NOTE 5. INVESTMENTSINVESTMENT IN UNCONSOLIDATED ENTITIESENTITY
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Assets: | | | |
Real estate investments, net | $ | 30,923,892 |
| | $ | 31,668,300 |
|
Cash and cash equivalents | 541,151 |
| | 466,379 |
|
Other assets | 207,011 |
| | 117,075 |
|
Total assets | $ | 31,672,054 |
| | $ | 32,251,754 |
|
Liabilities: | | | |
Mortgage notes payable | $ | 13,810,054 |
| | $ | 13,994,844 |
|
Below-market lease, net | 2,990,965 |
| | 3,103,778 |
|
Other liabilities | 151,365 |
| | 61,188 |
|
Total liabilities | 16,952,384 |
| | 17,159,810 |
|
Total equity | 14,719,670 |
| | 15,091,944 |
|
Total liabilities and equity | $ | 31,672,054 |
| | $ | 32,251,754 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Total revenues | $ | 672,011 |
| | $ | 643,600 |
| | $ | 2,032,004 |
| | $ | 1,965,612 |
|
Expenses: | | | | | | | |
Interest expense | 144,329 |
| | 146,861 |
| | 430,215 |
| | 437,846 |
|
Depreciation and amortization | 248,136 |
| | 248,136 |
| | 744,408 |
| | 743,485 |
|
Other expenses | 179,680 |
| | 153,654 |
| | 548,378 |
| | 523,348 |
|
Total expenses | 572,145 |
| | 548,651 |
| | 1,723,001 |
| | 1,704,679 |
|
Net income | $ | 99,866 |
| | $ | 94,949 |
| | $ | 309,003 |
| | $ | 260,933 |
|
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Total revenues | | $ | 697,851 | | | $ | 672,011 | | | $ | 2,047,424 | | | $ | 2,032,004 | |
Expenses: | | | | | | | | |
Interest expense | | 141,935 | | | 144,329 | | | 424,544 | | | 430,215 | |
Depreciation and amortization | | 250,015 | | | 248,136 | | | 749,913 | | | 744,408 | |
Other expenses | | 178,522 | | | 179,680 | | | 544,225 | | | 548,378 | |
Total expenses | | 570,472 | | | 572,145 | | | 1,718,682 | | | 1,723,001 | |
Net income | | $ | 127,379 | | | $ | 99,866 | | | $ | 328,742 | | | $ | 309,003 | |
REIT I
The Company’s investment in REIT I representedPrior to the Merger on December 31, 2019, the Company had an approximate 4.8% ownership interest as of September 30, 2019 and December 31, 2018.in REIT I. The Company recorded its share of income (loss)loss of REIT I based on REIT I’s results of operations for the three and nine months ended September 30, 2019 and 2018.2019. During the three and nine months ended September 30, 2019, and 2018, the Company received $75,746 and $68,316$220,858, respectively, in cash distributions respectively, related to its investmentinterest in REIT II. The following is REIT I's summarized results of operations for the three and nine months ended September 30, 2019:
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Total revenues | | $ | 3,302,347 | | | $ | 9,868,701 | |
Expenses: | | | | |
Depreciation and amortization | | 1,450,227 | | | 4,336,641 | |
Interest expense | | 828,987 | | | 2,674,383 | |
Other expenses | | 1,746,989 | | | 4,150,881 | |
Total expenses | | 4,026,203 | | | 11,161,905 | |
Other income: | | | | |
Other income (1) | | 0 | | | 113,773 | |
Net loss | | $ | (723,856) | | | $ | (1,179,431) | |
(1) The gain on disposal of real estate investment property of $113,773 during the nine months ended September 30, 2019 was due to the higher mortgage loan balance and 2018,related interest payable for the Company received cash distributions of $220,858 and $204,947, respectively. The following is summarized financial information for REIT I:Antioch, California Chase property compared to its net book value when it was relinquished in a foreclosure sale on March 13, 2019.
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Assets: | | | |
Real estate investments, net | $ | 119,207,755 |
| | $ | 125,075,537 |
|
Cash and cash equivalents and restricted cash | 2,888,310 |
| | 3,376,145 |
|
Other assets | 2,628,518 |
| | 3,070,475 |
|
Total assets | $ | 124,724,583 |
| | $ | 131,522,157 |
|
Liabilities: | | | |
Mortgage notes payable, net | $ | 61,840,703 |
| | $ | 61,446,068 |
|
Below-market lease intangibles, net | 2,460,720 |
| | 3,105,843 |
|
Other liabilities | 2,324,417 |
| | 3,359,618 |
|
Total liabilities | 66,625,840 |
| | 67,911,529 |
|
Redeemable common stock | — |
| | 163,572 |
|
Total shareholders’ equity | 58,098,743 |
| | 63,447,056 |
|
Total liabilities and shareholders’ equity | $ | 124,724,583 |
| | $ | 131,522,157 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Total revenues | $ | 3,302,347 |
| | $ | 3,293,384 |
| | $ | 9,868,701 |
| | $ | 9,889,765 |
|
Expenses: | | | | | | | |
Depreciation and amortization | 1,450,227 |
| | 1,424,669 |
| | 4,336,641 |
| | 4,282,006 |
|
Interest expense | 828,987 |
| | 714,138 |
| | 2,674,383 |
| | 1,830,849 |
|
Impairment of real estate investment property (1) | — |
| | — |
| | — |
| | 862,190 |
|
Other expenses | 1,746,989 |
| | 1,133,547 |
| | 4,150,881 |
| | 3,520,467 |
|
Total expenses | 4,026,203 |
| | 3,272,354 |
| | 11,161,905 |
| | 10,495,512 |
|
Other income: | | | | | | | |
Other income (2) | — |
| | — |
| | 113,773 |
| | — |
|
Net loss | $ | (723,856 | ) | | $ | 21,030 |
| | $ | (1,179,431 | ) | | $ | (605,747 | ) |
| |
(1) | During the second quarter of 2018, REIT I recorded an impairment charge of $862,190 related to its investment in a property in Antioch, California due to the expiration of the tenant’s lease term at December 31, 2017 and REIT I’s subsequent difficulties encountered during the first half of 2018 in its efforts to re-lease the property at acceptable rent rates and without incurring substantial tenant improvement costs. The impairment charge was less than 1.0% of REIT I’s total investments in real estate property and the book value of the property after the impairment charge was less than 2.0% of REIT I’s total investments in real estate property when recorded. |
| |
(2) | The gain on sale of real estate investment property of $113,773 during the nine months ended September 30, 2019 reflects the difference between the mortgage loan balance and related interest payable for the property in Antioch, California compared with its net book value when it was relinquished in a foreclosure sale on March 13, 2019. |
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 6. DEBTCONDENSED CONSOLIDATED BALANCE SHEETS DETAILS
Mortgage Notes PayableTenant Receivables, Net
As of September 30, 2019 and December 31, 2018, the Company’s mortgage notes payableTenant receivables consisted of the following:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Straight-line rent | | $ | 3,880,016 | | | $ | 3,541,238 | |
Tenant rent | | 933,626 | | | 420,959 | |
Tenant reimbursements | | 1,811,884 | | | 1,854,883 | |
Tenant other | | 333,085 | | | 407,684 | |
Total | | $ | 6,958,611 | | | $ | 6,224,764 | |
Accounts Payable, Accrued and Other Liabilities
Accounts payable, accrued and other liabilities were comprised of the following:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Accounts payable | | $ | 533,307 | | | $ | 660,111 | |
Accrued expenses (a) | | 4,385,071 | | | 5,773,214 | |
Accrued distributions | | 694,554 | | | 962,615 | |
Accrued interest payable | | 647,632 | | | 1,690,168 | |
Unearned rent | | 1,679,277 | | | 1,963,896 | |
Lease incentive obligation | | 5,157 | | | 505,157 | |
Total | | $ | 7,944,998 | | | $ | 11,555,161 | |
(a) Includes accrued Merger expenses of $1,570,622 as of December 31, 2019.
|
| | | | | | | | | | | | | | | |
Collateral | | Principal Amount September 30, 2019 | | Principal Amount December 31, 2018 | | Contractual Interest Rate (1) | | Effective Interest Rate (1) | | Loan Maturity |
Accredo/Walgreen properties | | $ | 6,889,730 |
| | $ | 6,996,469 |
| | 3.95% | | 3.95 | % | | 7/1/2021 |
Dana property | | 4,572,030 |
| | 4,632,398 |
| | 4.56% | | 4.56 | % | | 4/1/2023 |
Six Dollar General properties | | 3,834,828 |
| | 3,885,334 |
| | 4.69% | | 4.69 | % | | 4/1/2022 |
Wyndham property (2) | | 5,742,900 |
| | 5,820,600 |
| | One-month LIBOR+2.05% | | 4.34 | % | | 6/5/2027 |
Williams Sonoma property (2) | | 4,551,900 |
| | 4,615,800 |
| | One-month LIBOR+2.05% | | 4.05 | % | | 6/5/2022 |
Omnicare property | | 4,293,753 |
| | 4,349,963 |
| | 4.36% | | 4.36 | % | | 5/1/2026 |
Harley property | | 6,778,769 |
| | 6,868,254 |
| | 4.25% | | 4.25 | % | | 9/1/2024 |
Northrop Grumman property | | 5,703,258 |
| | 5,809,367 |
| | 4.40% | | 4.40 | % | | 3/2/2021 |
EMCOR property | | 2,875,046 |
| | 2,911,577 |
| | 4.35% | | 4.35 | % | | 12/1/2024 |
exp US Services property | | 3,400,983 |
| | 3,446,493 |
| | (3) | | 4.25 | % | | 11/17/2024 |
Husqvarna property | | 6,379,182 |
| | 6,379,182 |
| | (4) | | 4.60 | % | | 2/20/2028 |
AvAir property | | 14,575,000 |
| | 14,575,000 |
| | (5) | | 4.84 | % | | 3/27/2028 |
3M property | | 8,320,000 |
| | 8,360,000 |
| | One-month LIBOR+2.25% | | 5.09 | % | | 3/29/2023 |
Cummins property | | 8,489,200 |
| | 8,530,000 |
| | One-month LIBOR+2.25% | | 5.16 | % | | 4/4/2023 |
24 Hour Fitness property (6) | | 6,308,926 |
| | 8,900,000 |
| | 4.64% | | 4.64 | % | | 4/1/2049 |
Texas Health property (7) | | — |
| | 4,842,500 |
| | One-month LIBOR+4.30% | | 6.56 | % | | 3/13/2019 |
Bon Secours property | | 5,250,000 |
| | 5,250,000 |
| | 5.41% | | 5.41 | % | | 9/15/2026 |
Costco property | | 18,850,000 |
| | 18,850,000 |
| | 4.85% | | 4.85 | % | | 1/1/2030 |
Total mortgage notes payable | | 116,815,505 |
| | 125,022,937 |
| | | | | | |
Less unamortized deferred financing costs | | (1,990,507 | ) | | (2,313,629 | ) | | | | | | |
| | $ | 114,824,998 |
| | $ | 122,709,308 |
| | | | | | |
| |
(1) | Contractual interest rate represents the interest rate in effect under the mortgage note payable as of September 30, 2019. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2019 consisting of the contractual interest rate and the effect of the interest rate swap, if applicable. For further information regarding the Company’s derivative instruments, see Note 7. |
| |
(2) | The loans on each of the Williams Sonoma and Wyndham properties (collectively, the "Property") located in Summerlin, Nevada were originated by Nevada State Bank ("Bank"). The loans are collateralized by a deed of trust and a security agreement with assignment of rents and fixture filing. In addition, the individual loans are subject to a cross collateralization and cross default agreement whereby any default under, or failure to comply with the terms of any one or both of the loans, is an event of default under the terms of both loans. The value of the Property must be in an amount sufficient to maintain a loan to value ratio of no more than 60%. If the loan to value ratio is ever more than 60%, the borrower shall, upon the Bank’s written demand, reduce the principal balance of the loans so that the loan to value ratio is no more than 60%. |
| |
(3) | The initial contractual interest rate is 4.25% and starting November 18, 2022, the interest rate is T-Bill index plus 3.25%. |
| |
(4) | The initial contractual interest rate is 4.60% for the first five years and starting February 21, 2023, the interest rate is the greater of 4.60% or five-year Treasury Constant Maturity ("TCM") plus 2.45% for the second five years. |
| |
(5) | The initial contractual interest rate is 4.84% for the first five-years and starting March 28, 2023, the interest rate is the greater of 4.60% or five-year TCM plus 2.45% for the second five-years. |
| |
(6) | The loan refinancing on March 7, 2019 reduced the principal amount outstanding and the interest rate and extended the maturity. The interest rate for the note payable outstanding as of September 30, 2019 adjusts in the 133rd, 253rd and 313th months. |
| |
(7) | The loan was fully repaid on the March 13, 2019 maturity date. |
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 7. DEBT
Mortgage Notes Payable, Net
As of September 30, 2020 and December 31, 2019, the Company’s mortgage notes payable consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collateral | | 2020 Principal Amount | | 2019 Principal Amount | | Contractual Interest Rate (1) | | Effective Interest Rate (1) | | Loan Maturity |
Accredo/Walgreens property (8)(11) | | $ | 8,538,000 | | | $ | 6,853,442 | | | 3.80% | | 3.80% | | 2025-08-01 |
Six Dollar General properties | | 3,765,883 | | | 3,819,264 | | | 4.69% | | 4.69% | | 2022-04-01 |
Dana property | | 4,488,612 | | | 4,551,250 | | | 4.56% | | 4.56% | | 2023-04-01 |
Northrop Grumman property | | 5,556,618 | | | 5,666,866 | | | 4.40% | | 4.40% | | 2021-03-02 |
exp US Services property | | 3,338,239 | | | 3,385,353 | | | (3) | | 4.25% | | 2024-11-17 |
Harley Davidson property (13) | | 0 | | | 6,748,029 | | | 4.25% | | 4.25% | | 2024-09-01 |
Wyndham property (2) | | 5,634,900 | | | 5,716,200 | | | One-month LIBOR + 2.05% | | 4.34% | | 2027-06-05 |
Williams Sonoma property (2) | | 4,461,300 | | | 4,530,600 | | | One-month LIBOR + 2.05% | | 4.34% | | 2022-06-05 |
Omnicare property | | 4,213,726 | | | 4,273,552 | | | 4.36% | | 4.36% | | 2026-05-01 |
EMCOR property | | 2,824,657 | | | 2,862,484 | | | 4.35% | | 4.35% | | 2024-12-01 |
Husqvarna property | | 6,379,182 | | | 6,379,182 | | | (4) | | 4.60% | | 2028-02-20 |
AvAir property (9) | | 19,950,000 | | | 14,575,000 | | | 3.80% | | 3.80% | | 2025-08-01 |
3M property | | 8,197,500 | | | 8,290,000 | | | One-month LIBOR + 2.25% | | 5.09% | | 2023-03-29 |
Cummins property | | 8,364,300 | | | 8,458,600 | | | One-month LIBOR + 2.25% | | 5.16% | | 2023-04-04 |
Former 24 Hour Fitness property (5)(13) | | 0 | | | 6,283,898 | | | One-month LIBOR + 4.30% | | 4.64% | | 2049-04-01 |
Texas Health property | | 4,382,914 | | | 4,400,000 | | | 4.00% | | 4.00% | | 2024-12-05 |
Bon Secours property | | 5,198,071 | | | 5,250,000 | | | 5.41% | | 5.41% | | 2026-09-15 |
Costco property | | 18,850,000 | | | 18,850,000 | | | 4.85% | | 4.85% | | 2030-01-01 |
Taylor Fresh Foods | | 12,350,000 | | | 12,350,000 | | | 3.85% | | 3.85% | | 2029-11-01 |
Levins property (6) | | 2,044,473 | | | 2,079,793 | | | One-month LIBOR + 1.93% | | 3.74% | | 2021-01-05 |
Island Pacific Supermarket property (6)(11) | | 0 | | | 1,891,225 | | | One-month LIBOR + 1.93% | | 3.74% | | 2033-05-30 |
Dollar General Bakersfield property (6) | | 2,283,061 | | | 2,324,338 | | | One-month LIBOR + 1.48% | | 3.38% | | 2021-03-05 |
Rite Aid property (6)(11) | | 0 | | | 3,659,338 | | | One-month LIBOR + 1.50% | | 3.25% | | 2021-05-05 |
PMI Preclinical property (6) | | 4,045,472 | | | 4,118,613 | | | One-month LIBOR + 1.48% | | 3.38% | | 2021-03-05 |
EcoThrift property (6) | | 2,590,233 | | | 2,639,237 | | | One-month LIBOR + 1.21% | | 2.96% | | 2021-07-05 |
GSA (MSHA) property (6) | | 1,763,359 | | | 1,796,361 | | | One-month LIBOR + 1.25% | | 3.13% | | 2021-08-05 |
PreK San Antonio property (6) | | 5,064,184 | | | 5,140,343 | | | 4.25% | | 4.25% | | 2021-12-01 |
Dinan Cars property (6)(7)(13) | | 0 | | | 2,710,834 | | | 2.76% | | 2.76% | | 2022-01-05 |
Solar Turbines, Amec Foster, ITW Rippey properties (6) | | 9,270,830 | | | 9,434,692 | | | 3.35% | | 3.35% | | 2026-11-01 |
Dollar General Big Spring property (6) | | 602,617 | | | 611,161 | | | 4.50% | | 4.50% | | 2022-04-01 |
Gap property (6) | | 3,588,893 | | | 3,643,166 | | | 4.15% | | 4.15% | | 2023-08-01 |
L-3 Communications property (6) | | 5,211,418 | | | 5,284,884 | | | 4.69% | | 4.69% | | 2022-04-01 |
Sutter Health property (6) | | 13,950,432 | | | 14,161,776 | | | 4.50% | | 4.50% | | 2024-03-09 |
Walgreens property (6)(10) | | 3,198,668 | | | 3,000,000 | | | 4.25% | | 4.25% | | 2030-07-16 |
Total mortgage notes payable | | 180,107,542 | | | 195,739,481 | | | | | | | |
Plus unamortized mortgage premium, net (12) | | 470,411 | | | 489,664 | | | | | | | |
Less unamortized deferred financing costs | | (1,576,836) | | | (2,189,938) | | | | | | | |
Mortgage notes payable, net | | $ | 179,001,117 | | | $ | 194,039,207 | | | | | | | |
(1)Contractual interest rate represents the interest rate in effect under the mortgage note payable as of September 30, 2020. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2020, consisting of the contractual interest rate and the effect of the interest rate swap, if applicable (see Note 8 for further information regarding the Company’s derivative instruments).
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
(2)The loans on each of the Williams Sonoma and Wyndham properties (collectively, the “Property”) located in Summerlin, Nevada were originated by Nevada State Bank (“Bank”). The loans are collateralized by a deed of trust and a security agreement with assignment of rents and fixture filing. In addition, the individual loans are subject to a cross collateralization and cross default agreement whereby any default under, or failure to comply with the terms of any one or both of the loans, is an event of default under the terms of both loans. The value of the Property must be in an amount sufficient to maintain a loan to value ratio of no more than 60%. If the loan to value ratio is ever more than 60%, the borrower shall, upon the Bank’s written demand, reduce the principal balance of the loans so that the loan to value ratio is no more than 60%.
(3)The initial contractual interest rate is 4.25% and starting November 18, 2022, the interest rate is the U.S. Treasury Bill index rate plus 3.25%.
(4)The initial contractual interest rate is 4.60% through February 20, 2023 and then the greater of 4.60% or five-year Treasury Constant Maturity (“TCM”) plus 2.45% through February 20, 2028.
(5)The interest rate adjusts in the 133rd, 253rd and 313th months. As discussed in Note 4, during the three months ended September 30, 2020, the Company recorded an impairment charge of $5,664,517 related to its investment in the 24 Hour Fitness property in Las Vegas, Nevada due to the substantial impact on fitness centers from the COVID-19 pandemic and the requirement of an indefinite and potentially extended period of store closures and the resulting inability of the tenant to make rent payments. On April 1, 2020, the Company’s special purpose subsidiary initiated negotiations with the lender on the 24 Hour Fitness property regarding the special purpose subsidiary's request for a deferral of mortgage payments until the tenant resumes paying rent. The lender on this property did not agree to provide any substantial mortgage relief to the Company's special purpose subsidiary, but rather agreed to temporarily reduce its $32,000 monthly mortgage payment by $8,000 for 4 monthly payments from May through August 2020. On June 15, 2020, the Company received written notice that the lease was formally rejected in connection with 24 Hour Fitness' Chapter 11 bankruptcy proceeding and the premises were surrendered to the Company's subsidiary. As of September 30, 2020, the 24 Hour Fitness property was classified as held for sale (see Note 4).
(6)The loan was acquired through the Merger on December 31, 2019.
(7)The Company negotiated a lease termination with Dinan Cars effective January 31, 2020 in exchange for a termination payment from Dinan Cars of $783,182 which was used to reduce the principal balance of this mortgage by $650,000 and establish a payment reserve with the remaining $133,182. In connection with the principal prepayment, the Company terminated the related swap agreement on February 4, 2020 at a cost of $47,000 (see Note 8 for further discussion of the swap agreement termination and Note 11 for details on the sale of the property on October 28, 2020).
(8)The mortgage note with original principal of $6,800,000 as of June 30, 2020 with an interest rate of 3.95% was refinanced on August 10, 2020 with a new loan for $8,538,000 with an interest rate of 3.80%, secured only by the Accredo property and which will mature on August 1, 2025.
(9)The mortgage note with original principal of $14,545,000 as of June 30, 2020 with an effective interest rate of 4.84% was refinanced on July 29, 2020 with a new loan for $19,950,000 with an interest rate of 3.80% and will mature on August 1, 2025. In connection with this refinancing, the mortgage note balance for the Walgreens, Stockbridge, GA property was fully repaid.
(10)The mortgage note of $3,000,000 as of June 30, 2020 with an interest rate of 7.50% was refinanced on July 22, 2020 for $3,217,500 with an interest rate of 4.25%, which will mature on July 16, 2030.
(11)The property was sold during the three months ended September 30, 2020.
(12)Represents unamortized net mortgage premium acquired through the Merger.
(13)The September 30, 2020 principal amount is included in mortgage notes payable related to investments held for sale, net (see details below).
The following weresummarizes the face value, carrying amount and fair value of the Company’s mortgage notes payable (Level 3 measurement): as of September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Face Value | | Carrying Value | | Fair Value | | Face value | | Carrying Value | | Fair Value |
Mortgage notes payable | $ | 180,107,542 | | | $ | 179,001,117 | | | $ | 179,676,613 | | | $ | 195,739,481 | | | $ | 194,039,207 | | | $ | 200,535,334 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| Face Value | | Carrying Value | | Fair Value | | Face value | | Carrying Value | | Fair Value |
Mortgage notes payable | $ | 116,815,505 |
| | $ | 114,824,998 |
| | $ | 123,669,045 |
| | $ | 125,022,937 |
| | $ | 122,709,308 |
| | $ | 123,821,490 |
|
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Disclosures of the fair values of financial instruments are based on pertinent information available to the Company as of the period end and require a significant amount of judgment. The actual value could be materially different from the Company’s estimate of fair value.
Mortgage Notes Payable Related to Real Estate Investments Held For Sale, Net
As discussed in detail in Note 4, the Company classified 3 properties as real estate held for sale as of September 30, 2020. The following table summarizes the Company's mortgage notes payable related to real estate investments held for sale as of September 30, 2020:
| | | | | | | | |
Collateral | | September 30, 2020 |
Harley Davidson property | | $ | 6,655,415 | |
24 Hour Fitness property | | 6,241,355 | |
Dinan Cars property | | 2,019,168 | |
Total | | 14,915,938 | |
Plus unamortized mortgage premium | | 2,307 | |
Less deferred financing costs | | (246,875) | |
Mortgage notes payable, net | | $ | 14,671,370 | |
Unsecured Credit Facility, Net
The details of the Company's unsecured credit facility as of September 30, 2020 and December 31, 2019 follow:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Unsecured credit facility | | $ | 6,000,000 | | | $ | 7,740,000 | |
Less unamortized deferred financing costs | | (32,271) | | | (90,139) | |
Unsecured credit facility, net | | $ | 5,967,729 | | | $ | 7,649,861 | |
On December 19, 2019, the Company, together withNNN LP, the Operating Partnership, Merger Sub, BrixInvest and NNN LP ("Borrowers"modiv, LLC (collectively, the “Borrowers”), has entered into a Business Loan and Security Agreement and Promissory Note (the "Unsecured“Unsecured Credit Facility"Facility”) with Pacific Mercantile Bank ("Lender"(“PMB”). The Unsecured Credit Facility wasis a revolving unsecured line of credit for a maximum principal amount of $9,000,000 which was scheduled to mature on January 26,$12,000,000 and as of September 30, 2020 and December 31, 2019, unless earlier terminated. The Borrowers received extensions of the Unsecured Credit Facility through Aprilhad an outstanding balance of $6,000,000 and $7,740,000, respectively.
On March 13, 2020, the Company amended the Unsecured Credit Facility to extend the maturity date of $6,940,000 of outstanding borrowings under the Unsecured Credit Facility from March 31, 2020 to July 31, 2020, and to extend the maturity date of $3,060,000 of the outstanding borrowings under the Unsecured Credit Facility from May 4, 2020 to August 31, 2020.
On August 13, 2020, the Company amended the Unsecured Credit Facility to extend the maturity date of $6,000,000 of the outstanding borrowings under the Unsecured Credit Facility to September 1, 2020 and the maturity date of the remaining $6,000,000 of the outstanding borrowings under the Unsecured Credit Facility to October 15, 2021. The Company repaid $6,000,000 of the $12,000,000 then outstanding borrowings under the Unsecured Credit Facility with proceeds generated by property refinancings and asset sales during the three months ended September 30, 2019.2020. Under the August 13, 2020 amendment, there is a moratorium on new borrowings under the Unsecured Credit Facility until the remaining $6,000,000 is fully repaid. The Company paid PMB $25,000 for loan extension and modification fees in connection with the August 13, 2020 amendment.
In connection with the August 13, 2020 amendment to the Unsecured Credit Facility, the Company's Chairman, Mr. Wirta and the Wirta Trust have guaranteed the Company’s obligations under the Unsecured Credit Facility. On AprilJuly 30, 2019, Borrowers2020, the Company entered into a new Loan Agreement (the "New Credit Facility")an indemnification agreement with Lender which replacedMr. Wirta and the expiring $9,000,000 unsecured lineWirta Trust with respect to their guarantees of credit. The Newthe Company’s $12,000,000 Unsecured Credit Facility is a revolving unsecured linewith PMB pursuant to which the Company agreed to indemnify Mr. Wirta and the Wirta Trust if they are required to make payments to PMB pursuant to such guarantees.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Once the remaining $6,000,000 of outstanding borrowings under the Unsecured Credit Facility are fully repaid, the Unsecured Credit Facility will again be available to fund the Company’s acquisitions of single-tenant, income producing commercial, office, industrial or retail real estate properties, in an amount of $10,000,000 and matures on October 1, 2020, unless earlier terminated.up to 70% of the purchase price of such acquisitions. The NewCompany intends to repay amounts outstanding under the Unsecured Credit Facility has similar terms to the expired facility.
The New Credit Facility is securedfrom proceeds generated by a continuing guaranty executed by the Company’s Sponsorasset sales and Advisor, along with springing guaranties executed by Raymond E. Wirta, Chairman of the Board of the Company, and a trust belonging to Mr. Wirta, each in the amount of $10,000,000. Mr. Wirta’s guaranties become effective upon certain triggering events, including the failure by Borrowers to paymortgage refinancings on one or more subsequent advances within 90 days of disbursementthe properties owned, either directly or an eventindirectly through one or more wholly-owned single member special purpose entities, by the Operating Partnership, along with gross offering proceeds from the sale of default undershares of the New Credit Facility.Company’s common stock.
