UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q10-Q/A
(Amendment No. 1)
(Mark One)
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| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019MARCH 31, 2020
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 333-223022
Oaktree Real Estate Income Trust, Inc.
(Exact name of registrant as specified in its charter)
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| | |
| Maryland | | 82-2365593 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
333 South Grand Avenue, 28th Floor
Los Angeles, CA 90071
(Address of principal executive offices) (Zip Code)
(213) 830-6300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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| | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ☒☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☐ | | | Accelerated filer | ☐ |
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| Non-accelerated filer | X | | | Smaller reporting company | ☐ |
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| | | | | Emerging growth company | X |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X
The number of the registrant’s outstanding shares of common stock, par value $0.01 per share, as of November 14, 2019May 15, 2020 was 27,000, all19,010,739, consisting of which were8,834,022 Class I shares.
TABLE OF CONTENTS
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PART I. | | |
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II. | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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ITEM 5. | | |
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ITEM 6. | | |
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WEBSITE DISCLOSURE
Investorsshares and others should note that we use our website, www.oaktreeREIT.com, to announce material information to investors and the marketplace. While not all of the information that we post on our website is of a material nature, some information could be deemed to be material. Accordingly, we encourage investors, the media, and others interested in us to review the information that we share on our website. Information contained on, or available through, our website is not incorporated by reference into this document.
10,176,717 Class S shares.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Oaktree Real Estate Income Trust, Inc.
Consolidated Balance Sheets
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| | | | | | | | |
| | | September 30, 2019 (Unaudited) | | December 31, 2018 |
| Assets | | | | |
| Investments in real estate, net | | $ | 145,870,775 |
| | $ | — |
|
| Investments in real estate-related loans, net | | 49,098,314 |
| | — |
|
| Intangible assets, net | | 5,428,357 |
| | — |
|
| Cash and cash equivalents | | 5,357,343 |
| | 183,454 |
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| Restricted cash | | 932,644 |
| | — |
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| Accounts and other receivables, net | | 654,857 |
| | — |
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| Other assets | | 260,985 |
| | — |
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| Total Assets | | $ | 207,603,275 |
| | $ | 183,454 |
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| Liabilities and Deficit | | | | |
| Mortgage loans, net | | $ | 105,729,159 |
| | $ | — |
|
| Due to affiliates | | 99,226,119 |
| | 198,181 |
|
| Intangible liabilities, net | | 67,046 |
| | — |
|
| Accounts payable, accrued expenses and other liabilities | | 2,732,592 |
| | 102,930 |
|
| Commitments and contingencies (Note 11) | | — |
| | — |
|
| Total Liabilities | | 207,754,916 |
| | 301,111 |
|
| Stockholders’ Equity (Deficit) | | | | |
| Preferred stock, $0.01 par value per share, 50,000,000 shares authorized; no shares issued nor outstanding at September 30, 2019 and December 31, 2018, respectively | | — |
| | — |
|
| Common stock, $0.01 par value per share, 1,000,000,000 shares authorized; 27,000 and 20,000 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | | 270 |
| | 200 |
|
| Additional paid-in capital | | 306,536 |
| | 250,038 |
|
| Accumulated deficit | | (3,025,544 | ) | | (367,895 | ) |
| Total Stockholders’ Deficit | | (2,718,738 | ) | | (117,657 | ) |
| Non-controlling interests attributable to third party joint ventures | | 2,567,097 |
| | — |
|
| Total Deficit | | (151,641 | ) | | (117,657 | ) |
| Total Liabilities and Equity | | $ | 207,603,275 |
| | $ | 183,454 |
|
See accompanying notes to financial statements.
Oaktree Real Estate Income Trust, Inc.
Consolidated Balance Sheets
The following table presents the assets and liabilities of investments consolidated as a variable interest entities for which the Company is determined to be the primary beneficiary.
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| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| Assets | | | |
| Investments in real estate, net | $ | 145,870,775 |
| | — |
|
| Intangible assets, net | 5,428,357 |
| | — |
|
| Cash and cash equivalents | 1,855,194 |
| | $ | — |
|
| Restricted cash | 932,644 |
| | — |
|
| Accounts and other receivables, net | 396,198 |
| | — |
|
| Other assets | 260,985 |
| | — |
|
| Total Assets | $ | 154,744,153 |
| | $ | — |
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| | | | |
| Liabilities | | | |
| Mortgage loans, net | $ | 105,729,159 |
| | — |
|
| Intangible liabilities, net | 67,046 |
| | — |
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| Accounts payable, accrued expenses and other liabilities | 2,399,087 |
| | $ | — |
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| Total Liabilities | $ | 108,195,292 |
| | $ | — |
|
See accompanying notes to financial statements.
