__________________________
(1)Because there is no readily available market for these investments, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra REIT Advisors, Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.
(2)Amount represents the Company’s portion, or 61.3%, of the fair value or net investment value.
(3)Percentage is based on the Company’s pro rata share of the fair value or net investment value over the Company’s total members’ capital of $210.0 million at December 31, 2022.
(4)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to a third party.
(5)The loan participations from Terra Property Trust do not qualify for sale accounting and therefore, the gross amount of these loans remain in Terra Property Trust’s consolidated balance sheets.
(6)Terra Property Trust purchased a portion of the interest in this loan from Mavik Real Estate Special Opportunities Fund REIT, LLC, a related-party real estate investment trust managed by Terra REIT Advisors, via a participation agreement.
(7)This loan is currently in maturity default. For the year ended December 31, 2022, Terra Property Trust suspended interest income accrual of $3.7 million on this loan because recovery of such income was doubtful. As of December 31, 2022, Terra Property Trust recorded a specific allowance for credit losses of $11.2 million on the loan as a result of a decline in the fair value of the collateral.
(8)For the year ended December 31, 2022, Terra Property Trust suspended interest income accrual of $2.9 million on this loan because recovery of such income was doubtful. Additionally, the fair value of the loan declined as a result of a decline in the fair value of the collateral. As of December 31, 2022, Terra Property Trust recorded a specific allowance for credit losses of $12.9 million on the loan as a result of a decline in the fair value of the collateral.
(9)This loan is in maturity default. Terra Property Trust initiated a litigation to seek full repayment of the loan from the sponsor. For the year ended December 31, 2022, Terra Property Trust suspended interest income accrual of $2.0 million on this loan because recovery of such income was doubtful.
(10)This loan is classified as a trouble debt restructuring. Terra Property Trust does not anticipate a full recovery of the remaining principal balance, as such, the loan is fully reserved.
(11)These loans were used as collateral for $119.8 million of borrowings under a repurchase agreement.
(12)These loans were used as collateral for $90.1 million of borrowings under a revolving line of credit.
(13)Amount included $4.0 million of incremental borrowing that bears interest at an annual rate of 20.0% until certain conditions are met, at which time the interest rate will be the same as the original loan.
(14)These loans were used as collateral for $51.1 million of borrowings under a repurchase agreement.
(15)Amount included $3.0 million of incremental borrowing that bears interest at an annual rate of Term SOFR plus 7.0% with a SOFR floor of 4.30%.
(16)Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage.
(17)Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).
(18)From time to time, Terra Property Trust may invest in short-term debt and equity securities. These securities are comprised of shares of common and preferred stock and bonds.
(19)On August 3, 2020, Terra Property Trust entered into a subscription agreement with RESOF whereby Terra Property Trust committed to fund up to $50.0 million to purchase a limited partnership interest in RESOF. RESOF’s primary investment objective is to generate attractive risk-adjusted returns by purchasing performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. As of December 31, 2022, the unfunded commitment was $22.4 million.
(20)As of December 31, 2022, Terra Property Trust beneficially owned equity interest in three joint ventures that invest in real estate properties.
(21)On December 28, 2022, Terra Property Trust originated a $10.0 million mezzanine loan to a borrower to finance the acquisition of a real estate portfolio. Additionally, Terra Property Trust entered into a residual profit-sharing agreement with the borrower where the borrower will pay Terra Property Trust an additional amount of 35.0% of remaining net cash flow from the sale of the real estate portfolio. Terra Property Trust accounts for this arrangement using the equity method of accounting.
See notes to unaudited financial statements.
Notes to Consolidated Financial Statements (Unaudited)13
Terra Secured Income Fund 5, LLC
Notes to Consolidated Financial Statements (Unaudited)
SeptemberJune 30, 20172023
Note 1. Business
Terra Secured Income Fund 5, LLC (and, together with its consolidated subsidiaries,(the “Company”) is a real estate credit focused company that originates, structures, funds and manages high yielding commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the “Company”),United States. The Company’s loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. The Company focuses on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties in primary and secondary markets. The Company was formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. The Company was formed to originate, acquire and structure real estate-related loans, including mezzanine loans, first and second mortgage loans, subordinated mortgage loans, bridge loans, preferred equitymakes substantially all of its investments and other loans relatedconducts substantially all of its real estate lending business through Terra Property Trust, which has elected to high quality commercialbe taxed as a real estate. The Company completedestate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its original offering on Januarytaxable year ended December 31, 2015 and raised approximately $142 million in gross proceeds.2016. The Company’s investment strategy isobjectives are to invest substantially all of(i) preserve its members’ capital contributions, (ii) realize income from its investments and (iii) make monthly distributions to its members from cash generated from investments. There can be no assurances that the net proceeds of membership interestsCompany will be successful in and manage a diverse portfolio of, real estate-related loans. The Company seeks to create and maintain a portfolio of investments that generates a low volatility income stream for attractive and consistent cash distributions. The real-estate loans are typically investments between $3 million and $25 million, with unlevered yields on subordinated positions and levered yields on senior positions ranging from 12% to 16% and maturities between one to ten years.meeting its investment objectives.
In December 2015, the members approved the merger of Terra Secured Income Fund, 1, LLC (“Terra Fund 1”), Terra Secured Income Fund 2, LLC (“Terra Fund 2”), Terra Secured Income Fund 3, LLC (“Terra Fund 3”) and Terra Secured Income Fund 4, LLC (“Terra Fund 4”) with and into subsidiaries of the Company (individually, each a “Terra Fund” and collectively, the “Terra Funds”) through a series of separate mergers effective January 1, 2016.2016 (collectively, the “Mergers”). Following the Merger,Mergers, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust, a newly-formed and wholly-owned subsidiary of the Company that elected to be taxed as a real estate investment trust (“REIT”),REIT, in exchange for the shares of common sharesstock of Terra Property Trust. Upon completion of the Merger,Mergers, the Company became the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and began conducting substantially all of its real estate lending business through, Terra Property Trust. The
On March 2, 2020, Terra Fund 1, Terra Fund 2 and Terra Fund 3 merged with and into Terra Fund 4, with Terra Fund 4 continuing as the surviving company (the “Terra Fund Merger”), and the Company does not consolidateconsolidated its holdings of shares of common stock of Terra Property Trust asin Terra Fund 4. Subsequent to the Terra Fund Merger, the legal name of Terra Fund 4 was changed to Terra JV, LLC (“Terra JV”). On March 2, 2020, Terra Property Trust is notengaged in a series of transactions pursuant to which Terra Property Trust issued an investment company.aggregate of 4,574,470.35 shares of its common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans that Terra Property Trust owned, cash of $25.5 million and other working capital.
The Company’s investment activities are externally managed by Terra IncomeFund Advisors, LLC a private investment firm affiliated with(“Terra Fund Advisors” or the Company.“Manager”). The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or its affiliates or by individuals who were contracted by the Company or by the Manager or its affiliates to work on behalf of the Company pursuant to the terms of the operating agreement, as amended.
The CompanyCompany’s amended and restated operating agreement provides that the Company’s existence will continue in existence until December 31, 2023; however,2023, unless sooner terminated. However, the Company expects that prior to be terminatedsuch date it will consummate a liquidity transaction, which could occur as early as this year and may include an orderly liquidation of its assets or to consummate an alternative liquidity transaction on or prior to the five-year anniversaryevent such as a strategic business combination, a sale of the completionCompany or an initial public offering and listing of Terra Property Trust’s shares of common stock on a national securities exchange. The Manager would pursue an alternative liquidity event only if it believes such a transaction would be in the best interests of the Company’s original offering, which was January 31, 2015, unless extended for upmembers.
On October 1, 2022 (the “Closing Date”), pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Terra BDC Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”) merged with and into Terra Income Fund 6, LLC, a maximumwholly owned subsidiary of two one-year extensions atTerra Property Trust (“Terra LLC”), with Terra LLC continuing as the discretionsurviving entity of the Manager,merger (the “BDC Merger”) and as a wholly owned subsidiary of Terra Property Trust (Note 4). As of June 30, 2023, Terra JV, former shareholders of Terra BDC and Terra Offshore REIT held 70.0%, 19.9% and 10.1% of the issued and outstanding shares of Terra Property Trust’s common stock, respectively, and the Company and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in orderTerra JV (Note 4). Accordingly, as of June 30, 2023, the Company indirectly beneficially owned 61.3% of the outstanding shares of common stock of Terra Property Trust through Terra JV. The Company does not
Notes to facilitate an orderly liquidation orUnaudited Financial Statements
consolidate Terra JV because the Company and Terra Fund 7 share joint approval rights with respect to consummate such alternative liquidity transaction.certain major decisions that are taken by Terra JV and Terra Property Trust (Note 4).
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidatedinterim financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include all of the Company’s accounts and those of its consolidated subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition as of and for the periods presented. All intercompany balances and transactions have been eliminated.accounts. The accompanying interim financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. The Company is an investment company, as defined under U.S. GAAP, and applies accounting and reporting guidance in accordance with Financial Accounting Standards Board (“FASB”) ASCAccounting Standards Codification (“ASC”) Topic 946, Financial Services -— Investment Companies.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosuresdisclosure of contingent assets and liabilities atas of the date of the consolidated financial statements and the reported amounts of gains (losses), incomerevenues and expenses during the reporting period. Actual results could significantlymay ultimately differ from those estimates. The most significant estimates, inherent in the preparation of the Company’s consolidated financial statements is the valuation of investments.and those differences could be material.
Notes to Consolidated Financial Statements (Unaudited)
Equity Investment in Terra Property TrustJV
Equity investment in Terra Property TrustJV represents the Company’s equity interest in Terra Property Trust,JV, which was initially recorded at cost. Subsequent to the asset contribution, the equity investment is reported, at each reporting date, at fair value on the consolidated statements of financial condition. Change in fair value is reported in net change in unrealized appreciation or depreciation on investment on the consolidated statements of operations.
Revenue Recognition
Revenue is accounted for under ASC 605, Revenue Recognition, which provides among other things that revenue be recognized when there is persuasive evidence an arrangement exists, delivery and services have been rendered, price is fixed and determinable and collectability is reasonably assured.
Dividend Income: Dividend income associated with the Company’s ownership of Terra JV or Terra Property Trust is recognized on the record date as declared by Terra JV or Terra Property Trust. Any excess of dividendsdistributions over Terra JV or Terra Property Trust’s cumulative taxable net income are recorded as return of capital.
Other Operating Income: All other income is recognized when earned.
Cash and Cash Equivalents
The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents.Cash and cash equivalents are exposed to concentrations of credit risk. The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
Income Taxes
No provision for U.S. federal and state income taxes has been made in the accompanying consolidated financial statements, as individual members are responsible for their proportionate share of the Company’s taxable income. The Company, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the three and ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, none of the Company’s income was subject to the NYC UBT.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the consolidated financial statements and tax basis assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Such deferred tax assets and liabilities were not material.
The Company did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, Income Taxes, nor did the Company have any unrecognized tax benefits as of the periods presented herein. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its consolidated statements of operations. For the three and ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, the Company did not incur any interest or penalties.
Notes to Unaudited Financial Statements
Although the Company files federal and state tax returns, its primary tax jurisdiction is federal. The Company’s inception-to-date2019-2022 federal tax years remain subject to examination by the Internal Revenue Service.
Recent Accounting PronouncementsPronouncement
London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. In May 2014,July 2017, the FASB issued Accounting Standards UpdateU.K. Financial Conduct Authority, which regulates the LIBOR administrator, ICE Benchmark Administration Limited (“ASU”IBA”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The core principle, announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of the revenue model is that an entity recognizes revenue2021, which was subsequently delayed to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. The Company will adopt this standard on January 1, 2018 using the cumulative effect transition method. The Company is evaluating the impact of ASU 2014-09 but does not currently believe that the application of ASU 2014-09 will have a material impact on its consolidated financial statements and disclosures.
June 30, 2023. In January 2016,March 2020, the FASB issued ASU 2016-01,2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Instruments — Overall (Subtopic 825-10): RecognitionReporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and Measurementexceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for
Notes to Consolidated Financial Statements (Unaudited)
financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for the Company beginning onreference rate reform. In January 1, 2018. Management is currently
evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.
In February 2016,2021, the FASB issued ASU 2016-02, LeasesNo. 2021-01, Reference Rate Reform (Topic 842)848), which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition (“ASU 2016-02”2021-01”). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new standard also replaces existing sale-leaseback guidance with a new model applicable to both lessees and lessors. Additionally, the new standard requires extensive quantitative and qualitative disclosures. ASU 2016-02 is effective for U.S. GAAP public companies for fiscal years beginning afterIn December 15, 2018, including interim periods within those fiscal years. Early application will be permitted for all entities. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. This ASU is not expected to have any impact on the Company’s consolidated financial statements and disclosures as the Company does not have any lease arrangements.
In August 2016,2022, the FASB issued ASU 2016-15, Statement of Cash Flows2022-06, Reference Rate Reform (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a Consensus848) — Deferral of the FASB’s Emerging Issues Task ForceSunset Date of Topic 848 (“ASU 2016-15”2022-06”). ASU 2016-15 provides guidance2022-06 deferred the sunset date of ASU 2020-04 to December 31, 2024. In the event LIBOR is unavailable, Terra Property Trust’s investment documents provide for a substitute index, on how certain transactions are classifieda basis generally consistent with market practice, intended to put Terra Property Trust in substantially the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The guidance requires application usingsame economic position as LIBOR. As a retrospective transition method. Theresult, the Company does not expect the reference rate reform and the adoption of ASU 2016-152020-04 and ASU 2021-01 to have a material impact on its consolidated financial statements and disclosures.
In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The Company adopted the amendments to Regulation S-X on August 1, 2017. The adoption did not have a material impact on its consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a “set,” that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Management is currently evaluating the impact of this change will have on the Company’s consolidated financial statements and
disclosures.
Note 3. Investment and Fair Value
Equity Investment in Terra Property TrustJV
The Company investsinvested substantially all of its equity capital in the purchase of shares of common stock of Terra Property Trust. As of both June 30, 2023 and December 31, 2022, Terra JV held 70.0% of the issued and outstanding shares of Terra Property TrustTrust’s common stock, and its primarythe Company and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV, and Terra JV became the Company’s only investment position is the common shares of Terra Property Trust.(Note 4).