Under the terms of the NewUnsecured Credit Facility, the Borrowers pay a variable rate of interest on outstanding amounts equal to one (1)1 percentage point over an independent indexthe prime rate published in The Wall Street Journal, basedprovided that the interest rate in effect on the highest rate on corporate loans posted by at least 75% of the largest banks (the "Index").any one day shall not be less than 5.50% per annum. The interest rate was 6.00%5.50% and 6.50%5.75% as of September 30, 20192020 and December 31, 2018,2019, respectively. The current interest rate is 5.75%.5.50%, which is the minimum rate.
To secure the payment and performance of all obligations under the Unsecured Credit Facility, each of modiv, LLC and BrixInvest granted to PMB a security interest in all of their right, title and interest in their accounts, inventory, equipment, deposit accounts, intellectual property, general intangibles, investment property and other property.
The NewUnsecured Credit Facility contains customary representations, warranties and covenants.covenants, which are substantially similar to those in the Company's prior credit facility. The Company’s ability to borrow under the NewUnsecured Credit Facility iswill be subject to its ongoing compliance with various affirmative and negative covenants, including with respect to indebtedness, guaranties, mergers and asset sales, liens, dividends,tangible net worth, corporate existence and financial reporting obligations. The NewUnsecured Credit Facility also contains customary events of default, including, without limitation, nonpayment of principal, interest, fees or other amounts when due, violation of covenants, breaches of representations or warranties and change of ownership. Upon the occurrence of an event of default, LenderPMB may accelerate the repayment of amounts outstanding under the NewUnsecured Credit Facility, take possession of any collateral securing the Unsecured Credit Facility and exercise other remedies subject, in certain instances, to the expiration of an applicable cure period. The August 13, 2020 amendment to the agreement requires the Company to maintain a minimum debt service coverage ratio of 1.25 to 1.00 and tangible net worth of $125,000,000, measured quarterly.
AsShort-term Notes Payable
In connection with the Self-Management Transaction, the Company assumed from BrixInvest its unsecured short-term notes payable (formerly known as “Convertible Promissory Notes”) of September 30, 2019 and$4,800,000 on December 31, 20182019. The notes represented private party notes and bore interest at a fixed rate of 8% with all interest and principal due on the maturity date. Except for six notes from one borrower aggregating $1,024,750 for which the maturity date was extended to April 30, 2020, all notes were repaid prior to March 31, 2020. In exchange for the maturity date extension, the Company had $0agreed to pay 2% of the principal and $9,000,000accrued interest, or $24,845, as an extension fee and agreed to an increase in the interest rate from 8% to 10% per annum during the extension period. The maturity date for the $490,000 of outstanding borrowings, respectively,the extended short-term notes was subsequently accelerated to April 6, 2020 in exchange for a $10,000 reduction in the extension fee to $14,845 and these notes were repaid on April 6, 2020.
Economic Relief Notes Payable
On April 20, 2020, a subsidiary of the Company entered into a loan agreement and promissory note evidencing an unsecured loan in the aggregate amount of $517,000 made to this subsidiary under the New Credit FacilityPaycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Unsecured Credit Facility, as then in effect. See Note 11 - Subsequent Events regarding borrowingsEconomic Security Act ("CARES Act"). The PPP is administered by the U.S. Small Business Administration (the “SBA”). Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the New Credit FacilityPPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. Recent modifications to the PPP by the U.S. Treasury and the Paycheck Protection Program Flexibility Act of 2020 have extended the time period for loan forgiveness beyond the original eight-week period to 24 weeks, making it possible for the Company's subsidiary to apply for forgiveness of 100% of its PPP loan prior to December 31, 2020. No assurance can be given that the Company's subsidiary will be successful in October 2019obtaining forgiveness of the loan in connection withwhole or in part.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The PPP loan was made through PMB. To the extent that the loan is not forgiven, the subsidiary and PMB may mutually agree to fully amortize any unforgiven principal balance of the loan over a property acquisition.period of up to 10 years from the date on which the subsidiary applies for loan forgiveness. The unamortized deferred financing costsannual interest rate on any unforgiven principal balance of $52,597the PPP loan is 1%. The promissory note evidencing the PPP loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the New Credit Facility are includedSBA or PMB, or breaching the terms of the loan documents. The occurrence of an event of default may result in other assetsthe repayment of all amounts outstanding, collection of all amounts owing from the subsidiary, or filing suit and obtaining judgment against the subsidiary.
On May 20, 2020, the Company also obtained a $10,000 Economic Injury Disaster Loan (“EIDL”) from the SBA which is expected to be treated as a grant since the Company has decided not to apply for an EIDL, and will therefore reduce the amount of the PPP loan that can be forgiven by $10,000.
Compliance with All Debt Agreements
On March 27, 2020, the Company's conflicts committee and board of directors approved an increase in the Company's condensed consolidated balance sheet asmaximum leverage from 50% to 55% in order to allow the Company to take advantage of September 30, 2019.the current low interest rate environment, the relative cost of debt and equity capital, and strategic borrowing advantages potentially available to the Company.
All Debt Agreements
Pursuant to the terms of mortgage notes payable secured byon certain of the Company’s properties and the Unsecured Credit Facility, the Company and/or the Borrowers are subject to certain financial loan covenants. The Company and/or the Borrowers were in compliance with all terms and conditions of the applicable loan agreements as of September 30, 2019.2020. Due to the COVID-19 pandemic, the lender to the Company's special purpose subsidiary which owns the property in Las Vegas, Nevada formerly leased to 24 Hour Fitness agreed to accept reduced payments on the related secured mortgage for four months commencing May 1, 2020 through August 1, 2020 (see Note 4 and above discussion). The Company remains in compliance with the loan agreement for this property and resumed paying the full amount of monthly principal and interest starting September 1, 2020. As discussed in Note 4, the Las Vegas, Nevada property is held for sale as of September 30, 2020.
The following summarizes the future principal repayments of the Company’s mortgage notes payable, unsecured credit facility and short-term notes payable as of September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Mortgage Notes Payable | | Unsecured Credit Facility | | Short-term Notes Payable (1) | | Total |
October through December 2020 | | $ | 589,782 | | | $ | 0 | | | $ | 527,000 | | | $ | 1,116,782 | |
2021 | | 19,665,222 | | | 6,000,000 | | | 0 | | | 25,665,222 | |
2022 | | 20,872,760 | | | 0 | | | 0 | | | 20,872,760 | |
2023 | | 25,642,334 | | | 0 | | | 0 | | | 25,642,334 | |
2024 | | 24,597,822 | | | 0 | | | 0 | | | 24,597,822 | |
2025 | | 30,781,081 | | | 0 | | | 0 | | | 30,781,081 | |
Thereafter | | 57,958,541 | | | 0 | | | 0 | | | 57,958,541 | |
Total principal | | 180,107,542 | | | 6,000,000 | | | 527,000 | | | 186,634,542 | |
Plus unamortized mortgage premium, net of unamortized discount | | 470,411 | | | 0 | | | 0 | | | 470,411 | |
Less deferred financing costs | | (1,576,836) | | | (32,271) | | | 0 | | | (1,609,107) | |
Net principal | | $ | 179,001,117 | | | $ | 5,967,729 | | | $ | 527,000 | | | $ | 185,495,846 | |
(1) The PPP loan is subject to potential forgiveness of up to $517,000 or repayment over an undetermined period of up to 10 years.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following summarizes the future principal repayments of the Company’s mortgage notes payable and New Credit Facility as of September 30, 2019:
|
| | | | | | | | | | | |
| Mortgage Note Payable | | New Credit Facility | | Total |
October through December 2019 | $ | 320,753 |
| | $ | — |
| | $ | 320,753 |
|
2020 | 1,523,095 |
| | — |
| | 1,523,095 |
|
2021 | 8,223,343 |
| | — |
| | 8,223,343 |
|
2022 | 14,617,593 |
| | — |
| | 14,617,593 |
|
2023 | 21,247,852 |
| | — |
| | 21,247,852 |
|
2024 | 12,966,778 |
| | — |
| | 12,966,778 |
|
Thereafter | 57,916,091 |
| | — |
| | 57,916,091 |
|
Total principal | 116,815,505 |
| | — |
| | 116,815,505 |
|
Less: Deferred financing costs, net | (1,990,507 | ) | | — |
| | (1,990,507 | ) |
Net principal | $ | 114,824,998 |
| | $ | — |
| | $ | 114,824,998 |
|
Interest Expense
The following is a reconciliation of the components of interest expense for the three and nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Mortgage notes payable: | | | | | | | | |
Interest expense | | $ | 2,135,624 | | | $ | 1,387,785 | | | $ | 6,471,492 | | | $ | 4,232,943 | |
Amortization of deferred financing costs | | 435,179 | | | 120,932 | | | 693,810 | | | 500,525 | |
Prepayment penalties | | 138,373 | | | 0 | | | 138,373 | | | 0 | |
(Gain) loss on interest rate swaps (1) | | (179,006) | | | 218,642 | | | 1,263,691 | | | 1,109,027 | |
Unsecured credit facility: | | | | | | | | |
Interest expense | | 128,333 | | | 0 | | | 449,791 | | | 110,060 | |
Amortization of deferred financing costs | | 42,288 | | | 11,432 | | | 117,624 | | | 23,311 | |
Other | | 31,737 | | | 0 | | | 61,280 | | | 0 | |
Total interest expense | | $ | 2,732,528 | | | $ | 1,738,791 | | | $ | 9,196,061 | | | $ | 5,975,866 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Mortgage notes payable: | | | | | | | |
Interest expense | $ | 1,387,785 |
| | $ | 1,053,148 |
| | $ | 4,232,943 |
| | $ | 2,875,623 |
|
Amortization of deferred financing costs | 120,932 |
| | 127,182 |
| | 500,525 |
| | 632,717 |
|
Loss (gain) on interest rate swaps (1) | 218,642 |
| | (187,787 | ) | | 1,109,027 |
| | (401,175 | ) |
Unsecured credit facility: | | | | | | | |
Interest expense | — |
| | 69,745 |
| | 110,060 |
| | 236,142 |
|
Amortization of deferred financing costs | 11,432 |
| | 8,572 |
| | 23,311 |
| | 21,429 |
|
Total interest expense | $ | 1,738,791 |
| | $ | 1,070,860 |
| | $ | 5,975,866 |
| | $ | 3,364,736 |
|
| |
(1) | (1) Includes unrealized (gain) loss (gain) on interest rate swaps of $221,530 and $(185,452) for the three months ended September 30, 2019 and 2018, respectively, and $1,095,547 and $(406,023) for the nine months ended September 30, 2019 and 2018, respectively, (see Note 7). Accrued interest payable, net of $11,780 and $5,950 at September 30, 2019 and December 31, 2018, respectively, represents the unsettled portion of the interest rate swaps from the last settlement period through the respective balance sheet dates. |
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 7. INTEREST RATE SWAP DERIVATIVES
The Company, through its wholly-owned limited liability company subsidiaries, has entered into interest rate swap agreements with amortizing notional amounts relating to four of its mortgage notes payable. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks.
The following table summarizes the notional amount and other information related to the Company’s interest rate swaps:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
Derivative Instruments | | Number of Instruments | | Notional Amount (i) | | Reference Rate (ii) | | Weighted Average Fixed Pay Rate | | Weighted Average Remaining Term | | Number of Instruments | | Notional Amount (i) | | Reference Rate (iii) | | Weighted Average Fixed Pay Rate | | Weighted Average Remaining Term |
Interest Rate Swap Derivatives | | 4 | | $ | 27,104,000 |
| | One-month LIBOR + applicable spread/Fixed at 4.05%-5.16% | | 4.69 | % | | 4.3 years | | 4 | | $ | 27,346,400 |
| | One-month LIBOR + applicable spread/Fixed at 4.05%-5.16% | | 4.73 | % | | 5.1 years |
| |
(i) | The notional amount of the Company’s swaps decreases each month to correspond to the outstanding principal balance on the related mortgage. The minimum notional amount (outstanding principal balance at the maturity date) as of September 30, 2019 was $24,967,299. |
| |
(ii) | The reference rate as of September 30, 2019. |
| |
(iii) | The reference rate as of December 31, 2018. |
The following table sets forth the fair value of the Company’s derivative instruments (Level 2 measurement), as well as their classification in the condensed consolidated balance sheets:
|
| | | | | | | | | | | | | | |
| | | | September 30, 2019 | | December 31, 2018 |
Derivative Instrument | | Balance Sheet Location | | Number of Instruments | | Fair Value | | Number of Instruments | | Fair Value |
Interest Rate Swaps | | Asset - Interest rate swap derivatives, at fair value | | — | | $ | — |
| | 2 | | $ | 151,215 |
|
Interest Rate Swaps | | Liability - Interest rate swap derivatives, at fair value | | 4 | | $ | (1,245,261 | ) | | 2 | | $ | (300,929 | ) |
The change in fair value of a derivative instrument that is not designated as a cash flow hedge for financial accounting purposes is recorded as interest expense in the condensed consolidated statements of operations. None of the Company’s derivatives at September 30, 2019 or December 31, 2018 were designated as hedging instruments; therefore, the net unrealized loss (gain) recognized on interest rate swaps of $221,530$(272,912) and $(185,452) was recorded as an increase (decrease) in interest expense$221,530 for the three months ended September 30, 20192020 and 2018,2019, respectively, and $1,095,547$1,019,840 and $(406,023) was recorded as an increase (decrease) in interest expense$1,095,547 for the nine months ended September 30, 20192020 and 2018,2019, respectively (see Note 6)8). Accrued interest payable of $66,322 and $22,282 as of September 30, 2020 and December 31, 2019, respectively, represents the unsettled portion of the interest rate swaps for the period from origination of the interest rate swap through the respective balance sheet dates.
NOTE 8. RELATED PARTY TRANSACTIONSINTEREST RATE SWAP DERIVATIVES
The Company, hasthrough its limited liability company subsidiaries, entered into an agreement (as amended, the "Advisory Agreement")interest rate swap agreements with amortizing notional amounts relating to 4 of its mortgage notes payable and assumed 8 additional swap agreements in conjunction with the Advisor. On August 9, 2019,Merger and terminated 3 swap agreements during the Advisory Agreement was further amended to delete the subordinated participation fee from the agreement. On August 9, 2019, the board of directorsnine months ended September 30, 2020. The notional amount is an indication of the Company, including allextent of the independent directors, also approved renewingCompany’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks.
The following table summarizes the Advisory Agreement, which was schedulednotional amount and other information related to expire on August 11, 2019 tothe Company’s interest rate swaps as of September 30, 2020 and December 31, 2019. 2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Derivative Instruments | | Number of Instruments | | Notional Amount (i) | | Reference Rate (ii) | | Weighted Average Fixed Pay Rate | | Weighted Average Remaining Term | | Number of Instruments | | Notional Amount (i) | | Reference Rate (iii) | | Weighted Average Fixed Pay Rate | | Weighted Average Remaining Term |
Interest Rate Swap Derivatives (iv) | | 9 | | $ | 39,384,598 | | | One-month LIBOR + applicable spread/Fixed at 3.13%-5.16% | | 3.53 | % | | 2.4 years | | 12 | | $ | 48,215,139 | | | One-month LIBOR + applicable spread/Fixed at 2.76%-5.16% | | 3.87 | % | | 2.9 years |
(i)The Advisory Agreement was further amended effective October 1, 2019 in connection withnotional amount of the Company’s new planswaps decreases each month to correspond to the outstanding principal balance on the related mortgage. The minimum notional amounts (outstanding principal balance at the maturity date) as of distribution whereby the Company will offer its shares of Class C Common Stock through a registered broker dealer. September 30, 2020 and December 31, 2019 were $37,528,748 and $45,514,229, respectively.
(ii)The reference rate was September 30, 2020.
(iii)The reference rate was December 31, 2019.
(iv)The Company agreedterminated the swap agreement related to pay all future organizationthe Dinan Cars property mortgage loan on February 4, 2020 at a cost of $47,000 (see Note 7). The Company also terminated the swap agreements related to the Rite Aid property mortgage loan on July 30, 2020 at a cost of $40,700 and offering costs, and to no longer be reimbursed by the Sponsor for the Company’s Investor Relations personnel costs afterIsland Pacific property mortgage loan on September 30, 2019, in exchange for the Sponsor’s agreement to terminate its right to receive 3%16, 2020 at a cost of all offering proceeds received by the Company after September 30, 2019 as reimbursement for organization and offering costs previously paid by the Sponsor.
$11,500 (see Note 7).
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Advisory Agreement entitlesfollowing table sets forth the Advisor to specified fees upon the provision of certain services with regard to investments in real estate and the management of those investments, among other services, and the disposition of investments, and, prior to October 1, 2019, entitled the Advisor to reimbursement of organizational and offering costs incurred by the Advisor or Sponsor on behalffair value of the Company, suchCompany’s derivative instruments (Level 2 measurement), as expenses related to the Offerings, and certain costs incurred by the Advisor or Sponsor in providing services to the Company. In addition, the Advisor is entitled to certain other feeswell as detailedtheir classification in the Advisory Agreement. condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2020 | | December 31, 2019 |
Derivative Instrument | | Balance Sheet Location | | Number of Instruments | | Fair Value | | Number of Instruments | | Fair Value |
Interest Rate Swaps | | Asset - Interest rate swap derivatives, at fair value | | 0 | | $ | 0 | | | 5 | | $ | 34,567 | |
Interest Rate Swaps | | Liability - Interest rate swap derivatives, at fair value | | 9 | | $ | (2,006,997) | | | 7 | | $ | (1,021,724) | |
The Sponsor also serveschange in fair value of a derivative instrument that is not designated as a cash flow hedge for financial accounting purposes is recorded as interest expense in the sponsor for REIT I and, prior to October 28, 2019, BRIX REIT. Duringcondensed consolidated statements of operations. None of the three and nine months endedCompany’s derivatives at September 30, 2020 or December 31, 2019 were designated as hedging instruments; therefore, the net unrealized (gain) loss recognized on interest rate swaps of $(272,912) and 2018, no business transactions occurred between the Company and REIT I, or BRIX REIT, other than$221,530 was recorded as described below or elsewhere herein, and those relating to the Company’s pending Merger with REIT I describeda (decrease) increase in Note 1 and investment in REIT I described in Note 5.
Summarized below are the related party costs incurred by the Company, including those incurred pursuant to the Advisory Agreement, for the three and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | | | | | Three Months Ended | | Nine Months Ended | | | | |
| September 30, 2019 | | September 30, 2019 | | September 30, 2018 | | December 31, 2018 |
| Incurred | | Incurred | | Receivable | | Payable | | Incurred | | Incurred | | Receivable | | Payable |
Expensed: | | | | | | | | | | | | | | | |
Asset management fees (1) | $ | 680,349 |
| | $ | 2,040,386 |
| | $ | — |
| | $ | — |
| | $ | 532,355 |
| | $ | 1,411,585 |
| | $ | — |
| | $ | — |
|
Subordinated participation fees | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 839,050 |
|
Operating expense reimbursements (2) | 132,000 |
| | 396,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Fees to affiliates | 812,349 |
| | 2,436,386 |
| | | | | | 532,355 |
| | 1,411,585 |
| | | | |
Property management fees* | 56,322 |
| | 168,394 |
| | — |
| | — |
| | 22,503 |
| | 54,654 |
| | — |
| | 96,792 |
|
Directors and officers insurance and other reimbursements** | 64,433 |
| | 198,108 |
| | — |
| | — |
| | 33,118 |
| | 70,034 |
| | — |
| | 30,164 |
|
Expense reimbursements (from) to Sponsor (3) | (96,104 | ) | | (332,336 | ) | | 4,090 |
| | — |
| | (298,645 | ) | | (952,098 | ) | | 16,838 |
| | — |
|
Capitalized: | | | | | | | | | | | | | | | |
Acquisition fees | 5,459 |
| | 5,459 |
| | — |
| | 644 |
| | 588,750 |
| | 1,532,108 |
| | — |
| | — |
|
Financing coordination fees | — |
| | 63,500 |
| | — |
| | — |
| | — |
| | 209,550 |
| | — |
| | — |
|
Reimbursable organizational and offering expenses (4) | 307,217 |
| | 1,207,381 |
| | 1,287 |
| | — |
| | 348,466 |
| | 1,164,763 |
| | — |
| | 13,168 |
|
| | | | | $ | 5,377 |
| | $ | 644 |
| | | | | | $ | 16,838 |
| | $ | 979,174 |
|
| |
* | Property management fees are classified within property operating expenses in the condensed consolidated statements of operations. |
| |
** | Directors and officers insurance and other reimbursements are classified within general and administrative expenses in the condensed consolidated statements of operations. |
| |
(1) | To the extent the Advisor elects, in its sole discretion, to defer all or any portion of its monthly asset management fee, the Advisor will be deemed to have waived, not deferred, that portion up to 0.025% of the total investment value of the Company’s assets. For the three and nine months ended September 30, 2019 and 2018, the Advisor did not waive any of the asset management fees. In addition to amounts presented in this table, the Company also incurred asset management fees to the Advisor of $65,993 and $65,993 related to the TIC Interest during the three months ended September 30, 2019 and 2018, respectively, and $197,978 and $197,978 during the nine months ended September 30, 2019 and 2018, respectively which amounts are reflected as a reduction of income recognized from investments in unconsolidated entities (see Note 5).
|
| |
(2) | Reflects reimbursement for personnel and overhead costs billed by the Advisor in compliance with the 2%/25% Limitation.
|
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
| |
(3) | Includes payroll costs related to Company employees that answer questions from prospective stockholders. See "Investor Relations Payroll Expense Reimbursement from Sponsor" below. The Sponsor agreed to reimburse the Company for these Investor Relations payroll costs which the Sponsor considers to be offering expenses in accordance with the Advisory Agreement. Effective October 1, 2019, the Company will no longer be reimbursed for these costs since it will no longer be offering its shares through the Sponsor. Theinterest expense reimbursements from the Sponsor for the three months ended September 30, 2019 and 2018 also include $0 and $125,181, respectively, of employment related legal fees which the Sponsor also agreed to reimburse the Company. For the nine months ended September 30, 2019 and 2018, expense reimbursements also include $(40,915) refunded to the Sponsor of employment related legal fees and $225,126 for employment related legal fees, respectively. The receivables related to these costs are reflected in "Due from affiliates" in the condensed consolidated balance sheets.
|
| |
(4) | As of September 30, 2019, the Sponsor had incurred $9,189,209 of organizational and offering costs on behalf of the Company. However, the Company is only obligated to reimburse the Sponsor for such organizational and offering expenses to the extent of 3% of gross offering proceeds resulting in a total reimbursement amount of $5,429,105 as of September 30, 2019. The Company ceased reimbursing the Sponsor for these costs effective October 1, 2019 in connection with the change in its plan of distribution whereby the Company will offer its shares of Class C common stock through a registered broker dealer. |
Organizational and Offering Expenses
Prior to October 1, 2019, the Company was obligated to reimburse the Sponsor or its affiliates for organizational and offering expenses (as defined in the Advisory Agreement) paid by the Sponsor on behalf of the Company. The Company reimbursed the Sponsor for organizational and offering expenses up to 3% of gross offering proceeds. The Sponsor and affiliates were responsible for any organizational and offering expenses to the extent they exceeded 3% of gross offering proceeds. As of September 30, 2019, the Sponsor has incurred organizational and offering expenses in excess of 3% of the gross offering proceeds received by the Company. As of September 30, 2019, the Company has reimbursed the Sponsor $5,429,105 in organizational and offering costs. The Company’s maximum liability for organizational and offering costs through September 30, 2019 was $5,429,105, of which $0 was payable as of September 30, 2019. The Company ceased reimbursing the Sponsor for these costs effective October 1, 2019 in connection with the change in its plan of distribution whereby the Company will offer its shares of Class C common stock through a registered broker dealer.
Investor Relations Payroll Expense Reimbursement from Sponsor
The Company employs Investor Relations personnel that answer inquiries from potential investors regarding the Company and/or its Registered Offering. The payroll expense associated with the Investor Relations personnel was reimbursed by the Sponsor prior to October 1, 2019 as described above. The Sponsor considered these payroll costs to be offering expenses. The payroll expense reimbursements from the Sponsor for the three months ended September 30, 20192020 and 2018 were $96,104 and $173,464,2019, respectively, and $1,019,840 and $1,095,547 was recorded as an increase in interest expense for the nine months ended September 30, 2020 and 2019, and 2018 were $373,251 and $726,972, respectively. The reduction in reimbursements during the 2019 period reflects a reduction in the number of Investor Relations personnel and related costs.respectively (see Note 7).
Acquisition Fees
The Company pays the Advisor a fee in an amount equal to 3% of the contract purchase price of the Company’s properties plus additions to real estate investments, as defined, as acquisition fees. The total of all acquisition fees and acquisition expenses shall be reasonable and shall not exceed 6% of the contract price of the property. However, a majority of the directors (including a majority of the independent directors) not otherwise interested in the transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to the Company.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Asset Management Fees
The Company pays the Advisor, as compensation for the advisory services rendered to the Company, a monthly fee in an amount equal to 0.1% of the total investment value, as defined (the "Asset Management Fee"), as of the end of the preceding month plus the book value of any properties or property improvements acquired during the month pro-rated based on the number of days owned. The Asset Management Fee is payable monthly on the last business day of such month. The Asset Management Fee, which must be reasonable in the determination of the Company’s independent directors at least annually, may or may not be taken, in whole or in part as to any year, in the sole discretion of the Advisor. All or any portion of the Asset Management Fee not paid as to any fiscal year is deferred without interest and may be paid in such other fiscal year as the Advisor shall determine. Additionally, to the extent the Advisor elects, in its sole discretion, to defer all or any portion of its monthly Asset Management Fee, the Advisor will be deemed to have waived, not deferred, that portion of its monthly Asset Management Fee that is up to 0.025% of the total investment value of the Company’s assets. The total amount of Asset Management Fees incurred in the three months ended September 30, 2019 and 2018 was $680,349 and $532,355 respectively, none of which was waived. The total amount of Asset Management Fees incurred in the nine months ended September 30, 2019 and 2018 was $2,040,386 and $1,411,585 respectively, of which none was waived. There were no Asset Management Fees payable at September 30, 2019 and December 31, 2018.
Financing Coordination Fees
Other than with respect to any mortgage or other financing related to a property concurrent with its acquisition, if the Advisor or an affiliate provides a substantial amount of the services (as determined by a majority of the Company’s independent directors) in connection with the post-acquisition financing or refinancing of any debt that the Company obtains relative to a property, then the Company pays to the Advisor or such affiliate a financing coordination fee equal to 1% of the amount of such financing. The Company did not pay any financing coordination fees during the three months ended September 30, 2019 and 2018 as there were no loans obtained during either quarter, and paid $63,500 and $209,550 of financing coordination fees during the nine months ended September 30, 2019 and 2018 related to one and three loans, respectively.
Property Management Fees
If the Advisor or any of its affiliates provides a substantial amount of the property management services (as determined by a majority of the Company’s independent directors) for the Company’s properties, then the Company pays the Advisor or such affiliate a property management fee equal to 1.5% of gross revenues from the properties managed. The Company also reimburses the Advisor and any of its affiliates for property-level expenses that such tenant pays or incurs to the Company, including salaries, bonuses and benefits of persons employed by the Advisor, except for the salaries, bonuses and benefits of persons who also serve as one of the Company’s executive officers or as an executive officer of such person. The Advisor or its affiliate may subcontract the performance of its property management duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracts for these services.
