UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2023
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number: 000-55780
Terra Secured Income Fund 5, LLC
(Exact name of registrant as specified in its charter)
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Delaware | | 90-0967526 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
205 West 28th Street, 12th Floor
New York, New York 10001
(Address of principal executive offices) (Zip Code)
(212) 753-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Securities Exchange Act of 1934:
None
Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:
Units of Limited Liability Company Interests
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☑ | Smaller reporting company | ☑ |
| | Emerging growth company | ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of August 11, 2023, the registrant had 6,622.2 units of limited liability company interests outstanding. No market value has been computed based upon the fact that no active trading market had been established as of the date of this document.
TABLE OF CONTENTS
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PART I | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Terra Secured Income Fund 5, LLC
Statements of Financial Condition
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| | June 30, 2023 | | December 31, 2022 | |
| | (unaudited) | | | |
Assets | | | | | |
Equity investment in Terra JV, LLC at fair value (cost of $209,715,486 and $215,070,522, respectively) | | $ | 189,317,374 | | | $ | 210,008,457 | | |
Cash and cash equivalents | | 71,781 | | | 102,256 | | |
Other assets | | 20,821 | | | 40,434 | | |
Total assets | | $ | 189,409,976 | | | $ | 210,151,147 | | |
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Liabilities and Members’ Capital | | | | | |
Liabilities | | | | | |
Accounts payable and accrued expenses | | $ | 245,691 | | | $ | 161,088 | | |
Total liabilities | | 245,691 | | | 161,088 | | |
Commitments and contingencies (Note 5) | | | | | |
Members’ capital: | | | | | |
Managing member | | — | | | — | | |
Non-managing members | | 189,164,285 | | | 209,990,059 | | |
Total members’ capital | | 189,164,285 | | | 209,990,059 | | |
Total liabilities and members’ capital | | $ | 189,409,976 | | | $ | 210,151,147 | | |
Net asset value per unit | | $ | 28,565 | | | $ | 31,710 | | |
See notes to unaudited financial statements.
Terra Secured Income Fund 5, LLC
Statements of Operations
(Unaudited)
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Investment income | | | | | | | |
Dividend income | $ | — | | | $ | 756,984 | | | $ | 292,254 | | | $ | 1,515,094 | |
Other operating income | 5 | | | 15 | | | 23 | | | 26 | |
Total investment income | 5 | | | 756,999 | | | 292,277 | | | 1,515,120 | |
Operating expenses | | | | | | | |
Professional fees | 105,069 | | | 133,139 | | | 316,401 | | | 260,199 | |
Other | 935 | | | 1,527 | | | 2,393 | | | 2,919 | |
Total operating expenses | 106,004 | | | 134,666 | | | 318,794 | | | 263,118 | |
Net investment (loss) income | (105,999) | | | 622,333 | | | (26,517) | | | 1,252,002 | |
Net change in unrealized (depreciation) appreciation on investment | (14,064,801) | | | 3,572,487 | | | (15,336,047) | | | 4,591,009 | |
Net (decrease) increase in members’ capital resulting from operations | $ | (14,170,800) | | | $ | 4,194,820 | | | $ | (15,362,564) | | | $ | 5,843,011 | |
Per unit data: | | | | | | | |
Net investment (loss) income per unit | $ | (16) | | | $ | 94 | | | $ | (4) | | | $ | 189 | |
Net (decrease) increase in members’ capital resulting from operations per unit | $ | (2,140) | | | $ | 633 | | | $ | (2,320) | | | $ | 881 | |
Weighted average units outstanding | 6,622.2 | | | 6,626.2 | | | 6,622.2 | | | 6,630.9 | |
See notes to unaudited financial statements.
Terra Secured Income Fund 5, LLC
Statements of Changes in Members’ Capital
(Unaudited)
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| Managing Member | | Non-Managing Members | | Total |
Balance, January 1, 2023 | $ | — | | | $ | 209,990,059 | | | $ | 209,990,059 | |
Capital distributions | — | | | (2,731,607) | | | (2,731,607) | |
Decrease in members’ capital resulting from operations: | | | | | |
Net investment income | — | | | 79,482 | | | 79,482 | |
Net change in unrealized depreciation on investment | — | | | (1,271,246) | | | (1,271,246) | |
Net decrease in members’ capital resulting from operations | — | | | (1,191,764) | | | (1,191,764) | |
Balance, March 31, 2023 | — | | | 206,066,688 | | | 206,066,688 | |
Capital distributions | — | | | (2,731,603) | | | (2,731,603) | |
Increase in members’ capital resulting from operations: | | | | | |
Net investment loss | — | | | (105,999) | | | (105,999) | |
Net change in unrealized depreciation on investment | — | | | (14,064,801) | | | (14,064,801) | |
Net decrease in members’ capital resulting from operations | — | | | (14,170,800) | | | (14,170,800) | |
Balance, June 30, 2023 | $ | — | | | $ | 189,164,285 | | | $ | 189,164,285 | |
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| Managing Member | | Non-Managing Members | | Total |
Balance, January 1, 2022 | $ | — | | | $ | 218,076,577 | | | $ | 218,076,577 | |
Capital distributions | — | | | (2,979,044) | | | (2,979,044) | |
Increase in members’ capital resulting from operations: | | | | | |
Net investment income | — | | | 629,669 | | | 629,669 | |
Net change in unrealized appreciation on investment | — | | | 1,018,522 | | | 1,018,522 | |
Net increase in members’ capital resulting from operations | — | | | 1,648,191 | | | 1,648,191 | |
Balance, March 31, 2022 | — | | | 216,745,724 | | | 216,745,724 | |
Capital distributions | — | | | (2,813,249) | | | (2,813,249) | |
Capital redemptions | — | | | (400,728) | | | (400,728) | |
Increase in members’ capital resulting from operations: | | | | | |
Net investment income | — | | | 622,333 | | | 622,333 | |
Net change in unrealized appreciation on investment | — | | | 3,572,487 | | | 3,572,487 | |
Net increase in members’ capital resulting from operations | — | | | 4,194,820 | | | 4,194,820 | |
Balance, June 30, 2022 | $ | — | | | $ | 217,726,567 | | | $ | 217,726,567 | |
See notes to unaudited financial statements.
Terra Secured Income Fund 5, LLC
Statements of Cash Flows
(Unaudited)
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| Six Months Ended June 30, |
| 2023 | | 2022 |
Cash flows from operating activities: | | | |
Net (decrease) increase in members’ capital resulting from operations | $ | (15,362,564) | | | $ | 5,843,011 | |
Adjustments to reconcile net increase in members’ capital resulting from operations to net cash provided by operating activities: | | | |
Return of capital on investment | 5,355,036 | | | 4,340,218 | |
Net change in unrealized depreciation (appreciation) on investment | 15,336,047 | | | (4,591,009) | |
Changes in operating assets and liabilities: | | | |
Decrease in other assets | 19,613 | | | 15,000 | |
Increase in accounts payable and accrued expenses | 84,603 | | | 44,742 | |
Net cash provided by operating activities | 5,432,735 | | | 5,651,962 | |
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Cash flows from financing activities: | | | |
Distributions paid | (5,463,210) | | | (5,792,293) | |
Payment for capital redemptions | — | | | (400,728) | |
Net cash used in financing activities | (5,463,210) | | | (6,193,021) | |
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Net decrease in cash and cash equivalents | (30,475) | | | (541,059) | |
Cash and cash equivalents at beginning of period | 102,256 | | | 836,052 | |
Cash and cash equivalents at end of period | $ | 71,781 | | | $ | 294,993 | |
See notes to unaudited financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment
June 30, 2023 (Unaudited)and December 31, 2022
Terra Secured Income Fund 5, LLC (the “Company”) invested substantially all of its equity capital in the purchase of shares of common stock of Terra Property Trust, Inc. (“Terra Property Trust”), an affiliate, through its parent, Terra JV, LLC (“Terra JV”). As of both June 30, 2023 and December 31, 2022, Terra JV held 70.0% of the issued and outstanding shares of Terra Property Trust’s common stock, and the Company and Terra Secured Income Fund 7, LLC (“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 (Note 4). Accordingly, 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 through Terra JV. Additionally, as of both June 30, 2023 and December 31, 2022, Terra JV was jointly-controlled by the Company and Terra Fund 7.