The following table presentstables present a summary of the Company’s investment at SeptemberJune 30, 20172023 and December 31, 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
Investment | | Cost | | Fair Value | | % of Members’ Capital | | Cost | | Fair Value | | % of Members’ Capital |
87.6% interest in Terra JV, LLC | | $ | 209,715,486 | | | $ | 189,317,374 | | | 100.1 | % | | $ | 215,070,522 | | | $ | 210,008,457 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Investment | | Cost | | Fair Value | | % of Net Assets | | Cost | | Fair Value | | % of Net Assets |
14,912,990 common shares of Terra Property Trust, Inc. | | $ | 277,456,081 |
| | $ | 277,326,857 |
| | 100.1 | % | | $ | 291,468,567 |
| | $ | 290,419,317 |
| | 100.3 | % |
For the three months ended SeptemberJune 30, 20172023 and 2016,2022, the Company received approximately $13.1$2.8 million and $9.6$2.9 million of dividendsdistributions from Terra Property Trust, respectively,JV, of which $8.7$2.8 million and none$2.1 million were returns of capital, respectively. For the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, the Company received approximately $29.7$5.6 million and $25.4$5.9 million of dividendsdistributions from Terra Property Trust, respectively,JV, of which $14.0$5.4 million and $0.3$4.3 million were returns of capital, respectively.
Notes to ConsolidatedUnaudited Financial Statements (Unaudited)
As of both June 30, 2023 and December 31, 2022, the Company indirectly beneficially owned 61.3% of the outstanding shares of common stock of Terra Property Trust (Note 4). The following tables present the summarized financial information of Terra Property Trust: | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
Carrying value of loans held for investment | | $ | 513,818,507 | | | $ | 626,490,767 | |
Equity investment in unconsolidated investments | | 32,608,994 | | | 62,498,340 | |
Real estate owned, net | | 176,133,625 | | | 49,228,687 | |
Cash, cash equivalent and restricted cash | | 58,096,906 | | | 36,469,592 | |
Other assets | | 39,044,373 | | | 38,649,506 | |
Total assets | | 819,702,405 | | | 813,336,892 | |
Term loan payable, unsecured notes payable, obligations under participation agreements, repurchase agreement payable, mortgage loan payable, revolving line of credit and secured borrowing | | (472,090,818) | | | (442,811,751) | |
Accounts payable, accrued expenses and other liabilities | | (41,639,591) | | | (39,996,127) | |
Lease intangible liabilities | | (16,827,043) | | | (8,646,840) | |
Total liabilities | | (530,557,452) | | | (491,454,718) | |
Total equity | | $ | 289,144,953 | | | $ | 321,882,174 | |
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Carrying value of investments | | $ | 331,875,638 |
| | $ | 330,683,840 |
|
Other assets | | 79,469,290 |
| | 53,966,401 |
|
Total assets | | 411,344,928 |
| | 384,650,241 |
|
Mortgage loan payable and obligations under participation agreements | | (105,051,385 | ) | | (66,855,038 | ) |
Accounts payable, accrued expenses and other liabilities | | (28,725,822 | ) | | (26,203,277 | ) |
Total liabilities | | (133,777,207 | ) | | (93,058,315 | ) |
Stockholder’s equity | | $ | 277,567,721 |
| | $ | 291,591,926 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenues | $ | 18,782,455 | | | $ | 14,688,113 | | | $ | 35,784,626 | | | $ | 26,800,383 | |
Expenses | (36,285,786) | | | (14,705,355) | | | (52,310,202) | | | (28,946,936) | |
Equity (loss) income from unconsolidated investments | (1,759,934) | | | 1,364,332 | | | (2,196,794) | | | 2,783,667 | |
Other gains (losses) | 26,200 | | | (54,656) | | | 32,784 | | | (102,567) | |
Net (loss) income | $ | (19,237,065) | | | $ | 1,292,434 | | | $ | (18,689,586) | | | $ | 534,547 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Revenues | | $ | 9,651,677 |
| | $ | 14,408,350 |
| | $ | 28,197,274 |
| | $ | 37,395,488 |
|
Expenses | | (4,598,716 | ) | | (4,584,017 | ) | | (12,379,894 | ) | | (12,493,517 | ) |
Realized gain on investments | | (604,169 | ) | | — |
| | (114,209 | ) | | 140,375 |
|
Net income | | $ | 4,448,792 |
| | $ | 9,824,333 |
| | $ | 15,703,171 |
| | $ | 25,042,346 |
|
Fair Value Measurements
The Company adoptedfollows the provisions of ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.
Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.
Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments areis determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and
Notes to Unaudited Financial Statements
financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
Notes to Consolidated Financial Statements (Unaudited)
Assets and Liabilities Reported at Fair Value
The following table summarizestables summarize the Company’s equity investment in Terra Property Trust at fair value on a recurring basis as of SeptemberJune 30, 20172023 and December 31, 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| Fair Value Measurements |
| Level 1 | | Level 2 | | Level 3 | | Total |
Investment: | | | | | | | |
Equity investment in Terra JV | $ | — | | | $ | — | | | $ | 189,317,374 | | | $ | 189,317,374 | |
| | | September 30, 2017 | | December 31, 2022 |
| Fair Value Measurements | | Fair Value Measurements |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Investment: | | | | | | | | Investment: | | | | | | | |
Equity investment in Terra Property Trust | $ | — |
| | $ | — |
| | $ | 277,326,857 |
| | $ | 277,326,857 |
| |
Equity investment in Terra JV | | Equity investment in Terra JV | $ | — | | | $ | — | | | $ | 210,008,457 | | | $ | 210,008,457 | |
|
| | | | | | | | | | | | | | | |
| December 31, 2016 |
| Fair Value Measurements |
| Level 1 | | Level 2 | | Level 3 | | Total |
Investment: | | | | | | | |
Equity investment in Terra Property Trust | $ | — |
| | $ | — |
| | $ | 290,419,317 |
| | $ | 290,419,317 |
|
Changes in Level 3 investment for the ninesix months ended SeptemberJune 30, 20172023 and 20162022 were as follows:
| | | | | | | | | | | |
| Equity Investment in Terra JV |
| Six Months Ended June 30, |
| 2023 | | 2022 |
Beginning balance | $ | 210,008,457 | | | $ | 217,324,720 | |
Return of capital | (5,355,036) | | | (4,340,218) | |
Net change in unrealized (depreciation) appreciation on investment | (15,336,047) | | | 4,591,009 | |
Ending balance | $ | 189,317,374 | | | $ | 217,575,511 | |
Net change in unrealized (depreciation) appreciation on investment for the period relating to those Level 3 assets that were still held by the Company | $ | (15,336,047) | | | $ | 4,591,009 | |
|
| | | | | | | | |
| | Equity Investment in Terra Property Trust |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Beginning balance | | $ | 290,419,317 |
| | $ | — |
|
Shares of Terra Property Trust common stock received in exchange for the Company’s consolidated portfolio of net assets | | — |
| | 288,259,804 |
|
Shares of Terra Property Trust common stock purchased | | — |
| | 10,000,000 |
|
Return of capital | | (14,012,486 | ) | | (315,730 | ) |
Net change in unrealized depreciation on investment | | 920,026 |
| | (1,400,694 | ) |
Ending balance | | $ | 277,326,857 |
| | $ | 296,543,380 |
|
Net change in unrealized depreciation on investment for the period relating to those Level 3 assets that were still held by the Company | | $ | 920,026 |
| | $ | (1,400,694 | ) |
Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, there were no transfers.
The Company estimated that its other financial assets and liabilities had fair values that approximated their carrying values at SeptemberJune 30, 20172023 and December 31, 20162022 due to their short-term nature.
Valuation Process for Fair Value Measurement
Market quotations are not readily available for the Company’s real estate-related investments throughinvestment in Terra Property Trust all ofor Terra JV, which areis included in Level 3 of the fair value hierarchy,hierarchy. The fair value of the Company’s sole investment takes into consideration the fair value of Terra Property Trust’s assets and therefore these investmentsliabilities which are valued utilizing a yield approach, i.e., a discounted cash flow methodology to arrive at an estimate of the fair value of each respective investment in the portfolio using an estimated market yield.methodology. In following this methodology, investmentsloans are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of the Company’s investments,Terra Property Trust’s loans, relevant factors, includingwhich may include available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions,provisions; the portfolio company’s ability to make payments, its net operating income, debt-service coverage ratio (“DSCR”),ratio; construction progress reports and construction budget analysis; the nature, quality, and realizable value of any collateral (and loan-to-value ratio); and the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates, replacement costs and the anticipated duration of each real estate-related loan investment.
loan. The fair value of Terra Property Trust’s
Notes to ConsolidatedUnaudited Financial Statements (Unaudited)
investment in an office building is determined using the discounted cash flow or direct capitalization method as appropriate. The fair value of Terra Property Trust’s investment in eight industrial buildings is based on the purchase price.
The Manager designates a valuation committee to oversee the entire valuation process of the Company’sTerra Property Trust’s Level 3 investments. The valuation committee is comprised of members of the Manager’s senior management, deal and portfolio management teams, who meet on a quarterly basis, or more frequently as needed, to review the CompanyTerra Property Trust investments being valued as well as the inputs used in the proprietary valuation model. Valuations determined by the valuation committee are supported by pertinent data and, in addition to a proprietary valuation model, are based on market data, industry accepted third-party valuation modelsdata and discount rates or other methods the valuation committee deems to be appropriate.
The following tables summarize the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 investments as of SeptemberJune 30, 20172023 and December 31, 2016.2022. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | Primary Valuation Technique | | Unobservable Inputs | | June 30, 2023 |
Asset Category | | | | Minimum | Maximum | Weighted Average |
Assets: | | | | | | | | | | |
Equity investment in Terra JV | | $ | 189,317,374 | | | Discounted cash flow (1)(2) | | Discount rate (1)(2) | | 6.01 | % | 19.54 | % | 19.78 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | Primary Valuation Technique | | Unobservable Inputs | | December 31, 2022 |
Asset Category | | | | Minimum | Maximum | Weighted Average |
Assets: | | | | | | | | | | |
Equity investment in Terra JV | | $ | 210,008,457 | | | Discounted cash flow (1)(2) | | Discount rate (1)(2) | | 5.22 | % | 18.51 | % | 16.80 | % |
_______________
(1)Discounted cash flows and discount rates applied to Terra Property Trust’s assets and liabilities.
(2)As of June 30, 2023, the fair value of Terra Property Trust’s investment in an office building was determined using the discounted cash flow method with discount rate of 8.50%. As of December 31, 2022, the fair value of the office building was determined using direct capitalization method with capitalization rate ranges from 6.00% to 6.25% and December 31, 2022. The fair value of Terra Property Trust’s investment in eight industrial buildings are based on the purchase price.
Risks and Uncertainties
The Company’s investment in Terra Property Trust through Terra JV is highly illiquid and there is no assurance that the Company will achieve its investment objectives, including targeted returns. Terra Property Trust’s loans are highly illiquid. Due to the illiquidity of the loans, valuation of the loans may be difficult, as there generally will be no established markets for these loans.
As the Company’s investment is carried at fair value with fair value changes recognized in the statements of operations, any changes in fair value would directly affect the Company’s members’ capital.
|
| | | | | | | | | | | | | | | |
| | Fair Value | Primary Valuation Technique | | Unobservable Inputs | | September 30, 2017 |
Asset Category | | | | Minimum | Maximum | Weighted Average |
Assets: | | | | | | | | | | |
Equity investment in Terra Property Trust | | $ | 277,326,857 |
| | Discounted cash flow | | Discount rate | | 2.56 | % | 15.00 | % | 12.71 | % |
|
| | | | | | | | | | | | | | | |
| | Fair Value | Primary Valuation Technique | | Unobservable Inputs | | December 31, 2016 |
Asset Category | | | | Minimum | Maximum | Weighted Average |
Assets: | | | | | | | | | | |
Equity investment in Terra Property Trust | | $ | 290,419,317 |
| | Discounted cash flow | | Discount rate | | 9.09 | % | 15.96 | % | 12.19 | % |
Note 4. Related Party Transactions
Merger
In December 2015, the members approved the merger of Terra Fund 1, Terra Fund 2, Terra Fund 3 and Terra Fund 4 with and into subsidiaries of the Company through a series of separate mergers effective January 1, 2016. Following the Merger, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust in exchange for the common shares of Terra Property Trust. Upon completion of the Merger, the Company became the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and began conducting substantially all of its real estate lending business through, Terra Property Trust.
Consent Solicitation
Terra Capital Markets, LLC (“Terra Capital Markets”), an affiliate of the manager, served as the dealer manager for the consent solicitation on the Merger, and was paid a voting advisory fee of $750 per initial unit sold to members in the Terra Funds and a dealer manager fee of 0.5% of the aggregate offering price of the units originally issued by the Terra Funds. Most of these fees were re-allowed to participating dealers. The Terra Funds also incurred costs for legal, accounting, and other professional services in connection with the consent solicitation. For the nine months ended September 30, 2016, the Company incurred $0.4 million of merger transaction costs.
Rights Offering
In connection with the Merger, the Company offered existing members of the Terra Funds the opportunity to invest in the Company through purchase of additional membership units (the “Rights Offering”). Terra Capital Markets served as the dealer manager for the sale of the Company’s membership units and received compensation of 3% in selling commission, 1% in dealer manager fees and a 1% broker dealer fee. Most of these fees are re-allowed to independent broker dealers and financial advisors. These fees amounted to approximately $1.3 million for the nine months ended September 30, 2016 and have been deducted from capital contributions received as selling commissions and dealer manager fees.
Operating Agreement
The Company entered intohas an operating agreement, as amended, with the Manager whereby the Manager is responsible for the Company’s day-to-day operations.Terra Fund Advisors. The operating agreement, as amended, is scheduled to terminate on December 31, 2023 unless the Company is dissolved earlier. Starting January 1, 2016, the Company conducts all of its real estate lending business through Terra Property Trust. As such, Terra Property Trust is responsible for management compensation paid and operating expenses reimbursed to the Managerits manager pursuant to a management agreement with the Manager.
Notes to Consolidated Financial Statements (Unaudited)
Due from Terra Property Trust
As of September 30, 2017, amount due from Terra Property Trust was $0.03 million, related to a professional fee invoice the Company paid on its behalf. As of December 31, 2016, there was no amount due from Terra Property Trust.