Disposition Fees
For substantial assistance in connection with the sale of properties, the Company pays the Advisor or one of its affiliates 3% of the contract sales price, as defined, of each property sold; provided, however, that if, in connection with such disposition, commissions are paid to third parties unaffiliated with the Advisor or its affiliates, the disposition fees paid to the Advisor, the Sponsor, their affiliates and unaffiliated third parties may not exceed the lesser of the competitive real estate commission or 6% of the contract sales price. There were no disposition fees incurred during the three and nine months ended September 30, 2019 and 2018.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Subordinated Participation Fees
For 2017 and 2018, the Company owed the Advisor or an affiliate a subordinated participation fee calculated as of December 31 of each year which was paid in the immediately following January. On August 9, 2019, the Advisory Agreement was amended to delete the subordinated participation fee from the agreement.
The subordinated participation fee was only due if the Preferred Return, as defined, was achieved and was equal to the sum of (using terms as defined in the Advisory Agreement):
| |
(i) | 30% of the product of (a) the difference of (x) the Preliminary NAV per share minus (y) the Highest Prior NAV per share, multiplied by (b) the number of shares outstanding as of December 31 of the relevant annual period, but only if this results in a positive number, plus |
| |
(ii) | 30% of the product of: (a) the amount by which aggregate distributions to stockholders during the annual period, excluding return of capital distributions, divided by the weighted average number of shares outstanding for the annual period, exceed the Preferred Return, multiplied by (b) the weighted average number of shares outstanding for the annual period calculated on a monthly basis. |
The Company calculated subordinated participation fees of $839,050 and $315,802 which were accrued as of December 31, 2018 and 2017, respectively, and paid in cash during the first quarter of 2019 and 2018, respectively.
Leasing Commission Fees
If a property or properties of the Company becomes unleased and the Advisor or any of its affiliates provides a substantial amount of the services (as determined by a majority of the Company’s independent directors) in connection with the Company’s leasing of a property or properties to unaffiliated third parties, then the Company pays the Advisor or such affiliate leasing commissions equal to 6% of the rents due pursuant to such lease for the first ten years of the lease term; provided, however (i) if the term of the lease is less than ten years, such commission percentage will apply to the full term of the lease and (ii) any rents due under a renewal of a lease of an existing tenant upon expiration of the initial lease agreement (including any extensions provided for thereunder) shall accrue a commission of 3% in lieu of the aforementioned 6% commission. There were no leasing commission fees incurred during the three and nine months ended September 30, 2019 and 2018.
Operating Expenses
Under the Company's charter, total operating expenses of the Company are limited to the greater of 2% of average invested assets or 25% of net income for the four most recently completed fiscal quarters (the "2%/25% Limitation"). If the Company exceeds the 2%/25% Limitation, the Advisor must reimburse the Company the amount by which the aggregate total operating expenses exceeds the limitation, or the Company must obtain a waiver from the Company's conflicts committee. For purposes of determining the 2%/25% Limitation amount, "average invested assets" means the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, reserves for bad debts or other non-cash reserves. "Total operating expenses" means all expenses paid or incurred by the Company, as determined by GAAP, that are in any way related to the Company’s operation including asset management fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based upon increases in NAV per share; (f) acquisition fees and acquisition expenses (including expenses, relating to potential investments that the Company does not close); and (h) disposition fees on the sale of real property and other expenses connected with the acquisition, disposition and ownership of real estate interests or other property (other than disposition fees on the sale of assets other than real property), including the costs of insurance premiums, legal services, maintenance, repair and improvement of real property.
The Company is in compliance with the 2%/25% Limitation for operating expenses for the four fiscal quarters ended September 30, 2019.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 9. STOCK COMPENSATION EXPENSE
The Company pays the members of its board of directors who are not executive officers for services rendered by issuing shares of Class C common stock to them. The independent directors earn a quarterly retainer of $12,500 which is paid in arrears and committee chairs receive an additional $2,500 per quarter. During 2019, the members of the Special Committee are being paid an additional $12,500 per quarter, which is also paid in shares of Class C common stock. The total amount paid was $105,000 and $48,240 for the three months ended September 30, 2019 and 2018, respectively, for which the Company issued 10,334 and 4,800 shares, respectively and $210,000 and $129,645 for the nine months ended September 30, 2019 and 2018, respectively, for which the Company issued 20,669 and 12,900 shares, respectively. The Company accrued $71,667 of stock compensation expense for the three and nine months ended September 30, 2019, and such amounts were paid during the fourth quarter of 2019.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company pays the members of its board of directors who are not executive officers for services rendered through cash payments or by issuing shares of Class C common stock to them.
For the three months ended September 30, 2020 and 2019, the total amount of fees incurred for board services was $101,250 and $105,000, respectively. For the three months ended September 30, 2020, $18,750 was paid in cash and the value paid by issuing shares of Class C common stock to directors was $101,250 in July 2020 (issued in arrears for second quarter services) and $82,500 for third quarter services on September 30, 2020, for which the Company issued 14,464 and 11,786 shares, respectively. During the three months ended September 30, 2019, the value paid by issuing shares of Class C common stock was $105,000 for which the Company issued 10,334 shares for the second quarter services, including service on a special committee. For the nine months ended September 30, 2020 and 2019, the total amount of fees incurred for board services was $305,833 and $281,667, respectively, and the value paid during the periods by issuing shares of Class C common stock was $255,833 and $210,000, respectively, for which the Company issued 33,066 and 20,669 shares, respectively.
In conjunction with the Self-Management Transaction effective December 31, 2019, the Advisory Agreement was terminated. The Advisory Agreement entitled the Former Advisor to specified fees upon the provision of certain services with regard to investments in real estate and the management of those investments, among other services, and the disposition of investments, as well as entitled the Former Advisor to reimbursement of organizational and offering costs incurred by the Former Advisor or Former Sponsor on behalf of the Company, such as expenses related to the Offerings, and certain costs incurred by the Former Advisor or Former Sponsor in providing services to the Company. In addition, the Former Advisor was entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the Advisory Agreement. The Former Sponsor also served as the sponsor for REIT I and BRIX REIT. Effective February 3, 2020, the Company's indirect subsidiary, modiv Advisors, LLC, became the advisor to BRIX REIT.
During the three and nine months ended September 30, 2020 and 2019, no business transactions occurred between the Company and BRIX REIT other than minor expenses advanced and, during the three and nine months ended September 30, 2019, no business transactions occurred between the Company and REIT I, other than as described below or elsewhere herein, and those relating to the Company’s investment in REIT I before the Merger, as described in Note 5.
On March 2, 2020, the Company borrowed a total of $4,000,000, secured by mortgages on its 2 Chevron properties, from the Company's Chairman, Mr. Wirta. The Company's conflicts committee approved the terms of these mortgages which bore interest at an annual rate of 8% and were scheduled to mature on June 2, 2020. On June 1, 2020, the maturity date of these mortgages was extended to September 1, 2020 on the same terms, along with an option for a further extension to November 30, 2020 at the Company’s election prior to August 18, 2020, which the Company elected not to exercise. On July 31, 2020 and August 28, 2020, the mortgages secured by the Chevron San Jose, CA property and Chevron Roseville, CA property, each for $2,000,000, were repaid along with all related accrued interest.
There were no related party costs, including those incurred pursuant to the Advisory Agreement, for the three and nine months ended September 30, 2020 and no related party receivable and payable as of September 30, 2020. Summarized below are
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
the related party costs incurred by the Company for the three and nine months ended September 30, 2019 and related party receivable and payable as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | | |
| | September 30, 2019 | | December 31, 2019 |
| | Incurred | | Incurred | | Receivable | | Payable |
Expensed: | | | | | | | | |
Asset management fees (1) | | $ | 680,349 | | | $ | 2,040,386 | | | $ | 0 | | | $ | 0 | |
Operating expense reimbursements | | 132,000 | | | 396,000 | | | 0 | | | 0 | |
Fees to affiliates | | 812,349 | | | 2,436,386 | | | | | |
Property management fees* | | 56,122 | | | 168,194 | | | 0 | | | 0 | |
Directors and officers insurance and other reimbursements** | | 64,433 | | | 198,108 | | | 0 | | | 0 | |
Expense reimbursements from Former Sponsor (2) | | (96,104) | | | (332,336) | | | 0 | | | 0 | |
Capitalized: | | | | | | | | |
Acquisition fees | | 5,459 | | | 5,459 | | | 0 | | | 0 | |
Financing coordination fees | | 0 | | | 63,500 | | | 0 | | | 0 | |
Reimbursable organizational and offering expenses (3) | | 307,217 | | | 1,207,080 | | | 0 | | | 0 | |
Other: | | | | | | | | |
Due from BRIX REIT (4) | | 0 | | | 0 | | | 1,378 | | | 0 | |
Due from TIC | | 0 | | | 0 | | | 954 | | | 0 | |
Notes due to Chairman of the Board | | 0 | | | 0 | | | 0 | | | 630,820 | |
| | | | | | $ | 2,332 | | | $ | 630,820 | |
*Property management fees are classified within property operating expenses on the condensed consolidated statements of operations.
** Directors and officers insurance and other reimbursements are classified within general and administrative expenses on the condensed consolidated statements of operations.
(1)To the extent the Former Advisor elected, in its sole discretion, to defer all or any portion of its monthly asset management fee, the Former Advisor was deemed to have waived, not deferred, that portion up to 0.025% of the total investment value of the Company’s assets. For the three and nine months ended September 30, 2019, the Former Advisor did 0t waive any of the asset management fees. In addition to amounts presented in this table, the Company also incurred asset management fees to the Former Advisor of $47,977 and $143,930 related to the TIC Interest during the three and nine months ended September 30, 2019, respectively, which amounts were reflected as reductions of income recognized from investments in unconsolidated entities (see Note 5).
(2)Includes payroll costs related to Company employees that answered questions from prospective stockholders. See “Investor Relations Payroll Expense Reimbursement from Former Sponsor” below. The Former Sponsor agreed to reimburse the Company for these investor relations compensation costs which the Former Sponsor considered to be offering expenses in accordance with the Advisory Agreement which was terminated effective September 30, 2019. The expense reimbursements from the Former Sponsor for the three and nine months ended September 30, 2019 also included a refund of $0 and $40,915 of employment related legal fees, respectively, which the Former Sponsor agreed to reimburse the Company.
(3)As of September 30, 2019, the Former Sponsor had incurred $9,189,209 of organizational and offering costs on behalf of the Company. However, the Company was only obligated to reimburse the Former Sponsor for such organizational and offering expenses to the extent of 3% of gross offering proceeds.
(4)The receivables represent incidental expenses advanced to BRIX REIT, which included unpaid asset management fees of $242,299 as of December 31, 2019 due from BRIX REIT, which were fully reserved and the Company agreed to waive in May 2020 given the impact of the COVID-19 pandemic on BRIX REIT.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Organizational and Offering Expenses
The Company was obligated to reimburse the Former Sponsor or its affiliates for organizational and offering expenses (as defined in the Advisory Agreement) paid by the Former Sponsor on behalf of the Company. The Company reimbursed the Former Sponsor for organizational and offering expenses up to 3% of gross offering proceeds. Pursuant to an amendment to the Advisory Agreement dated October 14, 2019, the Company agreed to pay all future organization and offering costs, and to no longer be reimbursed by the Former Sponsor for investor relations personnel costs after September 30, 2019, in exchange for the Former Sponsor's agreement to terminate its right to receive 3% of all offering proceeds as a reimbursement for organization and offering costs paid by the Former Sponsor.
The Former Sponsor and its affiliates were responsible for any organizational and offering expenses to the extent they exceeded 3% of gross offering proceeds through September 30, 2019. Through September 30, 2019, the Former Sponsor had incurred organizational and offering expenses in excess of 3% of the gross offering proceeds received by the Company. Through September 30, 2019, the Company reimbursed the Former Sponsor $5,429,105 in organization and offering costs, which was the Company's maximum liability for organization and offering costs.
Investor Relations Payroll Expense Reimbursement from Former Sponsor
The Company employs investor relations personnel to answer inquiries from potential and existing investors regarding the Company and/or its Registered Offerings. The payroll expenses associated with the investor relations personnel were reimbursed by the Former Sponsor through September 30, 2019. The Former Sponsor considered these payroll expenses to be offering expenses. The amount of payroll expenses reimbursements from the Former Sponsor for the three and nine months ended September 30, 2019 was $96,104 and $373,251, respectively, which was partially offset by a refund of employment related legal costs of $0 and $40,915, respectively.
Acquisition Fees
The Company paid the Former Advisor an amount equal to 3% of the contract purchase price of the Company’s properties plus additions to real estate investments as acquisition fees. The total of all acquisition fees and acquisition expenses was required to be reasonable and not to exceed 6% of the contract price of the property. However, a majority of the directors (including a majority of the independent directors) not otherwise interested in the transaction had the authority to approve fees in excess of these limits if they determined the transaction to be commercially competitive, fair and reasonable to the Company. Acqusition fees incurred were $5,459 during the three and nine months ended September 30, 2019.
Asset Management Fee
The Company paid the Former Advisor, as compensation for the advisory services rendered to the Company, a monthly fee in an amount equal to 0.1% of the total investment value, as defined in the Advisory Agreement (the “Asset Management Fee”), as of the end of the preceding month plus the book value of any properties acquired during the month, pro-rated based on the number of days owned. The Asset Management Fee was payable monthly on the last business day of such month. The Asset Management Fee, which was required to be reasonable in the determination of the Company’s independent directors at least annually, was to be taken or waived, in whole or in part as to any year, in the sole discretion of the Former Advisor. All or any portion of the Asset Management Fee not paid as to any fiscal year was allowed to be deferred without interest and paid in such other fiscal year as the Former Advisor determined.
Additionally, to the extent the Former Advisor elected, in its sole discretion, to defer all or any portion of its monthly Asset Management Fee, the Former Advisor was deemed to have waived, not deferred, that portion of its monthly Asset Management Fee that was up to 0.025% of the total investment value of the Company’s assets. The total amount of Asset Management Fees incurred during the three and nine months ended September 30, 2019 was $680,349 and $2,040,386, respectively, of which NaN was waived.
Financing Coordination Fee
Other than with respect to any mortgage or other financing related to a property concurrent with its acquisition, if the Former Advisor or an affiliate provided a substantial amount of the services (as determined by a majority of the Company’s independent directors) in connection with the post-acquisition financing or refinancing of any debt that the Company obtained relative to a property, then the Company was to pay the Former Advisor or such affiliate a financing coordination fee equal to 1% of the amount of such financing.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
There were 0 financing coordination fees during the three months ended September 30, 2019 as there were no loans obtained during the quarter but the Company incurred and paid $63,500 of financing coordination fees related to a single loan during the nine months ended September 30, 2019.
Property Management Fees
If the Former Advisor or any of its affiliates provided a substantial amount of the property management services (as determined by a majority of the Company’s independent directors) for the Company’s properties, then the Company paid the Former Advisor or such affiliate a property management fee equal to 1.5% of gross revenues from the properties managed. The Company also reimbursed the Former Advisor and any of its affiliates for property-level expenses that such tenant paid or incurred to the Company, including salaries, bonuses and benefits of persons employed by the Former Advisor, except for the salaries, bonuses and benefits of persons who also served as one of the Company’s executive officers. The Former Advisor or its affiliate were entitled to subcontract the performance of its property management duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracted for these services. The Former Advisor provided property management services for 10 properties in the Company's portfolio during the three and nine months ended September 30, 2019. The Company incurred and paid $56,122 and $168,194 of property management fees during the three and nine months ended September 30, 2019, respectively.
Disposition Fees
For substantial assistance in connection with the sale of properties, the Company was to pay the Former Advisor or one of its affiliates 3% of the contract sales price, as defined in the Advisory Agreement, of each property sold; provided, however, that if, in connection with such disposition, commissions were paid to third parties unaffiliated with the Former Advisor or its affiliates, the disposition fees paid to the Former Advisor, the Former Sponsor, their affiliates and unaffiliated third parties could not exceed the lesser of the competitive real estate commission or 6% of the contract sales price. There were 0 disposition fees incurred during the three and nine months ended September 30, 2019.
Subordinated Participation Fees
The Company incurred a subordinated participation fee calculated as of December 31 of each year through 2018, payable to the Former Advisor or an affiliate thereof, which was paid (if owed) in the immediately following January. The subordinated participation fee was only due if the Preferred Return, as defined in the Advisory Agreement, was achieved and was equal to the sum of (using terms as defined in the Advisory Agreement):
(i)30% of the product of (a) the difference of (x) the Preliminary NAV per share minus (y) the Highest Prior NAV per share, multiplied by (b) the number of shares outstanding as of December 31 of the relevant annual period, but only if this resulted in a positive number, plus
(ii)30% of the product of: (a) the amount by which aggregate distributions to stockholders during the annual period, excluding return of capital distributions, divided by the weighted average number of shares outstanding for the annual period, exceeded the Preferred Return, multiplied by (b) the weighted average number of shares outstanding for the annual period calculated on a monthly basis.
The Company calculated a subordinated participation fee of $839,050, which was accrued as of December 31, 2018 and paid in cash during the three months ended March 31, 2019. On August 9, 2019, the Advisory Agreement was amended to eliminate the Subordinated Participation Fee.
Leasing Commission Fees
If a property or properties of the Company became unleased and the Former Advisor or any of its affiliates provided a substantial amount of the services (as determined by a majority of the Company’s independent directors) in connection with the Company’s leasing of a property or properties to unaffiliated third parties, then the Company paid the Former Advisor or such affiliate leasing commissions equal to 6% of the rents due pursuant to such lease for the first ten years of the lease term; provided, however (i) if the term of the lease was less than ten years, such commission percentage was applied to the full term of the lease and (ii) any rents due under a renewal of a lease of an existing tenant upon expiration of the initial lease agreement (including any extensions provided for thereunder) accrued a commission of 3% in lieu of the aforementioned 6% commission. There were 0 leasing commission fees incurred during the three and nine months ended September 30, 2019.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Other Operating Expense Reimbursements
Under the Company's charter, prior to December 31, 2019, total operating expenses of the Company were limited to the greater of 2% of average invested assets or 25% of net income for the four most recently completed fiscal quarters (the “2%/25% Limitation”). If the Company exceeded the 2%/25% Limitation, the Former Advisor was required to reimburse the Company the amount by which the aggregate total operating expenses exceeded the limitation, or the Company was required to obtain a waiver from the Company's conflicts committee. For purposes of determining the 2%/25% Limitation amount, “average invested assets” meant the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, reserves for bad debts or other non-cash reserves. “Total operating expenses” meant all expenses paid or incurred by the Company, as determined by GAAP, that were in any way related to the Company’s operation including asset management fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based upon increases in NAV per share; (f) acquisition fees and acquisition expenses (including expenses related to potential investments that the Company did not close); and (h) disposition fees on the sale of real property and other expenses connected with the acquisition, disposition and ownership of real estate interests or other property (other than disposition fees on the sale of assets other than real property), including the costs of insurance premiums, legal services, maintenance, repair and improvement of real property. The total reimbursable operating expenses incurred were $132,000 and $396,000 during the three and nine months ended September 30, 2019, respectively. The Company was in compliance with the 2%/25% Limitation for operating expenses for the four fiscal quarters ended September 30, 2019.
Due to Affiliates
In connection with the Self-Management Transaction, the Company assumed two notes payable aggregating $630,820 on December 31, 2019 owed to Mr. Wirta, the Company's Chairman, which were presented under due to affiliates in the Company's condensed consolidated balance sheets as of December 31, 2019. The notes payable had identical terms including a fixed interest rate of 10% paid semi-monthly and a maturity date of April 23, 2020. The remaining principal amount of $218,931 due for each note, aggregating $437,862, was paid on the maturity date.
Related Party Transactions with Unconsolidated Entities
The Company’s portion of asset management fees paid to the Former Advisor relating to the TIC Interest for the three and nine months ended September 30, 2019 was $47,977 and $143,930, respectively. The advisory agreement with the entity that owns the TIC Interest property was assigned to the Company's taxable REIT subsidiary following the Self-Management Transaction and the Company earns a monthly management fee equal to 0.1% of the total investment value of the property from this entity, which resulted in a fee of $65,993 for the three months ended September 30, 2020, of which the Company's portion was $47,984, and a fee of $197,979 for the nine months ended September 30, 2020, of which the Company's portion was $143,951.
The Company’s portion of asset management fees paid to the Former Advisor relating to REIT I for the three and nine months ended September 30, 2019 was $9,483 and $29,606, respectively.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company depends on its Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide the respective services, the Company will be required to obtain such services from other sources. In the event the Self-Management Transaction is consummated, the Company will become self-managed and its own employees will provide the services. Prior to the suspension of the Offerings on September 18, 2019, the Company depended on its Sponsor for services to sell the Company’s shares of common stock. In connection with the change in its plan of distribution whereby the Company will offer its shares of Class C common stock through a registered broker dealer and effective October 1, 2019 pursuant to an amendment to the Advisory Agreement, the Sponsor no longer provides these services.
The Company generally does not require collateral or other security from tenants, other than security deposits or letters of credit. However, since concentration of rental revenue from certain tenants exists, the inability of those tenants to make their payments could have an adverse effect on the Company.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the property could result in future environmental liabilities.
Tenant Improvements
Pursuant to lease agreements, as of September 30, 20192020 and December 31, 2018,2019, the Company had obligations to pay $60,598 and $98,329, respectively, for $401,392 and $3,789,091, respectively, in siteon-site and tenant improvements to be incurred by tenants, including a 72.7% share of the tenant improvements for the Santa Clara, property. During the second quarter of 2019, $3,387,699 of the restricted cash balance as of December 31, 2018 was released to a tenant to reimburse it for tenant improvement costs under the terms of the lease agreement.California TIC Interest. As of both September 30, 20192020 and December 31, 2018,2019, the Company had $100,135 and $3,486,927$92,684 of restricted cash held to fund other tenant improvements.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Operating Lease
As a result of the Self-Management Transaction, on December 31, 2019, a subsidiary of the Company assumed the operating lease of the corporate office in Costa Mesa, California from BrixInvest. The office lease had a remaining term of four years, ending on June 30, 2024. During the second quarter of 2020, the Company's subsidiary re-evaluated its physical office space requirement given the effect of the COVID-19 pandemic, commenced negotiations with the landlord in May 2020 and vacated the premises to the landlord on June 1, 2020. Effective October 29, 2020, the Company’s subsidiary entered into a lease amendment for early termination of the lease in exchange for a lease termination fee of $1,350,000 and as such the Company derecognized the right of use asset and the corresponding lease liability as of September 30, 2020. The termination fee was paid by the Company's subsidiary releasing its $135,544 security deposit and the Company's cash payment of $1,214,456. As a result of this transaction, the operating lease liability of $2,087,713 and the amount of accrued but unpaid lease payments of $242,216 which were previously included in accounts payable, accrued and other liabilities were partially offset by the elimination of the right of use asset of $2,019,577 and the release of the security deposit, resulting in a lease termination expense of $1,175,192 included in other expense for the three and nine months ended September 30, 2020.
Because the rate implicit in the subsidiary's lease was not readily determinable, the Company used an incremental borrowing rate to account for the lease as of December 31, 2019. In determining the Company's incremental borrowing rate for the lease, the Company considered the rate on its unsecured borrowings, observable risk-free interest rates and credit spreads correlating to the Company's creditworthiness and the term of the subsidiary's lease agreement. The discount rate used was 5.75%.
Redemption of Common Stock
The Company has a share repurchase program that enables qualifying stockholders to sell their stock to the Company in limited circumstances. The maximum amount of common stock that may be repurchased per month is limited to no more than 2% of the Company’s most recently determined aggregate NAV. Repurchases for any calendar quarter will beare limited to no more than 5% of its most recently determined aggregate NAV. The foregoing repurchase limitations are based on "net repurchases"“net repurchases” during a quarter or month, as applicable. Thus, for any given calendar quarter or month, the maximum amount of repurchases during that quarter or month will be equal to (1) 5% or 2% (as applicable) of the Company’s most recently determined aggregate NAV, plus (2) proceeds from sales of new shares in the Registered OfferingOfferings and Class S Offering (including purchases pursuant to its Registered DRP Offering) since the beginning of a current calendar quarter or month, less (3) repurchase proceeds paid since the beginning of the current calendar quarter or month.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Company has the discretion to repurchase fewer shares than have been requested to be repurchased in a particular month or quarter, or to repurchase no shares at all, in the event that it lacks readily available funds to do so due to market conditions beyond the Company’s control, its needit needs to maintain liquidity for its operations, or because the Company determines that investing in real property or other illiquid investments is a better use of its capital than repurchasing its shares. In the event that the Company repurchases some but not all of the shares submitted for repurchase in a given period, shares submitted for repurchase during such period will be repurchased on a pro-rata basis. basis, subject to any Extraordinary Circumstance Repurchase (defined below).
The Company has the discretion, but not the obligation, under extraordinary market or economic circumstances, to make a special repurchase in equal, nominal quantities of shares from all stockholders who have submitted share repurchase requests during the period (“Extraordinary Circumstance Repurchase”). Extraordinary Circumstance Repurchases will precede any pro rata share repurchases that may be made during the period.
During the period July 2020 to October 2020, the Company received share repurchase requests and repurchased shares as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Value of Share Repurchase Requests Received | | Repurchase Date | | Value of Shares Repurchased (1) |
July 2020 | | $ | 8,359,586 | | | August 5, 2020 | | $ | 995,028 | |
August 2020 | | $ | 8,002,288 | | | September 3, 2020 | | $ | 1,420,636 | |
September 2020 | | $ | 6,747,834 | | | October 5, 2020 | | $ | 1,393,275 | |
October 2020 | | $ | 5,907,195 | | | November 4, 2020 | | $ | 1,537,198 | |
(1) Included Extraordinary Circumstance Repurchases and after applicable administrative fees for shares held less than three years.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
In addition, the Company’s board of directors may amend, suspend or terminate the share repurchase program without stockholder approval upon 3010 days’ notice if its directors believe such action is in the Company and its stockholders’ best interests. The Company’s board of directors may also amend, suspend or terminate the share repurchase program due to changes in law or regulation, or if the board of directors becomes aware of undisclosed material information that the Company believes should be publicly disclosed before shares are repurchased.
In order to protect the interests of long-term investors, on August 7, 2019, the board of directors amended the share repurchase program for the Class C common stock to require that shares be held for 90 days after they have been issued to the applicable stockholder before the Company will accept requests for repurchase. This policy is being implemented to:
avoid disruption to cash management and real estate investment activity;
reduce the cost burden incurred from short-term share repurchase requests; and
protect the Company, its stockholders and corresponding financial institutions from fraudulent cyber activities.
In accordance with the terms of the share repurchase program, this amendment became effective September 12, 2019, which was 30 days after the Form 10-Q for the quarter ended June 30, 2019 and a related supplement to the prospectus for the Registered Offering were filed with the SEC.
Legal and Regulatory Matters
From time-to-time, the Company may become party to legal proceedings that arise in the ordinary course of its business. Other than as described below, the Company is not a party to any legal proceeding, nor is the Company aware of any pending or threatened litigation that could have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
BeginningOn September 18, 2019, a lawsuit was filed in 2017, the SEC conducted an investigationSuperior Court of the Company's SponsorState of California, County of Los Angeles (the “State Court Action”), against the Former Advisor by “John Doe,” a fictitiously-named individual who was one of the Former Advisor's former employees. The Former Advisor understands that the plaintiff was its former Chief Digital Officer, who along with six other employees was subject to a reduction in force, communicated to all in advance, that was a result of financial constraints of the Former Advisor which necessitated the elimination of numerous job positions in May 2019. In the lawsuit, the former employee claims he was terminated in retaliation for his purported whistleblowing with respect to alleged misleading statements made by the Former Advisor and fraudulently induced arbitration requirements applicable to employees and investors. The complaint seeks to enjoin and rescind the enforcement of the arbitration agreement signed by the former employee and the arbitration requirements related to among other things,this complaint. In September 2020, the advertising and sale of securities in connection with the Registered Offering and compliance with broker-dealer regulations. The Company cooperated with the SEC in this matter. Recently, the Company’s Sponsor, proposed a settlement of the investigationState Court Action was removed to the SEC and, on September 26, 2019, the SEC accepted the settlement and entered an order (the “Order”) instituting proceedings against the Sponsor pursuant to Section 8AUnited States District Court, Central District of the Securities Act and Section 21C of the Exchange Act.California. The Company is not a party to the settlementlawsuit. The Former Advisor has denied all the accusations and allegations in the complaint and the staff of the enforcement division of the SEC did not recommend any actionFormer Advisor intends to vigorously defend against the Company.claims made by the plaintiff.