The following table presents a summary of the Company’s investment as of June 30, 2023 and December 31, 2022:
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| | | | Percentage Interest | | June 30, 2023 | | December 31, 2022 |
Investment | | Date Acquired | | | Cost | | Fair Value | | % of Members’ Capital | | Cost | | Fair Value | | % of Members’ Capital |
Terra JV, LLC | | 3/2/2020 | | 87.6 | % | | $ | 209,715,486 | | | $ | 189,317,374 | | | 100.1 | % | | $ | 215,070,522 | | | $ | 210,008,457 | | | 100.0 | % |
The following table presents a schedule of loans held for investment by Terra Property Trust at 100% and the Company’s pro-rata share of the fair value at June 30, 2023:
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Portfolio Company | Collateral Location | Property Type | Coupon Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity Date | Principal Amount | Amortized Cost | Fair Value (1) | Pro Rata Fair Value (2) | % (3) |
Loans held for investment: | | | | | | | | | | | | |
Mezzanine loans: | | | | | | | | | | | | |
150 Blackstone River Road, LLC | US - MA | Industrial | 8.5 | % | 8.5 | % | — | % | 9/21/2017 | 9/6/2027 | $ | 7,000,000 | | $ | 7,000,000 | | $ | 6,557,811 | | $ | 4,019,938 | | 2.1 | % |
610 Walnut Investors LLC (4)(5) | US - CA | Office | Term SOFR + 12.0% (2.0% Floor) | 17.1 | % | 1.0 | % | 8/30/2022 | 9/7/2024 | 20,244,654 | | 20,401,547 | | 20,407,825 | | 12,509,997 | | 6.6 | % |
Dwight Mezz II, LLC | US - CA | Student housing | 11.0 | % | 11.0 | % | — | % | 5/11/2017 | 5/6/2027 | 3,000,000 | | 2,925,837 | | 2,891,786 | | 1,772,665 | | 0.9 | % |
UNJ Sole Member, LLC (6) | US - CA | Mixed-use | Term SOFR + 10.15% (4.85% Floor) | 15.3 | % | 1.0 | % | 11/24/2021 | 6/1/2027 | 7,444,357 | | 7,485,029 | | 7,468,372 | | 4,578,112 | | 2.4 | % |
| | | | | | | | 37,689,011 | | 37,812,413 | | 37,325,794 | | 22,880,712 | | 12.0 | % |
Preferred equity investments: | | | | | | | | | | | | |
370 Lex Part Deux, LLC (7) | US - NY | Office | Term SOFR + 8.36% (2.44% Floor) | 13.5 | % | — | % | 12/17/2018 | 7/9/2022 | 67,726,792 | | 67,726,793 | | 56,454,778 | | 34,606,779 | | 18.2 | % |
Ann Street JV LLC | US - GA | Multifamily | 14.0 | % | 14.0 | % | 1.0 | % | 11/12/2021 | 6/7/2024 | 16,339,266 | | 16,685,384 | | 16,235,521 | | 9,952,374 | | 5.3 | % |
Asano Bankers Hill, LLC | US - CA | Mixed-use | SOFR + 15.0% (0.25% Floor) | 20.1 | % | 1.0 | % | 2/2/2022 | 2/5/2025 | 18,567,296 | | 18,935,757 | | 19,354,303 | | 11,864,188 | | 6.3 | % |
REEC Harlem Holdings Company, LLC (8) | US - NY | Mixed-use | LIBOR + 12.5% | 17.7 | % | — | % | 3/9/2018 | 3/9/2023 | 15,258,233 | | 15,258,233 | | 2,358,983 | | 1,446,057 | | 0.8 | % |
RS JZ Driggs, LLC (9) | US - NY | Multifamily | 12.3% | 12.3 | % | 1.0 | % | 5/1/2018 | 1/1/2021 | 5,351,053 | | 5,351,053 | | 5,351,053 | | 3,280,195 | | 1.7 | % |
| | | | | | | | 123,242,640 | | 123,957,220 | | 99,754,638 | | 61,149,593 | | 32.3 | % |
See notes to unaudited financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
June 30, 2023 (Unaudited)and December 31, 2022
Terra Property Trust’s Schedule of Loans Held for Investment as of June 30, 2023 (Continued):
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Portfolio Company | Collateral Location | Property Type | Coupon Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity Date | Principal Amount | Amortized Cost | Fair Value (1) | Pro Rata Fair Value (2) | % (3) |
Loans held for investment: | | | | | | | | | | | | |
First mortgages: | | | | | | | | | | | | |
14th & Alice Street Owner, LLC (10) | US - CA | Multifamily | LIBOR + 4.0% (0.25% Floor) | 9.2 | % | 2.0 | % | 10/15/2021 | 4/15/2023 | $ | 1,364,944 | | $ | 1,364,944 | | $ | — | | $ | — | | — | % |
1389 Peachtree St, LP; 1401 Peachtree St, LP; 1409 Peachtree St, LP (11) | US - GA | Office | Term SOFR + 4.61% | 9.8 | % | 0.5 | % | 2/22/2019 | 8/10/2023 | 58,865,991 | | 59,155,584 | | 55,139,746 | | 33,800,664 | | 17.9 | % |
AGRE DCP Palm Springs, LLC (11) | US - CA | Hotel - full/ select service | Term SOFR +5.1% (1.8% Floor) | 10.3 | % | 1.5 | % | 12/12/2019 | 1/1/2024 | 43,222,382 | | 43,826,614 | | 43,499,719 | | 26,665,328 | | 14.1 | % |
AARSHW Property LLC (12)(13) | US - NJ | Industrial | SOFR +7.5% (0.15% Floor) | 12.6 | % | 0.9 | % | 3/7/2022 | 8/17/2024 | 57,340,667 | | 57,865,942 | | 58,221,180 | | 35,689,583 | | 18.8 | % |
AAESUF Property LLC (12) | US - NJ | Land | SOFR + 11.95% (0.05% Floor) | 17.0 | % | 5%-10% | 3/15/2022 | 3/1/2024 | 20,031,209 | | 20,825,909 | | 21,140,968 | | 12,959,413 | | 6.9 | % |
American Gilsonite Company | US - UT | Infrastructure | 14.0 | % | 14.0 | % | 1.0 | % | 8/31/2021 | 8/31/2023 | 21,250,000 | | 21,556,794 | | 21,467,893 | | 13,159,818 | | 7.0 | % |
Fourth Street's Kingswood, LLC (12)(14) | US - WA | Multifamily | Term SOFR + 7.75% (4.25% Floor) | 12.9 | % | 1.0 | % | 3/24/2023 | 3/24/2026 | 6,400,791 | | 6,120,513 | | 6,445,560 | | 3,951,128 | | 2.1 | % |
Grandview’s Remington Place, LLC (15) | US - WA | Multifamily | Term SOFR + 4.45% (0.05% Floor) | 9.6 | % | 0.5 | % | 4/22/2022 | 4/22/2024 | 23,100,000 | | 23,203,590 | | 23,236,153 | | 14,243,762 | | 7.5 | % |
Hillsborough Owners LLC | US - NC | Mixed-use | Term SOFR + 8.1% (0.25% Floor) | 13.3 | % | 1.0 | % | 10/27/2021 | 11/1/2023 | 21,476,465 | | 21,578,080 | | 21,627,967 | | 13,257,944 | | 7.0 | % |
Mesa AZ Industrial Owner, LLC (4)(12) | US - AZ | Land | Term SOFR + 12.7% (2.3% Floor) | 17.8 | % | 1.0 | % | 9/15/2022 | 9/14/2023 | 31,000,000 | | 31,296,394 | | 31,296,394 | | 19,184,690 | | 10.1 | % |
NB Factory TIC 1, LLC (15) | US - UT | Student housing | Term SOFR + 5.0% (0.25% Floor) | 10.1 | % | 3.3 | % | 8/16/2021 | 3/5/2024 | 28,000,000 | | 28,842,742 | | 28,917,484 | | 17,726,418 | | 9.4 | % |
Patrick Henry Recovery Acquisition, LLC (11) | US - CA | Office | Term SOFR +3.06% (1.5% Floor) | 8.2 | % | 0.3 | % | 11/25/2019 | 12/1/2023 | 18,000,000 | | 18,043,198 | | 17,923,436 | | 10,987,066 | | 5.8 | % |
The Lux Washington, LLC (12) | US - WA | Multifamily | Term SOFR + 7.1% (0.75% floor) | 12.3 | % | 1.0 | % | 7/22/2021 | 1/22/2024 | 23,468,419 | | 23,746,824 | | 23,748,850 | | 14,558,045 | | 7.7 | % |