Due to Terra Property Trust
As of September 30, 2017, there was no amount due to Terra Property Trust. As of December 31, 2016, approximately $0.4 million was due to Terra Property Trust, as reflected on the consolidated statements of financial condition, primarily related to an adjustment to the contribution of the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust on January 1, 2016.manager.
Dividend Income
As discussed in Note 3, for the three months ended SeptemberJune 30, 20172023 and 2016,2022, the Company received approximately $13.1$2.8 million and $9.6$2.9 million of distributions from Terra Property Trust, respectively,JV, of which $8.7$2.8 million and none was a return$2.1 million were returns of capital, respectively. For the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, the Company received approximately $29.7$5.6 million and $25.4$5.9 million of distributions from Terra Property Trust, respectively,JV, of which $14.0$5.4 million and $0.3$4.3 million was a returnwere returns of capital, respectively.
Notes to Unaudited Financial Statements Note 5. Significant Risk Factors
InBDC Merger
On the normal course of business, the Company enters into transactions in various financial instruments. The Company’s financial instruments are subject to, but are not limitedClosing Date, pursuant to the following risks:Terra BDC Merger Agreement, Terra BDC merged with and into Terra LLC, with Terra LLC surviving as a wholly owned subsidiary of Terra Property Trust. The Certificate of Merger and Articles of Merger with respect to the BDC Merger were filed with the Secretary of State of the State of Delaware and State Department of Assessments and Taxation of Maryland, respectively, with an effective time and date of 12:02 a.m., Eastern Time, on the Closing Date (the “Effective Time”).
Market Risk
The Company’s loans throughAt the Effective Time, except for any shares of common stock, par value $0.001 per share, of Terra BDC (“Terra BDC Common Stock”) held by Terra Property Trust are highly illiquid and there is no assurance that the Company will achieve its investment objectives, including targeted returns. Due to the illiquidityor any wholly owned subsidiary of the loans, valuation of the loans may be difficult, as there generally will be no established markets for these loans. As the Company’s loans were carried at fair value with fair value changes recognized in the consolidated statements of operations, all changes in market conditions would directly affect the Company’s members’ capital.
Credit Risk
Credit risk represents the potential loss that Terra Property Trust or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of Class B Common Stock, par value $0.01 per share of Terra Property Trust (“TPT Class B Common Stock”) and (ii) cash, without interest, in lieu of any fractional shares of TPT Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of TPT Class B Common Stock to which such holder would incur if the borrowers failed to perform pursuantotherwise be entitled by (y) $14.38.
Pursuant to the terms of their obligationsthe transactions described in the Terra BDC Merger Agreement, approximately 4,847,910 shares of TPT Class B Common Stock were issued to former Terra Property Trust. Thus,BDC stockholders in connection with the valueBDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of the underlying collateral,Closing Date. Following the creditworthinessconsummation of the borrower or other counterparty, andBDC Merger, former Terra BDC stockholders owned approximately 19.9% of the priority of Terra Property Trust’s lien on the borrower’s assets are of importance. Terra Property Trust minimizes its exposure to credit risk by limiting exposure to any one individual borrower and any one asset class. Additionally, Terra Property Trust employs an asset management approach and monitors the portfolio of loans, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value ratio, DSCR and the debt yield. Terra Property Trust also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.
Mezzanine loans and preferredcommon equity investments are subordinate to senior mortgage loans and, therefore, involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender’s investment is fully recovered. As a result, in the event of a default, Terra Property Trust may not recover all of its investment.
The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
Concentration Risk
Terra Property Trust holds real estate related loans. Thus, the loan portfolio of Terra Property Trust may be subject to a more rapid change in value than would be the case if Terra Property Trust maintained a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce Terra Property Trust’s capital.
Notes to Consolidated Financial Statements (Unaudited)
Liquidity Risk
Liquidity risk represents the possibility that the Company may not be able to sell its positions at a reasonable price in timesindirectly beneficially owned approximately 61.3% of low trading volume, high volatility and financial stress.
Interest Rate Risk
Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair valuecommon equity of Terra Property Trust’s interest-bearing financial instruments.Trust.
Prepayment Risk
Prepayments can either positively or adversely affect the yields on loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond Terra Property Trust’s control, and consequently, such prepayment rates cannot be predicted with certainty. If Terra Property Trust does not collect a prepayment fee in connection with a prepayment or is unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, Terra Property Trust may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios, Terra Property Trust may fail to recoup fully its cost of acquisition of certain loans.
Use of Leverage
As part of Terra Property Trust’s investment strategy, Terra Property Trust may borrow and utilize leverage. While borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses.
Property Acquisitions
Terra Property Trust may find it necessary to take possession of collateral including, without limitation, an asset or a business, through a purchase or foreclosure action. Borrowers may resist mortgage foreclosure or sales actions by asserting numerous claims and defenses, which delay both repayments of existing loan investments and acquisition of the collateral and add cost to such actions.
There can be no assurance that Terra Property Trust will be able to successfully operate, hold or maintain the collateral in accordance with its expectations.
Further, there can be no assurance that there will be a ready market for resale of foreclosed or acquired properties because investments in real estate generally are not liquid and holding periods are difficult to predict. In addition, there may be significant expenditures associated with holding real property, including real estate taxes and maintenance costs. The liquidation proceeds upon sale of the real estate may be less than the amount invested in the loan, and its fair value and such differences could be material.
Note 6.5. Commitments and Contingencies
The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. The Manager has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.
The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.
Note 7.6. Members’ Capital
As of Septemberboth June 30, 20172023 and December 31, 2016,2022, the Company had 6,697.56,622.2 units and 6,826.5 units outstanding, respectively.outstanding. The net asset value per unit was $41,405$28,565 and $42,423$31,710 as of SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively.
Capital Contributions
As of January 31, 2015, the offering period ended and the Company stopped accepting capital contributions.
In connection with the Merger between the Terra Funds, original membership units of Terra Funds 1 through 4 were exchanged for 3,206.7 Continuing Income Units (regular units in the Company) and 463.6 Termination Units (membership interest in the Company offered to members of Terra Funds 1 through 4 who wish to enter the liquidation phase of their investments). The Company also offered existing members of the Terra Funds the opportunity to invest in the Company through the Rights Offering. For the nine months ended September 30, 2016, the Company sold 573.3 units and received capital contributions of approximately $25.6 million, net of selling commissions and dealer manager fees.
Capital Distributions
At the discretion of the Manager, the Company may make distributions from net cash flow from operations, net disposition proceeds, or other cash available for distribution. Distributions are made to holders of Continuing Income Units (regular units of limited liability company interest in the Company) in proportion to their unit holdings until they receive a return of their initial Deemed Capital Contribution, as defined in the operating agreement, plus a preferred return ranging from 8.5% to 9.0% depending on the historical preferred return applicable to their Terra FundFunds units, after which time distributions are made 15% to the Manager which the Company referredrefers to as the carried interest distribution, and 85% to the holders of Continuing Income Units. The preferred return applicable to the Continuing Income Units sold in the Rights Offeringoffering concurrent with the Mergers is 8.5%.
In addition, holders of Termination Units receive monthly distributions at a fixed rate of 6.0% per annum of the Unreturned Invested Capital, as defined in the operating agreement.
For the ninethree months ended SeptemberJune 30, 20172023 and 2016,2022, the Company made total capital distributiondistributions to non-managernon-managing members of $23.1$2.7 million and $22.9$2.8 million, respectively. For the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, the Company made total distributions to non-managing members of $5.4 million and $5.8 million, respectively. For the three and six months ended June 30, 2023 and 2022, the Company did not accrue or make any carried interest distributions to the Manager.
Notes to Unaudited Financial Statements
Capital Redemptions
In the Merger, members of Terra Funds 1 through 4 who wished to enter the liquidation phase of their investments chose to receive Termination Units as merger consideration. These Termination Units will be redeemed on the original expected liquidation dates of the funds. For the nine months ended September 30, 2017, 121.1 Termination Units of Terra Fund 3 were redeemed for $5.0 million. For the nine months ended September 30, 2016, 161.3 Termination Units of Terra Fund 1 were redeemed for $6.8 million. These Termination Units were redeemed at book value as defined in the amended and restated operating agreement. Additionally, for the nine months ended September 30, 2017, 7.9 units of Continuing Income Units were redeemed for $0.3 million. For the nine months ended September 30, 2016, the Company also paid $3.4 million to members the Manager was unable to establish their continuation to qualify as “accredited investors” under the Securities Act of 1933, as amended, and to members holding their interests through a qualified ERISA plan to redeem their units.
The following table presents a summary of the Termination Units outstanding as of September 30, 2017:
|
| | | | | |
Fund | | Number of
Units
| | Scheduled
Redemption Date
|
Terra Fund 4 | | 50.4 |
| | July 2018 |
At the discretion of the Manager, a reserve of 5% of cash from operations may be established in order to repurchase units from non-managing members. The Manager is under no obligation to redeem non-managing members’ units. As of SeptemberJune 30, 20172023 and December 31, 2016,2022, no such reserve was established. For the three and six months ended June 30, 2023, the Company did not redeem any units. For the three and six months ended June 30, 2022, the Company redeemed 12.2 units for $0.4 million.
Allocation of Income (Loss)
Profits and losses are allocated to the members in proportion to the units held in a given calendar year.
Member Units
Each membership interest through the original offering was offered for a price of $50,000 per unit. The membership interests in Terra Funds 1 through 4 were exchanged for units of the Company at a price of $43,410 per unit, which was the exchange value per unit of the Company on December 31, 2015, and the units in the Rights Offering was offered at a price of $47,000 per unit. The following table provides a roll forward of the units outstanding of the Company for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
| | Managing Member | | Non-Managing Members | | Total | | Managing Member | | Non-Managing Members | | Total |
Units outstanding, beginning of period | | — |
| | 6,826.5 |
| | 6,826.5 |
| | — |
| | 2,878.9 |
| | 2,878.9 |
|
Units issued in the Merger | | — |
| | — |
| | — |
| | — |
| | 3,670.4 |
| | 3,670.4 |
|
Units admitted through the Rights Offering | | — |
| | — |
| | — |
| | — |
| | 573.3 |
| | 573.3 |
|
Early redemption of Continuing Income Units | | — |
| | (7.9 | ) | | (7.9 | ) | | — |
| | — |
| | — |
|
Termination Units redeemed | | — |
| | (121.1 | ) | | (121.1 | ) | | — |
| | (161.3 | ) | | (161.3 | ) |
Units outstanding, end of period | | — |
| | 6,697.5 |
| | 6,697.5 |
| | — |
| | 6,961.3 |
| | 6,961.3 |
|
Note 8.7. Financial Highlights
The financial highlights represent the per unit operating performance, return and ratios for the non-managing members’ class, taken as a whole, for the ninesix months ended SeptemberJune 30, 20172023 and 2016.2022. These financial highlights consist of the operating performance, the internal rate of return (“IRR”) since inception of the Company, and the expense and net investment income ratios which are annualized except for the non-recurring expenses.
The IRR, net of all fees and carried interest (if any), is computed based on actual dates of the cash inflows (capital contributions), outflows (capital distributions), and the ending capital at the end of the respective period (residual value) of the non-managing members’ capital account.
The following summarizes the Company’s financial highlights for the ninesix months ended SeptemberJune 30, 20172023 and 2016:2022:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 |
Per unit operating performance: | | | |
Net asset value per unit, beginning of period | $ | 31,710 | | | $ | 32,860 | |
(Decrease) increase in members’ capital from operations (1): | | | |
Net investment (loss) income | (4) | | | 189 | |
Net change in unrealized (depreciation) appreciation on investment | (2,316) | | | 692 | |
Total (decrease) increase in members’ capital from operations | (2,320) | | | 881 | |
Distributions to members (2): | | | |
Capital distributions | (825) | | | (874) | |
Net decrease in members’ capital resulting from distributions | (825) | | | (874) | |
Net asset value per unit, end of period | $ | 28,565 | | | $ | 32,867 | |
| | | |
Ratios to average net assets: | | | |
Expenses | 0.31 | % | | 0.24 | % |
Net investment (loss) income | (0.03) | % | | 1.14 | % |
| | | |
IRR, beginning of period | 4.65 | % | | 4.91 | % |
IRR, end of period | 3.79 | % | | 4.98 | % |
._______________(1)The per unit data was derived by using the weighted average units outstanding during the applicable periods, which were 6,622.2 and 6,630.9 for the six months ended June 30, 2023 and 2022.
(2)The per unit data for distributions reflects the actual amount of distributions paid per unit during the periods.
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto and other financial information included elsewhere in this quarterly report on Form 10-Q. In this report, the “Company,” “we,” “us” and “our” refer to Terra Secured Income Fund 5, LLC and its consolidated subsidiaries.LLC.
We make forward-looking statements in this quarterly report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. The forward-looking statements contained in this quarterly report on Form 10-Q may include, but are not limited to, statements as to:
In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Members are advised to consult any additional disclosures that we may make directly to members or through reports that we may file in the future with the Securities and Exchange Commission, (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| Fixed Rate | | Floating Rate (1) | | Total Gross Loans | | Obligations under Participation Agreements | | Total Net Loans |
Number of loans | 32 |
| 1 |
| 1 |
| | 33 |
| | 19 |
| | 33 |
|
Principal balance | $ | 274,799,217 |
| | $ | 52,986,912 |
| | $ | 327,786,129 |
| | 70,020,950 |
| | $ | 257,765,179 |
|
Amortized cost | 278,381,358 |
| | 53,494,280 |
| | 331,875,638 |
| | 70,992,661 |
| | 260,882,977 |
|
Fair value | 278,265,904 |
| | 53,637,569 |
| | 331,903,473 |
| | 70,910,091 |
| | 260,993,382 |
|
Weighted average coupon rate | 12.60 | % | | 9.73 | % | | 12.13 | % | | 12.49 | % | | 11.99 | % |
Weighted-average remaining terms (year) | 1.68 |
| | 0.44 |
| | 1.48 |
| | 1.26 |
| | 1.54 |
|
Equity Investments
Additionally, as of June 30, 2023 and December 31, 2022, Terra Property Trust owned 14.9% and 50.0%, respectively, of equity interest in a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. Terra Property Trust also beneficially owned equity interests in three joint ventures that invest in real estate properties. In 2022, in connection with a mezzanine loan Terra Property Trust originated, Terra Property Trust entered into a residual profit-sharing arrangement with the borrower. Terra Property Trust accounted for this arrangement as an equity investment. In May 2023, we purchased the underlying assets and the $10 million mezzanine loan was settled in connection with the purchase. As of June 30, 2023 and December 31, 2022, these equity investments had total carrying values of $32.6 million and $62.5 million, respectively.