Under the settlement, the Sponsor, without denying or admitting any substantive findings in the Order, consented to entry of the Order, finding violations by it of Section 5(b)(1) of the Securities Act and Section 15(a) of the Exchange Act. The Order does not find that the Sponsor violated any anti-fraud provisions of the federal securities laws or any other law and does not find any criminal violations or any scienter based violation involving the offer and sale of securities.
Under the terms of the Order, the Sponsor (i) agreed to cease-and-desist from committing or causing any future violations of Section 5(b) of the Securities Act and Section 15(a) of the Exchange Act, (ii) paid to the SEC a civil money penalty in the amount of $300,000, and (iii) agreed to undertake that any real estate investment trust which is or was formed, organized, or advised by it, including the Company, will not distribute securities except through a registered broker-dealer. Although the Company is not a party to the settlement or the Order, the Sponsor’s undertaking in the Order will result in the securities the Company issues in any offering, including its registered public offering, being distributed only through a registered broker-dealer.
NOTE 11. SUBSEQUENT EVENTS
The Company evaluates subsequent events up until the date the condensed consolidated financial statements are issued. Significant subsequent events are described below:
Offering Status
Through October 31, 2019,2020, the Company had sold 17,882,66119,727,497 shares of Class C common stock in the Registered Offering,Offerings, for aggregate gross offering proceeds of $179,035,582,$196,433,674, which included 1,461,8042,262,304 shares of Class C common stock sold under its distribution reinvestment plan for gross proceeds of $14,736,539.$21,556,543. Through October 31, 2019,2020, the Company hashad sold 186,260190,616 shares of Class S common stock in the Class S Offering, for aggregate gross offering proceeds of $1,890,319,$1,928,448, which included 1,9485,652 shares of Class S common stock sold under its dividenddistribution reinvestment plan for gross proceeds of $19,769.$51,284.
Distributions
The Company filed a pre-effective amendment to its Form S-11paid the September 2020 distribution of $688,630 on October 18, 2019, which includes the Company’s updated plan of distribution whereby the Company will offer its Class C common stock through North Capital, a registered broker dealer. On October 23, 2019, North Capital filed an application with the FINRA with respect to the offering of the Company’s Class C common stock. The Registered Offering of the Company's Class C common stock is expected to recommence following receipt of a no objection letter from FINRA, and the SEC declaring the registration statement effective.
Distributions
On August 30, 2019, the Company’s board of directors declared distributions26, 2020, based on the daily record dates for the period September 1 through September 30, 2019 at thedistribution rate of $0.00192740$0.00095890 per share per day on the outstanding shares of itsClass C and Class S common stock, which the Company paid on October 25, 2019.
On August 30, 2019, the Company’s boardreflects an annualized distribution rate of directors also declared distributions$0.35 per share or 5.0% per share based on daily record dates for the period October 1 through October 31, 2019, November 1 through November 30, 2019 and December 1 through December 31, 2019 at the rate of $0.00192740Company's estimated NAV per share per dayof $7.00 (unaudited). The Company generally pays distributions on the outstanding shares25th day following the end of its common stock, whicheach month, or the Company will paynext business day if the 25th day falls on November 25, 2019, December 26, 2019 and January 27, 2020, respectively.a weekend or holiday.
Redeemable Common Stock Redeemed
Subsequent to September 30, 2019,2020, the Company redeemed 255,347419,929 shares of Class C common stock for $2,558,712. There were no$2,926,160 and 616 shares of Class S common stock redeemed subsequentfor $4,313.
RW HOLDINGS NNN REIT, INC.
Notes to September 30, 2019.Condensed Consolidated Financial Statements (continued)
Acquisition and Use(Unaudited)
Sale of Non-Refundable Purchase DepositReal Estate Investment
On October 24, 2019,28, 2020, the Company through a wholly-owned subsidiarycompleted the sale of its Morgan Hill, CA industrial property which was leased to Dinan Cars for $6,100,000, which generated net proceeds of $3,811,580 after repayment of the existing mortgage, commissions and closing costs.
Operating Partnership, completed the acquisition of a cold storage warehouse and distribution facility with approximately 216,727 square feet located in Yuma, Arizona. This property is 100% leased to a wholly-owned subsidiary of Taylor Fresh Foods, Inc., an American-based producer of fresh-cut fruits and vegetables. The property’s triple-net lease expires on September 30, 2033. The property is expected to generate $24,124,800 in total rental revenue over the course of its remaining lease term. The contract purchase price for the property was $24,700,000 which was funded with $7,410,000 in net proceeds fromLease
Effective October 29, 2020, the Company’s registered offering of Class C common stock (including the non-refundable purchase deposit of $2,000,000 reflected in the Company’s balance sheet as of September 30, 2019), a mortgage secured by the property for $12,350,000 that provides 10-year financing at a fixed rate of 3.85% with five years of interest only payments and 27.5-year amortization thereafter, and $4,940,000 borrowed under the Company’s line of credit. The seller of the property was not affiliated with the Company or its affiliates. Under the terms of the Advisory Agreement with its Sponsor and its Advisor, the Company paid the Advisor an acquisition fee of $741,000 in connection with this acquisition in October 2019.
Amended and Restated Share Repurchase Program
On October 14, 2019, the Company amended and restated its SRP for its Class C common stock to clarify the requirement that Class C common stock be held for 90 days before the shares will be accepted for redemption, excluding shares acquired pursuant to the Company’s distribution reinvestment plan or automatic investment program if the applicable stockholder has held their initial investment for at least 90 days.
Furthermore, the share repurchase program was amended to allow the Company to repurchase all of the Class C common stock owned by a stockholder if, as a result of a request for repurchase, such stockholder will own shares having a value of less than $500 (based on the Company’s most-recently published offering price per Class C common stock).
As discussed in Note 1, the Company temporarily suspended its share repurchase program effective October 19, 2019 and the share repurchase program will remain suspended until such time, if any, as the Company’s board of directors, in its discretion, may approve the reinstatement of the share repurchase program.
Should the Merger be completed, the Company currently anticipates the reinstatement of the share repurchase program to occur shortly after the closing of the transactions, which is expected to occur in late December 2019 or early January 2020.
Acquisition of Intellectual Property From the Sponsor and Website Hosting Agreement With BRIX REIT, Inc.
Following the announcement of the pending Self-Management Transaction, BRIX REIT suspended its offering in order to assess its advisory agreement with the Sponsor. On October 28, 2019, BRIX REIT terminated its advisory agreement with the Sponsor and became self-managed on an interim basis. BRIX REIT may consider entering into a new advisory agreement with a subsidiary of the Company in the event that the Self-Management Transaction is completed.
Effective October 28, 2019, the Operating Partnership acquired certain software and related assets of the Sponsor in order for the Operating Partnership to develop and operate a new online platform for BRIX REIT, Inc. The Operating Partnership entered into a website hosting services agreement with BRIX REIT effective October 28, 2019 pursuant tolease amendment for early termination of the lease of its former corporate office in Costa Mesa, California in exchange for a lease termination fee of $1,350,000 which the Operating Partnership will host the online platform at www.brix-reit.com for BRIX REIT. In connection with such hosting services, BRIX REIT will pay the Operating Partnership service fees equal to the direct costwas paid by the Operating Partnership to third parties for services related to the Operating Partnership’s hostingrelease of the online platform, plussubsidiary’s $135,544 security deposit and the then-current time and materials rates charged by the Operating PartnershipCompany's cash payment of $1,214,456 (see Note 10 for the servicesfurther details).
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition, results of operations and cash flows together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 20182019 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC"“SEC”) on April 6, 2020, and our Quarterly Reports for the three months ended March 29, 2019.31, 2020 and June 30, 2020 filed with the SEC on June 24, 2020 and August 14, 2020, respectively. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. See "Forward-Looking Statements"“Forward-Looking Statements” above.
Management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"(“GAAP”). The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed on May 14, 2015 as a Maryland corporation that elected to be treatedtaxed as a real estate investment trust, or REIT, for federal income tax purposes beginning with our taxable year ended December 31, 2016 and we intend to continue to operate so as to remain qualified as a REIT for federal income tax purposes thereafter. We intend to invest primarily in single tenant income-producing properties which are leased to creditworthy tenants under long-term net leases. Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in entities that own and operate real estate. We will make substantially all acquisitions of our real estate investments directly through Rich UnclesRW Holdings NNN REIT Operating Partnership, LP, a Delaware limited liability companypartnership (the "Operating Partnership"“Operating Partnership”), or indirectly through limited liability companies or limited partnerships, including through other REITs, or through investments in joint ventures, partnerships, tenants-in-common, co-tenancies or other co-ownership arrangements with other owners of properties, affiliatessome of which may be affiliated with us or our Advisor (as defined below)executive officers or other persons.directors.
We consider our Company to be a perpetual-life investment vehicle because we have no finite date for liquidation and no current intention to list our shares of common stock for trading on a national securities exchange or over-the-counter trading market. Although we have registered a fixed number of shares forpursuant to the Registered Offering (as defined below),Offerings, we intend to effectively conduct a continuous offering of an unlimited amount of our shares of common stock over an unlimited time period by conducting an uninterrupted series of additional public offerings, subject to regulatory approval of our filings for such additional offerings, and one or more offerings exempt from the registration statement requirements of the Securities Act of 1933, as amended (the "Securities Act"), such as our Class S Offering.offerings. This perpetual-life structure is aligned with our overall objective of investing in real estate assets with a long-term view towards making regular cash distributions and generating capital appreciation.
SubjectWe hold our investments in real property through special purpose limited liability companies which are wholly-owned subsidiaries of the Operating Partnership or Katana Merger Sub, LP (“Merger Sub”), which is described below. The Operating Partnership was formed on January 28, 2016. We are the sole general partner of, and owned a 99% partnership interest in, the Operating Partnership prior to certain restrictionsthe completion of the Self-Management Transaction (defined below) on December 31, 2019. Our wholly-owned subsidiary, Rich Uncles NNN LP, LLC, a Delaware limited liability company formed on May 13, 2016 (“NNN LP”), owned the remaining 1% partnership interest in the Operating Partnership and limitations,was the sole limited partner of the Operating Partnership prior to the completion of the Self-Management Transaction on December 31, 2019.
Following the completion of the Self-Management Transaction, we, including NNN LP, own an approximately 87% partnership interest in the Operating Partnership. Daisho OP Holdings, LLC, a formerly wholly-owned subsidiary of BrixInvest (defined below) (“Daisho”) which was spun off from BrixInvest on December 31, 2019, was issued and held 657,949.5 units of Class M limited partnership interest (the “Class M OP Units”), or an approximate 12% limited partnership interest, in the Operating Partnership as of December 31, 2019. The Class M OP Units were distributed to the members of Daisho during 2020. In connection with the Self-Management Transaction, our business is currentlyChief Executive Officer and Chief Financial Officer were issued an aggregate of 56,029 units of Class P limited partnership interest (the “Class P OP Units”) in the Operating Partnership and thereby own the remaining approximate 1% limited partnership interest in the Operating Partnership.
We were externally managed by our former advisor, Rich Uncles NNN REIT Operator, LLC (our "Advisor"(the “Former Advisor”), a Delaware limited liability company, wholly-owned by our sponsor, BrixInvest, LLC (d/b/a Rich Uncles LLC, our "Sponsor"), pursuant to the Second Amended and Restated Advisory Agreement between us,dated August 11, 2017, as amended (the “Advisory Agreement”), through December 31, 2019. The Former Advisor was wholly-owned by our Advisorformer sponsor, BrixInvest, LLC (f/k/a Rich Uncles, LLC) (“BrixInvest” or the “Former Sponsor”), a Delaware limited liability company whose members included Messrs. Halfacre and Wirta.
On December 31, 2019, pursuant to an Agreement and Plan of Merger dated September 19, 2019 (the “Merger Agreement”), Rich Uncles Real Estate Investment Trust I (“REIT I”) merged with and into Merger Sub, a Delaware limited partnership and our Sponsor (as amended,wholly-owned subsidiary, with Merger Sub surviving as our direct wholly-owned subsidiary (the “Merger”). At such time, the "Advisory Agreement"separate existence of REIT I ceased. As a result, we issued 8,042,221.6 shares of our Class C common stock to former shareholders of REIT I. In addition, on December 31, 2019, a self-management transaction was completed, whereby we, the Operating Partnership, BrixInvest and Daisho effectuated a Contribution Agreement (the “Contribution Agreement”) pursuant to which we acquired substantially all of the assets and assumed certain liabilities of BrixInvest in exchange for 657,949.5 Class M OP Units in the Operating Partnership (the “Self-Management Transaction”). As a result of the completion of the Merger and the Self-Management Transaction, we became self-managed.
Our Former Advisor managesmanaged our operations and will manage our portfolio of core real estate properties and real estate related assets. Our Advisor also providesassets and provided asset-management and other administrative services on our behalf. Our Former Advisor iswas paid certain fees as set forth in Note 8 9 to our unaudited condensed consolidated financial statements.
On June 24, 2015, our Sponsor purchased 10,000 shares of common stock for $100,000 and As discussed above, beginning on January 1, 2020, we became the initial stockholder. Our Sponsor purchased another 10,000 shares of common stock on December 31, 2015 for $100,000. On July 15, 2015, we filed a registration statement on Form S-11 with the SEC to register an initial public offering to offer a maximum of 90,000,000 shares of common stock for sale to the public (the "Primary Offering"). We also registered a maximum of 10,000,000 shares of common stock pursuant to our distribution reinvestment plan (the "Registered DRP Offering" and together with the Primary Offering, the "Registered Offering"). The SEC declared our registration statement effective on June 1, 2016 and we commenced the sale of our shares to the public on July 20, 2016.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Under applicable SEC rules, the current registration statement for the Registered Offering was scheduled to terminate on June 1, 2019, but remained effective because we filed a new registration statement on Form S-11 with the SEC on May 24, 2019 to extend the Registered Offering in accordance with Rule 415 of the Securities Act. Our current registration statement on Form S-11 will terminate when the new registration statement is declared effective by the SEC. On October 18, 2019, we filed a pre-effective amendment to our Form S-11 which includes our updated plan of distribution whereby we will offer our Class C common stock through North Capital Private Securities Corporation (“North Capital”), a registered broker dealer.
We reserve the right to terminate the Registered Offering at any time, and will terminate the Registered Offering if we sell our maximum offering amount of Class C common stock. If we terminate the Registered Offering, we will notify stockholders by filing a prospectus supplement with the Securities and Exchange Commission. The Registered Offering must be registered in every state in which we offer or sell our shares and, as a result, we are also required to renew the registration statement for the Registered Offering annually or file a new registration statement to continue the Registered Offering. Therefore, we may have to stop selling shares in any state in which our registration for the Registered Offering is not renewed or otherwise extended.
On August 11, 2017, we began offering up to 100,000,000 shares of Class S common stock exclusively to non-U.S. Persons as defined under Rule 903 promulgated under the Securities Act pursuant to an exemption from the registration requirements of the Securities Act and in accordance with Regulation S of the Securities Act (the "Class S Offering" and, together with the Registered Offering, the "Offerings"). The Class S common stock has similar features and rights as the Class C common stock, including with respect to voting and liquidation except that the Class S common stock offered in the Class S Offering may be sold through brokers or other persons who may be paid upfront and deferred selling commissions and fees. We reserve the right to terminate the Class S Offering at any time.
On January 11, 2019, our board of directors approved and established an estimated net asset value ("NAV") per share of our common stock in the Offering of $10.16 (unaudited). Effective January 14, 2019, the purchase price per share of our common stock in the Offerings increased from $10.05 (unaudited) to $10.16 (unaudited).self-managed.
We expect to use substantially all of the net proceeds from the Offerings to acquire and manage a portfolio of real estate investments. We intend to invest primarily in single tenant income-producing properties which are leased to creditworthy tenants under long-term net leases. While our current focus is on single tenant net leased properties, we plan to diversify our portfolio by geography, investment size and investment risk with the goal of acquiring a portfolio of income-producing real estate investments that provides attractive and stable returns to our stockholders. Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interest in entities that own and operate real estate.
Our investment objectives and policies may be amended or changed at any time by our board of directors. Although we have no plans at this time to change any of our investment objectives and policies, our board of directors may change any and all such investment objectives and policies, including our focus on single tenant commercial properties, if we believeit believes such changes are in the best interestinterests of our stockholders. Rich Uncles NNN REIT Operator, LLC, our Advisor, makes recommendations on
As we accept subscriptions for shares in the Offerings, we transfer substantially all investmentsof the net proceeds of the Offerings to our boardOperating Partnership as a capital contribution in exchange for units of directors.general partnership and/or limited partnership interest; however, we will be deemed to have made capital contributions to the Operating Partnership in the amount of the gross offering proceeds received from investors. All proposed real estate investments must be approved by at least a majorityofferings of our boardcommon stock are made through a registered broker-dealer, and we are directly responsible for all organization and offering costs, including our investor relations personnel.
Because we plan to conduct substantially all of directors.
Pending Merger Transaction
On March 19, 2019,our operations through the Operating Partnership, we announced that we intended to explore a potential acquisition of Rich Unclesare considered an Umbrella Partnership Real Estate Investment Trust, or UPREIT. Using an UPREIT structure may give us an advantage in acquiring properties from persons who might not otherwise sell their properties because of unfavorable tax results. Generally, a sale of property directly to a REIT, or a contribution in exchange for REIT shares, is a taxable transaction to the selling property owner. However, in an UPREIT structure, a seller of a property who desires to defer taxable gain on the sale of property may transfer the property to the Operating Partnership in exchange for partnership interests in the Operating Partnership without recognizing gain for tax purposes.
Although we historically have conducted, and intend to continue to conduct, substantially all of our operations through the Operating Partnership, as a result of the Merger with REIT I, ("we hold the assets acquired from REIT I")I through Merger Sub, our wholly-owned subsidiary.
We present our financial statements on a consolidated basis, including the Operating Partnership and Merger Sub. All items of income, gain, deduction (including depreciation), an affiliated real estate investment trust that is sponsored by our Sponsor or its real estate properties portfolioloss and that we had formed a special committeecredit of the Operating Partnership and Merger Sub flow to us as all independent directors (the "Special Committee") to evaluate the potentialsubsidiary entities are disregarded for federal tax purposes except for a transactiontaxable REIT subsidiary formed on January 15, 2020. These tax items do not generally flow through us to our stockholders. Rather, our net income and net capital gain effectively flow through us to our stockholders as and when we pay distributions.
Impact of the COVID-19 Pandemic
Due to the current COVID-19 pandemic in the United States and globally, our tenants and operating partners, property locations and the economy as a whole are severely impacted. The magnitude and duration of the COVID-19 pandemic and its impact on our tenants, cash flows and future results of operations could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic, the success of actions taken to contain or treat COVID-19, and reactions by consumers, companies, governmental entities and capital markets. The U.S. and global economies entered into a recession during the first quarter of 2020. Weakness in the U.S. and global economies continues, the severity and duration of which are unpredictable but expected to be significant as evidenced by approximately 12.6 million U.S. workers unemployed as of September 30, 2020. The prolonged duration and impact of the COVID-19 pandemic continues to disrupt our business operations and impact our financial performance. Several tenants have requested rent abatements and one tenant (24 Hour Fitness) has not paid rent since March 2020 and has provided formal notice that it has rejected the lease through its Chapter 11 bankruptcy proceeding and the premises were surrendered to our subsidiary. We have collected approximately 95% of rents due during the third quarter of 2020 and for the month of October 2020; however, there can be no assurance that this rate of collections will continue. In certain cases, we have negotiated with REIT I. The Special Committee engaged UBS Securities LLCtenants and lenders regarding the deferral or resumption of rent payments and the partial deferral of mortgage payments, as appropriate, and further negotiations may occur.
During the second quarter of 2020, our subsidiary re-evaluated its financial advisorphysical office space requirement given the effect of the COVID-19 pandemic, commenced negotiations with the landlord in May 2020 and Morris Manning & Martin, LLP as its legal advisor. REIT I conducted a multi-round bidding process directed by Cushman & Wakefield. The bidding process resulted in a short list of bidders submitting acquisition bidsvacated the premises to a special committee of REIT I's trust managers for review, includingthe landlord on June 1, 2020. Effective October 29, 2020, our bid. On June 21, 2019, we announced that following REIT I's review of all bids, REIT I and our Special Committee commenced an exclusive due diligence process in order to determine whether a potential transaction might result.
On September 20, 2019, we announced that we hadsubsidiary entered into an agreement and plan of merger (the "Merger Agreement") pursuant to which a business combination would be effected by REIT I's merger with our subsidiary (the "Merger") and REIT I's existence would cease. The Merger is subject to certain closing conditions, including the approvallandlord for early termination of the Merger by both our stockholders and REIT I’s shareholders, as discussed below. The Merger is expected to close as soon as practicable following our annual meeting of stockholders, which is scheduled to be held on December 17, 2019 and the satisfaction of the closing conditions. The combined company ("Combined Company") following the Merger will retain our name. The Merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each of REIT I's common shares (the “REIT I Common Shares”) issued and outstanding immediately prior to the effective time of the Merger (other than shares we own will be automatically canceled and retired, and converted into the right to receive one share of our Class C common stock, with any fractional REIT I Common Shares converted into a corresponding number of fractional shares of Class C common stock.
On October 22, 2019, we filed a joint proxy statement and prospectus with the SEC relating to our annual meeting of stockholders to be held on December 17, 2019 to vote on the Merger. Stockholders of record on October 21, 2019 are eligible to vote on the proposal to approve the Merger.
Pending Self -Management Transaction
In addition, on September 20, 2019, we announced that we had entered into a contribution agreement (the "Contribution Agreement") with our Sponsor and Daisho OP Holdings, LLC, a wholly-owned subsidiary of our Sponsor (“Daisho"). The Contribution Agreement provides for a series of transactions, agreements, and amendments to our existing agreements and arrangements whereby we will acquire substantially all of the assets of BrixInvestlease in exchange for 657,949.5 unitsa lease termination fee of Class M limited partnership interest (the “Class M OP Units”) in the Operating Partnership (the “Self-Management Transaction”).
Prior to the closing$1,350,000. The termination fee was paid by our subsidiary releasing its $135,544 security deposit and we made a cash payment of the Self-Management Transaction, (i) substantially all of the Sponsor's assets and liabilities will be contributed to Daisho’s wholly-owned subsidiary, modiv, LLC (“modiv”), and (ii) the Sponsor will spin off Daisho to the Sponsor's members (the “Spin Off”). Pursuant to the Self-Management Transaction, Daisho will contribute to the Operating Partnership all of the membership interests in modiv in exchange for the Class M OP Units.$1,214,456. As a result of these transactions and the Self-Management Transaction, the Sponsor, through its subsidiary, Daisho, will transfer allthis transaction, we recorded a lease termination expense of its operating assets, including but not limited to (a) all personal property used$1,175,192 (which was net of previously accrued rent expense) in or necessaryother expense for the conduct of the Sponsor's business, (b) all intellectual property, goodwill, licensesthree and sublicenses granted and obtained with respect thereto and certain domain names, (c) all continuing employees, and (d) certain other assets and liabilities, to modiv, and will distribute 100% of the ownership interests in Daisho to the members of the Sponsor in the Spin Off. The Sponsor is currently engaged in the business of serving directly or indirectly as our sponsor and advisor as well as for REIT I's advisor, and was the sponsor and advisor for BRIX REIT, Inc. ("BRIX REIT") until the BRIX REIT advisory agreement was terminated effective October 28, 2019. We are the sole general partner of the Operating Partnership. Therefore, upon the consummation of the Self-Management Transaction, we will become self-managed, and if the Merger is consummated, the Combined Company would become self-managed.
The terms of the Class M OP Units to be issued in the Self-Management Transaction will be set forth in a Second Amended and Restated Limited Partnership Agreement, which will become effective upon the closing of the Self-Management Transaction (the “Amended OP Agreement”). The Class M OP Units will be non-voting, non-dividend accruing, and will not be able to be transferred or exchanged prior to the one-year anniversary of completing the Self-Management Transaction. Following the one-year anniversary of completing the Self-Management Transaction, the Class M OP Units will be convertible into units of Class C limited partnership interest in the Operating Partnership (“Class C OP Units”) at a conversion ratio of five Class C OP Units for each one Class M OP Unit, subject to a reduction in the conversion ratio (which reduction varies depending upon the amount of time held) if the exchange occurs prior to the four-year anniversary of completing the Self-Management Transaction. Under the Amended OP Agreement, the Class C OP Units will continue to be exchangeable for cash or shares of our Class C Common Stock on a one for one basis, as we determine. The Class M OP Units will be eligible for an increase in the conversion ratio if we achieve the agreed-upon targets for assets under management and adjusted funds from operations in 2021, 2022 and 2023.
As ofnine months ended September 30, 2019, we had incurred $2,426,530 in costs related to the Merger and the Self-Management Transaction. The Merger will be accounted for as an asset acquisition and the related costs will be capitalized and allocated to the assets acquired upon completion of the Merger. The Self-Management Transaction will be accounted for as an acquisition of a business and the related costs are charged to expense. We allocated the costs of the financial and legal advisors between the Merger and the Self-Management Transaction based on the relative value of the transactions, resulting in $1,626,170 of Merger costs recorded in other assets pending completion of the Merger and $800,360 of expenses for the Self-Management Transaction recorded as general and administrative expenses.2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Amendment to Advisory Agreement
Until September 18, 2019, when the Registered Offering was suspended in connection with the pending Merger, our Sponsor provided organizational and offering services to us to manage our organization and the Registered Offering and reimbursed us for the costs of our Investor Relations personnel. Our Sponsor was entitled to include the reimbursement of such expenses as part of our reimbursement to them of organization and offering costs, but reimbursement did not exceed an amount equal to 3% of gross offering proceeds. The Advisory Agreement was amended effective October 1, 2019 in connection with our new plan of distribution whereby we will offer our shares of Class C Common Stock through a registered broker dealer. We agreed to pay all future organization and offering costs, and to no longer be reimbursed by the Sponsor for our Investor Relations personnel costs after September 30, 2019, in exchange for the Sponsor’s agreement to terminate its right to receive 3% of all offering proceeds received by us after September 30, 2019 as reimbursement for organization and offering costs previously paid by the Sponsor.
Updated Estimated Net Asset Value Per Share, Temporary Suspension of Primary Offerings Distribution Reinvestment Plans and Share Repurchase ProgramsResumption of Primary Offerings
On May 8, 2020, we announced that due to the impacts of the COVID-19 pandemic on our real estate properties, our board of directors authorized the engagement of an independent third-party real estate advisory and consulting firm to perform an independent valuation of our real estate assets and real estate related liabilities associated with our properties for the purpose of assisting the board of directors in updating our estimated net asset value (“NAV”) per share to reflect the impact of the COVID-19 pandemic. Our board of directors announced a new estimated NAV per share of $7.00 (unaudited) on May 22, 2020. Additional information on the determination of our estimated NAV per share, including the process used to determine our estimated NAV per share, can be found in our Current Report on Form 8-K filed with the SEC on May 22, 2020.