University Park Berkeley, LLC (12) | US - CA | Multifamily | Term SOFR + 5.50% (4.00% Floor) | 10.6 | % | 1.0 | % | 3/30/2023 | 10/5/2024 | 27,402,924 | | 27,750,542 | | 27,748,949 | | 17,010,106 | | 9.0 | % |
| | | | | | | | 380,923,792 | | 385,177,670 | | 380,414,299 | | 233,193,965 | | 123.3 | % |
Total gross loans held for investment | | | | | | | | 541,855,443 | | 546,947,303 | | 517,494,731 | | 317,224,270 | | 167.6 | % |
Obligations under participation agreements (4)(5) | | | | | | (13,678,820) | | (13,789,070) | | (13,789,071) | | (8,452,701) | | (4.5) | % |
Allowance for credit losses | | | | | | | | — | | (33,128,796) | | — | | — | | — | % |
Net loans held for investment | | | | | | | | $ | 528,176,623 | | $ | 500,029,437 | | $ | 503,705,660 | | $ | 308,771,569 | | 163.1 | % |
See notes to unaudited financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
June 30, 2023 (Unaudited)and December 31, 2022
Terra Property Trust’s Schedule of Loans Held for Investment as of June 30, 2023 (Continued):
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Operating real estate: | | | | | | | | | | | | | | | | | | | |
Description | | Acquisition Date | | Fair Value of Real Estate (1) | | Encumbrance | | Net Investment | | Pro Rata Net Investment (2) | | % (3)(17) | | | |
| | | |
Multi-tenant office building in Santa Monica, CA (16) | | 7/30/2018 | | $ | 27,603,118 | | | $ | 27,603,118 | | | $ | — | | | $ | — | | | — | % | | | | | | | |
Industrial buildings in Dallas/Fort Worth, TX | | 3/24/2023 | | 48,798,273 | | | 32,368,367 | | | 16,429,906 | | | 10,071,532 | | | 5.3 | % | | | | | | | |
Industrial buildings in Dallas/Fort Worth, TX (18) | | 5/25/2023 | | 83,288,961 | | | 40,250,000 | | | 43,038,961 | | | 26,382,883 | | | 13.9 | % | | | | | | | |
| | | | $159,690,352 | | $100,221,485 | | $59,468,867 | | $36,454,415 | | 19.2 | % | | | | | | | |
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Portfolio Company | | Dividend Yield | | Acquisition Date | | Maturity Date | | Shares | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) | | | |
Marketable securities (19): | | | | | | | | | | | | | | | | | | | |
Corporate Bonds | | | | | | | | | | | | | | | | | | | |
Terra Property Trust, Inc. Corporate Bonds | | 6.0 | % | | Various | | 6/30/2026 | | 63,367 | | | $ | 1,188,019 | | | $ | 1,203,973 | | | $ | 738,035 | | | 0.39 | % | | | |
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Equity investments: | | | | | | | | | | | | | | | | | | | |
Portfolio Company | | | | Ownership Interest | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) | | | |
Mavik Real Estate Special Opportunities Fund, LP - limited partnership interest (20) | | | | 14.9% | | $ | 18,136,440 | | | $ | 17,669,396 | | $ | 10,831,340 | | | 5.7 | % | | | |
LEL Arlington JV LLC - limited liability member units (21) | | | | | 27.2% | | 6,689,133 | | | 7,483,563 | | 4,587,424 | | | 2.4 | % | | | |
LEL NW 49th JV LLC - limited liability member units (21) | | | | 27.2% | | 1,546,725 | | | 2,516,474 | | 1,542,599 | | | 0.8 | % | | | |
TCG Corinthian FL Portfolio JV LLC (21) | | | | | | | | 34.0% | | 6,236,696 | | | 7,105,467 | | 4,355,651 | | | 2.3 | % | | | |
| | | | | | | | | | $ | 32,608,994 | | | $ | 34,774,900 | | $ | 21,317,014 | | | 11.2 | % | | | |
__________________________
(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, LLC (“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 $189.2 million at June 30, 2023.
(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 three and six months ended June 30, 2023, Terra Property Trust suspended interest income accrual of $2.5 million and $4.8 million, respectively, on this loan because recovery of such income was doubtful. As of June 30, 2023, Terra Property Trust recorded an 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)This loan is currently in maturity default. For the three and six months ended June 30, 2023, Terra Property Trust suspended interest income accrual of $1.0 million and $1.8 million, respectively, 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 June 30, 2023, Terra Property Trust recorded an 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 three and six months ended June 30, 2023, Terra Property Trust suspended interest income accrual of $0.3 million and $0.5 million, respectively, on this loan because recovery of such income was doubtful.
(10)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 $85.4 million of borrowings under a repurchase agreement.
(12)These loans were used as collateral for $105.4 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)Terra Property Trust is committed to fund up to $39.0 million of first mortgage as well as $3.0 million of subordinated loan. The subordinated loan bears interest at an annual rate of Term SOFR plus 12.0% with a Term SOFR floor of 4.25%.
(15)These loans were used as collateral for $37.5 million of borrowings under a repurchase agreement.
(16) Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage. The mortgage loan payable on this property is currently in default. Terra Property Trust has sought to convey its interest in the office building and ground lease in lieu of foreclosure. Additionally, during the three and six months ended June 30, 2023, Terra Property Trust recognized an impairment charge of $11.8 million to reduce the carrying value of the real estate property to its estimated fair value.
(17)Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).
(18)In May 2023, Terra Property Trust acquired five industrial buildings for $3.5 million cash payment and the settlement of a mezzanine loan that was accounted for as an equity investment and five senior loans that were held for investment.
(19)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.
(20)On August 3, 2020, Terra Property Trust entered into a subscription agreement with Mavik Real Estate Special Opportunities Fund, LP (“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 June 30, 2023, the unfunded commitment was $37.4 million.
(21)As of June 30, 2023, Terra Property Trust beneficially owned equity interest in three joint ventures that invest in real estate properties.