Portfolio Investment Activity
Net loan Portfolio
For the three months ended June 30, 2023 and 2022, Terra Property Trust invested $7.5 million and $0.3 million in new and add-on investments and had $6.4 million and $10.6 million of repayments, resulting in net investments of $1.1 million and net repayment of investments of $10.9 million, respectively. Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement, the term loan, the repurchase agreements and the revolving line of credit.
For the six months ended June 30, 2023 and 2022, Terra Property Trust invested $33.2 million and $25.7 million in new and add-on investments and had $46.3 million and $11.9 million of repayments, resulting in net repayments of $13.1 million and net investments of $13.7 million, respectively. Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement, the term loan, the repurchase agreements and the revolving line of credit.
Real Estate Ownership
Additionally, in the first quarter of 2023, Terra Property Trust purchased three industrial buildings in Texas for total capitalized costs of $48.8 million. In the second quarter of 2023, Terra Property Trust purchased another five industrial buildings in Texas and the related mezzanine loan that was accounted for as an equity investment and five senior loans that were accounted as loans held for investment were settled in connection with the acquisition. The five industrial buildings have total capitalized costs of $83.3 million. In connection with these acquisitions, Terra Property Trust obtained mortgage financing totaling $72.6 million.
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| | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Fixed Rate | | Floating Rate (1) | | Total Gross Loans | | Obligations under Participation Agreements | | Total Net Loans |
Number of loans | 37 |
| | 1 |
| | 38 |
| | 11 |
| | 38 |
|
Principal balance | $ | 275,554,910 |
| | $ | 50,450,061 |
| | $ | 326,004,971 |
| | 32,635,785 |
| | $ | 293,369,186 |
|
Amortized cost | 279,781,074 |
| | 50,902,766 |
| | 330,683,840 |
| | 32,986,194 |
| | 297,697,646 |
|
Fair value | 278,931,283 |
| | 50,924,056 |
| | 329,855,339 |
| | 32,904,955 |
| | 296,950,384 |
|
Weighted average coupon rate | 12.98 | % | | 9.19 | % | | 12.38 | % | | 12.96 | % | | 12.33 | % |
Weighted-average remaining terms (year) | 1.42 |
| | 1.19 |
| | 1.39 |
| | 1.35 |
| | 1.37 |
|
_______________
| |
(1) | This loan pays an annual coupon rate of London Interbank Offered Rate (“LIBOR”) plus 8.5% with a LIBOR floor of 0.5%. Coupon rate shown was determined using the applicable annual coupon rate as of September 30, 2017 and December 31, 2016.
|
Portfolio Information
The tables below detailset forth the types of loansassets in Terra Property Trust’s loan portfolio, as well as the property type and geographic location of the properties securing thesethe loans in the portfolio, on a net loan basis, which represents Terra Property Trust’s proportionate share of the loans, based on its economic ownership of these loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
Investment Structure | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total |
First mortgages | | $ | 380,923,792 | | | $ | 385,177,670 | | | $ | 380,414,299 | | | 54.3 | % | | $ | 456,408,889 | | | $ | 461,299,182 | | | $ | 458,085,397 | | | 63.1 | % |
Preferred equity investments | | 123,242,640 | | | 123,957,220 | | | 99,754,638 | | | 14.3 | % | | 121,231,434 | | | 122,132,177 | | | 97,127,877 | | | 13.4 | % |
Mezzanine loans | | 24,010,191 | | | 24,023,343 | | | 23,536,723 | | | 3.4 | % | | 26,767,345 | | | 26,770,521 | | | 26,325,341 | | | 3.6 | % |
Credit facility | | — | | | — | | | — | | | — | % | | 28,802,833 | | | 29,080,183 | | | 28,926,544 | | | 4.0 | % |
Allowance for credit losses | | — | | | (33,128,796) | | | — | | | — | % | | — | | | (25,471,890) | | | — | | | — | % |
Total loan investments | | $ | 528,176,623 | | | 500,029,437 | | | 503,705,660 | | | 72.0 | % | | $ | 633,210,501 | | | 613,810,173 | | | 610,465,159 | | | 84.1 | % |
Marketable securities | | 1,188,019 | | | 1,203,973 | | | 0.2 | % | | | | 136,265 | | | 147,960 | | | — | % |
Real estate owned | | | | 159,306,582 | | | 159,690,352 | | | 22.8 | % | | | | 40,581,847 | | | 52,500,000 | | | 7.2 | % |
Equity investment in unconsolidated Investments | | 32,608,994 | | | 34,774,900 | | | 5.0 | % | | | | 62,498,340 | | | 63,161,348 | | | 8.7 | % |
Total | | | | $ | 693,133,032 | | | $ | 699,374,885 | | | 100.0 | % | | | | $ | 717,026,625 | | | $ | 726,274,467 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Loan Structure | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total |
First mortgages | | $ | 106,946,912 |
| | $ | 107,981,096 |
| | $ | 108,124,338 |
| | 41.4 | % | | $ | 117,890,016 |
| | $ | 118,995,391 |
| | $ | 119,018,338 |
| | 40.1 | % |
Mezzanine loans | | 89,335,269 |
| | 90,756,354 |
| | 90,821,211 |
| | 34.8 | % | | 118,524,437 |
| | 121,037,421 |
| | 120,466,609 |
| | 40.6 | % |
Preferred equity investments | | 53,482,998 |
| | 54,065,527 |
| | 53,968,834 |
| | 20.7 | % | | 47,415,691 |
| | 48,229,921 |
| | 47,838,821 |
| | 16.1 | % |
Other (1) | | 8,000,000 |
| | 8,080,000 |
| | 8,078,999 |
| | 3.1 | % | | 9,539,042 |
| | 9,626,616 |
| | 9,626,616 |
| | 3.2 | % |
Allowance for loan losses | | — |
| | — |
| | — |
| | — | % | | — |
| | (191,703 | ) | | — |
| | — | % |
Total | | $ | 257,765,179 |
| | $ | 260,882,977 |
| | $ | 260,993,382 |
| | 100.0 | % | | $ | 293,369,186 |
| | $ | 297,697,646 |
| | $ | 296,950,384 |
| | 100.0 | % |
_______________
| |
(1) | Other includes $8.0 million of unused cash from a credit facility at September 30, 2017 and $9.5 million of unused cash from two credit facilities at December 31, 2016. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
Property Type | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total |
Office | | $ | 151,158,617 | | | $ | 151,538,052 | | | $ | 136,136,714 | | | 19.4 | % | | $ | 171,611,750 | | | $ | 172,042,063 | | | $ | 159,780,622 | | | 22.0 | % |
Multifamily | | 103,427,397 | | | 104,222,850 | | | 102,766,086 | | | 14.7 | % | | 104,589,464 | | | 105,570,432 | | | 103,784,913 | | | 14.3 | % |
Industrial | | 64,340,667 | | | 64,865,942 | | | 64,778,991 | | | 9.3 | % | | 147,796,164 | | | 148,891,742 | | | 148,409,441 | | | 20.4 | % |
Mixed use | | 62,746,351 | | | 63,257,099 | | | 50,809,625 | | | 7.3 | % | | 64,880,450 | | | 65,838,965 | | | 52,303,392 | | | 7.2 | % |
Infill land | | 51,031,209 | | | 52,122,303 | | | 52,437,362 | | | 7.5 | % | | 48,860,291 | | | 49,565,437 | | | 49,864,054 | | | 6.9 | % |
Hotel - full/select service | | 43,222,382 | | | 43,826,614 | | | 43,499,719 | | | 6.2 | % | | 43,222,382 | | | 43,758,804 | | | 43,062,933 | | | 5.9 | % |
Student housing | | 31,000,000 | | | 31,768,579 | | | 31,809,270 | | | 4.5 | % | | 31,000,000 | | | 31,774,261 | | | 31,816,276 | | | 4.4 | % |
Infrastructure | | 21,250,000 | | | 21,556,794 | | | 21,467,893 | | | 3.1 | % | | 21,250,000 | | | 21,840,359 | | | 21,443,528 | | | 3.0 | % |
Allowance for credit losses | | — | | | (33,128,796) | | | — | | | — | % | | — | | | (25,471,890) | | | — | | | — | % |
Total loan investments | | $ | 528,176,623 | | | 500,029,437 | | | 503,705,660 | | | 72.0 | % | | $ | 633,210,501 | | | 613,810,173 | | | 610,465,159 | | | 84.1 | % |
Marketable securities | | 1,188,019 | | | 1,203,973 | | | 0.2 | % | | | | 136,265 | | | 147,960 | | | — | % |
Real estate owned | | | | 159,306,582 | | | 159,690,352 | | | 22.8 | % | | | | 40,581,847 | | | 52,500,000 | | | 7.2 | % |
Equity investment in unconsolidated investments | | 32,608,994 | | | 34,774,900 | | | 5.0 | % | | | | 62,498,340 | | | 63,161,348 | | | 8.7 | % |
Total | | | | $ | 693,133,032 | | | $ | 699,374,885 | | | 100.0 | % | | | | $ | 717,026,625 | | | $ | 726,274,467 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Property Type | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total |
Multifamily | | $ | 71,765,501 |
| | $ | 72,775,385 |
| | $ | 72,426,060 |
| | 27.8 | % | | $ | 83,510,933 |
| | $ | 85,021,199 |
| | $ | 84,556,067 |
| | 28.5 | % |
Office | | 57,382,912 |
| | 57,930,352 |
| | 58,076,047 |
| | 22.3 | % | | 69,506,033 |
| | 70,159,209 |
| | 70,158,868 |
| | 23.6 | % |
Land | | 53,960,000 |
| | 54,486,816 |
| | 54,486,769 |
| | 20.8 | % | | 53,746,133 |
| | 54,255,486 |
| | 54,258,353 |
| | 18.2 | % |
Hotel | | 53,922,152 |
| | 54,641,489 |
| | 54,562,580 |
| | 20.9 | % | | 66,351,287 |
| | 67,557,902 |
| | 67,077,247 |
| | 22.6 | % |
Industrial | | 7,000,000 |
| | 7,000,000 |
| | 7,000,000 |
| | 2.7 | % | | — |
| | — |
| | — |
| | — | % |
Student housing | | 5,734,614 |
| | 5,968,935 |
| | 6,362,927 |
| | 2.4 | % | | 5,700,000 |
| | 6,125,635 |
| | 6,215,839 |
| | 2.1 | % |
Mixed use | | — |
| | — |
| | — |
| | — | % | | 2,515,758 |
| | 2,533,450 |
| | 2,527,566 |
| | 0.9 | % |
Other (1) | | 8,000,000 |
| | 8,080,000 |
| | 8,078,999 |
| | 3.1 | % | | 12,039,042 |
| | 12,236,468 |
| | 12,156,444 |
| | 4.1 | % |
Allowance for loan losses | | — |
| | — |
| | — |
| | — | % | | — |
| | (191,703 | ) | | — |
| | — | % |
Total | | $ | 257,765,179 |
| | $ | 260,882,977 |
| | $ | 260,993,382 |
| | 100.0 | % | | $ | 293,369,186 |
| | $ | 297,697,646 |
| | $ | 296,950,384 |
| | 100.0 | % |
_______________
| |
(1) | Other includes $8.0 million of unused cash from a credit facility at September 30, 2017 and $9.5 million of unused cash from two credit facilities at December 31, 2016. Other also includes $2.5 million of retail properties as of December 31, 2016. |
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| | June 30, 2023 | | December 31, 2022 |
Geographic Location | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total |
United States | | | | | | | | | | | | | | | | |
California | | $ | 125,567,737 | | | $ | 126,944,398 | | | $ | 125,505,319 | | | 18.0 | % | | $ | 151,668,387 | | | $ | 153,158,967 | | | $ | 150,237,383 | | | 20.8 | % |
New York | | 88,336,078 | | | 88,336,079 | | | 64,164,814 | | | 9.2 | % | | 91,845,479 | | | 91,877,084 | | | 67,737,205 | | | 9.3 | % |
New Jersey | | 77,371,876 | | | 78,691,851 | | | 79,362,148 | | | 11.3 | % | | 62,228,622 | | | 62,958,482 | | | 63,290,218 | | | 8.7 | % |
Georgia | | 75,205,257 | | | 75,840,968 | | | 71,375,267 | | | 10.2 | % | | 72,401,718 | | | 73,101,964 | | | 71,971,448 | | | 9.9 | % |
Washington | | 52,969,210 | | | 53,070,927 | | | 53,430,563 | | | 7.6 | % | | 56,671,267 | | | 57,027,639 | | | 57,191,604 | | | 7.9 | % |
Utah | | 49,250,000 | | | 50,399,536 | | | 50,385,377 | | | 7.2 | % | | 49,250,000 | | | 50,698,251 | | | 50,345,762 | | | 6.9 | % |
Arizona | | 31,000,000 | | | 31,296,394 | | | 31,296,394 | | | 4.5 | % | | 31,000,000 | | | 31,276,468 | | | 31,276,468 | | | 4.3 | % |
North Carolina | | 21,476,465 | | | 21,578,080 | | | 21,627,967 | | | 3.1 | % | | 43,520,028 | | | 44,041,162 | | | 43,634,806 | | | 6.0 | % |
Massachusetts | | 7,000,000 | | | 7,000,000 | | | 6,557,811 | | | 0.9 | % | | 7,000,000 | | | 7,000,000 | | | 6,638,219 | | | 0.9 | % |
Texas | | — | | | — | | | — | | | — | % | | 67,625,000 | | | 68,142,046 | | | 68,142,046 | | | 9.4 | % |
Allowance for credit losses | | — | | | (33,128,796) | | | — | | | — | % | | — | | | (25,471,890) | | | — | | | — | % |
Total loan investments | | $ | 528,176,623 | | | 500,029,437 | | | 503,705,660 | | | 72.0 | % | | $ | 633,210,501 | | | 613,810,173 | | | 610,465,159 | | | 84.1 | % |
Marketable securities | | 1,188,019 | | | 1,203,973 | | | 0.2 | % | | | | 136,265 | | | 147,960 | | | — | % |
Real estate owned - California | | 27,603,118 | | | 27,603,118 | | | 3.9 | % | | | | 40,581,847 | | | 52,500,000 | | | 7.2 | % |
Real estate owned - Texas | | 131,703,464 | | | 132,087,234 | | | 18.9 | % | | | | — | | | — | | | — | % |
Equity investment in unconsolidated Investments | | 32,608,994 | | | 34,774,900 | | | 5.0 | % | | | | 62,498,340 | | | 63,161,348 | | | 8.7 | % |
Total | | | | $ | 693,133,032 | | | $ | 699,374,885 | | | 100.0 | % | | | | $ | 717,026,625 | | | $ | 726,274,467 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Geographic Location | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair Value | | % of Total |
United States | | | | | | | | | | | | | | | | |
California | | $ | 90,816,912 |
| | $ | 91,818,221 |
| | $ | 91,838,599 |
| | 35.2 | % | | $ | 89,925,061 |
| | $ | 91,165,200 |
| | $ | 90,798,926 |
| | 30.5 | % |
New York | | 37,805,463 |
| | 38,107,156 |
| | 38,068,216 |
| | 14.5 | % | | 37,032,965 |
| | 37,324,858 |
| | 37,315,430 |
| | 12.6 | % |
Florida | | 34,529,152 |
| | 34,851,771 |
| | 34,858,786 |
| | 13.3 | % | | 49,122,324 |
| | 49,520,673 |
| | 49,320,018 |
| | 16.6 | % |
Washington | | 20,250,000 |