In connection with our plan to update the transactions contemplated above, on September 18, 2019, ourestimated NAV per share, the board of directors approved the temporary suspension of the Primary Offering, which is registered with the SEC under the Securities Act,primary offerings of our shares of Class C common stock and the primary offering portion of the Class S Offering, which we offer exclusively to non-U.S. investors. Our automatic investment program was also temporarily suspendedcommon stock, effective as of the close of business on September 18, 2019. We filed a pre-effective amendment toMay 7, 2020. On May 29, 2020, our Form S-11 on October 18, 2019, which includes our updated planboard of distribution whereby we will offer our Class C common stock through North Capital, a registered broker dealer. On October 23, 2019, North Capital filed an application withdirectors approved and directed the Financial Industry Regulatory Authority ("FINRA") with respect toresumption of the primary offerings effective June 1, 2020. The purchase price per share in the primary portion of the offering of our Class C common stock. The Registered Offeringstock was decreased from $10.27 to $7.00, and the purchase price per share in the primary portion of the offering of our Class CS common stock is expectedwas also decreased to recommence following receipt$7.00 plus the amount of a no objection letter from FINRAany applicable upfront commissions and the SEC declaring the registration statement effective. Upon recommencement of the Registered Offering, stockholders enrolled in the automatic investment program will again automatically purchase shares pursuant to such program unless otherwise determined by our board of directors.fees.
Our board of directors has also approved the temporary suspension of the distribution reinvestment program for Class C Common Stock and Class S Common Stock ("DRPs") effective September 18, 2019 and the temporary suspension of the share repurchase program for Class C Common Stock and Class S Common Stock ("SRPs") effective October 19, 2019. Redemption requests submitted prior to 10 a.m. PDT on October 19, 2019 were honored in accordance with the terms of the SRPs. Pursuant to the suspension of the DRPs, beginning September 19, 2019, all future distributions shall be paid to our stockholders in cash. The DRPs and the SRPs will remain suspended until such time, if any, as our board of directors, in its discretion, may approve the reinstatement of the DRPs and SRPs.
Should the Merger be completed, we currently anticipate the reinstatement of the share repurchase program to occur shortly after the closing of the transaction, which is expected to occur in late December 2019 or early January 2020.
The Company
We are a publicly registered, non-exchange traded company dedicated to providing stockholders with dependable monthly dividends.company. We believe we are qualified to operate as a REIT, which requires us to annually distribute at least 90% of our taxable income (excluding net capital gains) in the form of dividendsdistributions to our stockholders. Our monthly dividends are supported by the cash flow generated from real estate owned under long-term, net lease agreements with local, regional, and national commercial tenants and, to some extent, the waiver or deferral of asset management fees by our Sponsor. See "Distributions" below.
Our primary business consists of acquiring, financing and owning single-tenant retail, office and industrial real estate leased to creditworthy tenants on long-term leases. We primarily generate revenues by leasing properties to tenants pursuant to net leases. As of September 30, 2019, we owned 242020, our real estate investment portfolio, excluding real estate investments held for sale, consisted of (i) 39 properties (including 17 operating properties acquired in 13connection with the Merger on December 31, 2019) located in 14 states consisting of 14 retail properties, 14 office properties and 11 industrial properties, and(ii) one parcel of land, which serves as an easement to one of our operating properties, and (iii) a 72.7% undivided tenant-in-common real estate investmentinterest (the “TIC Interest”) in aan office property located in Santa Clara, CaliforniaCA interest as discussed in which we have an approximate 72.7% interest (the "TIC Interest") and a real estate investment in REIT I, an affiliated REIT, in which we have an approximate 4.8% interest.Note 5 to our unaudited condensed consolidated financial statements. The net book value of these investments at September 30, 20192020 was $231,386,218.$356,512,884. We also owned three properties held for sale (including one property acquired in the Merger) with a net book value of $23,033,118 as of September 30, 2020.
With respect to our diversified portfolio of 2439 operating properties as of September 30, 2019:2020:
Nine•14 properties are retail properties which represent an approximate 16%12% of the portfolio, 1014 properties are office properties which represent an approximate 52%50% of the portfolio, and five11 properties are industrial properties which represent an approximate 32%38% of the portfolio (expressed as a percentage of annualized base rent)net operating income);
Fully leased with a physical occupancy•Occupancy rate of 97.0%94%;
•Leased to 2433 different commercial tenants doing business in 1114 separate industries;
•Located in 1314 states;
With approximately 1,537,000•Approximately 2,171,191 square feet of aggregate leasable space;
With an•An average leasable space per property of approximately 64,00051,000 square feet; approximately 20,00016,000 square feet per retail property, approximately 62,00057,000 square feet per office property, and approximately 147,000118,000 square feet per industrial property; and
With an outstanding•Outstanding mortgage notesnote payable balance of $114,824,998, net$180,107,542.
As of deferred financing costs of $1,990,507.
Of the 24September 30, 2020, all 39 operating properties in theour portfolio as of September 30, 2019, all are single-tenant properties. At September 30, 2019,properties and all 2439 properties were leased, with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 6.65.6 years.
As of September 30, 2019,2020, we also have an approximate 4.8% interest in REIT I andheld an approximate 72.7% TIC Interest in a a 91,740 square feet property located in Santa Clara, California. The remaining approximate 27.3% of undivided interest in the Santa Clara property is held by Hagg Lane II, LLC (an approximate 23.4%) interest) and Hagg Lane III, LLC (an approximate 3.9%) interest). The manager of Hagg Lane II, LLC and Hagg Lane III, LLC isbecame a board member of the Sponsor.our board of directors in December 2019.
On October 24, 2019, we acquired a cold storage warehouse and distribution facility with approximately 216,727 square feet located in Yuma, Arizona as described in Note 11 to our unaudited condensed consolidated financial statements.
Investment Strategy
Our investment strategy isWe seek to acquire single-tenant retail, office,a portfolio consisting primarily of single tenant net leased properties throughout the United States diversified by corporate credit, physical geography, product type, and industriallease duration. Although we have no current intention to do so, we may also invest a portion of the net proceeds from our Offerings in single tenant net leased properties outside the United States. We intend to acquire assets consistent with our single tenant acquisition philosophy by focusing primarily on properties:
• where construction is substantially complete to reduce risks associated with construction of new buildings;
• leased on a “net” basis, where the tenant is responsible for the payment, and fluctuations in costs, of real estate and other taxes, insurance, utilities, and property maintenance;
• located in primary, secondary and certain select tertiary markets;
• leased to creditworthy tenants on long-term leases. Our ideal portfolio is comprised of 40% office, 40% industrial, and 20% retail, with greater than 50% of our real estate leasedstrong financial statements, including, but not limited to investment grade tenants as determined by one ofcredit quality, at the big three credit rating agencies (Standard & Poor’s, Moody’s or FitchRatings). When identifying new properties for investment,time we generally focus on acquiring high-quality real estate that tenants consider importantacquire them; and
• subject to the successful operation of their business. We generally seek to acquire real estate that has the following property characteristics:
freestanding and commercially-zonedlong-term leases with a single tenant;
located in significant markets, which markets are identified and ranked based on several key demographic and real estate specific metrics such as population growth, income, unemployment, job growth, GDP growth, rent growth, and vacancy rates;
located in strategic locations critical to generating revenue for the tenants that occupy them (i.e., the tenants need the properties in which they operate in order to conduct their businesses);
located within and attractive demographic areas relative to the business of our tenants and are generally fungible and have good visibility and easy access to major thoroughfares;
withdefined rental or lease payments that approximate or are lower than market rents; and
can be purchased with the simultaneous execution or assumption of long-term, net lease agreements, offering both current income and the potential for future rentrate increases.
The 20 properties of the REIT I portfolio which are the subject of the Merger are generally aligned with these characteristics.
Our independent directors have approved an allocation of up to $10,000,000 to be invested in properties with less than five years of remaining lease term that can be purchased at a discount, repositioned by negotiating an extended lease term with the tenant and then either sold at a profit or held in our portfolio. Prior to purchasing such properties, our Advisor will assess the expected probability of obtaining an extended lease term from the tenant by evaluating, among other factors, the property’s performance (e.g. store sales and profitability), location, population in the immediate area, current rent in relation to the market, local competition, age of the property and quality of existing tenant improvements.
Liquidity and Capital Resources
Liquidity
Our proceeds from shares sold in the Offerings and secured or unsecured borrowings from banks or other lenders have been, and will continue to be, primarily used to invest in real estate investments or to re-lease and reposition our primary sourceproperties in accordance with our investment strategy and policies, including costs and fees associated with such investments. We also expect to use a portion of liquidity, primarilythe proceeds of the Offerings for (i) property acquisitions; (ii) capital expenditures; (iii) payment of principal on our outstanding indebtedness; and (iv)for payment of feescapital expenditures, tenant improvement costs and leasing costs related to our Advisor. Our cash needs for the purchase of real estate propertiesinvestments; to provide liquidity to our stockholders pursuant to our share repurchase programs; and other real estate investments will be funded primarily from the sale of our shares, including those offered for sale through our dividend reinvestment plan, and from debt proceeds. We have accrued costs of $956,694 related to the Merger and Self-Management transactions as of September 30, 2019 and expect to incur approximately $2,000,000 of additional costs between October 1, 2019 and the closing of these transactions. The costs of the Merger and Self-Management transactions will be funded from proceeds from the Offerings and borrowings under our line of credit.general corporate purposes.
Our aggregate borrowings, secured and unsecured, from financial institutions must be reasonable in relation to our tangible assets. Our charter limits the amount we may borrow to 300% of our net assets, unless any excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report, along with a justification for such increase; however, historically we have limited borrowings to 50% of the costvalue of our tangible assets calculated atunless any excess borrowing is approved by a majority of the conflicts committee of our board of directors and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess. On March 27, 2020, our conflicts committee and board of directors approved an increase in our maximum leverage from 50% to 55% in order to allow us to take advantage of the current low interest rate environment, the relative cost before deducting depreciation or other non-cash reserves.of debt and equity capital and strategic borrowing advantages potentially available to us. Our borrowings on one or more individual properties may exceed 50%55% of their individual cost, so long as our overall leverage does not exceed 50%.55% of the aggregate value of our tangible assets. We may exceed this limit only if any excess borrowing is approved by a majority of our conflicts committee and is disclosed to our stockholders in our next quarterly report, along with the justification
for such excess. When calculating our use of leverage, we will not include borrowings relating to the initial acquisition of properties and that are outstanding under a revolving credit facility (or similar agreement). There is no limitation on the amount we may borrow for the purchase of any single asset. As of September 30, 2019,2020, our leverage ratio was 46%48%.
We may borrow amounts from our Advisor or Sponsoraffiliates including directors and executive officers if such loan is approved by a majority of our directors, including a majority of our conflicts committee, not otherwise interested in the transaction, as being fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances. Any such loan will be included in determining whether we have complied with the borrowing limit in our charter. NeitherOn March 2, 2020, we borrowed a total of $4,000,000, secured by mortgages on our Advisor nortwo Chevron properties, from our Sponsor has any obligationChairman, Mr. Wirta (see Notes 7 and 9 to make any loansour unaudited condensed consolidated financial statements). Our conflicts committee approved the terms of these mortgages, which bore interest at an annual rate of 8% and were scheduled to us.mature on June 2, 2020. On June 1, 2020, the maturity date of these mortgages was extended to September 1, 2020 on the same terms, along with an option for a further extension to November 30, 2020 at our election prior to August 18, 2020, which we elected not to exercise. On July 31, 2020 and August 28, 2020, the mortgages secured by the Chevron San Jose, CA property and Chevron Roseville, CA property, each for $2,000,000, were repaid along with all related accrued interest with a portion of the proceeds from the refinancing of the AvAir Chandler, Arizona property and sale of the Walgreens Stockbridge, Georgia property.
Debt financing for acquisitions and investments may be obtained at the time an asset is acquired or an investment is made or at such later time as determined to be appropriate. In addition, debt financing may be used from time-to-time for property improvements, lease inducements, tenant improvements and other working capital needs.
As of September 30, 2019,2020, the outstanding principal balancesface value of our mortgage notes payable on our operating properties and the unsecured revolving credit facility before unamortized deferred financing costs, were $116,815,505$180,107,542 and $0,$6,000,000, respectively. TheOn August 13, 2020, we amended the unsecured revolving credit facility which was scheduled to mature on January 26, 2019, was extended to aextend the maturity date of April 30, 2019. On April 30, 2019, we entered into a loan agreement for a new revolving$6,000,000 of outstanding borrowings under the unsecured credit facility for a maximum principal amount of $10,000,000, maturing on Octoberto September 1, 2020 on similar termsand the maturity date of the remaining $6,000,000 of outstanding borrowings under the unsecured credit facility to the expired facility.October 15, 2021. As of September 30, 2019, our pro-rata share (approximately 4.8%) of REIT I’s mortgage notes payable was $3,019,868 and2020, our pro-rata share (approximately 72.7%) of the TIC Interest’s mortgage note payable was $10,181,117. $9,975,781, which is not included in our condensed consolidated balance sheets.
Pursuant to the Self-Management Transaction, we assumed short-term notes aggregating $4,800,000 with maturity dates during the first quarter of 2020. On March 4, 2020, the repayment schedule for $1,024,750 of these short-term notes was extended from March 9, 2020 to April 30, 2020 in exchange for payment of an extension fee of 2% of the outstanding principal and accrued interest, or $24,845, and an increase in the interest rate from 8% to 10% per annum for the period of the extension. The maturity date for $490,000 of the extended short-term notes was subsequently accelerated to April 6, 2020 in exchange for a $10,000 reduction of the extension fee to $14,845. The remainder of these short-term notes was fully repaid on March 9, 2020 and the extended short-term notes were fully repaid on April 30, 2020.
Sale of Real Estate Investments and Refinancing Transactions
During the three months ended September 30, 2020, we sold the following real estate investments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property | | Location | | Disposition Date | | Property Type | | Rentable Square Feet | | Contract Sales Price | | Net Proceeds After Debt Repayment |
Rite Aid | | Lake Elsinore, CA | | 8/3/2020 | | Retail | | 70,960 | | | $ | 7,250,000 | | | $ | 3,299,016 | |
Walgreens (1) | | Stockbridge, GA | | 8/27/2020 | | Retail | | 15,120 | | | 5,538,462 | | | 5,296,356 | |
Island Pacific | | Elk Grove, CA | | 9/16/2020 | | Retail | | 27,296 | | | 3,155,000 | | | 1,124,016 | |
| | | | | | | | 113,376 | | | $ | 15,943,462 | | | $ | 9,719,388 | |
(1) The mortgage for this property was previously repaid on August 10, 2020 in connection with the refinancing of the Accredo property as discussed below and in Note7 to our unaudited condensed consolidated financial statements.
Subsequent to September 30, 2020, on October 28, 2020, we completed the sale of our Morgan Hill, CA industrial property which was previously leased to Dinan Cars for $6,100,000, which generated net proceeds of $3,811,580 after repayment of the existing mortgage, commissions and closing costs.
In addition, two additional properties (the Las Vegas property formerly leased to 24 Hour Fitness and the Bedford, TX property leased to Harley Davidson) are held for sale as of September 30, 2020 and we are working to complete sales for these properties during the fourth quarter of 2020 and early 2021, respectively.
In July and August 2020, we refinanced the following mortgage notes.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | New | | | | | | | | |
Properties | | Principal Amount | | Principal Amount | | Prior Interest Rate | | New Interest Rate | | Prior Maturity Date | | New Maturity Date |
Accredo/Walgreens properties | | $ | 6,779,786 | | | $ | 8,538,000 | | | 3.95 | % | | 3.80 | % | | 2021-07-01 | | 2025-08-01 |
AvAir property | | 14,539,619 | | | 19,950,000 | | | 4.84 | % | | 3.80 | % | | 2028-03-27 | | 2025-08-01 |
Walgreens property | | 3,000,000 | | | 3,217,500 | | | 7.50 | % | | 4.25 | % | | 2020-08-06 | | 2030-07-16 |
As a result of the refinancings above, we generated total net proceeds of $6,904,178, a portion of which was used to repay a $2,000,000 mortgage note on one of our Chevron properties discussed above. We used the balance of these proceeds to repay a portion of our $6,000,000 in outstanding borrowings under the Unsecured Credit Facility which was due by September 1, 2020 as described above.
See Notes 6 and 11 Note 7 to our unaudited condensed consolidated financial statements for additional information regarding our outstanding indebtedness.
Capital Resources
Generally, our cash requirements for property acquisitions, debt payments, capital expenditures, and other investments will be funded by the Offerings and borrowings from financial institutions and mortgage indebtedness on our properties, and to a lesser extent, by loans from affiliates or internally generated funds. Our cash requirements for operating and interest expenses repurchases of common stock and dividend distributions will generally be funded by internally generated fundsfunds. Offering proceeds and to some extent, the waiver or deferral of asset management fees by our Sponsor. Proceeds from the Offeringsdebt financings may also be used to fund repurchases of common stock and, in limited circumstances, dividend distributions.stock. If available, future sources of capital include proceeds from the Offerings, secured or unsecured borrowings from banks or other lenders and proceeds from the sale of properties, as well as any undistributed funds from operations.
Effect of the COVID-19 Pandemic on Our Capital Resources
Our tenants and operating partners, property locations and the economy as a whole are severely impacted by the current COVID-19 pandemic in the United States and globally. The magnitude and duration of the COVID-19 pandemic and its impact on our tenants, our cash flows and our future results of operations will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic, the success of actions taken to contain or treat COVID-19, and reactions by consumers, companies, governmental entities and capital markets. The U.S. and global economies entered into a recession during the first quarter of 2020. While the U.S. economy experienced a significant quarter over quarter increase in gross domestic product (“GDP”) during the third quarter of 2020, GDP was still below GDP for the third quarter of 2019. Weakness in the U.S. and global economies continues, the severity and duration of which are unpredictable but expected to be significant, particularly given the rising number of COVID-19 cases reported in the U.S. and the world. The prolonged duration and impact of the COVID-19 pandemic could continue to disrupt our business operations and impact our financial performance. Several tenants have requested rent abatements and one tenant (24 Hour Fitness) has not paid rent since March 2020 and provided formal notice that it has rejected the lease in connection with its Chapter 11 bankruptcy proceeding and the premises were surrendered to our subsidiary as further described below. We have collected approximately 95% of rents due during the third quarter of 2020 and for the month of October 2020; however, there can be no assurance that this rate of collections will continue. In certain cases, we have negotiated with tenants and lenders regarding the deferral or resumption of rent payments and the partial deferral of mortgage payments, as appropriate and further negotiations may occur.
As discussednoted above, one of our existing properties, a 45,000-square-foot gym located in Note 1, onLas Vegas, Nevada, was formerly leased to 24 Hour Fitness. This property was purchased by our subsidiary approximately two years ago for $12,658,311 and secures a $6,241,355 mortgage as of September 18, 2019, our board of directors approved the temporary suspension30, 2020 which includes a mortgage repayment guarantee for 50% of the Primary Offering, which is registeredbalance outstanding, or $3,120,678 as of September 30, 2020. In early 2018, before we purchased the property, 24 Hour Fitness negotiated a 12-year lease extension. The lease had just under 10 years of term remaining prior to being rejected by 24 Hour Fitness in connection with its bankruptcy proceeding.
From the SEC underdate of purchase until March 2020, we were collecting approximately $76,000 per month in rent from 24 Hour Fitness. At the Securities Act,end of March 2020, 24 Hour Fitness sent us written notice stating that it would not be paying rent due to government-mandated shutdowns as a result of the COVID-19 pandemic. During the first quarter of 2020, 24 Hour Fitness engaged a third-party restructuring agent to handle negotiations with landlords and creditors, and our subsidiary began active negotiations with this restructuring agent in hopes that we might be able to retain 24 Hour Fitness as our tenant. However, on June 15, 2020, our subsidiary received written notice that the lease was formally rejected through 24 Hour Fitness' Chapter 11 bankruptcy proceeding and the primary offering portionpremises were surrendered to our subsidiary. Furthermore, the lender on this property did not agree to provide any substantial mortgage relief to us, but rather agreed to only temporarily reduce our $32,000 monthly mortgage payment by $8,000 for four monthly payments from May through August 2020.
On September 17, 2020 our special purpose subsidiary entered into a purchase and sale agreement to sell the property formerly leased to 24 Hour Fitness, subject to a number of contingencies including lender approval of the Class S Offering. Our automatic investment programbuyer’s assumption of the existing mortgage. There can be no assurances that all of the contingencies will be satisfied or that the transaction will close. If our special purpose subsidiary cannot complete this transaction, then it would consider allowing the lender to foreclose on, and take possession of, the property. The estimated liability of $3,120,678 under a loan guarantee related to the secured mortgage was also temporarily suspended effectiveaccrued and included in liabilities related to real estate investments held for sale on the condensed consolidated balance sheet as of September 30, 2020.
The COVID-19 pandemic has also severely impacted our ability to raise capital through our Offerings. From January 2, 2020 through October 31, 2020, we raised approximately $16,200,000 through our Offerings, including our distribution reinvestment plans, a 57% decrease compared with approximately $40,200,000 raised during the closefirst ten months of business2019. In addition, share repurchases increased from approximately $12,146,000 during the ten months of 2019 to approximately $14,547,000 in the first ten months of 2020, and we were unable to repurchase an additional approximately $4,363,000 in repurchase requests received during October 2020.
A subsidiary of ours was successful in obtaining a $517,000 loan through the Small Business Administration’s Paycheck Protection Program (“PPP”), which was funded by Pacific Mercantile Bank on September 18, 2019. We filed a pre-effective amendment to our Form S-11 on October 18, 2019, which includes our updated plan of distribution whereby we will offer our Class C common stock through North Capital, a registered broker dealer. On October 23, 2019, North Capital filed an application with the FINRA with respectApril 20, 2020. Recent modifications to the offeringPPP by the U.S. Treasury and Congress have extended the time period for loan forgiveness beyond the original eight-week period, making it possible for our subsidiary to apply for forgiveness of our Class C common stock. The Registered Offering100% of our Class C common stock is expected to recommence following receipt of a no objection letter from FINRA, and the SEC declaring the registration statement effective. Upon recommencement of the Registered Offering, stockholders enrolled in the automatic investment program will again automatically purchase shares pursuant to such program unless otherwise determined by our board of directors.its PPP loan.
Cash Flow Summary
The following table summarizes our cash flow activity for the nine months ended September 30, 20192020 and 2018:2019: |
| | | | | | | |
| 2019 | | 2018 |
Net cash provided by operating activities | $ | 4,563,195 |
| | $ | 2,555,989 |
|
Net cash used in investing activities | $ | (6,480,653 | ) | | $ | (53,653,282 | ) |
Net cash provided by financing activities | $ | 5,454,232 |
| | $ | 52,264,654 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Net cash provided by operating activities | $ | 3,811,648 | | | $ | 4,563,195 | |
Net cash provided by (used in) investing activities | $ | 13,207,680 | | | $ | (6,480,653) | |
Net cash (used in) provided by financing activities | $ | (14,945,552) | | | $ | 5,454,232 | |
Cash Flows from Operating Activities
For the nine months ended September 30, 20192020 and 2018,2019, net cash provided by operating activities was $3,811,648 and $4,563,195, respectively.
The cash provided by operating activities during the nine months ended September 30, 2020 primarily reflects adjustments to our net loss of $52,097,300 for distributions from investment in unconsolidated entity of $542,140; non-cash charges for impairment of goodwill, intangible assets and $2,555,989, respectively.impairment of real estate investment property aggregating $44,078,928 due to the COVID-19 pandemic; and net other non-cash charges of $11,820,920 related to depreciation and amortization, unrealized loss on interest rate swap valuation, stock compensation expense, amortization of deferred financing costs and above-market leases, partially offset by amortization of deferred rents, amortization of below-market leases, gain on sale of real estate investments and undistributed income from investment in an unconsolidated entity. In addition, the net non-cash charges were partially offset by a net use of cash due to changes in operating assets and liabilities of $533,040 during the nine months ended September 30, 2020 primarily due to increases in tenant receivables and prepaid and other assets and decrease in due to affiliates, offset in part by an increase in accounts payable, accrued and other liabilities.
The cash provided by operating activities during the nine months ended September 30, 2019 primarily reflects adjustments to our net loss of $2,973,765 for distributions from investmentsinvestment in unconsolidated entities of $716,215 and net non-cash charges of $7,669,593 primarily related to depreciation and amortization, unrealized loss on interest rate swap valuation, amortization of deferred financing costs and stock compensation expense, partially offset by amortization of deferred rents, amortization of below-market lease intangibles and income from investments in unconsolidated entities. In addition, the net non-cash charges were partially offset by a net use of cash resulting from a net changedue to changes in operating assets and liabilities of $848,848 during the nine months ended September 30, 2019 primarily due to increases in tenant receivables, prepaid and other assets and a decrease in due to affiliates, net which were partially offset by an increase in accounts payable, accrued and other liabilities.
The cash provided by operating activities during the nine months ended September 30, 2018 primarily reflects our net income of $16,145 adjusted for distributions from investments in unconsolidated entities of $557,968 and net non-cash charges of$3,977,476 primarily relatedWe continue to depreciation and amortization, amortization of deferred financing costs, distributions from investments in unconsolidated entities, stock compensation expense and amortization of above-market lease intangibles, partially offset by amortization of deferred rents, unrealized gain on interest rate swap valuation, amortization of below-market lease intangibles and income from investments in unconsolidated entities. In the addition, the net non-cash charges were also partially offset by a use of cash resulting from a net change in operating assets and liabilities of $1,995,600 during the nine months ended September 30, 2018 due to an increase in tenant receivables and other assets and decreases in accounts payable, accrued and other liabilities and due to affiliates.
We expect that our cash flows from operating activities before changes in operating assets and liabilities will continue to be positive in the next twelve months as a result of anticipated future acquisitionsa full year of real estateoperations for the properties which we acquired during 2019; however, there can be no assurance that this expectation will be realized given the uncertain impacts of the COVID-19 pandemic on our tenants and the relatedour operating contributions from such investments.results.
Cash Flows from Investing Activities
Net cash provided by investing activities was $13,207,680 for the nine months ended September 30, 2020 and consisted primarily of the following:
• $15,364,073 for proceeds from sale of real estate investments, partially offset by
•$600,291 for additions to existing real estate properties, including transaction costs for assets acquired in the Merger;
•$566,102 for additions to intangible assets; and
•$990,000 for additions to lease incentives.
Net cash used in investing activities was $6,480,653 for the nine months ended September 30, 2019 and consisted primarily of the following:
•$3,387,699 payment of an obligation related to a previously recorded tenant improvement;
•$1,005,523 of costs related to pending acquisitions including pending merger with REIT I;the then-pending Merger;
•$2,000,000 of non-refundablefor a refundable real estate purchase deposit; and
•$181,972 of additions to existing real estate investments; partially offset by
•$100,000 of refund of a real estate purchase deposit.
Cash Flows from Financing Activities
Net cash used in investingfinancing activities was $53,653,282$14,945,552 for the nine months ended September 30, 20182020 and consisted of the following:
•$50,863,08010,378,762 of proceeds from issuance of common stock, partially offset by payments for offering costs and commissions of $979,832;
•$35,705,500 of proceeds from mortgage notes payable; partially offset by principal payments of $36,421,500 and deferred financing cost payments of $389,662 to third parties;
•$527,000 of proceeds from economic relief notes payable, more than offset by full repayments of principal of $4,800,000 on short-term notes payable; and
•$4,260,000 of proceeds from borrowings on our unsecured credit facility; these proceeds were more than offset by $13,154,123 used for repurchases of shares under the acquisitionsshare repurchase plan and $4,071,697 of four operating properties and a parcel of land;
$749,094 of additionsdistributions paid to existing real estate investments;
$1,541,108 for the payment of acquisition fees to affiliate; and
$500,000 of refundable deposit for the Bon Secours property.
Cash Flows from Financing Activitiescommon stockholders.
