internal control over financial reporting as of SeptemberJune 30, 2018,2019, utilizing the 2013 framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
Based on their assessment, we determined that the Company’s internal control over financial reporting was effective as of SeptemberJune 30, 2018.2019.
This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting since the Company, isas a smaller reporting company under the rules of the SEC.SEC, is not required to include such report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS.
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| ITEM 1. | LEGAL PROCEEDINGS. |
The status of our legal proceedings is provided in Note 13 - “CommitmentsCommitments and Contingencies” Contingenciesof the accompanying unaudited condensed consolidated financial statements and is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Item 1A, “Risk Factors,” in our Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or results of operations. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
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| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
ITEM 5. OTHER INFORMATION.
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| ITEM 5. | OTHER INFORMATION. |
None.Asset Management Agreement
ITEM 6. EXHIBITSOn August 14, 2019, the Company entered into a non-discretionary investment advisory agreement (the “Advisory Agreement”) with Juniper Investment Advisors, LLC, a Delaware limited liability company (“JIA”), with an effective commencement date of August 1, 2019, pursuant to which JIA will manage certain assets of the Company, including the Company’s loan portfolio and certain of its legacy real-estate owned properties. Under the terms of the Advisory Agreement, the Company will pay JIA a management fees ranging from 1.0% to 1.5% of the net asset value of certain assets under management, as well as a performance fee equal to 20% of the net profits from those assets upon disposition after the Company has received an annualized 7% return on its investment from those assets and recovery of the Company’s basis in such assets. In connection with the Advisory Agreement, certain employees of the Company have transitioned to become employees of JIA, and JIA will also sublet a portion of the Company’s office space.
Jay Wolf and Alejandro Krys together own 50% of JIA. Messrs. Wolf and Krys are also the owners of Juniper Capital Partners, LLC, a Delaware limited liability company, the sole member of Juniper NVM, LLC, a Delaware limited liability company (“JNVM”) and the manager of JCP Realty Partners, LLC, a Delaware limited liability company (“JCP Realty”). JCP Realty and JNVM are the collective holders of all the Series B-1 Cumulative Convertible Preferred Stock in the Company. Mr. Wolf is also a member of the board of directors of the Company and its investment committee.
Exhibit Index
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Exhibit
No. | | Description of Document |
No. | |
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| 3.1 | | |
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| 3.1.1 | | |
| | |
| 3.2 | | |
| | |
| 3.2.1 | | |
| | | |
3.33.4 | | |
| | | |
3.44.1 | | |
| | | |
4.14.3 | | Second Amended and Restated Investment Agreement, between IMH Financial Corporation, Juniper NVM, LLC,dated as of May 31, 2018, by and among JPMorgan Chase Funding Inc., JCP Realty Partners, LLC, Juniper NVM, LLC, and JPMorgan Chase Funding Inc., dated May 31, 2018.the Company (filed as Exhibit 10.2 to Current Report on Form 8-K filed on June 4, 2018 and incorporated by reference to the filing). |
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| 4.4 | | |
| | |
| 4.6 | | |
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| 10.6 | | |
| | |
| 10.7 | | |
| | |
| 10.8 | | |
| | |
| 10.9 | | |
| | |
| 10.10 | | |
| | |
| 10.33 | | |
| | |
| 31.1* | | |
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| 31.2* | | |
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| 32.2*† | | |
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|
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Exhibit
No. | | Description of Document |
| * | | Filed herewith. |
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| † | | This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act, and is not to be incorporated by reference into any filings of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Date: | NovemberAugust 14, 20182019 | IMH FINANCIAL CORPORATION | |
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| | | By: | /s/ Samuel J. Montes | |
| | | | Samuel J. Montes | |
| | | | Chief Financial Officer | |
KNOW ALL MEN BY THESE PRESENTS, that Lawrence D. Bain, whose signature appears below constitutes and appoints Samuel J. Montes his true and lawful attorney-in-fact and agent, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | | Title | | Date |
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| /s/ Lawrence D. Bain | | Interim Chief Executive Officer and ChairmanCo-Chairman | | NovemberAugust 14, 20182019 |
| Lawrence D. Bain | | (Principal Executive Officer) | | |
| | | | | |
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| /s/ Samuel J. Montes | | Chief Financial Officer(Principal Financial Officer | | NovemberAugust 14, 20182019 |
| Samuel J. Montes | | (Principal Financial Officer and Principal AccountingOfficer) | | |