| | 20,360,848 |
| | 20,417,124 |
| | 7.8 | % | | — |
| | — |
| | — |
| | — | % |
Pennsylvania | | 15,410,000 |
| | 15,554,693 |
| | 15,564,431 |
| | 6.0 | % | | 18,982,000 |
| | 19,162,115 |
| | 19,184,642 |
| | 6.5 | % |
Georgia | | 15,250,000 |
| | 15,588,190 |
| | 15,386,904 |
| | 5.9 | % | | 4,250,000 |
| | 4,604,941 |
| | 4,387,683 |
| | 1.5 | % |
Texas | | 7,651,038 |
| | 7,879,004 |
| | 7,764,279 |
| | 3.0 | % | | 9,139,038 |
| | 9,363,678 |
| | 9,330,002 |
| | 3.1 | % |
Massachusetts | | 7,000,000 |
| | 7,000,000 |
| | 7,000,000 |
| | 2.7 | % | | 4,000,000 |
| | 4,112,275 |
| | 4,071,618 |
| | 1.4 | % |
Delaware | | 4,396,000 |
| | 4,436,072 |
| | 4,438,478 |
| | 1.7 | % | | 7,000,000 |
| | 7,057,616 |
| | 7,086,338 |
| | 2.4 | % |
Alabama | | 3,700,000 |
| | 3,775,021 |
| | 3,744,552 |
| | 1.4 | % | | 3,844,445 |
| | 3,928,742 |
| | 3,882,318 |
| | 1.3 | % |
Oregon | | 3,140,000 |
| | 3,273,511 |
| | 3,290,784 |
| | 1.3 | % | | 5,000,000 |
| | 5,356,923 |
| | 5,324,812 |
| | 1.8 | % |
North Carolina | | 2,198,000 |
| | 2,222,837 |
| | 2,219,723 |
| | 0.9 | % | | 4,921,404 |
| | 4,985,576 |
| | 4,985,280 |
| | 1.7 | % |
Tennessee | | 1,884,000 |
| | 1,966,718 |
| | 1,959,580 |
| | 0.8 | % | | 9,877,843 |
| | 10,179,485 |
| | 10,047,055 |
| | 3.4 | % |
New Jersey | | — |
| | — |
| | — |
| | — | % | | 22,639,955 |
| | 22,865,291 |
| | 22,864,082 |
| | 7.7 | % |
Virginia | | — |
| | — |
| | — |
| | — | % | | 6,675,510 |
| | 6,737,238 |
| | 6,737,238 |
| | 2.3 | % |
Arizona | | — |
| | — |
| | — |
| | — | % | | 5,719,598 |
| | 5,772,487 |
| | 5,772,487 |
| | 1.9 | % |
Other (1) | | 13,734,614 |
| | 14,048,935 |
| | 14,441,926 |
| | 5.5 | % | | 15,239,043 |
| | 15,752,251 |
| | 15,842,455 |
| | 5.3 | % |
Allowance for loan losses | | — |
| | — |
| | — |
| | — | % | | — |
| | (191,703 | ) | | — |
| | — | % |
Total | | $ | 257,765,179 |
| | $ | 260,882,977 |
| | $ | 260,993,382 |
| | 100.0 | % | | $ | 293,369,186 |
| | $ | 297,697,646 |
| | $ | 296,950,384 |
| | 100.0 | % |
_______________
| |
(1) | Other includes $8.0 million of unused cash from a credit facility, $2.7 million of properties in Indiana, $1.9 million of properties in South Carolina and $1.1 million of properties in Utah at September 30, 2017. Other includes $9.5 million of unused cash from two credit facilities, $2.7 million of properties in Indiana and $3.0 million of properties in South Carolina at December 31, 2016. |
Factors Impacting Operating Results
Our operating results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income generated by Terra Property Trust from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first and second mortgage loans, subordinated mortgage loans, bridge loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business. Interest income and borrowing costs of Terra Property Trust may vary as a result of changes in interest rates, which could impact the net interest we receive on our assets. Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets.
Market Risk
Terra Property Trust’s loans are highly illiquid, and there is no assurance that it will achieve its investment objectives, including targeted returns. Due to the illiquidity of the loans, valuation of Terra Property Trust’s loans may be difficult, as there generally will be no established markets for these loans.
Credit Risk
Credit risk represents the potential loss that Terra Property Trust would incur if the borrowers failed to perform pursuant to the terms of their obligations to Terra Property Trust. Terra Property Trust minimizes itsmanages exposure to credit risk by limiting exposure to any one individual borrower and any one asset class. Additionally, Terra Property Trust employs an asset management approach and monitormonitors the portfolio of loans through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value ratio, debt service coverage ratio, and the debt yield. Terra Property Trust also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.
The performance and value of Terra Property Trust’s loans depend upon the sponsors’ ability to operate or manage the development of the respective properties that serve as collateral so that each property’s value ultimately supports the repayment of the loan balance. Mezzanine loans and preferred equity investments are subordinate to senior mortgage loans and, therefore,
involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender’s investment is fully recovered. As a result, in the event of a default, Terra Property Trust may not recover all of its investments.
In addition, Terra Property Trust is exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond its control. Terra Property Trust seeks to manage these risks through its underwriting and asset management processes.
We and Terra Property Trust maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
Concentration Risk
Terra Property Trust holds real estate-related loans. Thus, its loan portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce Terra Property Trust’s capital.
Liquidity Risk
Liquidity risk represents the possibility that we may not be able to sell, directly or indirectly, our positionsequity interest in Terra Property Trust or Terra JV at a reasonable price in times of low trading volume, high volatility and financial stress.
Interest Rate Risk
Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair value of our interest-bearing financial instruments. With respect to Terra Property Trust’s business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to slow,slow; and (v) to the extent we enter into interest rate swap agreements as part of Terra Property Trust’s hedging strategy, the value of these agreements to increase.
Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to increase,increase; and (v) to the extent Terra Property Trust enters into interest rate swap agreements as part of its hedging strategy, the value of these agreements to decrease.
Prepayment Risk
Prepayments can either positively or adversely affect the yields on Terra Property Trust’s loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If Terra Property Trust does not collect a prepayment fee in connection with a prepayment or are unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, Terra Property Trust may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios Terra Property Trust may fail to recoup fully its cost of acquisition of certain loans.
Extension Risk
Extension risk is the risk that Terra Property Trust’s assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In which case, to the extent Terra Property Trust has financed the acquisition of an asset, Terra Property Trust may have to finance its asset at potentially higher costs without the ability to reinvest principal into higher yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting its net interest spread, and thus its net interest income.
Real Estate Risk
The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; pandemics; natural disasters; and other acts of god. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause Terra Property Trust to suffer losses.
Use of Leverage
Terra Property Trust may deploydeploys moderate amounts of leverage as part of ourits operating strategy, which may consist of borrowings under first mortgage financings, warehouse facilities, term loans, repurchase agreements and other credit facilities. While borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses.
Results of Operations
The following table presents the comparative results of our operations for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | | | | | | 2022 | | Change | | 2023 | | 2022 | | Change |
Investment income | | | | | | | | | | | | | | | | |
Dividend income | $ | — | | | | | | | | $ | 756,984 | | | $ | (756,984) | | | $ | 292,254 | | | $ | 1,515,094 | | | $ | (1,222,840) | |
Other operating income | 5 | | | | | | | | 15 | | | $ | (10) | | | 23 | | | 26 | | | (3) | |
Total investment income | 5 | | | | | | | | 756,999 | | | (756,994) | | | 292,277 | | | 1,515,120 | | | (1,222,843) | |
Operating expenses | | | | | | | | | | | | | | | | |
Professional fees | 105,069 | | | | | | | | 133,139 | | | (28,070) | | | 316,401 | | | 260,199 | | | 56,202 | |
Other | 935 | | | | | | | | 1,527 | | | (592) | | | 2,393 | | | 2,919 | | | (526) | |
Total operating expenses | 106,004 | | | | | | | | 134,666 | | | (28,662) | | | 318,794 | | | 263,118 | | | 55,676 | |
Net investment (loss) income | (105,999) | | | | | | | | 622,333 | | | (728,332) | | | (26,517) | | | 1,252,002 | | | (1,278,519) | |
Net change in unrealized (depreciation) appreciation on investment | (14,064,801) | | | | | | | | 3,572,487 | | | (17,637,288) | | | (15,336,047) | | | 4,591,009 | | | (19,927,056) | |
Net (decrease) increase in members’ capital resulting from operations | $ | (14,170,800) | | | | | | | | $ | 4,194,820 | | | $ | (18,365,620) | | | $ | (15,362,564) | | | $ | 5,843,011 | | | $ | (21,205,575) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Investment income | | | | | | | | | | | |
Dividend income | $ | 4,448,792 |
| | $ | 9,824,336 |
| | $ | (5,375,544 | ) | | $ | 15,703,171 |
| | $ | 25,042,346 |
| | $ | (9,339,175 | ) |
Other operating income | 111 |
| | 614 |
| | (503 | ) | | 1,064 |
| | 8,571 |
| | (7,507 | ) |
Total investment income | 4,448,903 |
| | 9,824,950 |
| | (5,376,047 | ) | | 15,704,235 |
| | 25,050,917 |
| | (9,346,682 | ) |
Operating expenses | | | | | | | | | | | |
Professional fees | 104,100 |
| | 269,635 |
| | (165,535 | ) | | 431,465 |
| | 549,211 |
| | (117,746 | ) |
Merger transaction fees | — |
| | — |
| | — |
| | — |
| | 388,692 |
| | (388,692 | ) |
Other | 3,448 |
| | (38,342 | ) | | 41,790 |
| | 35,761 |
| | 52,954 |
| | (17,193 | ) |
Total operating expenses | 107,548 |
| | 231,293 |
| | (123,745 | ) | | 467,226 |
| | 990,857 |
| | (523,631 | ) |
Net investment income | 4,341,355 |
| | 9,593,657 |
| | (5,252,302 | ) | | 15,237,009 |
| | 24,060,060 |
| | (8,823,051 | ) |
Net change in unrealized depreciation on investment | 428,032 |
| | (730,673 | ) | | 1,158,705 |
| | 920,026 |
| | (1,400,694 | ) | | 2,320,720 |
|
Net increase in members’ capital resulting from operations | $ | 4,769,387 |
| | $ | 8,862,984 |
| | $ | (4,093,597 | ) | | $ | 16,157,035 |
| | $ | 22,659,366 |
| | $ | (6,502,331 | ) |
Dividend Income
Dividend income associated with our indirect ownership of Terra Property Trust primarily represents our proportionate share of Terra Property Trust’s net income or loss for the period. Any excess of distributions received from Terra Property Trust over its net income is recorded as return of capital. As of both June 30, 2023 and December 31, 2022, through Terra JV we indirectly beneficially owned 61.3% of the outstanding shares of common stock of Terra Property Trust.
For the three months ended SeptemberJune 30, 20172023 and 2016,2022, we received distributions of $13.1$2.8 million and $9.6$2.9 million, respectively, or $0.88$0.19 and $0.65$0.19 per share, respectively, from Terra Property Trust, of which $4.4 millionnone and $9.6$0.8 million was recorded as dividend income respectively, representing Terra Property Trust’s net income for the periods presented, and $8.7$2.8 million and none$2.1 million was recorded as return of capital, respectively. The $5.4 million decrease in Terra Property Trust’s net income was primarily due to (i) $3.6 million of prepayment fee income received from one loan during
For the threesix months ended SeptemberJune 30, 2016 as the borrower repaid the loan two years before the scheduled maturity date; (ii) a decrease in net interest income of 0.8 million as a result of lower weighted average principal balance2023 and lower weighted average coupon rate; and (iii) operating income of $0.5 million for three months ended September 30, 2016 from Terra Park Green Members, LLC (“Terra Park Green”), a wholly-owned subsidiary of Terra Property Trust that owned two commercial office building parks and the related operations, which was subsequently sold in November 2016. The $8.7 million increase in return of capital was primarily due to the decrease in Terra Property Trust’s net income as well as additional cash needed to redeem Terra Fund 3’s Termination Units.
For the nine months ended September 30, 2017 and 2016,2022, we received distributions of $29.7$5.6 million and $25.4$5.9 million, respectively, or $1.99$0.38 and $1.71$0.39 per share, respectively, from Terra Property Trust, of which $15.7$0.3 million and $25.0$1.5 million was recorded as dividend income respectively, representing Terra Property Trust’s net income for the periods presented, and $14.0$5.4 million and $0.3$4.3 million was recorded as return of capital, respectively.