Net cash provided by financing activities was $5,454,232 for the nine months ended September 30, 2019 and consisted primarily of the following:
•$34,559,949 of proceeds from issuance of common stock and investor deposits, partially offset by payments for offering costs and commissions of $1,207,562; and
•$6,350,000 of proceeds from mortgage notes payable;payable, more than offset by principal payments of $14,557,433 and deferred financing cost payments of $175,311 to third parties and deferred financing fees of $63,500 paid to an affiliate; and
•$4,869,000 of proceeds from borrowings on our unsecured credit facility; which wasfacility, more than offset by $13,869,000payments on our former unsecured credit facility of repayments under both our New Credit Facility and Unsecured Credit Facility, as then in effect. Such$13,869,000; these proceeds were furtheralso more than offset in part by
$8,379,336 $8,379,336 used for repurchases of shares under the share repurchase plan;plan and
$1,901,575 $1,901,575 of distributions paid to common stockholders.
Net cash provided by financing activities was $52,264,654 for the nine months ended September 30, 2018 and consisted of the following:$34,616,876 of proceeds from issuance of common stock, partially offset by payments for offering costs and commissions of $1,177,728; and
$51,587,500 of proceeds from mortgage notes payable, partially offset by principal payments of $12,664,740 and deferred financing cost payments of $996,010 to third parties and $209,550 to affiliates;
$18,450,000 of proceeds from borrowings on our unsecured credit facility obtained in 2018, which were used to repay our former unsecured credit facility along with additional repayments during the period for an aggregate of $30,450,000 in repayments; further offset in part by
$5,719,152 used for repurchases of shares under the share repurchase plan; and
$1,172,542 of distributions paid to stockholders.
Results of Operations
As of September 30, 2019,2020, we owned (i) 2439 operating properties, including 17 operating properties which we acquired through the Merger with REIT I on December 31, 2019 and one property acquired on October 24, 2019, (ii) one parcel of land, usedwhich currently serves as an easement to one of our operatingoffice properties, and (iii) an approximate 72.7% TIC Interest and (iv) an approximate 4.8% interest in REIT I, an affiliated REIT.Interest. We did not acquire any operating propertyproperties during the first nine months of 2019 compared to four2020 or 2019. We sold three properties during the third quarter of 2020 and have classified three properties as held for sale as of September 30, 2020. The operating property acquisitionsresults of the three properties that were classified in the nine months ended September 30, 2018 (acquired March 29, 2018, April 4, 2018, July 27, 2018 and September 13, 2018). During 2018, we acquired a totalordinary course of six operating properties.business as held for sale are included in our continuing results of operations.
We expect that rental income, tenant reimbursements, depreciation and amortization expense, and interest expense and asset management fees to affiliates will eachall increase in the next twelve monthsremainder of 2020 as compared with 2019 as a result of the 2018December 31, 2019 acquisitions discussed above, our October 24, 2019 property acquisition discussed in Note 11, the Merger, and our anticipated future acquisitions of real estate investments.partially offset by results from properties sold. Our results of operations for the three and nine months ended September 30, 2019 are2020 may not be indicative of those expected in future periods as we expectperiods. However, due to the current COVID-19 pandemic in the United States and globally, our tenants and operating partners continue to raise capital through the Offerings and expect to acquire additional properties.
Upon completionbe impacted. The impact of the Merger, we would have approximately $445,000,000COVID-19 pandemic on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of assets under management with 46 single-tenant, net leased properties consistingthe pandemic, the success of 19 retail properties, 15 office properties (including the TIC Interest)action taken to contain or treat COVID-19, and 12 industrial properties (including the property acquired in October 2019). The 20 additional properties acquired in the Merger would increase our revenuesreactions by approximately 55% with a corresponding increase in expected cash to be generated by operating activities. The increased cash flow from the merged properties will be partially offset by an increase in generalconsumers, companies, governmental entities and administrative costs resulting from the Self-Management Transaction since the personnel and other administrative costs of our advisor’s business are greater than the asset management fees, property management fees, and cost reimbursements that we will no longer be paying, and the acquisition fees that we previously paid were capitalized in accordance with GAAP, rather than expensed as personnel costs. In addition, we will no longer be reimbursed for our Investor Relations personnel costs.
capital markets.
Comparison of the Three Months Ended September 30, 20192020 to the Three Months Ended September 30, 20182019
Rental Income
Rental income, including tenant reimbursements, for the three months ended September 30, 2020 and 2019 was $9,557,191 and 2018 was $6,125,957, and $4,725,279, respectively. The significant increase of $1,400,678$3,431,234, or 29.6%56%, quarter-over-quarter primarily reflects rental income from the four20 operating properties acquired subsequentthrough the Merger with REIT I on December 31, 2019 (see Note 4 to June 30, 2018 (two eachour unaudited condensed consolidated financial statements regarding the sale of three properties during the current year quarter, as well as one tenant which filed for bankruptcy during the second quarter of 2020) and one additional operating property acquired in the third and fourth quarters of 2018).October 2019. Pursuant to most of our lease agreements, tenants are required to pay or reimburse all or a portion of the property operating expenses. The annualized base rental income of the operating properties owned as of September 30, 20192020 was $17,562,000.$26,625,527 excluding annualized base rental income for real estate properties held for sale.
Fees to Affiliates
Fees to affiliates, or asset management fees to affiliate,affiliates, were $812,349$0 and $532,355,$812,349, respectively, for the three months ended September 30, 2020 and 2019 and 2018.for our investments in operating properties. The fee iswas equal to 0.1% of the total investment value of our properties on a monthly basis.basis through December 31, 2019, when the Advisory Agreement was terminated in connection with the Self-Management Transaction. The significant increase of $279,994 or 52.6% quarter-over-quarter was primarily duefees for the three months ended September 30, 2019 correspond to the increase in the number of24 operating properties owned from 20 properties as of June 30, 2018 to 24 properties as of September 30, 2019 (two properties each were acquired in the third and fourth quarters of 2018). In addition, we incurred $132,000 of operating expense reimbursement in the current year quarter which reflects the portion of the operating expenses incurred by our Advisor allocated to us. We did not incur a similar operating expense reimbursement in the prior year quarter as such reimbursement would have caused us to exceed the 2%/25% Limitation for operating expenses for the four fiscal quarters ended September 30, 2018.during that quarter. In addition, we incurred asset management fees to the Former Advisor of $65,993$47,977 related to our approximate 72.7% TIC Interest during the each of the three months ended September 30, 2019, and 2018, which amounts are reflected as a reduction of income recognized from investments in unconsolidated entities. The Advisory Agreement with the entities that own the TIC Interest property was assigned to our taxable REIT subsidiary following the Self-Management Transaction and we earn a monthly management fee equal to 0.1% of the total investment value of the property from this entity, which resulted in a management fee of $65,993 for the three months ended September 30, 2020, of which our portion of expense relating to the TIC Interest was $47,984.
General and Administrative
General and administrative expenses were $918,636$2,522,719 and $598,578$918,636 for the three months ended September 30, 20192020 and 2018,2019, respectively. The significant increase of $320,058 and 53.5%$1,604,083, or 175%, quarter-over-quarter primarily reflects $800,360the costs of expenses incurred in connectionself-management of all 39 operating properties owned and three properties held for sale during the current year quarter, including personnel, occupancy and technology services costs, compared with the pending Self-Management Transaction, partially offset by decreasescosts of the Advisory Agreement for the 24 operating properties owned during the prior year quarter, along with increases in the cost of Investor Relations personnel due to a reduction in the number of employeesdirectors and legal costsofficers insurance, and post-closing accounting fees related to employment matters. The expenses for the Self-Management Transaction primarily reflect an allocation of the fees of the financial advisor to the Special Committee, along with legal fees for the Special Committee's legal counsel. Costs related to our pending Merger with REIT I are included in other assets and are expected to be capitalized and allocated to the assets acquired upon completion of the Merger.Transaction.
Depreciation and Amortization
Depreciation and amortization expense was $2,393,725$4,304,470 and $1,861,649$2,393,725 for the three months ended September 30, 2020 and 2019, respectively. The purchase price of properties acquired, including properties acquired in the Merger, is allocated to tangible assets, identifiable intangibles and assumed liabilities and depreciated or amortized over their estimated useful lives. The significant increase of $1,910,745, or 80%, quarter-over-quarter primarily reflects the expenses of all 39 operating properties owned and three properties held for sale during the current year quarter, including 17 of the 20 operating properties acquired on December 31, 2019 in the Merger, and the amortization of intangibles primarily acquired in the Self-Management Transaction of $458,371, as compared with expenses for the 24 operating properties owned during the prior year quarter.
Interest Expense
Interest expense was $2,732,528 and $1,738,791 for the three months ended September 30, 2020 and 2019, respectively (see Note 7 to our unaudited condensed consolidated financial statements for the detail of the components of interest expense). The significant increase of $993,737, or 57%, quarter-over-quarter was primarily due to the increase in the average principal balance of mortgage notes payable from approximately $116,974,000 during the third quarter of 2019 to approximately $196,378,000 during the third quarter of 2020. Average unsecured credit facility borrowings were approximately $9,065,000 during the third quarter of 2020 compared to zero unsecured credit facility borrowings during the third quarter of 2019.
Property Expenses
Property expenses were $1,677,055 and $1,362,661 for the three months ended September 30, 2020 and 2019, respectively. These expenses primarily relate to property taxes and repairs and maintenance expenses. The significant increase of $314,394, or 23%, quarter-over-quarter primarily reflects the expenses of all 39 operating properties owned, three properties sold and three properties held for sale during the current year quarter, including 17 of the 20 operating properties acquired on December 31, 2019 in the Merger, as compared with expenses for the 24 operating properties owned during the prior year quarter.
Expenses Reimbursed by Former Sponsor or Affiliates
Expenses reimbursed by our Former Sponsor or affiliates thereof were $0 and $96,104 for the three months ended September 30, 2020 and 2019, respectively. For the quarter ended September 30, 2019, the amounts reimbursed by the Former Sponsor were for investor relations payroll costs. Concurrent with the closing of the Self-Management Transaction on December 31, 2019, the Advisory Agreement was terminated.
Gain on Sale of Real Estate Investments
The gain on sale of investments of $1,693,642 for the three months ended September 30, 2020 relates to the sale of three retail properties during the current year quarter (see Note 4 to our unaudited condensed consolidated financial statements for more details).
Other (Expense) Income, Net
The lease termination expense of $(1,175,192) for the three months ended September 30, 2020 reflects the fee for early termination of our Costa Mesa office lease following the surrender of the leased premises to the lessor during the second quarter of 2020 (see Note 10 to our unaudited condensed consolidated financial statements for more details).
Interest income was $51 and $45,940 for the three months ended September 30, 2020 and 2019, respectively.
Income from investments in unconsolidated entities was $92,617 and $37,570 for the three months ended September 30, 2020 and 2019, respectively. This represents our approximate 72.7% TIC Interest in the Santa Clara property's results of operations for the third quarter of 2020 and 2019, respectively, and includes the results of our approximate 4.8% interest in REIT I's results of operations for the third quarter of 2019. We acquired REIT I in the Merger on December 31, 2019.
Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019
Rental Income
Rental income, including tenant reimbursements, for the nine months ended September 30, 2020 and 2019 was $29,888,620 and $17,907,668, respectively. The significant increase of $11,980,952, or 67%, period-over-period primarily reflects rental income from the 20 operating properties acquired through the Merger with REIT I on December 31, 2019 and 2018,one additional operating property acquired in October 2019. Three of the operating properties acquired through the Merger were sold during the current year quarter. No rental income was recorded for one tenant, which filed for bankruptcy, for the period since April 1, 2020 (see Note 4 to our unaudited condensed consolidated financial statements for more details). Pursuant to most of our lease agreements, tenants are required to pay or reimburse all or a portion of the property operating expenses. The annualized base rental income of the operating properties owned as of September 30, 2020 was $26,625,527, excluding annualized base rental income for real estate properties held for sale.
Fees to Affiliates
Fees to affiliates, or asset management fees to affiliates, were $0 and $2,436,386, respectively, for the nine months ended September 30, 2020 and 2019 for our investments in operating properties. The fee was equal to 0.1% of the total investment value of our properties on a monthly basis through December 31, 2019, when the Advisory Agreement was terminated in connection with the Self-Management Transaction. The fees for the nine months ended September 30, 2019 correspond to the 24 operating properties owned during that period. In addition, we incurred asset management fees to the Former Advisor of $143,951 related to our approximate 72.7% TIC Interest during the nine months ended September 30, 2019, which amounts are reflected as a reduction of income recognized from investments in unconsolidated entities. The Advisory Agreement with the entities that own the TIC Interest property was assigned to our taxable REIT subsidiary following the Self-Management Transaction and we earn a monthly management fee equal to 0.1% of the total investment value of the property from this entity, which resulted in a management fee of $197,979 for the nine months ended September 30, 2020, of which our portion of expense relating to the TIC Interest was $143,951.
General and Administrative
General and administrative expenses were $7,447,082 and $2,312,081 for the nine months ended September 30, 2020 and 2019, respectively. The significant increase of $5,135,001, or 222%, period-over-period primarily reflects the costs of self-management of all 39 operating properties owned and three properties held for sale during the current year period, including personnel, occupancy and technology services costs, compared with the costs of the Advisory Agreement for the 24 operating properties owned during the prior year period, along with increases in directors and officers insurance, audit fees, third party consulting costs and post-closing legal costs related to the Self-Management Transaction of $201,920.
Depreciation and Amortization
Depreciation and amortization expense was $13,420,256 and $7,176,716 for the nine months ended September 30, 2020 and 2019, respectively. The purchase price of the acquired properties is allocated to tangible assets, identifiable intangibles and assumed liabilities and depreciated or amortized over their estimated useful lives. The significant increase of $532,076$6,243,540, or 87%, period-over-period primarily reflects the expenses of all 39 operating properties owned, three properties sold and 28.6% quarter-over-quarter was primarily due tothree properties held for sale during the four additionalcurrent year period, including the 20 operating properties acquired on December 31, 2019 in the second halfMerger, and the amortization of 2018.intangibles primarily acquired in the Self-Management Transaction of $1,372,910, as compared with expenses for the 24 operating properties owned during the prior year period.
Interest Expense
Interest expense was $1,738,791$9,196,061 and $1,070,860$5,975,866 for the threenine months ended September 30, 20192020 and 2018,2019, respectively (see Note 6 7 to our unaudited condensed consolidated financial statements for the detail of the components of interest expense). The significant increase of $667,931$3,220,195, or 62.4% quarter-over-quarter54%, period-over-period was primarily due to increased mortgage notes payable outstanding and unrealized lossthe increase in the current period as compared with unrealized gain in the prior year period. The average principal balance of mortgage notes payable increased from approximately $94,390,000$118,483,000 during the threefirst nine months ended September 30, 2018of 2019 to approximately $116,974,000$197,182,000 during the threefirst nine months ended September 30, 2019. There were no borrowings under ourof 2020. Average unsecured credit facility borrowings were approximately $2,856,000 during the threefirst nine months ended September 30,of 2019 and 2018.increased to an average of $10,290,000 during the first nine months of 2020.
Property Expenses
Property expenses were $1,362,661$5,480,411 and $772,394$3,537,249 for the threenine months ended September 30, 20192020 and 2018,2019, respectively. These expenses primarily relate to property taxes and repairs and maintenance expenses. The significant increase of $590,267$1,943,162, or 76.4% quarter-over-quarter was55%, period-over-period primarily reflects the expenses of all 39 operating properties owned, three properties sold and three properties held for sale during the current year period, including the 20 operating properties acquired on December 31, 2019 in the Merger, as compared with expenses for the 24 operating properties owned during the prior year period.
Impairment of Investments in Real Estate Properties
Impairment charges aggregating $9,506,525 recorded in the first nine months of 2020, which were approximately 2% of our total investments in real estate property, relates to the impairments of the three vacant properties located in Las Vegas, Nevada, Morgan Hill, California and Cedar Park, Texas and the sale of our property in Lake Elsinore, California. These impairment charges are due to the four additional operatingnegative impacts of the COVID-19 pandemic including the government mandated closure of the 24 Hour Fitness store in Las Vegas, Nevada and the subsequent receipt on June 15, 2020 of written notice that the lease was formally rejected in connection with 24 Hour Fitness' Chapter 11 bankruptcy proceeding and the surrender of the premises to our subsidiary, as well as uncertainty regarding our ability to re-lease the other two vacant properties acquiredon the same or better terms, or at all (see Note 4 to our unaudited condensed consolidated financial statements for impairment details). The Lake Elsinore property was sold on August 3, 2020 and the Morgan Hill property was sold on October 28, 2020. We have negotiated an early termination of the Dana lease in Cedar Park, Texas as discussed in Note 4 to our unaudited condensed consolidated financial statements and have engaged brokers to identify a potential new tenant for the property.
Impairment of Goodwill and Intangible Assets
Impairment charges of $34,572,403 recorded in the second half 2018.first nine months of 2020 consisted of goodwill impairment of $33,267,143 (approximates 66% of goodwill) and intangible assets impairment of $1,305,260 (approximates 16% of intangible assets) related to our investor list. These impairments were recorded in the first quarter of 2020 and reflect the negative impacts of the COVID-19 pandemic to the carrying values of goodwill and intangible assets (see Note 3 to our unaudited condensed consolidated financial statements for impairment details).
Reserve for Loan Guarantee
The reserve for our estimated liability under a loan guarantee amounted to $3,120,678 for the nine months ended September 30, 2020. This represents the estimated liability for a loan guarantee related to our subsidiary's secured mortgage for the Las Vegas, Nevada property, as a result of the evaluation of the impact of the COVID-19 pandemic on the tenant's business and the risk that the lender could foreclose on the property (see “Effect of the COVID-19 Pandemic on Our Capital Resources”above and Note 6 to our unaudited condensed consolidated financial statements).
On September 17, 2020 our special purpose subsidiary entered into a purchase and sale agreement to sell the Las Vegas, Nevada property, subject to a number of contingencies including lender approval of the buyer’s assumption of the existing mortgage. There can be no assurances that all of the contingencies will be satisfied or that the transaction will close. If our special purpose subsidiary cannot complete this transaction, then it would consider allowing the lender to foreclose on, and take possession of, the property.
Expenses Reimbursed by Former Sponsor or Affiliates
Expenses reimbursed by our Former Sponsor or affiliates were $96,104$0 and $298,645$332,336 for the threenine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2019, and 2018, respectively. For the three months ended September 30, 2019 and 2018, the amounts reimbursed by the Former Sponsor for Investor Relationsinvestor relations payroll costs were $96,104 and $173,464, respectively. The 2018 quarter also includes $125,181of $332,336 reflect $373,251 of costs, partially offset by a $40,915 refund to the Former Sponsor of employment related legal fees which were reimbursed byfees. Concurrent with the Sponsor. closing of the Self-Management Transaction on December 31, 2019, the Advisory Agreement was terminated.
Gain on Sale of Real Estate Investments
The significant decreasegain on sale of $202,541 or 67.8% in reimbursements corresponds primarilyreal estate investments of $1,693,642 for the nine months ended September 30, 2020 reflects the gain on sale of three retail properties during the current period (see Note 4 to our unaudited condensed consolidated financial statements for more details).
Other (Expense) Income, Net
The lease termination expense of $(1,175,192) for the nine months ended September 30, 2020 reflects the fee for early termination of our Costa Mesa office lease following the surrender of the leased premises to the reduced numberlessor during the second quarter of Investor Relations personnel and related costs. Reimbursement2020 (see Note 10 to our unaudited condensed consolidated financial statements for organization and offering costs was discontinued effective October 1, 2019 as described under “Organizational and Offering Costs” below.
Other Incomemore details).
Interest income was $45,940$4,873 and $4,648$56,971 for the threenine months ended September 30, 2020 and 2019, respectively, and 2018, respectively.other expense was $4,855 for the nine months ended September 30, 2020.
Income from investments in unconsolidated entities was $37,570$239,028 and $69,863$167,558 for the threenine months ended September 30, 20192020 and 2018,2019, respectively. This represents our approximate 4.8% and 4.4% interest, respectively, in REIT I's results of operations and our approximate 72.7% TIC Interest in the Santa Clara property's results of operations for the three months ended September 30, 2019 and 2018, respectively.
Comparison of the Nine Months Ended September 30, 2019 to the Nine Months Ended September 30, 2018
Rental Income
Rental income, including tenant reimbursements for the nine months ended September 30, 2019 and 2018 was $17,907,668 and $12,567,223, respectively. The significant increase of $5,340,445 or 42.5% period-over-period primarily reflects rental income from the six operating properties acquired in 2018. Pursuant to most of our lease agreements, tenants are required to pay all or a portion of the property operating expenses. The annualized base rental income of the operating properties owned as of September 30, 2019 was $17,562,000.
Fees to Affiliates
Fees to affiliates, or asset management fees to affiliate, were $2,436,386 and $1,411,585, respectively, for the nine months ended September 30, 2019 and 2018. The fee is equal to 0.1% of the total investment value of our properties on a monthly basis. The significant increase of $1,024,801 or 72.6% period-over-period was primarily due to the increase in the number of operating properties owned from 18 properties on January 1, 2018 to 24 properties as of September 30, 2019. In addition, we incurred asset management fees to the Advisor of $197,978 related to our approximate 72.7% TIC Interest during each of the nine months ended September 30, 2019 and 2018, which amounts are reflected as a reduction of income recognized from investments in unconsolidated entities. In addition, we incurred $396,000 of operating expense reimbursements in the current year period which reflects the portion of the operating expenses incurred by our Advisor allocated to us. We did not incur a similar operating expense reimbursement in the prior year period as such reimbursement would have caused us to exceed the 2%/25% Limitation for operating expenses for the four fiscal quarters ended September 30, 2018.
General and Administrative
General and administrative expenses were $2,312,081 and $2,047,761 for the nine months ended September 30, 2019 and 2018, respectively. The increase of $264,320 or 12.9% period-over-period was primarily reflects $800,360 of expenses incurred in connection with the pending Self-Management Transaction, partially offset by decreases in the cost of Investor Relations personnel due to a reduction in the number of employees and legal costs related to employment matters. The expenses for the Self-Management Transaction primarily reflect an allocation of the fees of the financial advisor to the Special Committee, along with legal fees for the Special Committee's legal counsel. Costs related to our pending Merger with REIT I are included in other assets and are expected to be capitalized and allocated to the assets acquired upon completion of the Merger.
Depreciation and Amortization
Depreciation and amortization expense was $7,176,716 and $4,888,394 for the nine months ended September 30, 2019 and 2018, respectively. The purchase price of the acquired properties is allocated to tangible assets, identifiable intangibles and assumed liabilities and depreciated or amortized over their estimated useful lives. The significant increase of $2,288,322 or 46.8% period-over-period was primarily due to the six additional operating properties acquired in 2018.
Interest Expense
Interest expense was $5,975,866 and $3,364,736 for the nine months ended September 30, 2019 and 2018, respectively (see Note 6 to our unaudited condensed consolidated financial statements for the detail of the components of interest expense). The significant increase of $2,611,130 or 77.6% period-over-period was primarily due to the increase in the average principal balance of mortgage notes payable and unrealized loss in the current period as compared with unrealized gain in the prior year period (see Note 7 to our unaudited condensed consolidated financial statements). The average principal balance of mortgage notes payable increased from approximately $82,879,000 during the nine months ended September 30, 2018 to approximately $118,483,000 during the nine months ended September 30, 2019, (see Note 6 to our unaudited condensed consolidated financial statements). Average unsecured credit facility borrowings were approximately $5,000,000 during the nine months ended September 30, 2018 compared to $2,856,000 during the nine months ended September 30, 2019.
Property Expenses
Property expenses were $3,537,249 and $1,966,616 for the nine months ended September 30, 2019 and 2018, respectively. These expenses primarily relate to property taxes and repairs and maintenance expenses. The significant increase of $1,570,633 or 79.9% period-over-period was primarily due to the six additional operating properties acquired in 2018.
Expenses Reimbursed by Sponsor or Affiliates
Expenses reimbursed by our Sponsor or affiliates were $332,336 and $952,098 for the nine months ended September 30, 2019 and 2018, respectively. For the first nine months ended September 30,of 2020 and 2019, respectively, and 2018,includes the amounts reimbursed by the Sponsor for Investor Relations payroll costs were $373,251 and $726,972, respectively. The expense reimbursements from the Sponsor during the nine months ended September 30, 2019 and 2018 also include $(40,915)results of refund to the Sponsor and $225,126 of employment related legal fees, respectively, which the Sponsor agreed to reimburse. The significant decrease of $619,762 or 65.1% in reimbursements corresponds primarily to the reduced number of Investor Relations personnel and related costs as described above under general and administrative expenses. Reimbursement for organization and offering costs was discontinued effective October 1, 2019 as described under “Organizational and Offering Costs” below.
Other Income
Interest income was $56,971 and $12,568 for the nine months ended September 30, 2019 and 2018, respectively.
Income from investments in unconsolidated entities was $167,558 and $163,348 for the nine months ended September 30, 2019 and 2018, respectively. This represents our approximate 4.8% and 4.4% interest respectively, in REIT I's results of operations and our approximate 72.7% TIC Interestfor the first nine months of September 30, 2019. We acquired REIT I in the Santa Clara property's results of operations for the nine months ended September 30, 2019 and 2018, respectively.Merger on December 31, 2019.
Organizational and Offering Costs
Prior to October 1, 2019, our organizational and offering costs were paid by our Sponsor on our behalf. Offering costs include all expenses incurred in connection with the Offerings, including Investor Relationsinvestor relations payroll expenses. Other organizational and offering costs include all expenses incurred in connection with our formation, including, but not limited to legal fees, federal and state filing fees, and other costs to incorporate.
During Our organizational and offering costs were paid by our Former Sponsor on our behalf through September 30, 2019, after which we agreed to pay all future organization and offering costs pursuant to an amendment to the primary Offerings,Advisory Agreement in October 2019 and to no longer be reimbursed by our Former Sponsor for investor relations personnel costs after September 30, 2019, in exchange for our Former Sponsor's agreement to terminate its right to receive 3% of gross offering proceeds as reimbursement for organization and offering costs paid by our Former Sponsor. Prior to September 30, 2019, we were obligated to reimburse our Former Sponsor for organizational and offering costs related to the Offerings paid by themit on our behalf, provided such reimbursement did not exceed 3% of gross offering proceeds raised in the Offerings as of the date of the reimbursement.
The Advisory Agreement was amended effective October 1, 2019 in connection with our new plan We recorded $5,429,105 of distribution whereby we will offer our shares of Class C Common Stock through a registered broker dealer. We agreed to pay all future organization and offering costs, and to no longer be reimbursed by the Sponsor for our Investor Relations personnel costs after September 30, 2019, in exchange for the Sponsor’s agreement to terminate its right to receive 3% of all offering proceeds received by us after September 30, 2019 as reimbursement for organization and offering costs previously paid by the Sponsor.
As of September 30, 2019, we had not directly incurred any organizational and offering costs relatedpaid to the Offerings as all such costs had been funded by our Sponsor. As a result, these organizational and offering costs relatedFormer Sponsor or affiliates through September 30, 2019. See Note 9 to the Offerings are not recorded in our unaudited condensed consolidated financial statements as of September 30, 2019 other than to the extent of 3% of the gross offering proceeds.for additional information. Through September 30, 2019, our Former Sponsor had incurred organizational and offering costs on our behalf in connection with ourthe Offerings in excess of $9,189,209. Through3.0% of the gross offering proceeds received by us. From October 1, 2019 through December 31, 2019, we incurred $509,739 of direct organizational and offering costs related to the Offerings.
For the nine months ended September 30, 2019,2020, we incurred organizational and offering costs including primarily legal fees, FINRA, SEC and blue sky filing costs and personnel costs for investor relations personnel of $981,748 related to the Offerings, which are recorded in our financial statements as of September 30, 2020 as an offset to equity. As of September 30, 2020, we had recorded $5,429,105 of organizational and offering costs of which $0 was payable$5,429,105 paid to theour Former Sponsor or affiliates. See Note 8 to our unaudited condensed consolidated financial statementsaffiliates and $1,491,487 which we incurred directly, for additional information.an aggregate of $6,920,592 of organizational and offering costs.