See notes to unaudited financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
June 30, 2023 (Unaudited)and December 31, 2022
The following table presents a schedule of loans held for investment held by Terra Property Trust as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company | Collateral Location | Property Type | Coupon Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity Date | Principal Amount | Amortized Cost | Fair Value (1) | Pro Rata Fair Value (2) | % (3) |
Loans held for investment: | | | | | | | | | | | | |
Mezzanine loans: | | | | | | | | | | | | |
150 Blackstone River Road, LLC | US - MA | Industrial | 8.5 | % | 8.5 | % | — | % | 9/21/2017 | 9/6/2027 | $ | 7,000,000 | | $ | 7,000,000 | | $ | 6,638,219 | | $ | 4,069,228 | | 1.9 | % |
610 Walnut Investors LLC (4)(5) | US - CA | Office | Term SOFR + 12.0% (2.0% Floor) | 16.4 | % | 1.0 | % | 8/30/2022 | 9/7/2024 | 18,625,738 | | 18,738,386 | | 18,767,281 | | 11,504,343 | | 5.5 | % |
Dwight Mezz II, LLC | US - CA | Student housing | 11.0 | % | 11.0 | % | — | % | 5/11/2017 | 5/6/2027 | 3,000,000 | | 2,916,369 | | 2,914,042 | | 1,786,308 | | 0.9 | % |
Havemeyer TSM LLC (6) | US - NY | Mixed-use | 15.0 | % | 15.0 | % | 1.0 | % | 12/18/2020 | 3/1/2023 | 3,282,208 | | 3,313,813 | | 3,315,293 | | 2,032,275 | | 1.0 | % |
UNJ Sole Member, LLC (6) | US - CA | Mixed-use | 15.0 | % | 15.0 | % | 1.0 | % | 11/24/2021 | 6/1/2027 | 7,444,357 | | 7,482,547 | | 7,371,101 | | 4,518,485 | | 2.2 | % |
| | | | | | | | 39,352,303 | | 39,451,115 | | 39,005,936 | | 23,910,639 | | 11.5 | % |
Preferred equity investments: | | | | | | | | | | | | |
370 Lex Part Deux, LLC (7) | US - NY | Office | LIBOR + 8.25% (2.44% Floor) | 12.6 | % | — | % | 12/17/2018 | 7/9/2022 | 67,586,792 | | 67,586,792 | | 56,338,079 | | 34,535,242 | | 16.5 | % |
Ann Street JV LLC | US - GA | Multifamily | 14.0 | % | 14.0 | % | 1.0 | % | 11/12/2021 | 6/7/2024 | 15,217,540 | | 15,648,482 | | 15,127,126 | | 9,272,928 | | 4.4 | % |
Asano Bankers Hill, LLC | US - CA | Mixed-use | SOFR + 15.0% (0.25% Floor) | 19.1 | % | 1.0 | % | 2/2/2022 | 7/31/2024 | 17,450,623 | | 17,920,424 | | 17,578,839 | | 10,775,828 | | 5.1 | % |
REEC Harlem Holdings Company, LLC (8) | US - NY | Mixed-use | LIBOR + 12.5% | 16.9 | % | — | % | 3/9/2018 | 3/9/2023 | 15,983,234 | | 15,983,234 | | 3,090,588 | | 1,894,530 | | 0.9 | % |
RS JZ Driggs, LLC (9) | US - NY | Multifamily | 12.3 | % | 12.3 | % | 1.0 | % | 5/1/2018 | 1/1/2021 | 4,993,245 | | 4,993,245 | | 4,993,245 | | 3,060,859 | | 1.5 | % |
| | | | | | | | 121,231,434 | | 122,132,177 | | 97,127,877 | | 59,539,387 | | 28.4 | % |
First mortgages: | | | | | | | | | | | | |
14th & Alice Street Owner, LLC (10) | US - CA | Multifamily | LIBOR + 4.0% (0.25% Floor) | 8.4 | % | 2.0 | % | 10/15/2021 | 4/15/2023 | 1,364,944 | | 1,364,944 | | — | | — | | — | % |
1389 Peachtree St, LP; 1401 Peachtree St, LP; 1409 Peachtree St, LP (11) | US - GA | Office | LIBOR + 4.5% | 8.9 | % | 0.5 | % | 2/22/2019 | 8/10/2023 | 57,184,178 | | 57,453,482 | | 56,844,322 | | 34,845,569 | | 16.7 | % |
330 Tryon DE LLC (11) | US - NC | Office | Term SOFR + 4.25% (0.1% Floor) | 8.6 | % | 0.5 | % | 2/7/2019 | 3/1/2024 | 22,800,000 | | 22,902,215 | | 22,687,235 | | 13,907,275 | | 6.6 | % |
AGRE DCP Palm Springs, LLC (11) | US - CA | Hotel - full/ select service | LIBOR +5.0% (1.8% Floor) | 9.4 | % | 1.5 | % | 12/12/2019 | 1/1/2024 | 43,222,382 | | 43,758,804 | | 43,062,933 | | 26,397,578 | | 12.6 | % |
AARSHW Property LLC (12)(13) | US - NJ | Industrial | SOFR +7.5% (0.15% Floor) | 11.6 | % | 0.9 | % | 3/7/2022 | 8/17/2024 | 44,368,331 | | 44,669,513 | | 44,702,632 | | 27,402,713 | | 13.0 | % |
AAESUF Property LLC (11) | US - NJ | Land | SOFR + 11.95% (0.05% Floor) | 16.0 | % | 5%-10% | 3/15/2022 | 3/1/2024 | 17,860,291 | | 18,288,969 | | 18,587,586 | | 11,394,190 | | 5.4 | % |
See notes to unaudited financial statements.