For the three months ended June 30, 2023, Terra Property Trust recorded a net loss of $19.2 million, compared to net income of $1.3 million recorded in the same period in 2022. The $9.3 million decreasechange in Terra Property Trust’s net income (loss) was primarily due to (i) $3.6an increase in real estate operating loss of $13.7 million as a result of an impairment charge of $11.8 million recorded in the second quarter of 2023 to write down the carrying value of the office building to its estimated fair value; an
increase in allowance for credit losses of $4.6 million as a result of a decline in the fair value of the collateral of the loans; an increase in equity loss of $3.1 million from RESOF and the joint ventures due to adjustments made to equity income as a result of the dilution in Terra Property Trust’s ownership interest in RESOF as new investors were admitted in 2022 and 2023 and an increase in depreciation and amortization expense, and interest expense recorded by the joint ventures; and prepayment fee income received from one loan duringof $1.2 million recognized in 2022 (there was no such prepayment fee income for the three months ended SeptemberJune 30, 2016 as the borrower repaid the loan two years before the scheduled maturity date; (ii) a decrease2023), partially offset by an increase in net interest income of 3.7$2.4 million as a result of loweran increase in the weighted average principal balance lowerof net loans and an increase in the weighted average coupon rate andon net loans due to new loans Terra Property Trust entered into as well as loans acquired in connection with the suspensionBDC Merger.
For the six months ended June 30, 2023, Terra Property Trust recorded a net loss of $1.2$18.7 million, ofcompared to net interest income accrual on two loans as discussed in “Annualized Net Effective Yield” below; and (iii) operating income of $1.5 million for nine months ended September 30, 2016 from Terra Park Green which was subsequently sold$0.5 recorded in November 2016.the same period in 2022. The $13.7 million increase in return of capital was primarily due to the decreasechange in Terra Property Trust’s net income (loss) was primarily due to an increase in real estate operating loss of $13.0 million as a result of an impairment charge of $11.8 million recorded in the second quarter of 2023 to write down the carrying value of the office building to its estimated fair value; an increase in allowance for credit losses of $3.7 million as a result of a decline in the fair value of the collateral of the loans; an increase in equity loss of $5.0 million from RESOF and the joint ventures due to adjustments made to equity income as a result of the dilution in Terra Property Trust’s ownership interest in RESOF as new investors were admitted in 2022 and 2023 and an increase in depreciation and amortization expense, and interest expense recorded by the joint ventures; an increase of $1.4 million in fees paid and operating expenses reimbursed to Terra REIT Advisors, as a result of an increase in total assets under management; and prepayment fee income of $1.2 million recognized in 2022 (there was no such prepayment fee income for the three months ended June 30, 2023), partially offset by an increase in net interest income of $5.3 million as a result of an increase in the weighted average principal balance of net loans and an increase in the weighted average coupon rate on net loans due to new loans Terra Property Trust entered into as well as additional cash needed to redeem Terra Fund 3’s Termination Units.loans acquired in connection with the BDC Merger.
Net Loan Portfolio
In assessing the performance of Terra Property Trust’s loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements and mortgagesecured borrowing, term loan payable, revolving line of credit and repurchase agreement payable.
The following tables presenttable presents a reconciliation of Terra Property Trust’s loan portfolio on a weighted average basis from a gross basis to a net basis for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2023 | | 2022 |
| | Weighted Average Principal Amount (1) | | Weighted Average Coupon Rate (2) | | Weighted Average Principal Amount (1) | | Weighted Average Coupon Rate (2) |
Total portfolio | | | | | | | | |
Gross loans | | $ | 606,761,243 | | | 12.4 | % | | $ | 557,341,571 | | | 8.4 | % |
Obligations under participation agreements and secured borrowing | | (13,459,586) | | 17.1 | % | | (85,476,509) | | 10.5 | % |
Repurchase agreements payable | | (147,054,763) | | | 7.0 | % | | (186,274,094) | | 3.5 | % |
Revolving line of credit | | (117,050,294) | | | 8.5 | % | | (61,522,134) | | | 4.0 | % |
Net loans (3) | | $ | 329,196,600 | | | 16.0 | % | | $ | 224,068,834 | | | 13.0 | % |
Senior loans | | | | | | | | |
Gross loans | | 481,108,382 | | 11.8 | % | | 417,597,220 | | 7.2 | % |
Obligations under participation agreements and secured borrowing | | — | | — | % | | (37,883,729) | | 8.1 | % |
Repurchase agreements payable | | (147,054,763) | | | 7.0 | % | | (186,274,094) | | 3.5 | % |
Revolving line of credit | | (117,050,294) | | | 8.5 | % | | (61,522,134) | | | 4.0 | % |
Net loans (3) | | $ | 217,003,325 | | | 16.8 | % | | $ | 131,917,263 | | | 13.5 | % |
Subordinated loans (4) | | | | | | | | |
Gross loans | | 125,652,861 | | 14.3 | % | | 139,744,351 | | 12.3 | % |
Obligations under participation agreements | | (13,459,586) | | 17.1 | % | | (47,592,780) | | 12.5 | % |
Net loans (3) | | $ | 112,193,275 | | | 14.0 | % | | $ | 92,151,571 | | | 12.2 | % |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 |
| | Weighted Average Principal Amount | | Weighted Average Coupon Rate | | Weighted Average Principal Amount | | Weighted Average Coupon Rate |
Gross loans | | $ | 314,920,884 |
| | 12.1% | | $ | 318,263,084 |
| | 12.5% |
Obligations under participation agreements | | (68,234,833 | ) | | 12.5% | | (24,792,000 | ) | | 13.2% |
Mortgage loan payable | | (34,000,000 | ) | | 5.7% | | (34,000,000 | ) | | 5.8% |
Net loans | | $ | 212,686,051 |
| | 13.0% (1) | | $ | 259,471,084 |
| | 13.3% (1) |
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
| | Weighted Average Principal Amount | | Weighted Average Coupon Rate | | Weighted Average Principal Amount | | Weighted Average Coupon Rate |
Gross loans | | $ | 338,889,294 |
| | 12.0% | | $ | 309,970,724 |
| | 12.8% |
Obligations under participation agreements | | (52,385,371 | ) | | 12.4% | | (22,848,289 | ) | | 13.4% |
Mortgage loan payable | | (36,928,955 | ) | | 5.7% | | (30,435,055 | ) | | 5.8% |
Net loans | | $ | 249,574,968 |
| | 12.8% (1) | | $ | 256,687,380 |
| | 13.6% (1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2023 | | 2022 |
| | Weighted Average Principal Amount (1) | | Weighted Average Coupon Rate (2) | | Weighted Average Principal Amount (1) | | Weighted Average Coupon Rate (2) |
Total portfolio | | | | | | | | |
Gross loans | | $ | 620,485,639 | | | 12.3 | % | | $ | 531,915,282 | | | 8.4 | % |
Obligations under participation agreements and secured borrowing | | (13,181,738) | | 17.1 | % | | (82,267,911) | | 10.5 | % |
Repurchase agreements payable | | (157,207,602) | | | 7.0 | % | | (144,128,510) | | | 3.5 | % |
Term loan payable | | — | | | — | % | | (20,836,327) | | | 5.3 | % |
Revolving line of credit | | (107,111,725) | | | 8.5 | % | | (53,252,643) | | | 5.0 | % |
Net loans (3) | | $ | 342,984,574 | | | 15.7 | % | | $ | 231,429,891 | | | 11.8 | % |
Senior loans | | | | | | | | |
Gross loans | | 489,904,811 | | 11.7 | % | | 394,099,125 | | 7.1 | % |
Obligations under participation agreements and secured borrowing | | — | | — | % | | (37,026,717) | | 8.1 | % |
Repurchase agreements payable | | (157,207,602) | | | 7.0 | % | | (144,128,510) | | 3.5 | % |
Term loan payable | | — | | | — | % | | (20,836,327) | | | 5.3 | % |
Revolving line of credit | | (107,111,725) | | | 8.5 | % | | (53,252,643) | | | 5.0 | % |
Net loans (3) | | $ | 225,585,484 | | | 16.5 | % | | $ | 138,854,928 | | | 11.7 | % |
Subordinated loans (4) | | | | | | | | |
Gross loans | | 130,580,828 | | 14.3 | % | | 137,816,157 | | 12.3 | % |
Obligations under participation agreements | | (13,181,738) | | 17.1 | % | | (45,241,194) | | 12.4 | % |
Net loans (3) | | $ | 117,399,090 | | | 14.0 | % | | $ | 92,574,963 | | | 12.3 | % |
_______________
| |
(1) | Represents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans less interest expense) divided by the weighted average principal amount of the net loans during the period. |
(1)Amount is calculated based on the number of days each loan is outstanding.
For(2)Amount is calculated based on the three and nine months ended September 30, 2017 as compared to the same periods in 2016, the decrease inunderlying principal amount of each loan.
(3)The weighted average coupon rate was due to an increase in investments in seniorrepresents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans which are typically larger principal-balanceless interest expense) divided by the weighted average principal amount of the net loans paying lower levels of interest reflecting the lower perceived risk due to their senior position in the borrower's capital structure as compared to investments in subordinated loans, as well as the new subordinated loans we originated and purchased during the current periods have coupon rates that are lower than those of the maturing subordinated loans.period.
(4)Subordinated loans include mezzanine loans, preferred equity investments and credit facilities.
Annualized Net Effective Yield
The following table presents a calculation of Terra Property Trust’s annualized net effective yield on its net loan portfolio for the periods presented:
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 | | Change |
Interest income | | $ | 9,598,478 |
| | $ | 9,245,815 |
| | $ | 352,663 |
|
Interest expense — obligations under participation agreements | | (2,001,349 | ) | | (839,996 | ) | | (1,161,353 | ) |
Interest expense — mortgage loan payable | | (625,477 | ) | | (503,466 | ) | | (122,011 | ) |
Net interest income | | $ | 6,971,652 |
| | $ | 7,902,353 |
| | $ | (930,701 | ) |
| | | | | | |
Weighted average carrying value of gross loans | | $ | 320,242,875 |
| | $ | 325,305,778 |
| | $ | (5,062,903 | ) |
Weighted average carrying value of obligations under participation agreements | | (69,032,326 | ) | | (25,292,536 | ) | | (43,739,790 | ) |
Weighted average carrying value of mortgage loan payable | | (33,921,185 | ) | | (33,736,918 | ) | | (184,267 | ) |
Weighted average carrying value of net loans | | $ | 217,289,364 |
| | $ | 266,276,324 |
| | $ | (48,986,960 | ) |
| | | | | | |
Annualized net effective yield (1) | | 12.7 | % | | 12.7 | % | | — | % |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 | | Change |
Senior loans | | | | | | |
Weighted average carrying value of net loans | | $ | 84,784,385 |
| | $ | 71,433,279 |
| | $ | 13,351,106 |
|
Annualized net effective yield (1) | | 11.4 | % | | 12.7 | % | | (1.3 | )% |
Subordinated loans | | | | | | |
Weighted average carrying value of net loans | | $ | 132,504,979 |
| | $ | 194,843,045 |
| | $ | (62,338,066 | ) |
Annualized net effective yield (1) | | 13.4 | % | | 12.6 | % | | 0.8 | % |
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change |
Interest income | | $ | 27,721,062 |
| | $ | 29,008,206 |
| | $ | (1,287,144 | ) |
Interest expense — obligations under participation agreements | | (4,712,165 | ) | | (2,321,418 | ) | | (2,390,747 | ) |
Interest expense — mortgage loan payable | | (2,021,006 | ) | | (1,174,968 | ) | | (846,038 | ) |
Net interest income | | $ | 20,987,891 |
| | $ | 25,511,820 |
| | $ | (4,523,929 | ) |
| | | | | | |
Weighted average carrying value of gross loans | | $ | 345,427,543 |
| | $ | 318,048,375 |
| | $ | 27,379,168 |
|
Weighted average carrying value of obligations under participation agreements | | (56,230,271 | ) | | (23,284,885 | ) | | (32,945,386 | ) |
Weighted average carrying value of mortgage loan payable | | (36,737,795 | ) | | (26,701,336 | ) | | (10,036,459 | ) |
Weighted average carrying value of net loans | | $ | 252,459,477 |
| | $ | 268,062,154 |
| | $ | (15,602,677 | ) |
| | | | | | |
Annualized net effective yield (1) | | 11.4 | % | | 12.8 | % | | (1.4 | )% |
| | | | | | |
Senior loans | | | | | | |
Weighted average carrying value of net loans | | $ | 104,279,060 |
| | $ | 61,575,436 |
| | $ | 42,703,624 |
|
Annualized net effective yield (1) | | 9.2 | % | | 13.0 | % | | (3.8 | )% |
Subordinated loans | | | | | | |
Weighted average carrying value of net loans | | $ | 148,180,417 |
| | $ | 206,486,718 |
| | $ | (58,306,301 | ) |
Annualized net effective yield (1) | | 12.8 | % | | 12.6 | % | | 0.2 | % |
_______________
| |
(1) | Represents the annualized net interest income divided by the weighted average carrying value of net loans during the period. We do not annualize one-time transaction fee income and expenses such as net origination fee income or expenses and net exit fee income or expenses. |
The following table presents the components of the annualized net effective yield on Terra Property Trust’s net loan portfolio:
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Net contractual interest income (1) | | 12.7 | % | | 13.3 | % | | (0.6 | )% | | 12.5 | % | | 13.5 | % | | (1.0 | )% |
Non-collection of interest income, net (2) | | — | % | | — | % | | — | % | | (0.5 | )% | | — | % | | (0.5 | )% |
Amortization of net purchase premium (3) | | (0.1 | )% | | (0.6 | )% | | 0.5 | % | | (0.5 | )% | | (0.7 | )% | | 0.2 | % |
Net transaction fee income (expense) | | 0.1 | % | | — | % | | 0.1 | % | | (0.1 | )% | | — | % | | (0.1 | )% |
Total | | 12.7 | % | | 12.7 | % | | — | % | | 11.4 | % | | 12.8 | % | | (1.4 | )% |
_______________
| |
(1) | The decrease was primarily due to a decrease in weighted average coupon rate (see “Net Loan Portfolio” above). |
| |
(2) | The increase was primarily due to a decrease in amortization of net purchase premium as a result of the majority of the net purchase premium recognized in connection with the Merger in 2016 became substantially amortized. |
| |
(3) | During the nine months ended September 30, 2017, Terra Property Trust did not receive interest income payment of $1.2 million, net of interest expense on obligations under participation agreements, on a senior loan and a subordinated loan. In July 2017, the principal balances of these two loans were repaid in full. |
Professional Fees
For the three and nine months ended September 30, 2017 as compared to the same periods in 2016, professional fees decreased by $0.2 million and $0.1 million, respectively, primarily due to professional fees incurred in 2016 related to the additional SEC financial statement audit and reporting requirements in relation to the initial filing of our registration statement on Form 10.