Distributions
We intend to pay distributions on a monthly basis, and we paid our first distribution on July 11, 2016. The rate is determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant. Our board of directors has not pre-established a percentage range of return for distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders other than as necessary to meet REIT qualification requirements.
During our offering stage, when we may raise capital more quickly than we acquire income producing assets,
Distributions declared, distributions paid and from time-to-timecash flows provided by operating activities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Distributions | | Distributions Declared | | Distributions Paid | | Cash Flows Provided by Operating | |
Period (1) | | Declared | | Per Share | | Cash | | Reinvested | | Activities | |
| | | | | | | | | | | |
First Quarter 2020 (2) | | $ | 4,189,102 | | | $ | 0.175875 | | | $ | 1,379,751 | | | $ | 2,360,514 | | | $ | 1,947,505 | | * |
Second Quarter 2020 (3) | | 3,270,291 | | | 0.136000 | | | 1,710,514 | | | 2,304,199 | | | (774,533) | | * |
Third Quarter 2020 (4) | | 2,135,815 | | | 0.136000 | | | 981,432 | | | 1,150,452 | | | 2,638,676 | | |
2020 Totals | | $ | 9,595,208 | | | $ | 0.447875 | | | $ | 4,071,697 | | | $ | 5,815,165 | | | $ | 3,811,648 | | |
| | | | | | | | | | | |
First Quarter 2019 (5) | | $ | 2,388,694 | | | $ | 0.175875 | | | $ | 552,134 | | | $ | 1,763,630 | | | $ | 773,736 | | |
Second Quarter 2019 (6) | | 2,605,268 | | | 0.175875 | | | 630,184 | | | 1,900,893 | | | 2,112,395 | | |
Third Quarter 2019 (7) | | 2,784,235 | | | 0.175875 | | | 719,257 | | | 2,020,768 | | | 1,677,064 | | * |
Fourth Quarter 2019 (8) | | 2,807,322 | | | 0.175875 | | | 2,116,411 | | | 667,391 | | | 185,709 | | * |
2019 Totals | | $ | 10,585,519 | | | $ | 0.703500 | | | $ | 4,017,986 | | | $ | 6,352,682 | | | $ | 4,748,904 | | * |
* Includes non-recurring Merger costs of $201,920 during our operational state, we may not pay distributions from operations. In these cases, distributions may bethe nine months ended September 30, 2020 ($193,460 during the quarter ended March 31, 2020 and $8,460 during the quarter ended June 30, 2020) and $1,468,913 for the year ended December 31, 2019 ($800,359 during the quarter ended September 30, 2019 and $668,554 during the quarter ended December 31, 2019).
(1)The distribution paid per share of Class S common stock is net of deferred selling commissions.
(2)The distribution of $1,415,328 for the month of March 2020 was declared in whole orJanuary 2020 and paid on April 27, 2020. The amount was recorded as a liability as of March 31, 2020.
(3)The distribution of $691,443 for the month of June 2020 was declared in part fromMay 2020 and paid on July 27, 2020. The amount was recorded as a liability as of June 30, 2020.
(4)The distribution of $674,837 for the waiver or deferralmonth of fees otherwise due to our Advisor, if so elected by our Advisor. Historically,September 2020 was declared in May 2020 and paid on October 26, 2020. The amount was recorded as a liability as of September 30, 2020 in the accompanying unaudited condensed consolidated balance sheets.
(5)The distribution of $821,300 for the month of March 2019 was declared in February 2019 and paid on April 25, 2019. The amount was recorded as a liability as of March 31, 2019.
(6)The distribution of $896,291 for the month of June 2019 was declared in February 2019 and paid on July 25, 2019. The amount was recorded as a liability as of June 30, 2019.
(7)The distribution of $937,863 for the month of September 2019 was declared in August 30, 2019 and paid on October 25, 2019. The amount was recorded as a liability as of September 30, 2019.
(8)The distribution of $966,491 for the month of December 2019 was declared in August 30, 2019 and paid on January 25, 2020. The amount was recorded as a liability as of December 31, 2019 in the accompanying consolidated balance sheets.
Our sources of cash used to pay our distributions have been from net rental income received, along with the waiver and deferral of management fees and, to a limited extent, offering proceeds. The leases for certain of our real estate acquisitions may provide for rent abatements. These abatements are an inducement for the tenant to enter into or extend the term of its lease. distribution payments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Net Rental Income Received | | Waived Advisor Asset Management Fees | | Deferred Advisor Asset Management Fees | | Offering Proceeds (1) |
2020 | | | | | | | | |
First Quarter 2020 | | $ | 4,189,102 | | | (2) | | (2) | | $ | — | |
Second Quarter 2020 | | 3,270,291 | | | (2) | | (2) | | — | |
Third Quarter 2020 | | 2,135,815 | | | (2) | | (2) | | — | |
2020 Totals | | $ | 9,595,208 | | | | | | | $ | — | |
| | | | | | | | |
2019 | | | | | | | | |
First Quarter 2019 | | $ | 2,388,694 | | | $ | — | | | $ | — | | | $ | — | |
Second Quarter 2019 | | 2,605,268 | | | — | | | — | | | — | |
Third Quarter 2019 | | 2,784,235 | | | — | | | — | | | — | |
Fourth Quarter 2019 | | 2,807,322 | | | — | | | — | | | — | |
2019 Totals | | $ | 10,585,519 | | | $ | — | | | $ | — | | | $ | — | |
(1)In connection with the acquisition of some properties, we may be able to negotiate a reduced purchase price for the acquired property in an amount that equals the previouslyan agreed-upon rent abatement. During the period of any rent abatement on properties that we acquire, we may be unable to fully fund our distributions from net rental income received and waivers or deferralsreceived. In connection with the extension of Advisor asset management fees.the lease term of some existing properties, we may agree to pay a lease extension fee. In that event,those events, we may expand the sources of cash used to fund our stockholder distributions to include proceeds from the sale of our common stock, but only during the periods, and up to the amounts, of any rent abatements where we are able to negotiate a reduced purchase price.price or the amounts extend a lease term by payment of an extension fee.
Distributions declared, distributions paid and cash flows provided by operating activities were as follows: |
| | | | | | | | | | | | | | | | | | | | |
| | Total Distributions | | Distributions Declared | | Distributions Paid | | Cash Flows Provided by Operating |
Period (1)(2) | | Declared | | Per Share | | Cash | | Reinvested * | | Activities |
First Quarter 2018 (3) | | $ | 2,173,195 |
| | $ | 0.17588 |
| | $ | 335,216 |
| | $ | 1,260,232 |
| | $ | 38,144 |
|
Second Quarter 2018 (4) | | 1,864,493 |
| | 0.17588 |
| | 392,014 |
| | 1,408,441 |
| | 1,279,870 |
|
Third Quarter 2018 (5) | | 2,041,912 |
| | 0.17588 |
| | 445,312 |
| | 1,539,893 |
| | 1,237,975 |
|
Fourth Quarter 2018 (6) | | 2,203,622 |
| | 0.17588 |
| | 483,531 |
| | 1,669,538 |
| | 3,295,899 |
|
2018 Totals | | $ | 8,283,222 |
| | $ | 0.70352 |
| | $ | 1,656,073 |
| | $ | 5,878,104 |
| | $ | 5,851,888 |
|
| | | | | | | | | | |
First Quarter 2019 (7) | | $ | 2,388,694 |
| | $ | 0.17588 |
| | $ | 552,134 |
| | $ | 1,763,630 |
| | $ | 773,736 |
|
Second Quarter 2019 (8) | | 2,605,268 |
| | 0.17588 |
| | 630,184 |
| | 1,900,893 |
| | 2,112,395 |
|
Third Quarter 2019 (9) | | 2,784,235 |
| | 0.17588 |
| | 719,257 |
| | 2,020,768 |
| | 1,677,064 |
|
2019 Totals | | $ | 7,778,197 |
| | $ | 0.52764 |
| | $ | 1,901,575 |
| | $ | 5,685,291 |
| | $ | 4,563,195 |
|
| |
* | We temporarily suspended our DRP on October 19, 2019 and the DRP will remain suspended until such time, if any, as our board of directors, in its discretion, may approve the reinstatement of the DRP. |
| |
(1) | The distribution paid per share of Class S common stock is net of deferred selling commissions. |
| |
(2) | Our board of directors declared distributions for four months (December 2017 through March 2018) beginning in the first quarter of 2018. To transition to a process of declaring dividends prior to the beginning of each month, dividends declared per share of common stock in succeeding quarters reflects four rather than three months of dividends. |
| |
(3) | The distribution of $577,747 for the month of March 2018 was declared in March 2018 and paid on April 25, 2018. The amount was recorded as a liability as of March 31, 2018. |
| |
(4) | The distribution of $641,785 for the month of June 2018 was declared in June 2018 and paid on July 25, 2018. The amount was recorded as a liability as of June 30, 2018. |
(2)Subsequent to the Self-Management Transaction on December 31, 2019, asset management fees are not applicable.
62
| |
(5) | The distribution of $698,492 for the month of September 2018 was declared in September 2018 and paid on October 25, 2018. The amount was recorded as a liability as of September 30, 2018. |
| |
(6) | The distribution of $749,170 for the month of December 2018 was declared in December 2018 and paid on January 25, 2019. The amount was recorded as a liability as of December 31, 2018. |
| |
(7) | The distribution of $821,300 for the month of March 2019 was declared in February 2019 and paid on April 25, 2019. The amount was recorded as a liability as of March 31, 2019. |
| |
(8) | The distribution of $896,291 for the month of June 2019 was declared in February 2019 and paid on July 25, 2019. The amount was recorded as a liability as of June 30, 2019. |
| |
(9) | The distribution of $937,863 for the month of September 2019 was declared in August 30, 2019 and paid on October 25, 2019. The amount was recorded as a liability as of September 30, 2019 in the accompanying unaudited condensed consolidated balance sheets. |
Our sources of distribution payments were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
Period | | Total Sources of Distributions | | Net Rental Income Received | | Waived Advisor Asset Management Fees | | Deferred Advisor Asset Management Fees | | Offering Proceeds (1) |
First Quarter 2018 | | $ | 2,173,195 |
| | $ | 2,173,195 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Second Quarter 2018 | | 1,864,493 |
| | 1,864,493 |
| | — |
| | — |
| | — |
|
Third Quarter 2018 | | 2,041,912 |
| | 2,041,912 |
| | — |
| | — |
| | — |
|
Fourth Quarter 2018 | | 2,203,622 |
| | 2,203,622 |
| | — |
| | — |
| | — |
|
2018 Totals | | $ | 8,283,222 |
| | $ | 8,283,222 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
First Quarter 2019 | | $ | 2,388,694 |
| | $ | 2,388,694 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Second Quarter 2019 | | 2,605,268 |
| | 2,605,268 |
| | — |
| | — |
| | — |
|
Third Quarter 2019 | | 2,784,235 |
| | 2,784,235 |
| | — |
| | — |
| | — |
|
2019 Totals | | $ | 7,778,197 |
| | $ | 7,778,197 |
| | $ | — |
| | $ | — |
| | $ | — |
|
For the period January 1, 2018 through September 30, 2019, distributionsDistributions to stockholders were declared and paid based on daily record dates at rates per share per day. However, distributions to stockholders for the period March 1, 2019 through June 30, 2019 were declared on February 28, 2019 and for the period September 1, 2019 through December 31, 2019 were declared on August 30, 2019. The distribution details are as follows: | | Distribution Period | | Rate Per Share Per Day | | Declaration Date | | Payment Date | Distribution Period | | Rate Per Share Per Day (1) | | Declaration Date | | Payment Date |
2018 | | |
| | | | | |
2020 | | 2020 | | | | | | |
January 1-31 | | January 1-31 | | $ | 0.00192210 | | | December 18, 2019 | | February 25, 2020 |
February 1-29 | | February 1-29 | | $ | 0.00191257 | | | January 24, 2020 | | March 25, 2020 |
March 1-31 | | March 1-31 | | $ | 0.00191257 | | | January 24, 2020 | | April 27, 2020 |
April 1-30 | | April 1-30 | | $ | 0.00191257 | | | January 24, 2020 | | May 26, 2020 |
May 1-31 | | May 1-31 | | $ | 0.00160493 | | (2) | May 20, 2020 | | June 25, 2020 |
June 1-30 | | June 1-30 | | $ | 0.00095890 | | | May 20, 2020 | | July 27, 2020 |
July 1-31 | | July 1-31 | | $ | 0.00095890 | | | May 20, 2020 | | August 26, 2020 |
August 1-31 | | August 1-31 | | $ | 0.00095890 | | | May 20, 2020 | | September 28, 2020 |
September 1-30 | | September 1-30 | | $ | 0.00095890 | | | May 20, 2020 | | October 26, 2020 |
October 1-31 | | October 1-31 | | $ | 0.00095890 | | | September 30, 2020 | | (3) |
November 1-30 | | November 1-30 | | $ | 0.00095890 | | | September 30, 2020 | | (3) |
December 1-31 | | December 1-31 | | $ | 0.00095890 | | | September 30, 2020 | | (3) |
| 2019 | | 2019 | | | | | | |
January 1-31 | | $ | 0.00189113 |
| | February 1, 2018 | | February 26, 2018 | January 1-31 | | $ | 0.00191183 | | | December 26, 2018 | | February 25, 2019 |
February 1-28 | | $ | 0.00209375 |
| | February 1, 2018 | | March 26, 2018 | February 1-28 | | $ | 0.00209375 | | | January 31, 2019 | | March 25, 2019 |
March 1-31 | | $ | 0.00189113 |
| | March 20, 2018 | | April 25, 2018 | March 1-31 | | $ | 0.00192740 | | | February 28, 2019 | | April 25, 2019 |
April 1-30 | | $ | 0.00195417 |
| | April 3, 2018 | | May 25, 2018 | April 1-30 | | $ | 0.00192740 | | | February 28, 2019 | | May 28, 2019 |
May 1-31 | | $ | 0.00189113 |
| | May 1, 2018 | | June 26, 2018 | May 1-31 | | $ | 0.00192740 | | | February 28, 2019 | | June 25, 2019 |
June 1-30 | | $ | 0.00195417 |
| | June 1, 2018 | | July 25, 2018 | June 1-30 | | $ | 0.00192740 | | | February 28, 2019 | | July 25, 2019 |
July 1-31 | | $ | 0.00189113 |
| | July 1, 2018 | | August 27, 2018 | July 1-31 | | $ | 0.00189113 | | | June 25, 2019 | | August 26, 2019 |
August 1-31 | | $ | 0.00189113 |
| | August 1, 2018 | | September 25, 2018 | August 1-31 | | $ | 0.00189113 | | | July 31, 2019 | | September 25, 2019 |
September 1-30 | | $ | 0.00195417 |
| | September 1, 2018 | | October 25, 2018 | September 1-30 | | $ | 0.00192740 | | | August 30, 2019 | | October 25, 2019 |
October 1-31 | | $ | 0.00189113 |
| | September 27, 2018 | | November 26, 2018 | October 1-31 | | $ | 0.00192740 | | | August 30, 2019 | | November 25, 2019 |
November 1-30 | | $ | 0.00195417 |
| | October 29, 2018 | | December 26, 2018 | November 1-30 | | $ | 0.00192740 | | | August 30, 2019 | | December 26, 2019 |
December 1-31 | | $ | 0.00189113 |
| | November 28, 2018 | | January 25, 2019 | December 1-31 | | $ | 0.00192740 | | | August 30, 2019 | | January 25, 2020 |
|
| | | | | | | | |
Distribution Period | | Rate Per Share Per Day | | Declaration Date | | Payment Date |
2019 | | |
| | | | |
January 1-31 | | $ | 0.00191183 |
| | December 26, 2018 | | February 25, 2019 |
February 1-28 | | $ | 0.00209375 |
| | January 31, 2019 | | March 25, 2019 |
March 1-31 | | $ | 0.00192740 |
| | February 28, 2019 | | April 25, 2019 |
April 1-30 | | $ | 0.00192740 |
| | February 28, 2019 | | May 28, 2019 |
May 1-31 | | $ | 0.00192740 |
| | February 28, 2019 | | June 25, 2019 |
June 1-30 | | $ | 0.00192740 |
| | February 28, 2019 | | July 25, 2019 |
July 1-31 | | $ | 0.00189113 |
| | June 25, 2019 | | August 26, 2019 |
August 1-31 | | $ | 0.00189113 |
| | July 31, 2019 | | September 25, 2019 |
September 1-30 | | $ | 0.00912740 |
| �� | August 30, 2019 | | October 25, 2019 |
October 1-31 | | $ | 0.00912740 |
| | August 30, 2019 | | November 25, 2019 * |
November 1-30 | | $ | 0.00912740 |
| | August 30, 2019 | | December 26, 2019 * |
December 1-31 | | $ | 0.00912740 |
| | August 30, 2019 | | January 27, 2020 * |
(1) Distributions paid per share of Class S common stock are net of deferred selling commissions.
(2) Rate per share per day reflects $0.00191257 per day through May 21, 2020 and $0.00095890 per day thereafter.
(3) Distribution has not been paid as of the filing date of this Quarterly Report on Form 10-Q.
Going forward, we expect our board of directors to continue to declare cash distributions based on daily record dates and to pay these distributions on a monthly basis, and after the completion of our Offerings to continue to declare distributions based on a single record date as of the end of the month, and to pay these distributions on a monthly basis. Cash distributions will be determined by our board of directors based on our financial condition, projected cash flows and such other factors as our board of directors deems relevant. We have not established a minimum dividend or distribution level, and our charter does not require that we make dividends or distributions to our stockholders other than as necessary to meet REIT qualification requirements.
Properties
Portfolio Information
Our wholly-owned investments in real estate investmentsproperties as of September 30, 2020, December 31, 2019 and September 30, 2019 were as follows: | | | As of | | As of |
| September 30, 2019 | | December 31, 2018 | | September 30, 2018 | | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
Number of properties: | | | | | | Number of properties: | (1)(2) | | (2) | | |
Retail | 9 |
| | 9 |
| | 9 |
| Retail | 14 | | 19 | | | 9 | |
Office | 10 |
| | 10 |
| | 8 |
| Office | 14 | | 14 | | | 10 | |
Industrial | 5 |
| | 5 |
| | 5 |
| Industrial | 11 | | 12 | | | 5 | |
Total operating properties | 24 |
| | 24 |
| | 22 |
| |
Total operating properties and properties held for sale | | Total operating properties and properties held for sale | 39 | | 45 | | | 24 | |
Land | 1 |
| | 1 |
| | 1 |
| Land | 1 | | 1 | | | 1 | |
Total properties | 25 |
| | 25 |
| | 23 |
| Total properties | 40 | | 46 | | 25 |
| | | | | | | | | | | |
Leasable square feet: | | | | | | Leasable square feet: | |
Retail | 185,384 |
| | 185,384 |
| | 185,384 |
| Retail | 200,449 | | | 362,764 | | | 185,384 | |
Office | 616,284 |
| | 616,284 |
| | 446,203 |
| Office | 904,499 | | | 904,499 | | | 616,284 | |
Industrial | 735,016 |
| | 735,016 |
| | 735,016 |
| Industrial | 1,066,243 | | | 1,093,539 | | | 735,016 | |
Total | 1,536,684 |
| | 1,536,684 |
| | 1,366,603 |
| Total | 2,171,191 | | | 2,360,802 | | | 1,536,684 | |
(1) Excludes two retail properties and one industrial property held for sale as of September 30, 2020 and three retail properties that were sold during the third quarter of 2020.
(2) Includes 17 and 20 properties for September 30, 2020 and December 31, 2019, respectively, acquired through the Merger with REIT I on December 31, 2019 as follows: (i) 11 retail properties with an aggregate leasable square feet of 177,380; (ii) six office properties with an aggregate leasable square feet of 183,752 and (iii) three industrial properties with an aggregate leasable square feet of 246,259.
The above table does not include an approximate 72.7% TIC interest in a 91,740 square feet office property located in Santa Clara, California and an approximate 4.8%, 4.8% and 4.4% interest, respectively, in REIT I, an affiliated REIT, as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively. If the pending Merger with REIT I is completed, we will own a total of 46 operating properties including the property acquired in October 2019 discussed in Note 11 as follows:
19 retail, 15 office and 12 industrial properties.California.
We have a very limited operating history. As of September 30, 2019,2020, we had onlyhave acquired: (i) 2445 operating properties; (ii) one parcel of land, which currently serves as an easement to one of our office properties; and (iii) the TIC Interest and (iv) an approximate 4.8% interest in REIT I, an affiliated REIT. We acquired an additional industrial property in October 2019 as described in Note 11 to our unaudited condensed consolidated financial statements. Therefore, we have limited operations.Interest. In evaluating these properties as potential acquisitions, including the determination of an appropriate purchase price to be paid for the properties, we considered a variety of factors, including the condition and financial performance of the properties, the terms of the existing leases and the creditworthiness of the tenants, property location, visibility and access, age of the properties, physical condition and curb appeal, neighboring property uses, local market conditions, including vacancy rates, area demographics, including trade area population and average household income and neighborhood growth patterns and economic conditions.
During December 2019 and January 2020, we amended lease agreements to extend the lease terms for three of our properties. In December 2019, the lease for the Walgreens property in Stockbridge, GA was extended for 10 years to February 28, 2031 in exchange for an incentive payment of $500,000 payable in four installments of $125,000 each, commencing January 10, 2020 with the final installment paid April 1, 2020. In January 2020, the lease for the Walgreens property in Santa Maria, CA was extended for 10 years to March 31, 2032 in exchange for an incentive payment of $490,000 payable in four installments of $122,500 each, commencing January 15, 2020 with the final installment paid April 1, 2020. In January 2020, the lease for the Accredo property in Orlando, FL was extended for 3 1/2 years to December 31, 2024 and we paid a leasing commission of $215,713 to the tenant’s broker in February 2020. In October 2020, the lease for the Wood Group (f/k/a AMEC Foster Wheeler) property in Carlsbad, CA was extended for five years to February 28, 2026 and we agreed to repair and replace the existing heating, air conditioning and ventilation systems and will pay a leasing commission of $146,680 to the tenant’s broker in two equal installments of $73,340 due in December 2020 and April 2021. We are continuing to explore potential lease extensions for many of our properties.
Effective August 1, 2020, we executed an amendment for the early termination of the Dana lease from July 31, 2024 to July 31, 2022 in exchange for an early termination payment of $1,381,767 due on July 31, 2022 and continued rent payments of $65,000 per month from August 1, 2020 through July 1, 2022. In the event that we are able to re-lease or sell the Dana property prior to July 31, 2022, Dana would be obligated to continue paying rent of $65,000 per month through July 1, 2022 or may elect to pay a cash lump sum payment to us equal to the net present value of the remaining rent payments.
On August 3, 2020, we completed the sale of our Lake Elsinore retail property which was leased to Rite Aid for $6,100,000, which generated net proceeds of $3,299,016 after payment of the existing mortgage, commissions and closing costs.
On August 27, 2020, we completed the sale of our Stockbridge, GA retail property which was leased to Walgreens for $5,538,462, which generated net proceeds of $5,296,356 after repayment of commissions and closing costs. The mortgage for this property was previously repaid on August 10, 2020 in connection with the refinancing of the Accredo property as discussed above in “Liquidity and Capital Resources” and in Note 7 to our unaudited condensed consolidated financial statements.
On September 16, 2020, we completed the sale of our Elk Grove, CA retail property which was leased to Island Pacific for $3,155,000, which generated net proceeds of $1,124,016 after repayment of the existing mortgage, commissions and closing costs.
On October 28, 2020, we completed the sale of our Morgan Hill, CA industrial property which was previously leased to Dinan Cars for $6,100,000, which generated net proceeds of $3,811,580 after repayment of the existing mortgage, commissions and closing costs. In addition, the property in Las Vegas, Nevada formerly leased to 24 Hour Fitness and the property leased to Harley Davidson through April 12, 2032 located in Bedford, Texas are held for sale.
Other than as discussed below, we do not have other plans to incur any significant costs to renovate, improve or develop the properties. We believe that the properties are adequately insured. We have one tenant with a lease that providedprovides for a tenant improvement allowance totaling $3,486,927. The majoritywhich has a remaining balance of $60,598 that will be funded from operating cash flow or proceeds from our Offerings. We expect that the related improvements werewill be completed by June 30, 2019 and $3,387,699 was released to reimburse the tenant for these tenant improvements during the first nine months of 2019 under the terms of the lease agreement.2020 calendar year. As of September 30, 2019,2020, there wasis a restricted cash deposit of $100,135$92,684 that is available to reimburse the tenantbe used to pay for the remaining tenant improvement under the termsa portion of the lease agreement.other improvements.
In addition, we have identified approximately $855,000$1,188,000 of roof replacement, exterior painting and sealing and parking lot repairs/restriping that are expected to be completed in 2019.the next 12 months. Approximately $177,000$867,000 of these improvements are expected to be recoverable from the tenant through their operating expense reimbursements. There are no restricted cash deposits that are available to be used to pay for these improvements. We will be required to pay for the improvements, and the reimbursements from tenants will be billed over an extended period of time per the terms of the leases. The remaining costs of approximately $678,000 that$321,000 are not recoverable from tenants are expected to be capitalized.tenants. These improvements will be funded from operating cash flows or offering proceeds.proceeds from the Offerings.
Recent Market Conditions
Currently, bothWe face significant uncertainties due to the COVID-19 pandemic as described above in “Liquidity and Capital Resources -Effect of the COVID-19 Pandemic on Our Capital Resources.” Both the investing and leasing environments are highly competitive. While there has been an increase inEven before the amount of capital flowing into the U.S. real estate markets, which resulted in an increase in real estate values in certain markets, theCOVID-19 pandemic, uncertainty regarding the economic and political environment hashad made businesses reluctant to make long-term commitments or changes in their business plans. The COVID-19 pandemic has resulted in significant disruptions in financial markets, business shutdowns and uncertainty about how the U.S. and global economy will perform over the next several months. The ongoing trade war between the U.S. and China has also increased the level of uncertainty and resulted in reductions in business investmentsinvestments.
Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, or rent abatements for tenants severely impacted by the COVID-19 pandemic, may result in decreases in cash flows from investment properties. We have two leases scheduled to expire during 2021 for one office property and one retail property, which comprise an aggregate of 157,419 square feet and approximately 7.5% of projected 2020 net operating income from properties. The tenants for both of these properties could ultimately leadreevaluate their use of such properties in light of the impacts of the COVID-19 pandemic, including their ability to recession.have workers succeed from working at home, and determine not to renew these leases or to seek rent or other concessions as a condition of renewing their leases. We have eight other leases scheduled to expire in either 2022 or 2023. Potential declines in economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio, which could have the following negative effects on us: the values of our investments in commercial properties could decrease below the amounts paid for such investments; and/or revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to pay dividendsmake distributions or meet our debt service obligations on debt financing.obligations.
Volatility in global markets and changing political environments can cause fluctuations
Uncertainties in the performance of the U.S. commercial real estate markets. Economic slowdowns in Europe, China and Japan are likely to negatively impact growth of the U.S. economy. Political uncertainties both home and abroad may discourage business investment in real estate and other capital spending. Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Increases in the cost of financing due to higher interest ratesmarkets may cause difficulty in refinancing debt obligations prior to maturity at terms as favorable as the terms of existing indebtedness. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure.
Recent financial conditions affecting commercialWe plan to rely on debt financing to finance our real estate properties and we may have been stable with low treasury ratesdifficulty refinancing some of our debt obligations prior to or at maturity, or we may not be able to refinance these obligations at terms as favorable as the terms of our initial indebtedness and increased lending from banks, insurance companies and commercial mortgage backed securities ("CMBS") conduits. Nevertheless,we also may be unable to obtain additional debt financing on attractive terms or at all. If we are not able to refinance our initial indebtedness on attractive terms at the various maturity dates, we may be forced to dispose of some of our assets.