Terra Property Trust’s Schedule of Loans Held for Investment as of December 31, 2022 (Continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company | Collateral Location | Property Type | Coupon Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity Date | Principal Amount | Amortized Cost | Fair Value (1) | Pro Rata Fair Value (2) | % (3) |
Loans held for investment: | | | | | | | | | | | | |
First mortgages (Continued): | | | | | | | | | | | | |
American Gilsonite Company | US - UT | Infrastructure | 14.0 | % | 14.0 | % | 1.0 | % | 8/31/2021 | 8/31/2023 | $ | 21,250,000 | | $ | 21,840,359 | | $ | 21,443,528 | | $ | 13,144,883 | | 6.3 | % |
Dallas - Big Town Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 26,635,183 | | 26,838,830 | | 26,838,830 | | 16,452,203 | | 7.8 | % |
Dallas - Oakland Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 9,673,597 | | 9,747,559 | | 9,747,559 | | 5,975,254 | | 2.8 | % |
Dallas - US HWY 80 Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 11,395,169 | | 11,482,294 | | 11,482,294 | | 7,038,646 | | 3.4 | % |
Dallas - 11333 Pagemill Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 12,296,945 | | 12,390,965 | | 12,390,965 | | 7,595,662 | | 3.6 | % |
Dallas - 11221 Pagemill Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 7,624,106 | | 7,682,398 | | 7,682,398 | | 4,709,310 | | 2.2 | % |
Grandview’s Madison Place, LLC (14) | US - WA | Multifamily | Term SOFR + 4.45% (0.05% Floor) | 8.8 | % | 0.8 | % | 2/10/2022 | 2/10/2025 | 17,000,000 | | 17,105,928 | | 17,105,928 | | 10,485,934 | | 5.0 | % |
Grandview’s Remington Place, LLC (14) | US - WA | Multifamily | Term SOFR + 4.45% (0.05% Floor) | 8.8 | % | 0.5 | % | 4/22/2022 | 4/22/2024 | 23,100,000 | | 23,199,620 | | 23,203,343 | | 14,223,649 | | 6.8 | % |
Hillsborough Owners LLC | US - NC | Mixed-use | LIBOR + 8.0% (0.25% Floor) | 12.4 | % | 1.0 | % | 10/27/2021 | 11/1/2023 | 20,720,028 | | 21,138,947 | | 20,947,571 | | 12,840,861 | | 6.1 | % |
Mesa AZ Industrial Owner, LLC (4)(12) | US - AZ | Land | Term SOFR + 12.7% (2.3% Floor) | 17.1 | % | 1.0 | % | 9/15/2022 | 9/14/2023 | 31,000,000 | | 31,276,468 | | 31,276,468 | | 19,172,475 | | 9.1 | % |
NB Factory TIC 1, LLC (14) | US - UT | Student housing | LIBOR + 5.0% (0.25% Floor) | 9.4 | % | 3.3 | % | 8/16/2021 | 3/5/2023 | 28,000,000 | | 28,857,892 | | 28,902,234 | | 17,717,069 | | 8.4 | % |
Patrick Henry Recovery Acquisition, LLC (11) | US - CA | Office | LIBOR +2.95% (1.5% Floor) | 7.3 | % | 0.3 | % | 11/25/2019 | 12/1/2023 | 18,000,000 | | 18,041,782 | | 17,824,300 | | 10,926,296 | | 5.2 | % |
The Lux Washington, LLC (12) | US - WA | Multifamily | LIBOR + 7.0% (0.75% floor) | 11.4 | % | 1.0 | % | 7/22/2021 | 1/22/2024 | 16,571,267 | | 16,722,091 | | 16,882,333 | | 10,348,870 | | 4.9 | % |
University Park Berkeley, LLC (11) | US - CA | Multifamily | LIBOR + 5.5% (4.0% Floor) | 8.6 | % | 0.8 | % | 2/27/2020 | 3/1/2023 | 26,342,468 | | 26,536,122 | | 26,472,938 | | 16,227,911 | | 7.7 | % |
| | | | | | | | 456,408,889 | | 461,299,182 | | 458,085,397 | | 280,806,348 | | 133.6 | % |
See notes to unaudited financial statements.
Terra Property Trust’s Schedule of Loans Held for Investment as of December 31, 2022 (Continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company | Collateral Location | Property Type | Coupon Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity Date | Principal Amount | Amortized Cost | Fair Value (1) | Pro Rata Fair Value (2) | % (3) |
Loans held for investment: | | | | | | | | | | | | |
Credit facility: | | | | | | | | | | | | |
William A. Shopoff & Cindy L. Shopoff (15) | US - CA | Industrial | 15.0 | % | 15.0 | % | 1.0 | % | 10/4/2021 | 4/4/2023 | $ | 28,802,833 | | $ | 29,080,183 | | $ | 28,926,544 | | $ | 17,731,971 | | 8.4 | % |
| | | | | | | | 28,802,833 | | 29,080,183 | | 28,926,544 | | 17,731,971 | | 8.4 | % |
Total gross loans held for investment | | | | | | | | 645,795,459 | | 651,962,657 | | 623,145,754 | | 381,988,345 | | 181.9 | % |
Obligations under participation agreements (4)(5) | | | | | | (12,584,958) | | (12,680,594) | | (12,680,595) | | (7,773,205) | | (3.7) | % |
Allowance for credit losses | | | | | | | | — | | (25,471,890) | | — | | — | | — | % |
Net loans held for investment | | | | | | | | $ | 633,210,501 | | $ | 613,810,173 | | $ | 610,465,159 | | $ | 374,215,140 | | 178.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating real estate: | | | | | | | | | | | | | | | | |
Description | | Acquisition Date | | Fair Value of Real Estate (1) | | Encumbrance | | Net Investment | | Pro Rata Net Investment (2) | | % (3)(17) | | | |
|
Multi-tenant office building in Santa Monica, CA (16) | | 7/30/2018 | | $ | 52,500,000 | | | $ | 29,252,308 | | | $ | 23,247,692 | | | $ | 14,250,835 | | | 6.8 | % | | | | |
| | | | | | | | | | | | | | | | |
Portfolio Company | | Dividend Yield | | Acquisition Date | | Maturity Date | | Shares | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) |
Marketable securities (18): | | | | | | | | | | | | | | | | |
Corporate Bonds | | | | | | | | | | | | | | | | |
Terra Property Trust, Inc. Corporate Bonds | | 6.0 | % | | Various | | 6/30/2026 | | 7,398 | | | $ | 136,265 | | | $ | 147,960 | | | $ | 90,699 | | | 0.04 | % |
Total marketable securities | | | | | | | | | | $ | 136,265 | | | $ | 147,960 | | | $ | 90,699 | | | 0.04 | % |
| | | | | | | | | | | | | | | | |
Equity investments: | | | | | | | | | | | | | | | | |
Portfolio Company | | | | Ownership Interest | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) |
Mavik Real Estate Special Opportunities Fund, LP - limited partnership interest (19) | | | | 27.9% | | $ | 36,794,674 | | | $ | 35,718,022 | | $ | 21,895,147 | | | 10.4 | % |
LEL Arlington JV LLC - limited liability member units (20) | | | | | 27.2% | | 7,271,603 | | | 7,483,563 | | 4,587,424 | | | 2.2 | % |
LEL NW 49th JV LLC - limited liability member units (20) | | | | 27.2% | | 1,521,556 | | | 2,519,781 | | 1,544,626 | | | 0.7 | % |
TCG Corinthian FL Portfolio JV LLC (20) | | | | | | | | 34.0% | | 6,896,816 | | | 7,426,291 | | 4,552,316 | | | 2.2 | % |
SF-Dallas Industrial, LLC (21) | | | | | | | | N/A | | 10,013,691 | | | 10,013,691 | | 6,138,393 | | | 2.9 | % |
| | | | | | | | | | $ | 62,498,340 | | | $ | 63,161,348 | | $ | 38,717,906 | | | 18.4 | % |
See notes to unaudited financial statements.
__________________________
(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.
Terra Secured Income Fund 5, LLC
Notes to Financial Statements (Unaudited)
June 30, 2023
Note 1. Business
Terra Secured Income Fund 5, LLC (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 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 makes substantially all of its investments and conducts substantially all of its real estate lending business through Terra Property Trust, which has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. The Company’s investment objectives are to (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 Company will be successful in meeting its investment objectives.
In December 2015, the members approved the merger of Terra Secured Income Fund, 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 (collectively, the “Mergers”). Following the 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 REIT, in exchange for the shares of common stock of Terra Property Trust. Upon completion of the 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.
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 consolidated its holdings of shares of common stock of Terra Property Trust in 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 engaged in a series of transactions pursuant to which Terra Property Trust issued an 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 Fund Advisors, LLC (“Terra Fund Advisors” or the “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 Company’s amended and restated operating agreement provides that the Company’s existence will continue until December 31, 2023, unless sooner terminated. However, the Company expects that prior to such 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 an alternative liquidity event such as a strategic business combination, a sale of the Company 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 members.
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 wholly owned subsidiary of Terra Property Trust (“Terra LLC”), with Terra LLC continuing as the surviving entity of the 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 Terra 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 Unaudited Financial Statements
consolidate Terra JV because the Company and Terra Fund 7 share joint approval rights with respect to 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
The interim 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. 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”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services — Investment Companies.
Use of Estimates
The preparation of 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 disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates, and those differences could be material.
Equity Investment in Terra JV
Equity investment in Terra JV represents the Company’s equity interest in Terra 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 statements of financial condition. Change in fair value is reported in net change in unrealized appreciation or depreciation on investment on the statements of operations.