Merger Transaction Fees
Merger transaction fees represent fees incurred in connection with the Merger. Terra Capital Markets, LLC, an affiliate of our Manager, served as the dealer manager for the consent solicitation and was paid a voting advisory fee of $750 per initial unit sold to members of the Terra Funds and a dealer manager fee of 0.5% of the aggregate offering price of the units originally issued by the Terra Funds. Most of these fees were re-allowed to participating dealers. The Terra Funds also incurred costs for legal, accounting, and other professional services in connection with the consent solicitation.
For the three and nine months ended September 30, 2017 and the three months ended September 30, 2016, there were no merger transaction fees recorded. For the nine months ended September 30, 2016, we recorded additional merger transaction fees of $0.4 million.
Net Change in Unrealized Depreciation(Depreciation) Appreciation on Investment
Net change in unrealized appreciation or depreciation on investment reflects the change in Terra Property Trust’s net loan portfoliofair value during the reporting period, including any reversal of previously recorded unrealized gains or losses, when gains or losses are realized.period. There may be fluctuations in unrealized gains and losses of the underlying portfolio as loans within the portfolio approach their respective maturity dates and fair value premiums are amortized or discounts are accreted to each loan’s respective collectible value.dates. In addition, the unrealized gains or losses in the portfolio may fluctuate over time due to changes in the market yields or carrying value adjustments such as the amortization or accretion of premiums, discounts, origination fees, and exit fees.yields.
2017 — For the three and ninesix months ended SeptemberJune 30, 2017,2023, we recorded a decrease innet change on unrealized depreciation on investment of $0.4$14.1 million and $0.9$15.3 million, respectively, primarily due to a decrease in the amortizationfair value of Terra Property Trust’s office building and a decrease in the fair value of a substantial portion ofloan in the net purchase premiums recognized in connection with the Merger in 2016, which reduced the carrying value of the loans. Terra Property Trust’s loan portfolio.
2016 — For the three and ninesix months ended SeptemberJune 30, 2016,2022, we recorded an increase in net change in unrealized depreciationappreciation on investment of $0.7$3.6 million and $1.4$4.6 million, respectively, primarily due to amortizationa decrease in the trading price of fair value premiums on loans within the portfolio as they neared their respective maturity dates, which reducedTerra Property Trust’s unsecured notes payable, partially offset by a decrease in the fair value of Terra Property Trust’s investments resulting from increases in the loans.underlying discount rates due to the macro-economic conditions.
Net (Decrease) Increase in Members’ Capital Resulting from Operations
For the three and ninesix months ended SeptemberJune 30, 20172023 net decrease in members’ capital was $14.2 million and $15.4 million, respectively, as compared to the same periods in 2016, the resultinga net increase in members’ capital results from operations decreased by $4.1of $4.2 million and $6.5$5.8 million, respectively.respectively, for the same periods in 2022.
Financial Condition, Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including funding and maintaining our assets and operations, making distributions to our members and other general business needs. Our primary cash requirements for the next twelve months are making the discretionary recurring distributions to our members and, to a lesser extent, redeeming Terra Fund 4 Termination Units for approximately $2.1 million. “Termination Units” refer to the membership interest in our fund that were issued to members of Terra Funds 1 through 4 who chose to enter the liquidation phase of their investments.members. We expect to use cash distributions received from Terra Property Trust to meet such cash requirements. Distributions are made at the discretion of Terra Property Trust’s expected loanboard of directors and liability maturities during the next twelve months include the sole mortgage loan payable with a principal amountwill depend upon, among other things, its actual results of $34.0 million which matures in March 2018, assuming no extensions,operations and obligations under participation agreements totaling $43.6 million. The first mortgage loan held by Terra Property Trust has a coupon rate of LIBOR plus 8.5%, the borrowings under the mortgage loan incurred to finance the asset bear interest at an annual rate of LIBOR plus 5.25%, and the weighted average net interest spreadliquidity.
between the yield on the first mortgage loan and the cost of funds under the mortgage loan payable was 2.26% for the nine months ended September 30, 2017. Terra Property Trust expects to use proceeds from the repayment of the corresponding investments to repay the mortgage loan payable and participation obligations. Additionally, Terra Property Trust expects to fund approximately $27.4$35.4 million of the unfunded commitments to borrowers during the next twelve months. Terra Property Trust expects to maintain sufficient cash on hand to fund such commitmentcommitments through matching these commitments with principal repayments on outstanding loans.loans or draw downs on its credit facilities. Additionally, Terra Property Trust had $27.6 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of Term SOFR plus 3.85% with a Term SOFR floor of 2.23%, that is collateralized by an office building. The mortgage loan payable matured on May 31, 2023. Terra Property Trust has sought to convey its interest in the office building and ground lease in lieu of foreclosure. In connection with the BDC Merger, Terra Property Trust assumed a $25.0 million term loan. This term loan bore interest at an annual rate of 5.625% and was to mature on July 1, 2023. In June 2023, the term loan was amended to extend the maturity date to March 31, 2024 and to increase the rate to a floating rate based on SOFR plus 7.375% with a SOFR floor of 5.0%. In connection with the amendment, total commitment on the term loan was reduced to $15.0 million. Terra Property Trust expects to either maintain sufficient liquidity to repay the facility or refinance the facility. Terra Property Trust’s line of credit with outstanding principal balance of $105.4 million matures on March 12, 2024 and its GS repurchase agreement with outstanding principal balance of $85.4 million matures on February 18, 2024 (see Summary of Financing below). Terra Property Trust expects to extend the maturity of both facilities by another year.
Summary of Financing
The table below summarizes Terra Property Trust’s debt financing as of June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Type of Financing | | Maximum Amount Available | | Outstanding Balance | | Amount Remaining Available | | Interest Rate | | Maturity Date |
Fixed Rate: | | | | | | | | | | |
Senior unsecured notes | | N/A | | $ | 85,125,000 | | | N/A | | 6.00% | | 6/30/2026 |
Senior unsecured notes | | N/A | | 38,375,000 | | | N/A | | 7.00% | | 3/31/2026 |
Mortgage loan payable | | N/A | | 40,250,000 | | | N/A | | 6.254% | | 6/6/2028 |
| | | | $ | 163,750,000 | | | | | | | |
Variable Rate: | | | | | | | | | | |
Mortgage loan payable | | N/A | | $ | 27,603,118 | | | N/A | | Term SOFR plus 3.85% with a Term SOFR floor of 2.23% | | 5/31/2023 |
Mortgage loan payable | | N/A | | 32,368,367 | | | N/A | | Term SOFR +3.5% (Term SOFR Floor of 3.75%) | | 4/9/2027 |
Term loan | | N/A | | 15,000,000 | | | N/A | | SOFR plus 7.375% with a SOFR floor of 5.0% | | 3/31/2024 |
Line of credit | | $ | 125,000,000 | | | 105,448,019 | | | $ | 19,551,981 | | | Term SOFR plus 3.35% with a combined floor of 6.00% | | 3/12/2024 |
UBS repurchase agreement | | 195,000,000 | | | 37,450,000 | | | 157,550,000 | | | Term SOFR plus a spread ranging from 1.60% to 2.25% | | 11/7/2024 |
GS repurchase agreement | | 200,000,000 | | | 85,382,682 | | | 114,617,318 | | | Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 1.75% to 3.00% | | 2/18/2024 |
| | $ | 520,000,000 | | | $ | 303,252,186 | | | $ | 291,719,299 | | | | | |
Cash Flows Provided by Operating Activities
20172023 — For the ninesix months ended SeptemberJune 30, 2017,2023, cash flows provided by operating activities were $28.5$5.4 million, primarily due to $29.7$5.6 million of dividends received from Terra Property Trust,JV, of which $14.0$5.4 million was recorded as a return of capital.
20162022— For the ninesix months ended SeptemberJune 30, 2016,2022, cash flows provided by operating activities were $2.7$5.7 million, primarily due to $25.4$5.9 million of dividends received from Terra Property Trust,JV, of which $0.3$4.3 million was recorded as a return of capital, partially offset by (i) $10.0 million used to purchase shares of common stock of Terra Property Trust; (ii) the payment of $5.3 million related to merger transaction fees that were accrued; (iii) $5.0 million of cash transferred to Terra Property Trust in connection with the Merger; (iv) $0.7 million reimbursed to the Manager for merger transaction fees paid; and (v) a $0.6 million of state and local tax paid in connection with the filing of the 2015 tax returns.capital.
Cash Flows used in Financing Activities
20172023 — For the ninesix months ended SeptemberJune 30, 2017,2023, cash flows used in financing activities was $28.4were $5.5 million, consisting ofrelated to distributions paid to members of $23.1 million and cash of $5.3 million used to primarily redeem Terra Fund 3 Termination Units.$5.5 million.
20162022— For the ninesix months ended SeptemberJune 30, 2016,2022, cash flows used in financing activities was $4.1were $6.2 million, primarily duerelated to distributions paid to members of $22.9$5.8 million and cash usedpayment for capital redemptions of $10.2 million, of which $6.8 million was used to redeem Terra Fund 1 Termination Units and $3.4 million was paid to other redeeming members. These cash outflows were partially offset by $25.6 million of proceeds from capital contributions from the offering concurrent with the Merger, net of selling commissions and dealer manager fees, and cash of $3.5 million acquired in the Merger.$0.4 million.
Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in conformity with United States generally accepted accounting principles, (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our expected operating plans, we will describe additional critical accounting policies in the notes to our future consolidated financial statements in addition to those discussed below.
Allowance for Loan Losses
Terra Property Trust’s investments are typically collateralized by either the sponsors’ equity interest in real estate properties or real estate properties. As a result, Terra Property Trust regularly evaluates the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. The Manager employs an asset management approach and monitors the portfolio of investments, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value, debt-service coverage ratio and the debt yield, supplemented by occasional site visits to evaluate the assets. The Manager also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments. The information gathered by way of the asset management process is sufficient in assessing collectability.
Using the information gathered by way of the asset management process, the Manager performs a quarterly, or more frequently as needed, review of Terra Property Trust’s portfolio of investments. In conjunction with this review, the Manager assesses the risk factors of each investment and assigns each investment a risk rating. Based on a 5-point scale, Terra Property Trust’s investments are rated “1” through “5”, from less risk to greater risk. For investments with a risk rating of “4” and “5”, the Manager assesses each investment for collectability. This includes the ability to realize the full amount of principal and interest in the event that Terra Property Trust needs to exercise its rights under the terms of the agreement and/or any other contemplated workout or modification. To the extent the net realizable amount analysis indicates the principal amount of the recorded investment as of the reporting date is in jeopardy, an appropriate allowance for loan losses will be recorded. Additionally, Terra Property Trust records a general allowance for loan losses equal to 1.5% of the aggregate principal amount of loans rated as a “4” and 5% of the aggregate principal amount of loans rated as a “5”. Loans on which a specific allowance is recorded are removed from the pool of loans on which a general allowance is calculated.
Fair Value Measurements
The fair value of financial instrumentsour investment is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Our financial assets and liabilities wereinvestment was recorded at fair value on our consolidated statements of assets and liabilities and were categorized based on the inputs valuation techniques as follows:
•Level 1. Quoted prices for identical assets or liabilities in an active market.
•Level 2. Financial assets and liabilities whose values are based on the following:
◦Quoted prices for similar assets or liabilities in active markets.
◦Quoted prices for identical or similar assets or liabilities in non-active markets.
◦Pricing models whose inputs are observable for substantially the full term of the asset or liability.
◦Pricing models whose inputs are derived principally from or corroborated by observable market data for
substantially full term of the asset or liability.
•Level 3. Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
Unobservable inputs reflect our assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available.
Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, we will continue to refine our valuation methodologies. The methods used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods will be appropriate and
consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.
Income Taxes
Management Agreement with Terra REIT Advisors
No provision for U.S. federal and state income taxes has been made in the accompanying consolidated financial statements, as individual members are responsible for their proportionate share of our taxable income. We, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the three and nine months ended September 30, 2017 and 2016, none of our income was subject to the NYC UBT.
We did not have any uncertain tax positions that met the recognition or measurement criteria of Accounting Standards Codification 740-10-25, Income Taxes, nor did we have any unrecognized tax benefits as of the periods presented herein. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. For the three and nine months ended September 30, 2017 and 2016, we did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. Our inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.
Contractual Obligations
Our wholly-owned subsidiary, Terra Property Trust currently pays the following fees to the ManagerTerra REIT Advisors pursuant to a management agreement:
Origination and Extension Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund, acquire or structure real estate-related loans,investments, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, the ManagerTerra REIT Advisors also receives an originationextension fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension. The origination fee is offset by the amount of any origination fee received by Terra Property Trust from borrowers.
Asset Management Fee. A monthly asset management fee at an annual rate equal to 1.0% of the aggregate funds under management, which includes the loan origination amount or aggregate gross acquisition cost, as applicable, for each real estate-related loan and cash held by Terra Property Trust.
Asset Servicing Fee. A monthly asset servicing fee at an annual rate equal to 0.25% of the aggregate gross origination price or aggregate gross acquisition price for each real estate related loan then held by Terra Property Trust (inclusive of closing costs and expenses).
Disposition Fee. A disposition fee in the amount of 1.0% of the gross sale price received by usTerra Property Trust from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and (ii) the amount of the fee paid by the borrower in connection with such transaction. If Terra Property Trust takes ownership of a property as a result of a workout or foreclosure of a loan, Terra Property Trust will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price.
Transaction Breakup Fee. In the event that Terra Property Trust receives any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any loan or disposition transaction, the ManagerTerra REIT Advisors will be entitled to receive one-half of such amounts, in addition to the reimbursement of all out-of-pocket fees and expenses incurred by the ManagerTerra REIT Advisors with respect to its evaluation and pursuit of such transactions.