The debt market remains sensitive to the macro environment, such as impacts of the COVID-19 pandemic, Federal Reserve policy, market sentiment or regulatory factors affecting the banking and CMBScommercial mortgage-backed securities industries. While we currently expect that financialhave been able to successfully refinance three of our properties as described above, economic conditions will remain favorablehave deteriorated rapidly during 2019, if they were to deteriorate,the last eight months as a result of the COVID-19 pandemic and we may experience more stringent lending criteria in the future, which may affect our ability to finance certain property acquisitions or refinance any debt at maturity. Additionally, for properties for which we are able to obtain financing, the interest rates and other terms on such loans may be unacceptable. We expect to manage the current mortgage lending environment by considering alternative lending sources, including securitized debt, fixed rate loans, borrowings onseeking a new line of credit, short-term variable rate loans, assumed mortgage loans in connection with property acquisitions, interest rate lock or swap agreements, or any combination of the foregoing.
Commercial real estate fundamentals continue to remain stable, as job creation has supported gains in office absorption, retail sales and warehouse distribution. Although commercial property construction activity has increased, it remains near historic lows; as a result, incremental demand growth has helped to reduce vacancy rates and support modest rental growth. Improving fundamentals have resulted in gains in property values. However, future increases in interest rates or a downturn in the economy could have a negative impact on property values.
Election as a REIT
We elected to be taxed as a REIT for federal income tax purposes under the Internal Revenue Code of 1986, as amended, beginning with the taxable year ended December 31, 2016. We believe we will continue to qualify as a REIT. To qualify and maintain status as a REIT, we must meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally would not be subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividendsdistributions paid deduction and excluding net capital gains).
If we fail to qualify as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to qualify as a REIT. We also will be disqualified for the four taxable years following the year during which qualification is lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to continue to qualify for treatment as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our condensed consolidated financial statements. We will be subject to certain state and local taxes related to the operations of properties in certain locations. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our condensed consolidated financial statements.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included under "“Critical Accounting Policies"Policies” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K, filed with the SEC on March 29, 2019.April 6, 2020. There have been no significant changes to our policies during the three months ended September 30, 2019.2020.
Commitments and Contingencies
We may be subject to certain commitments and contingencies with regard to certain transactions (see Note 10 to our unaudited condensed consolidated financial statements for discussion of commitment and contingencies).
Related-Party Transactions and Agreements
We have entered intoThrough December 31, 2019 we had contracted for advisory services through an Advisory Agreement with our Former Advisor whereby we have agreed to paypaid certain fees to, or reimbursereimbursed certain expenses of, our Former Advisor or our affiliates, such as acquisition fees and expenses, organization and offering costs, asset management fees, and reimbursement of certain operating costs and, until October 1, 2019, organization and offering costs (see Note 8 9 to our unaudited condensed consolidated financial statements for additional details of the various related-party transactions and agreements).
Subsequent Events
See Note 11 to our unaudited condensed consolidated financial statements for events that occurred subsequent to September 30, 20192020 through the filing date of this report.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements for recent accounting pronouncements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that had or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, or capital resources as of September 30, 2019.2020.
Item 3.Quantitative and Qualitative Disclosure about Market Risk
Not requiredapplicable as we are a Smaller Reporting Company.smaller reporting company.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of ourWe maintain disclosure controls and procedures as of the end of the period covered by this quarterly report. Disclosure controls and procedures include, without limitation, controls and proceduresthat are designed to ensure that information required to be disclosed by us in theour reports we file and submit under the Securities Exchange Act of 1934 is (i)recorded, processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii)that such information is accumulated and communicated to our management,us, including our principal executive officerChief Executive Officer and our principal financial officerChief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based onIn designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 2019 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officerChief Executive Officer and principal financial officerChief Financial Officer concluded that our disclosure controls and procedures, as of September 30, 2020, were effective as ofat the end of the period covered by this quarterly report.reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) that occurred during the three months ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness Most of Controls and Procedures
Our disclosure controls and procedures andour employees are working remotely due to the COVID-19 pandemic. However, we have not experienced any changes to our internal control arising from the COVID-19 pandemic that have materially affected or that are reasonably likely to materially affect our internal control over financial reportingreporting. We are designed to provide reasonable assurancecontinually monitoring and assessing the COVID-19 pandemic and the impact it may have on our operations, including our internal control.
PART II – OTHER INFORMATION
Item 1.Legal Proceedings
The information disclosed under Legal and Regulatory Matters in Note 10 to our unaudited condensed consolidated financial statements is incorporated herein by reference.
Item 1A.Risk Factors
We are includingOther than as disclosed below, there have been no material changes to the following additional risk factors which should be read in conjunction with our description of risk factors providedset forth under “Risk Factors” in Part I, Item 1A "Risk Factors"of our 2018 Annual Report on Form 10-K, for the year ended December 31, 2019, as filed with the SEC on March 29, 2019. See also the “Risk Factors” sectionApril 6, 2020 and in Part II, Item 1A of our joint proxy statementQuarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and prospectusJune 30, 2020, as filed with the SEC on October 22, 2019.June 24, 2020 and August 14, 2020, respectively.
CompletionRisks Related to the Impact of the Merger is subjectCOVID-19 Pandemic on Our Business
The recent outbreak of COVID-19 has and may continue to a numberadversely affect our business and/or operations, our tenants’ financial condition and the profitability of conditions,our retail properties.
Our business and/or operations and if these conditions are not satisfiedthe businesses of our tenants have been, and may continue to be, materially and adversely affected by the risks, or waived, the Merger will not be completed, which could result inpublic perception of the requirement that we or REIT I pay certain termination fees or, in certain circumstances, that we or REIT I pay expensesrisks, related to the other party.
recent outbreak of COVID-19. The Merger Agreement is subjectprofitability of our retail properties depends, in part, on the willingness of customers to many conditions which must be satisfiedvisit our tenants’ businesses. The risk, or waived in order to complete the Merger. The mutual conditionspublic perception of the parties include, among others: (i) the approvalrisk, of COVID-19 has caused, and could continue to cause, employees or customers to avoid our properties, which adversely affects foot traffic to our tenants’ businesses and our tenants’ ability to adequately staff their businesses. Most of the Merger bystates where we operate issued orders to close fitness centers and other retail establishments for a period of time and have put restrictions on the holders of a majority ofability to re-open those businesses. Such events have adversely impacted tenants’ sales and/or caused the outstanding common stocktemporary closure or slowdown of our company; (ii) the approval of the Merger by the REIT I shareholders;tenants’ businesses, which has severely disrupted their operations and (iii) the absence of any law, order or other legal restraint or prohibition that would prohibit, make illegal, enjoin, or otherwise restrict, prevent, or prohibit the Merger or any of the transactions contemplated by the Merger Agreement. In addition, each party’s obligation to consummate the Merger is subject to certain other conditions, including, among others: (a) the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers and other customary exceptions); (b) the other party’s compliance with its covenants and agreements contained in the Merger Agreement; and (c) the absence of any event, change, or occurrence arising during the period from the date of the Merger Agreement until the effective time of the Merger that, individually or in the aggregate, has had or would reasonably be expectedcould continue to have a material adverse effect on our business, financial condition and results of operations. Similarly, the other party.
There can be no assurance that the conditions to closingpotential effects of the Merger will be satisfied or waived or that the Merger will be completed. Failure to consummate the Mergerquarantined employees of office tenants may adversely impact their businesses and affect the Company’s or REIT I’s results of operations and business prospects for the following reasons, among others: (i) each of the Company and REIT I will incur certain transaction costs, regardless of whether the proposed Merger closes, which could adversely affect each company’s respective financial condition, results of operations andtheir ability to make distributionspay rent on a timely basis.
Measures intended to its stockholders; and (ii)prevent the proposed Merger, whether or not it closes, will divert the attentionspread of certain management and other key employees of affiliates of the Company and REIT I from ongoing business activities, including the pursuit of other opportunities that could be beneficialCOVID-19 have disrupted our ability to operate our business.
In response to the Company or REIT I, respectively. In addition, the Company or REIT I may terminate the Merger Agreement under certain circumstances, including, among other reasons, if the Merger is not completed by March 31, 2020 and if the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, REIT I may be required to pay the Company a termination feeoutbreak of $2,540,000. The Merger Agreement also provides that one party may be required to reimburse the other party’s transaction expenses, not to exceed $1,000,000, if the Merger Agreement is terminated under certain circumstances.
The pendency of the Merger could adversely affect the business and operations of REIT ICOVID-19 and the Company.
Priorfederal and state mandates implemented to the effective date of the Merger, some tenants, prospective tenants or vendors of each of REIT I and the Company may delay or defer decisions, which could negatively affect the revenues, earnings, cash flows and expenses of REIT I and the Company, regardless of whether the Merger is completed. Similarly, current and prospective employees of affiliates of REIT I and the Company may experience uncertainty about their future roles with the Combined Company following the Merger, which may materially adversely affect the ability of such affiliates to attract and retain key personnel during the pendency of the Merger. In addition, due to operating restrictions in the Merger Agreement, each of REIT I and the Company may be unable during the pendency of the Merger subject to certain exclusions, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.
There may be unexpected delays in the consummation of the Merger.
The Merger is expected to close in late December 2019 or early January 2020 assuming that all of the conditions in the Merger Agreement are satisfied or waived. The Merger Agreement provides that either we or REIT I may terminate the Merger Agreement if the Merger has not occurred by March 31, 2020. Certain events may delay the consummation of the Merger. Some of the events that could delay the consummation of the Merger include difficulties in obtaining the approvalcontrol its spread, most of our stockholders and REIT I shareholders, or satisfying the other closing conditionsemployees are working remotely. If our employees are unable to which the Merger is subject.
Failure to complete the pending Merger could negatively affect us.
It is possible that the pending Merger will not be approved which would prevent the transaction from being completed. If the pending Merger transaction is not completed, we may be subject to a number of material risks, including the following:
we have incurred and expect to incur substantial costs and expenses payable by us that are related to the potential Merger, such as legal and financial advisor fees.
Combined Company net income may decrease in the near termwork effectively as a result of the Self-Management Transaction.
The Combined Company will expense all cash and non-cash costs involved in self-management. As a result, statementsCOVID-19 pandemic, including because of illness, quarantines, office closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. Further, remote work arrangements may increase the risk of the Combined Company may be negatively impacted, driven predominately by the non-cash charges related to the issuance of units of limited partnership in the Operating Partnership as consideration in the Self-Management Transaction and, to a lesser extent, other transaction-related costs. In addition, while the Combined Company will no longer effectively bear the costs of the various fees and expense reimbursements previously paid to the Company and REIT I advisors after the Combined Company becomes internally managed, the Combined Company expenses will include the compensation and benefits of executive officers and the employees and consultants of the previous advisors, as well as overhead previously paid by the advisorscybersecurity incidents, data breaches or their affiliates in managing the Company’s and REIT I’s businesses and operations. Furthermore, these employees and consultants will be providing us services historically provided by the advisors. If these expenses are higher than the fees that are currently paid to the advisors or otherwise higher than currently anticipated, the Combined Company may not realize the anticipated cost savings and other benefits from the Self-Management Transaction and Combined Company net income could decrease further,cyber-attacks, which could have a material adverse effect on the Combined Company’sour business financial condition and results of operations.
The Self-Management Transaction may not be accretiveoperations, due to, Combined Company stockholders.
The Self-Management Transaction may not be accretive to Combined Company stockholders. While it is intended that the Self-Management Transaction will be accretive to Combined Company net income and earnings, there can be no assurance that this will be the case, as, among other things, the expensesloss of proprietary data, interruptions or delays in the operation of our business, damage to our reputation and any government imposed penalty.
The current COVID-19 pandemic, and any future outbreak of other highly infectious or contagious diseases, could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.
The COVID-19 pandemic has had, and any other pandemics in the future could have, repercussions across regional, national and global economies and financial markets. The outbreak of COVID-19 in the United States and in many countries has adversely impacted global economic activity and has contributed to significant volatility and negative pressure in the financial markets. The impact of the COVID-19 outbreak has been rapidly evolving and has continued to affect more countries. Many countries, including the United States, have responded by instituting quarantines for some period of time, mandating business and school closures and restrictions on their re-openings, banning group gatherings and restricting travel, among others.
Certain states and cities, including where we own properties, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules and restrictions to only essential businesses that may continue to operate. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including the real estate industry in which we and our tenants operate.
Many of our tenants have announced temporary closures of their stores or facilities and various tenants have requested rent deferral or rent abatement during this pandemic. In addition, in response to state and local government orders, all of our company personnel are currently working remotely. The effects of the state and local government orders, including an extended period of remote work arrangements, could strain our business continuity plans, introduce operational risk and impair our ability to manage our business. The COVID-19 pandemic may have a material adverse effect on our financial position, results of operations and cash flows, including among other factors:
•a partial or complete closure of, or other operational issues at, some or all of our properties resulting from government or tenant action;
•reduced economic activity severely impacts our tenants' business operations, financial condition and liquidity and may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations;
•reduced economic activity could result in a prolonged recession, which could negatively impact consumer discretionary spending and in return could severely impact our tenants' business operations, financial condition and liquidity;
•difficulty accessing debt and equity on attractive terms, or at all, impacts to our credit ratings, and a severe disruption and instability in the Self-Management Transactionglobal financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund our business operations or address maturing liabilities on a timely basis and our tenants' ability to fund their business operations and meet their obligations to us;
•the COVID-19 pandemic could negatively impact our future compliance with financial covenants of our mortgage notes payable and credit facilities and could result in a default or potential acceleration of payment of our debt obligations, which non-compliance could negatively impact our ability to make additional future borrowings;
•significant impairment in the value of our intangible assets as a result of weaker economic conditions;
•general decline in business activity and demand for real estate transactions has adversely affected our ability to grow our portfolio of properties;
•broad acceptance and success of working from home could negatively impact the demand for office space;
•the deterioration in our or our tenants' ability to operate in affected areas or delays in the supply of products or services to us or our tenants from vendors that are needed for our or our tenants' efficient operations has adversely affected our operations and those of our tenants; and
•potential negative impact on the health of our personnel and staff, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption.
The extent to which the COVID-19 pandemic impacts our business operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be higher than currently anticipatedpredicted with confidence; including the scope, severity and duration of the pandemic; the success of actions or measures taken to contain or treat COVID-19, or mitigate its impact; and the Combined Company may not achieve cost savingsdirect and indirect economic effects of the pandemic, among others. Extended closures by our tenants of their stores and any early terminations by our tenants of their leases could reduce our cash flows, which could impact our ability to continue paying distributions to our stockholders at expected levels, or at all.
The rapid development and fluidity of the COVID-19 pandemic precludes us from making any prediction as to the Self-Management Transaction.full adverse impact of the pandemic. Nevertheless, the pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance. Risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 and additional filings with the SEC should be interpreted with heightened caution as a result of the impact of and uncertainty surrounding the COVID-19 pandemic.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During July 2019,the three months ended September 30, 2020, we issued a total of 4,92126,250 shares of Class C common stock to five members of the four independentboard of directors for their service as board members during the second and issued an additional 492 sharesthird quarters of Class C common stock to two of the independent directors for their service as committee chairs.2020. Such issuances were made in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act. In addition, during August 2019, we issued an additional 4,921 shares of Class C common stock to the four independent directors for their services as members of the Special Committee to evaluate the potential for a merger transaction with REIT I.
During the three months ended September 30, 2019,2020, we also issued 19,812776 shares of Class S common stock in the Class S Offering for aggregate gross offering proceeds of $201,290. Of such$5,669. Such issuances 794 shares for gross offering proceeds of $8,067 were made pursuant to the dividenddistribution reinvestment plan applicable to our Class S common stock in reliance on an exemption from the registration requirements of the Securities Act under and in accordance with Regulation S of the Securities Act.
Use of Proceeds from Sales of Registered Securities
On June 1, 2016, ourthe Registered Offering (SEC Registration Statement on Form S-11 (File No. 333-205684) (the "Registration Statement"), covering an initial publicwas declared effective by the SEC, and on July 20, 2016, we began offering to offer a maximum of 90,000,000 shares of common stock for sale to the publicpublic. Pursuant to the Registered Offering, we sold shares of our Class C common stock directly to investors. Commencing in the Primary Offering was declared effectiveAugust 2017, we began selling shares of Class C common stock to U.S. persons only, as defined under the Securities Act. PursuantAct, as a result of the commencement of the Class S Offering to the Registration Statement, we also registered a maximum of 10,000,000 shares of common stock pursuant to our Registered DRP Offering. The shares of common stock covered by the Registration Statement were renamed and re-designated as Class C shares of common stock pursuant to amendments to our charter that became effective in August 2017.
PART II – OTHER INFORMATION (continued)
The Registered Offering commenced on July 20, 2016.non-U.S. Persons. Under applicable SEC rules, the current registration statement for the Registered Offering was scheduled to terminate on June 1, 2019, but remained effective because the Companywe filed a new registration statement on Form S-11 for the Follow-on Offering with the SEC on May 24, 2019 (SEC Registration No. 333-231724) to extend the Registered Offering in accordance with Rule 415 ofunder the Securities Act. The Company’s currentOur initial registration statement on Form S-11 will terminateterminated when the new registration statement isFollow-on Offering was declared effective by the SEC.SEC on December 23, 2019. As required by some states, the Company iswe are also required to renew the registration statement for the Registered Offering annually or file a new registration statement to continue the Registered Offering Our board of directorsannually. We may terminate the RegisteredFollow-on Offering at any time. Our board of directors will adjust the offering price of the shares of Class C common stock sold in the Follow-on Offering and the Registered DRP Offering sharesannually in the first quarter of each year during the course of the RegisteredFollow-on Offering as described in the registration statement, as amended, for the Registered Offering.connection with updated determinations of our NAV per share by our board of directors.
Through September 30, 2019,2020, we had sold 17,823,024an aggregate of 19,645,508 shares of Class C common stock in the Registered Offering,Offerings, including 1,461,8042,208,870 shares of Class C common stock sold under our Registered DRP Offering, for aggregate gross offering proceeds of $179,039,271.$195,859,756.
Through September 30, 2019,2020, we have paid $5,429,105 to our Sponsor as reimbursement$6,920,592 for organizational and offering costs related to our Registered Offerings, including $5,429,105 to our Former Sponsor as reimbursement through September 30, 2019, which reimbursement iswas subject to thea 3% of gross offering proceeds limitation.
From the commencement of the Registered Offering through September 30, 2019,2020, the net offering proceeds to us, after deducting the reimbursable organizational and offering expenses incurred as described above, were approximately $173,662,273,$187,069,811, including net offering proceeds from our Registered DRP Offering of $14,736,539.$20,385,113. Substantially all of these proceeds, along with proceeds from the Class S Offering and debt financing, were used to make approximately $253,347,000$287,732,000 of investments in real estate properties, including the purchase price of our investments, deposits paid for future acquisitions, acquisition fees and expenses, and costs of leveraging each real estate investment. Of the use of the offering proceeds described in the prior statement, $6,919,631$7,666,690 and $652,150$696,150 were used to pay acquisition fees and financing coordination fees to our Former Advisor, respectively. Our Former Sponsor was reimbursed for $5,429,105 of organizational and offering costs. See costs in connection with the Offerings (see Note 8 of9 to our unaudited condensed consolidated financial statements for details aboutregarding fees paid to affiliates.affiliates through December 31, 2019). In addition, throughwe incurred $1,491,487 of organization and offering costs directly. For the three months ended September 30, 2019, $288,370 of2020, no proceeds from the Offerings were used to fund stockholder distributions in connection with rent abatements as described above. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations —Distributions— Distributions for a description of the sources that have been used to fund our distributions.
Issuer Redemptions of Equity Securities
The following table summarizes our repurchase activity under ourWe have adopted a share repurchase program that enables qualifying stockholders to sell their stock to us in limited circumstances. The maximum amount of common stock that may be repurchased per month is limited to no more than 2% of our most recently determined aggregate NAV. Repurchases for any calendar quarter are limited to no more than 5% of our most recently determined aggregate NAV. The foregoing repurchase limitations are based on “net repurchases” during a quarter or month, as applicable. Thus, for any given calendar quarter or month, the maximum amount of repurchases during that quarter or month will be equal to (1) 5% or 2% (as applicable) of our most recently determined aggregate NAV, plus (2) proceeds from sales of new shares in the Registered Offerings and Class S Offering (including purchases pursuant to our Registered DRP Offering) since the beginning of a current calendar quarter or month, less (3) repurchase proceeds paid since the beginning of the current calendar quarter or month.
We have the discretion to repurchase fewer shares than have been requested to be repurchased in a particular month or quarter, or to repurchase no shares at all, in the event that we lack readily available funds to do so due to market conditions beyond our control, our need to maintain liquidity for our
Class C common stock for the three months ended September 30, 2019. As of September 30, 2019,operations or because we
have not repurchased any sharesdetermine that investing in real property or other illiquid investments is a better use of our
Class S common stock. |
| | | | | | | | | | |
| Total Number of Shares Repurchased During the Quarter | | Average Price Paid per Share | | Dollar Value of Shares Available That May Be Repurchased Under the Program (2) |
July 2019 | 178,005 |
| | $ | 9.94 |
| | $ | 1,769,231 |
|
August 2019 | 134,369 |
| | $ | 10.00 |
| | 1,343,729 |
|
September 2019 (1) | 255,347 |
| | $ | 10.02 |
| | 2,558,712 |
|
Totals | 567,721 |
| | | | $ | 5,671,672 |
|
| |
(1) | During the three months ended September 30, 2019, we agreed to repurchase 100% of all shares of Class C common stock requested for repurchase. The shares of Class C common stock requested for repurchase in September 2019 were repurchased in October 2019. We generally repurchase shares approximately three business days following the end of the applicable month in which requests were received. We temporarily suspended our share repurchase program ("SRP") on October 19, 2019 and the SRP will remain suspended until such time, if any, as our board of directors, in its discretion, may approve the reinstatement of the SRP. |
capital than repurchasing our shares. In the event that we repurchase some but not all of the shares submitted for repurchase in a given period, shares submitted for repurchase during such period will be repurchased on a pro-rata basis, subject to any Extraordinary Circumstance Repurchase.
PART II – OTHER INFORMATION (continued)
We have the discretion, but not the obligation, under extraordinary market or economic circumstances, to make a special repurchase in equal, nominal quantities of shares from all stockholders who have submitted share repurchase requests during the period. These Extraordinary Circumstance Repurchases will precede any pro rata share repurchases that may be made during the period.
| |
(2) | During the period July 2020 to October 2020, we received share repurchase requests as follows: | | | | | | | | | | | | | | | | | | | | | | | Value of Share Repurchase Requests Received | | Repurchase Date | | Value of Shares Repurchased (1) | July 2020 | | $ | 8,359,586 | | | August 5, 2020 | | $ | 995,028 | | August 2020 | | $ | 8,002,288 | | | September 3, 2020 | | $ | 1,420,636 | | September 2020 | | $ | 6,747,834 | | | October 5, 2020 | | $ | 1,393,275 | | October 2020 | | $ | 5,907,195 | | | November 4, 2020 | | $ | 1,537,198 | |
(1) Included Extraordinary Circumstance Repurchases and after applicable administrative fees for shares held less than three years. Following our calculation of NAV and NAV per share of $10.16 (unaudited), which our board approved on January 11, 2019 and calculated as of December 31, 2018, we repurchase shares based on NAV per share. Share repurchases for any 12-month period will not exceed 2% of our aggregate NAV per month, 5% of our aggregate NAV per quarter, or 20% of our aggregate NAV per year. These repurchase limits are described in greater detail under Share Repurchase Program - Limitations on Repurchase in Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 29, 2019. However, we will only repurchase Class C or Class S shares if, among other conditions, in the opinion of our Advisor, we have sufficient reserves with which to repurchase such shares and at the same time maintain our then-current plan of operations.
|
Our board may amend, suspend or terminate our Class C share repurchase program or Class S share repurchase program upon 3010 days’ notice to Class C stockholders or Class S stockholders, respectively, if the board believes such action is in our and such stockholders’ best interests, including because share repurchases place an undue burden on our liquidity, adversely affect our operations, adversely affect stockholders whose shares are not repurchased, or if the board determines that the funds otherwise available to fund our share repurchases are needed for other purposes. Our board may also amend, suspend or terminate our Class C share repurchase program or Class S share repurchase program due to changes in law or regulation, or if the board becomes aware of undisclosed material information that it believes should be publicly disclosed before shares are repurchased. For more information about the program, see Part II,Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Share Repurchase Program of
The following table summarizes our Annual Report as discussed above. See also Part II, Item 5. Other Information below in this report for information about an amendment torepurchase activity under our share repurchase program.program for our Class C common stock for the three months ended September 30, 2020. For the three months ended September 30, 2020, no shares of our Class S common stock were repurchased.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Repurchased During the Quarter (1) | | Average Price Paid Per Share (2) | | Total Number of Shares Purchased As Part of Publicly Announced Plan or Program | | Dollar Value of Shares Available That May Be Repurchased Under the Program |
July 1-31, 2020 (1) | | 107,853 | | | $ | 6.96 | | | 107,853 | | | (3) |
August 1-31, 2020 | | 142,857 | | | $ | 6.97 | | | 142,857 | | | (3) |
September 1-30, 2020 | | 203,990 | | | $ | 6.96 | | | 203,990 | | | (3) |
Total | | 454,700 | | | | | 454,700 | | | |
(1)We generally repurchase shares approximately three business days following the end of the applicable month in which requests were received.
(2)Following our calculation of our estimated NAV per share of $7.00 (unaudited), which our board of directors approved on May 20, 2020 and calculated as of April 30, 2020, any future share repurchases will be based on the estimated NAV per share of $7.00 (unaudited).
(3)A description of the maximum number of shares that may be purchased under our share repurchase program is included in the narrative preceding this table.
Item 6.Exhibits
The exhibits listed on the Exhibit Index below are included herewith or incorporated herein by reference.
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 20192020 (and are numbered in accordance with Item 601 of Regulation S-K). |
| | | | |
Exhibit | Description |
2.1 | |
2.2 | |
2.33.1 | |
2.4 | |
3.13.2 | |
3.2 | |
3.3 | |
3.4 | |
3.5 | |
3.6 | |
3.7 | |
4.1 | |
4.2 | |
4.3 | |
4.4 | |
10.14.5 | |
10.2*4.6 | |
31.1*4.7 | |
10.1 | Third Amendment dated August 13, 2020 to Loan Agreement dated December 31, 2019 between Pacific Mercantile Bank and RW Holdings NNN REIT, Inc., RW Holdings NNN REIT Operating Partnership, LP, Rich Uncles NNN LP, LLC, Katana Merger Sub, LP, BrixInvest, LLC and modiv, LLC(incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 000-55776) filed with the Securities and Exchange Commission on August 14, 2020) |
31.1* | |
31.2* | |
32.1** | |
101.INS | XBRL INSTANCE DOCUMENT |
| | | | | |
101.SCH | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT |
101.CAL | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
101.DEF | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
|
101.LAB | |
101.LAB | XBRL TAXONOMY EXTENSION LABELS LINKBASE |
101.PRE | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
* | Filed herewith. |
** | In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed "filed"“filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| RW Holdings NNN REIT, Inc. |
| (Registrant) |
| | |
| RW Holdings NNN REIT, Inc. |
By: | (Registrant) |
| | |
| By: | /s/ AARON S. HALFACRE |
| Name: | Aaron S. Halfacre |
| Title: | Chief Executive Officer (principal executive officer) |
| | |
| By: | /s/ RAYMOND J. PACINI |
| Name: | Raymond J. Pacini |
| Title: | Chief Financial Officer (principal financial officer) |
Date: November 12, 2019
13, 2020