Revenue Recognition
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 distributions 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 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 six months ended June 30, 2023 and 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 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 statements of operations. For the three and six months ended June 30, 2023 and 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 2019-2022 federal tax years remain subject to examination by the Internal Revenue Service.
Recent Accounting Pronouncement
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 July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, ICE Benchmark Administration Limited (“IBA”), announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, which was subsequently delayed to June 30, 2023. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions 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 reference rate reform. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition (“ASU 2021-01”). In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) — Deferral of the Sunset Date of Topic 848 (“ASU 2022-06”). ASU 2022-06 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 a basis generally consistent with market practice, intended to put Terra Property Trust in substantially the same economic position as LIBOR. As a result, the Company does not expect the reference rate reform and the adoption of ASU 2020-04 and ASU 2021-01 to have a material impact on its financial statements and disclosures.
Note 3. Investment and Fair Value
Equity Investment in Terra JV
The Company invested 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 Trust’s common stock, and the 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 (Note 4).
The following tables present a summary of the Company’s investment at June 30, 2023 and December 31, 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 | % |
For the three months ended June 30, 2023 and 2022, the Company received $2.8 million and $2.9 million of distributions from Terra JV, of which $2.8 million and $2.1 million were returns of capital, respectively. For the six months ended June 30, 2023 and 2022, the Company received $5.6 million and $5.9 million of distributions from Terra JV, of which $5.4 million and $4.3 million were returns of capital, respectively.
Notes to Unaudited Financial Statements
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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
Fair Value Measurements
The Company follows 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 is 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.
Assets and Liabilities Reported at Fair Value
The following tables summarize the Company’s equity investment at fair value on a recurring basis as of June 30, 2023 and December 31, 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Fair Value Measurements |
| Level 1 | | Level 2 | | Level 3 | | Total |
Investment: | | | | | | | |
Equity investment in Terra JV | $ | — | | | $ | — | | | $ | 210,008,457 | | | $ | 210,008,457 | |
Changes in Level 3 investment for the six months ended June 30, 2023 and 2022 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 | |
Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the six months ended June 30, 2023 and 2022, there were no transfers.
The Company estimated that its other financial assets and liabilities had fair values that approximated their carrying values at June 30, 2023 and December 31, 2022 due to their short-term nature.
Valuation Process for Fair Value Measurement
Market quotations are not readily available for the Company’s investment in Terra Property Trust or Terra JV, which is included in Level 3 of the fair value hierarchy. The fair value of the Company’s sole investment takes into consideration the fair value of Terra Property Trust’s assets and liabilities which are valued utilizing a yield approach, i.e., a discounted cash flow methodology. In following this methodology, loans are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of Terra Property Trust’s loans, relevant factors, which 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; the portfolio company’s ability to make payments, its net operating income, debt-service coverage 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. The fair value of Terra Property Trust’s
Notes to Unaudited Financial Statements
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 Terra 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 Terra 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, third-party valuation data 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 June 30, 2023 and December 31, 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.
Note 4. Related Party Transactions
Operating Agreement
The Company has an operating agreement, as amended, with 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 its manager pursuant to a management agreement with the manager.
Dividend Income
As discussed in Note 3, for the three months ended June 30, 2023 and 2022, the Company received $2.8 million and $2.9 million of distributions from Terra JV, of which $2.8 million and $2.1 million were returns of capital, respectively. For the six months ended June 30, 2023 and 2022, the Company received $5.6 million and $5.9 million of distributions from Terra JV, of which $5.4 million and $4.3 million were returns of capital, respectively.
Notes to Unaudited Financial Statements
BDC Merger
On the Closing Date, pursuant to the 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”).
At 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 or any wholly owned subsidiary of 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 otherwise be entitled by (y) $14.38.
Pursuant to the terms of the transactions described in the Terra BDC Merger Agreement, approximately 4,847,910 shares of TPT Class B Common Stock were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of the Closing Date. Following the consummation of the BDC Merger, former Terra BDC stockholders owned approximately 19.9% of the common equity of Terra Property Trust and the Company indirectly beneficially owned approximately 61.3% of the common equity of Terra Property Trust.
Note 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 6. Members’ Capital
As of both June 30, 2023 and December 31, 2022, the Company had 6,622.2 units outstanding. The net asset value per unit was $28,565 and $31,710 as of June 30, 2023 and December 31, 2022, respectively.
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 Funds units, after which time distributions are made 15% to the Manager which the Company refers 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 offering concurrent with the Mergers is 8.5%.
For the three months ended June 30, 2023 and 2022, the Company made total distributions to non-managing members of $2.7 million and $2.8 million, respectively. For the six months ended June 30, 2023 and 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
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 June 30, 2023 and December 31, 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.
Note 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 six months ended June 30, 2023 and 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 six months ended June 30, 2023 and 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.
Note 8. Subsequent Events
Management has evaluated subsequent events through the date the financial statements were available to be issued. Management has determined that there are no material events other than the ones below that would require adjustment to, or disclosure in, the Company’s financial statements.
Notes to Unaudited Financial Statements
Termination of WMC Merger Agreement
On June 28, 2023, Terra Property Trust announced it entered into an Agreement and Plan of Merger, dated as of June 27, 2023 (the “WMC Merger Agreement”), with Western Asset Mortgage Capital Corporation, a Delaware corporation (“WMC”). On July 27, 2023, WMC notified Terra Property Trust that its board of directors determined that a proposal from AG Mortgage Investment Trust, Inc. (“MITT”) to acquire WMC was a “Parent Superior Proposal” under the WMC Merger Agreement and that WMC’s board of directors intended to terminate the WMC Merger Agreement unless WMC received a revised proposal from Terra Property Trust by a specified deadline such that WMC’s board of directors determined that MITT’s proposal was no longer a “Parent Superior Proposal.”
On August 8, 2023, WMC terminated the WMC Merger Agreement pursuant to its terms (the “Termination”), and Terra Property Trust was paid a termination fee of $3.0 million.
Upon the Termination, the amended and restated management agreement Terra Property Trust entered into with WMC and the Manager on June 27, 2023, terminated in accordance with its terms. Terra Property Trust continues to be managed by the Manager pursuant to the terms of the existing Management Agreement between Terra Property Trust and the Manager.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in this section should be read in conjunction with our unaudited 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.
FORWARD-LOOKING STATEMENTS
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, 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:
•our expected financial performance, operating results and our ability to make distributions to our members in the future;
•Terra Property Trust’s ability to achieve the expected synergies, cost savings and other benefits from the BDC Merger (as defined below);
•risks associated with achieving expected synergies, cost savings and other benefits from Terra Property Trust’s increased scale.