In addition to the fees described above, Terra Property Trust reimburses the ManagerTerra REIT Advisors for operating expenses incurred in connection with services provided to the operations of Terra Property Trust, including Terra Property Trust’s allocable share of the Manager’sTerra REIT Advisors’s overhead, such as rent, employee costs, utilities, and technology costs.
The following table presents a summary of fees paid and costs reimbursed to Terra REIT Advisors in the Manageraggregate in connection with providing services to Terra Property Trust:
| | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | 2023 | | 2022 | | 2023 | | 2022 | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
Origination fee expense (1) | | $ | 624,255 |
| | $ | 734,706 |
| | $ | 2,381,562 |
| | $ | 2,396,149 |
| |
Origination and extension fee expense (1)(2) | | Origination and extension fee expense (1)(2) | | $ | 343,159 | | | $ | 381,947 | | | $ | 814,607 | | | $ | 1,068,312 | | |
Asset management fee | | 785,748 |
| | 948,372 |
| | 2,397,595 |
| | 2,482,315 |
| Asset management fee | | 2,105,049 | | | 1,640,628 | | | 4,102,476 | | | 3,128,723 | | |
Asset servicing fee | | 152,047 |
| | 227,101 |
| | 529,535 |
| | 602,662 |
| Asset servicing fee | | 496,374 | | | 395,718 | | | 966,899 | | | 745,047 | | |
Operating expenses reimbursed to Manager | | 725,197 |
| | 838,287 |
| | 2,425,699 |
| | 2,516,849 |
| |
Disposition fee (2) | | 197,614 |
| | 44,879 |
| | 798,333 |
| | 451,980 |
| |
Operating expenses reimbursed to Terra REIT Advisors | | Operating expenses reimbursed to Terra REIT Advisors | | 2,120,029 | | | 2,140,635 | | | 4,297,033 | | | 4,069,198 | | |
Disposition fee (3) | | Disposition fee (3) | | 917,750 | | | 479,500 | | | 1,208,563 | | | 479,500 | | |
Total | | $ | 2,484,861 |
| | $ | 2,793,345 |
| | $ | 8,532,724 |
| | $ | 8,449,955 |
| Total | | $ | 5,982,361 | | | $ | 5,038,428 | | | $ | 11,389,578 | | | $ | 9,490,780 | | |
_______________
| |
(1) | (1)Origination and extension fee expense is generally offset with origination and extension fee income. Any excess is deferred and amortized to interest income over the term of the investment. |
| |
(2) | Disposition fee is generally offset with exit fee income on the consolidated statements of operations. Any excess is deferred |
and amortized to interest income over the term of the investment.loan.
Off-Balance Sheet Arrangements
Other than contractual commitments and other legal contingencies incurred(2)Amount for the six months ended June 30, 2023 excluded $0.5 million of origination fees paid to the Terra REIT Advisors in connection with the normal course of our business, we do not have any off-balance sheet financings or liabilities.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The core principleacquisition of the revenue model is that an entity recognizes revenuethree industrial buildings in 2023. Amount for the six months ended June 30, 2022 excluded $0.2 million, of origination fees paid to depict the transfer of promised goods or services to customersTerra REIT Advisors in connection with its equity investment in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. We will adopt this standard on January 1, 2018 using the cumulative effect transition method. We are evaluating the impact of ASU 2014-09 but do not currently believe that the adoption of ASU 2014-09 will have a material impact on our consolidated financial statements and disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for us beginning on January 1, 2018. We are currently evaluating the impact these changes will have on our consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would beunconsolidated investment. These origination fees were capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new standard also replaces existing sale-leaseback guidance with a new model applicable to both lessees and lessors. Additionally, the new standard requires extensive quantitative and qualitative disclosures. ASU 2016-02 is effective for U.S. GAAP public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application will be permitted for all entities. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. This ASU is not expected to have any impact on our consolidated financial statements and disclosures as we do not have any lease arrangements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a Consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The guidance requires application using a retrospective transition method. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements and disclosure.
In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X was August 1, 2017. We adopted the amendments to Regulation S-X on August 1, 2017. The adoption did not have a material impact on our consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a “set,” that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the faircarrying value of the gross assets acquired (or disposed of)unconsolidated investment as a transaction cost.
(3)Disposition fee is concentratedgenerally offset with exit fee income and included in a single identifiable asset or a groupinterest income on the consolidated statements of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact these changes will have on our consolidated financial statements and disclosures.operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We may be subject to financial market risks, including changes in interest rates. To the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
As of SeptemberJune 30, 2017,2023, Terra Property Trust had one investmenttwo investments with aan aggregate principal balance of approximately $53.0$16.6 million, net of obligations under participation agreements, that providesprovide for interest income indexedat an annual rate of LIBOR plus a spread, six of which are subject to LIBOR, with a LIBOR floorfloor. A decrease of 0.5%.100 basis points in LIBOR would decrease Terra Property Trust’s annual interest income, net of interest expense on participation agreements, by approximately $0.2 million, and an increase of 100 basis points in LIBOR would increase Terra Property Trust’s annual interest income, net of interest expense on participation agreements, by approximately $0.2 million. Additionally, Terra Property Trust had approximately $34.016 investments with an aggregate principal balance of $458.6 million that provide for interest income at an annual rate of SOFR or Term SOFR plus a spread, 15 of which were subject to a SOFR or Term SOFR floor. A decrease of 100 basis points in SOFR or Term SOFR would decrease Terra Property Trust’s annual interest income by $4.9 million, and an increase of 100 basis points would increase Terra Property Trust’s annual interest income by $5.0 million.
Additionally, as of June 30, 2023, Terra Property Trust had $27.6 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of Term SOFR plus a spread that is collateralized by an office building; $32.4 million of borrowings outstanding under another mortgage loan payable that bear interest an annual rate of Term SOFR plus a spread that is collateralized by three industrial buildings; a revolving line of credit with an outstanding balance of $105.4 million that bears interest at an annual rate of Term SOFR plus a spread that is collateralized by $165.6 million of first mortgages; a repurchase agreement with an outstanding balance of $37.5 million that bears interest at an annual rate of LIBOR or Term SOFR, as applicable, plus 5.25%a spread that is collateralized by $51.1 million of first mortgages; another repurchase agreement with an outstanding balance of $85.4 million that bears interest at an annual rate of Term SOFR plus a spread that is collateralized by $120.1 million of first mortgages; and a $15.0 million of term loan that bears interest at an annual rate of SOFR plus a spread of 7.375% with a SOFR floor of 5.0%. A decrease of 1%100 basis points in LIBOR and Term SOFR would decrease ourTerra Property Trust’s annual net interest expense by approximately $0.03$2.9 million, and an increase of 1%100 basis points in LIBOR and Term SOFR would increase our annual net interest incomeexpense by approximately $0.2$3.0 million.
In July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, IBA, announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, which has subsequently been delayed to June 30, 2023. The Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions convened by the U.S. Federal Reserve, has recommended SOFR as a more robust reference rate alternative to U.S. dollar LIBOR. SOFR is calculated based on overnight transactions under repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. As such, the future of LIBOR at this time is uncertain.
Potential changes, or uncertainty related to such potential changes, may adversely affect the market for LIBOR-based loans, including Terra Property Trust’s portfolio of LIBOR-indexed, floating-rate loans, or the cost of its borrowings. In addition, changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based loans, including the value of the LIBOR-indexed, floating-rate loans in Terra Property Trust’s portfolio, or the cost of its borrowings. In the event LIBOR is unavailable, Terra Property Trust’s investment documents provide for a substitute index, on a basis generally consistent with market practice, intended to put us in substantially the same economic position as LIBOR.
We may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments, such as futures, options and forward contracts, subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in
interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. For the ninethree and six months ended SeptemberJune 30, 20172023 and 2016,2022, we did not engage in interest rate hedging activities.
In addition, we may have risks regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Fair Value Measurements.”Measurements” in this quarterly report on Form 10-Q.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including ourthe chief executive officer and chief financial officer of our Manager (performing functions equivalent to those a principal executive officer and principal financial officer of our company would perform if we had any officers), of the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2017.2023. Based on that evaluation, ourthe chief executive officer and chief financial officer of our Manager concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports.
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter, there was no change in our internal controls over financial reporting, as defined under
Rule 13a-15(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Neither we, Terra Property Trust nor Terra Income Advisors is currently subject to any material legal proceedings, nor, to our knowledge, are material legal proceedings threatened against us, Terra Property Trust or Terra Income Advisors.
From time to time, we, Terra Property Trust, Terra JV and individuals employed by Terra Income Advisorsour Manager may be a party to certain legal proceedings in the ordinary course of business.business, including proceedings relating to the enforcement of Terra Property Trust’s rights under contracts with its portfolio companies. Additionally, as of June 30, 2023, Terra Property Trust owned a multi-tenant office building that is subject to a ground lease. The ground lease provides for a new base rent every 5 years based on the greater of the annual base rent for the prior lease year or 9% of the fair market value of the land. The next rent reset on the ground lease is scheduled for November 1, 2025. Terra Property Trust is currently litigating with the landlord with respect to the appropriate method for determining the fair value of the land for purposes of setting the ground rent – Terra Ocean Ave., LLC v. Ocean Avenue Santa Monica Realty LLC, Superior Court of California, Los Angeles County, Case No. 20STCV34217. Terra Property Trust believes this determination should be based on comparable sales, while the landlord insists that the rent under the ground lease itself is also relevant. Terra Property Trust’s position has prevailed in all three of the prior arbitrations to reset the ground rent. Terra Property Trust intends vigorously to pursue the litigation. While Terra Property Trust believes its arguments will likely prevail, the outcome of thesethe legal proceedingsproceeding cannot be predicted with certainty, we docertainty. If the landlord prevails, the future rent reset determinations could result in significantly higher ground rent, which would likely result in a significant diminution in the value of Terra Property Trust’s interest in the ground lease and the office building.
On July 7, 2023, Centennial Bank filed a complaint for breach of guaranty against Terra Property Trust in the United States District Court, Southern District of New York (SDNY). The complaint relates to a loan made by Centennial Bank to Terra Ocean Ave., LLC (“Terra Ocean”), and alleges that Centennial Bank allegedly made a mistake in July 2021, in demanding a prepayment of $11.3 million instead of $28.5 million with respect to the loan, and that Terra Property Trust, as guarantor in certain limited respects, must now pay the difference (i.e. $17.2 million) plus interest and attorneys’ fees and costs. Centennial Bank’s now alleges that its mistake in determining the prepayment amount was caused by the wrongful failure to disclose the then-current status of the Lease Litigation by Terra Ocean and/or Terra Property Trust. On July 24, 2023, Terra Property Trust, through counsel appeared in the action. Although the action is in its initial stages, Terra Property Trust is seeking a dismissal of the complaint at the pleading stage and, if not expectsuccessful, is prepared to vigorously defend itself through trial. Terra Property Trust believes the claim by Centennial Bank is without merit.
Also on July 17, 2023, Centennial Bank filed a complaint against Terra Ocean for: (i) Breach of Contract; (ii) Judicial Foreclosure and Deficiency Judgment; and (iii) Specific Performance and Appointment of Receiver in the Superior Court of the State of California, County of Los Angeles. Centennial Bank seeks to foreclose on the deed of trust encumbering the tenant’s interest in the above-mentioned multi-tenant office building and ground lease. In the complaint, Centennial Bank alleges that these proceedings will have a material effect upon our financial condition or resultsits loan to Terra Ocean is in default and the outstanding principal amount of operations.the loan is $27.6 million as of the filing of the complaint. Prior to Centennial Bank filing its complaints against Terra Property Trust and Terra Ocean, Terra Ocean sought to convey its interest in the ground lease in lieu of foreclosure. Terra Ocean is in the process of preparing an appropriate response to Centennial Bank’s claims in this action.
Item 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the amendment no. 2 to Form 10 filed on July 24, 2017.year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.None.
Item 6. Exhibits.
The following exhibits are filed with this report. Documents other than those designated as being filed herewith are incorporated herein by reference.
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Exhibit No. | | Description and Method of Filing |
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Exhibit No.2.1 | | Description and Method of Filing |
2.1 | | |
2.2 | | |
2.2 | | |
2.3 | | |
2.3 | | |
2.4 | | |
2.4 | | |
2.5 | | |
2.5 | | Contribution Agreement by and among Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, the registrant, and Terra Property Trust, Inc., dated January 1, 2016 (incorporated by reference to Exhibit 2.5 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017). |
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Exhibit No.2.6 | | Description and Method of Filing |
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2.6 | | Amendment No. 1 to the Contribution Agreement by and among Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, the registrant, and Terra Property Trust, Inc., dated December 31, 2016 (incorporated by reference to Exhibit 2.6 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017). |
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3.1 | | |
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Exhibit No. | | Description and Method of Filing |
2.7 | | |
2.8 | | Agreement and Plan of Merger, dated as of May 2, 2022, by and among Terra Property Trust, Inc., Terra Income Fund 6, Inc., Terra Merger Sub, LLC, Terra Income Advisors, LLC and Terra REIT Advisors, LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Terra Income Fund 6, Inc. with the SEC on May 5, 2022). |
3.1 | | |
31.1* | | |
31.1* | | |
31.2* | | |
31.2* | | |
32** | | |
32** | | |
101.INS | | |
101.INS** | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH**101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL**101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB**101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE**101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF**104 | | Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL Taxonomy Extension Definition Linkbase Documentdocument) |
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* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Quarterly Report on Form10-Qreport to be signed on its behalf by the undersigned in the capacities indicated* thereunto duly authorized.
Date: November 13, 2017
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| TERRA SECURED INCOME FUND 5, LLC |
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| By: | /s/ Bruce D. BatkinVikram S. Uppal |
| | Bruce D. BatkinVikram S. Uppal |
| | Chief Executive Officer and Chief Investment Officer |
| | (Principal Executive Officer) |
| | |
| By: | /s/ Gregory M. Pinkus |
| | Gregory M. Pinkus |
| | Chief Financial Officer and Chief Operating Officer, |
| | Treasurer and Secretary |
| | (Principal Financial and Accounting Officer) |
___________
* The registrant is a limited liability company managed by Terra Fund Advisors, LLC, its sole and managing member and the persons are signing in their respective capacities as officers of Terra Fund Advisors, LLC.