•the availability of attractive risk-adjusted investment opportunities in our target asset class and other real estate-related investments that satisfy our objectives and strategies;
•the origination or acquisition of our targeted assets, including the timing of originations or acquisitions;
•volatility in our industry, interest rates and spreads, the debt or equity markets, the general economy or the real estate market specifically, whether the results of market events or otherwise;
•changes in our investment objectives and business strategy;
•the availability of financing on acceptable terms or at all;
•the performance and financial condition of our borrowers;
•changes in interest rates and the market value of our assets;
•borrower defaults or decreased recovery rates from our borrowers;
•changes in prepayment rates on our loans;
•our use of financial leverage;
•actual and potential conflicts of interest with any of the following affiliated entities: Terra Fund Advisors, LLC (“Terra Fund Advisors” or our “Manager”), Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Income Advisors, LLC; Terra Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra JV, LLC (“Terra JV”); Terra Property Trust, Inc. (“Terra Property Trust”); Terra Income Fund 6, LLC (formerly Terra Merger Sub, LLC), Terra Property Trust’s wholly owned subsidiary (“Terra LLC”); Terra Income Fund 6, Inc. (“Terra BDC”); Terra Secured Income Fund 5 International; Terra Income Fund International; Terra Secured Income Fund 7, LLC (“Terra Fund 7”); Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”); Mavik Real Estate Special Opportunities Fund, LP (“RESOF”); or any of their affiliates;
•our dependence on our Manager or its affiliates and the availability of its senior management teams and other personnel;
•liquidity transactions that may be available to us or our subsidiaries or affiliates in the future, including a liquidation of assets, a sale of our company or its subsidiaries or affiliates, or a strategic business combination, a listing of the shares of common stock of Terra Property Trust on a national securities exchange, or an adoption of a share repurchase plan, in each case, which may include the distribution of our common stock of Terra Property Trust indirectly owned by our company and certain other fund vehicles managed by Terra Capital Partners or its affiliates to the ultimate investors in these vehicles, and the timing of any such transactions;
•actions and initiatives of the U.S. federal, state and local government and changes to the U.S. federal, state and local government policies and the execution and impact of these actions, initiatives and policies;
•limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our exclusion or exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”), and Terra Property Trust to maintain its qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; and
•the degree and nature of our competition.
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-looking statements for any reason, including the factors set forth in “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2022 and in “Part II - Item 1A. Risk Factors” in this quarterly report on Form 10-Q. Other factors that could cause actual results to differ materially include:
•changes in the economy;
•risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and
•future changes in laws or regulations and conditions in our operating areas.
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, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
We are a real estate credit focused company that originates, structures, funds and manages commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. Our loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties primarily in primary and secondary markets. We believe loans in this size range are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. We were formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. We make substantially all of our investments, and conduct substantially all of our real estate lending business, through Terra Property Trust, which has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. Our investment objectives are to (i) preserve our members’ capital contributions, (ii) realize income from our investments and (iii) make monthly distributions to our members from cash generated from investments. There can be no assurances that we will be successful in meeting our investment objectives.
On January 1, 2016, Terra Secured Income Fund, LLC (“Terra Fund”), Terra Fund 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”) merged with and into our subsidiaries (collectively, the “Terra Funds”) through a series of separate mergers (collectively, the “Mergers”). Following the Mergers, we contributed the consolidated portfolio of our net assets and the net assets of the Terra Funds to Terra Property Trust in exchange for all of the shares of common stock of Terra Property Trust. We elected to engage
in the REIT formation transactions, to make our investments through Terra Property Trust and to provide our members with a more broadly diversified portfolio of assets, while providing us with enhanced access to capital and borrowings, lower operating costs and enhanced opportunities for growth.
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 we consolidated our holdings of shares of common stock of Terra Property Trust in Terra Fund 4. Subsequent to the Terra Fund Merger, the legal name of Terra Fund 4 was changed to Terra JV, LLC. On March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust issued an 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. Following the consummation of the BDC Merger (as defined below) and as of December 31, 2022, former Terra BDC stockholders owned approximately 19.9% of Terra Property Trust’s common equity, Terra JV held 70.0% of the issued and outstanding shares of Terra Property Trust’s common stock with the remainder of 10.1% held by Terra Offshore REIT; and we and Terra Fund 7 owned an 87.6% and 12.4% interest, respectively, in Terra JV. Accordingly, as of June 30, 2023, we indirectly beneficially owned 61.3% of the outstanding shares of common stock of Terra Property Trust through Terra JV.
As previously disclosed, we continue to explore alternative liquidity transactions on an opportunistic basis to maximize value for our investors. Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us, or our subsidiaries or affiliates, include a listing of our shares of common stock of Terra Property Trust on a national securities exchange, adoption of a share repurchase plan, a liquidation of assets, a sale of our company or its subsidiaries or affiliates or a strategic business combination, in each case, which may include the in-kind distribution of shares of common stock of Terra Property Trust indirectly owned by our company and certain other fund vehicles managed by Terra Capital Partners or its affiliates to the ultimate investors in these vehicles. We cannot provide any assurance that any alternative liquidity transaction will be available to us or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction.
Recent Developments
BDC Merger
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 wholly owned subsidiary of Terra Property Trust (“Terra LLC”), with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and 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 the 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”).
At the Effective Time, except for any shares of common stock, par value $0.001 per share (“Terra BDC Common Stock”), of Terra BDC held by Terra Property Trust or any of its wholly owned subsidiaries 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 otherwise be entitled by (y) $14.38.
Pursuant to the terms of the transactions described in the Terra BDC Merger Agreement, approximately 4,847,910 shares of TPT Class B Common Stock were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of the Closing Date. Following the consummation of the BDC Merger, former Terra BDC stockholders owned approximately 19.9% of the common equity of Terra Property Trust and we indirectly beneficially owned approximately 61.3% of the common equity of Terra Property Trust.
Portfolio Summary
Net Loan Portfolio
The following tables provide a summary of Terra Property Trust’s net loan portfolio as of June 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| Fixed Rate | | Floating Rate (1)(2)(3) | | Total Gross Loans | | Obligations under Participation Agreements | | Total Net Loans |
Number of loans | 5 | | | 18 | | | 23 | | | 1 | | | 23 | |
Principal balance | $ | 52,940,319 | | | $ | 488,915,124 | | | $ | 541,855,443 | | | $ | 13,678,820 | | | $ | 528,176,623 | |
Amortized cost | 53,069,799 | | | 460,748,708 | | | 513,818,507 | | | 13,789,070 | | | 500,029,437 | |
Fair value | 52,504,064 | | | 464,990,667 | | | 517,494,731 | | | 13,789,071 | | | 503,705,660 | |
Weighted average coupon rate | 13.22 | % | | 12.77 | % | | 12.82 | % | | 17.14 | % | | 12.71 | % |
Weighted-average remaining term (years) | 1.47 | | | 0.59 | | | 0.69 | | | 1.19 | | | 0.68 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Fixed Rate | | Floating Rate (1)(2)(3) | | Total Gross Loans | | Obligations under Participation Agreements | | Total Net Loans |
Number of loans | 8 | | | 23 | | | 31 | | | 1 | | | 31 | |
Principal balance | $ | 90,990,183 | | | $ | 554,805,276 | | | $ | 645,795,459 | | | $ | 12,584,958 | | | $ | 633,210,501 | |
Amortized cost | 92,274,998 | | | 534,215,769 | | | 626,490,767 | | | 12,680,594 | | | 613,810,173 | |
Fair value | 90,729,098 | | | 532,416,656 | | | 623,145,754 | | | 12,680,595 | | | 610,465,159 | |
Weighted average coupon rate | 13.82 | % | | 11.23 | % | | 11.59 | % | | 16.36 | % | | 11.50 | % |
Weighted-average remaining term (years) | 1.35 | | | 1.10 | | | 1.14 | | | 1.69 | | | 1.13 | |
_______________
(1)These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate SOFR (“Term SOFR”) plus a fixed spread. Coupon rates shown were determined using LIBOR of 5.22%, average SOFR of 5.07% and Term SOFR of 5.14% as of June 30, 2023, and LIBOR of 4.39%, average SOFR of 4.06% and Term SOFR of 4.36% as of December 31, 2022, respectively.
(2)As of June 30, 2023 and December 31, 2022, amount included $336.8 million and $413.1 million of senior mortgages used as collateral for $228.3 million and $261.0 million of borrowings under credit facilities, respectively.
(3)As of June 30, 2023 and December 31, 2022, 16 and 21 loans, respectively, were subject to a LIBOR, SOFR, or Term SOFR floor, as applicable.
Real Estate Ownership
In addition to Terra Property Trust’s net loan portfolio, as of June 30, 2023, Terra Property Trust owned eight industrial buildings acquired in 2023 and a multi-tenant office building acquired pursuant to a foreclosure; and as of December 31, 2022, Terra Property Trust owned a multi-tenant office building acquired pursuant to a foreclosure. The real estate and related lease intangible assets and liabilities had a net carrying value of $159.3 million and $40.6 million as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, the mortgage loans payable encumbering the industrial buildings and the multi-tenant office building had an outstanding principal amount of $100.2 million and as of December 31, 2022, the mortgage loans payable encumbering the multi-tenant office building had an outstanding principal amount of $29.3 million.
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.
Portfolio Information
The tables below set forth the types of assets in Terra Property Trust’s portfolio, as well as the property type and geographic location of the properties securing the 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.
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| | 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
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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 | % |
Factors Impacting Operating Results
Our 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 mortgage loans, subordinated mortgage 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 manages 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, 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 equity 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; 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; 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 deploys moderate amounts of leverage as part of its 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 six months ended June 30, 2023 and 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) | |
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 June 30, 2023 and 2022, we received distributions of $2.8 million and $2.9 million, or $0.19 and $0.19 per share, respectively, from Terra Property Trust, of which none and $0.8 million was recorded as dividend income and $2.8 million and $2.1 million was recorded as return of capital, respectively.
For the six months ended June 30, 2023 and 2022, we received distributions of $5.6 million and $5.9 million, or $0.38 and $0.39 per share, respectively, from Terra Property Trust, of which $0.3 million and $1.5 million was recorded as dividend income and $5.4 million and $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 change in Terra Property Trust’s net income (loss) was primarily due to an 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 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 $2.4 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 loans acquired in connection with the BDC Merger.
For the six months ended June 30, 2023, Terra Property Trust recorded a net loss of $18.7 million, compared to net income of $0.5 recorded in the same period in 2022. The change 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 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 secured borrowing, term loan payable, revolving line of credit and repurchase agreement payable.
The following table presents a reconciliation of Terra Property Trust’s loan portfolio on a weighted average basis from gross to net for the three and six months ended June 30, 2023 and 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
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(1)Amount is calculated based on the number of days each loan is outstanding.
(2)Amount is calculated based on the underlying principal amount of each loan.
(3)The weighted average coupon rate 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.
(4)Subordinated loans include mezzanine loans, preferred equity investments and credit facilities.
Net Change in Unrealized (Depreciation) Appreciation on Investment
Net change in unrealized appreciation on investment reflects the change in Terra Property Trust’s fair value during the reporting period. There may be fluctuations in unrealized gains and losses of the underlying portfolio as loans within the portfolio approach their respective maturity dates. In addition, the unrealized gains or losses in the portfolio may fluctuate over time due to changes in the market yields.
For the three and six months June 30, 2023, we recorded a net change on unrealized depreciation on investment of $14.1 million and $15.3 million, respectively, primarily due to a decrease in the fair value of Terra Property Trust’s office building and a decrease in the fair value of a loan in the Terra Property Trust’s loan portfolio.
For the three and six months ended June 30, 2022, we recorded an increase in net change in unrealized appreciation on investment of $3.6 million and $4.6 million, respectively, primarily due to a decrease in the trading price of Terra 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 underlying discount rates due to the macro-economic conditions.
Net (Decrease) Increase in Members’ Capital Resulting from Operations
For the three and six months ended June 30, 2023 net decrease in members’ capital was $14.2 million and $15.4 million, respectively, as compared to a net increase in members’ capital of $4.2 million and $5.8 million, 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. 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 board of directors and will depend upon, among other things, its actual results of operations and liquidity.
Terra Property Trust expects to fund approximately $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 commitments through matching these commitments with principal repayments on outstanding 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:
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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
2023 — For the six months ended June 30, 2023, cash flows provided by operating activities were $5.4 million, primarily due to $5.6 million of dividends received from Terra JV, of which $5.4 million was recorded as a return of capital.
2022— For the six months ended June 30, 2022, cash flows provided by operating activities were $5.7 million, primarily due to $5.9 million of dividends received from Terra JV, of which $4.3 million was recorded as a return of capital.
Cash Flows used in Financing Activities
2023 — For the six months ended June 30, 2023, cash flows used in financing activities were $5.5 million, related to distributions paid to members of $5.5 million.
2022— For the six months ended June 30, 2022, cash flows used in financing activities were $6.2 million, primarily related to distributions paid to members of $5.8 million and payment for capital redemptions of $0.4 million.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in conformity with United States generally accepted accounting principles, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the 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 financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the 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 financial statements in addition to those discussed below.
Fair Value Measurements
The fair value of our 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 investment was recorded at fair value on our 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.
Management Agreement with Terra REIT Advisors
Terra Property Trust currently pays the following fees to Terra 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 investments, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, Terra REIT Advisors also receives an extension 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.
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 Terra 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, Terra 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 Terra REIT Advisors with respect to its evaluation and pursuit of such transactions.
In addition to the fees described above, Terra Property Trust reimburses Terra 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 Terra 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 aggregate in connection with providing services to Terra Property Trust:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | |
| | 2023 | | 2022 | | 2023 | | 2022 | | |
Origination and extension fee expense (1)(2) | | $ | 343,159 | | | $ | 381,947 | | | $ | 814,607 | | | $ | 1,068,312 | | | |
Asset management fee | | 2,105,049 | | | 1,640,628 | | | 4,102,476 | | | 3,128,723 | | | |
Asset servicing fee | | 496,374 | | | 395,718 | | | 966,899 | | | 745,047 | | | |
Operating expenses reimbursed to Terra REIT Advisors | | 2,120,029 | | | 2,140,635 | | | 4,297,033 | | | 4,069,198 | | | |
Disposition fee (3) | | 917,750 | | | 479,500 | | | 1,208,563 | | | 479,500 | | | |
Total | | $ | 5,982,361 | | | $ | 5,038,428 | | | $ | 11,389,578 | | | $ | 9,490,780 | | | |
_______________
(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 loan.
(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 acquisition of the three industrial buildings in 2023. Amount for the six months ended June 30, 2022 excluded $0.2 million, of origination fees paid to Terra REIT Advisors in connection with its equity investment in an
unconsolidated investment. These origination fees were capitalized to the carrying value of the unconsolidated investment as a transaction cost.
(3)Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of 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 June 30, 2023, Terra Property Trust had two investments with an aggregate principal balance of $16.6 million, net of obligations under participation agreements, that provide for interest income at an annual rate of LIBOR plus a spread, six of which are subject to a LIBOR floor. A decrease of 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 16 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 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 100 basis points in LIBOR and Term SOFR would decrease Terra Property Trust’s annual interest expense by approximately $2.9 million, and an increase of 100 basis points in LIBOR and Term SOFR would increase our annual interest expense by approximately $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 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 three and six months ended June 30, 2023 and 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” 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 the 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 June 30, 2023. Based on that evaluation, the 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
Item 1. Legal Proceedings.
From time to time, we, Terra Property Trust, Terra JV and our Manager may be a party to certain legal proceedings in the ordinary course of 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 the legal proceeding cannot be predicted with certainty. 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 successful, 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 its loan to Terra Ocean is in default and the outstanding principal amount of 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 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.
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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2.1 | | |
2.2 | | |
2.3 | | |
2.4 | | |
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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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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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* | | |
31.2* | | |
32** | | |
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 | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | | Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL document) |
_______________
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned in the capacities indicated* thereunto duly authorized.
Date: August 11, 2023
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| TERRA SECURED INCOME FUND 5, LLC |
| | |
| By: | /s/ Vikram S. Uppal |
| | Vikram 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, |
| | (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.