Oaktree Real Estate Income Trust, Inc.
Consolidated Statements of Operations (unaudited)
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| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended
September 30, 2019 | | For the Three Months Ended
September 30, 2018 | | For the Nine Months Ended
September 30, 2019 | | For the Period from
January 10, 2018
through
September 30, 2018 |
| Revenues | | | | | | | | |
| Rental revenues | | $ | 2,298,740 |
| | $ | — |
| | $ | 3,540,440 |
| | $ | — |
|
| Other revenues | | 174,086 |
| | — |
| | 161,108 |
| | — |
|
| Total revenues | | 2,472,826 |
| | — |
| | 3,701,548 |
| | — |
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| Expenses | | | | | | | | |
| Rental property operating | | 956,906 |
| | — |
| | 1,437,279 |
| | — |
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| General and administrative expenses | | 649,722 |
| | 80,575 |
| | 1,099,118 |
| | 193,808 |
|
| Depreciation and amortization | | 1,798,506 |
| | — |
| | 2,841,782 |
| | — |
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| Total expenses | | 3,405,134 |
| | 80,575 |
| | 5,378,179 |
| | 193,808 |
|
| Other (expense) income | | | | | | | | |
| Interest income | | 910,192 |
| | 523 |
| | 1,051,580 |
| | 754 |
|
| Interest expense | | (1,513,816 | ) | | — |
| | (2,197,613 | ) | | — |
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| Total other (expense) income | | (603,624 | ) | | 523 |
| | (1,146,033 | ) | | 754 |
|
| Net loss | | (1,535,932 | ) | | (80,052 | ) | | (2,822,664 | ) | | (193,054 | ) |
| Net loss attributable to non-controlling interests | | 93,481 |
| | — |
| | 165,016 |
| | — |
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| Net loss attributable to stockholders | | $ | (1,442,451 | ) | | $ | (80,052 | ) | | $ | (2,657,648 | ) | | $ | (193,054 | ) |
| Net loss per share of common stock - basic and diluted | | $ | (53.42 | ) | | $ | (4.00 | ) | | $ | (106.29 | ) | | $ | (9.65 | ) |
| Weighted average number of shares outstanding | | 27,000 |
| | 20,000 |
| | 25,004 |
| | 20,000 |
|
See accompanying notes to financial statements.
Oaktree Real Estate Income Trust, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Deficit) (unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Periods from January 10, 2018 through September 30, 2018 |
| | Par Value | | | | | | | | | | |
| | Shares | | Common
Stock | | Common
Stock
Class I | | Common
Stock
Class S | | Common
Stock
Class T | | Common
Stock
Class D | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Total Stockholders' (Deficit) Equity | | Non-controlling Interests | | Total Equity |
| Balance at January 10, 2018 | 20,000 |
| | $ | — |
| | $ | 200 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 199,800 |
| | $ | — |
| | $ | 200,000 |
| | $ | — |
| | $ | 200,000 |
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| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (24,930 | ) | | (24,930 | ) | | — |
| | (24,930 | ) |
| Balance at March 31, 2018 | 20,000 | | — |
| | 200 |
| | — |
| | — |
| | — |
| | 199,800 |
| | (24,930 | ) | | 175,070 |
| | — |
| | 175,070 |
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| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (88,072 | ) | | (88,072 | ) | | — |
| | (88,072 | ) |
| Balance at June 30, 2018 | 20,000 |
| | — |
| | 200 |
| | — |
| | — |
| | — |
| | 199,800 |
| | (113,002 | ) | | 86,998 |
| | — |
| | 86,998 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (80,052 | ) | | (80,052 | ) | | — |
| | (80,052 | ) |
| Balance at September 30, 2018 | 20,000 |
| | $ | — |
| | $ | 200 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 199,800 |
| | $ | (193,054 | ) | | $ | 6,946 |
| | $ | — |
| | $ | 6,946 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2019 |
| | Par Value | | | | | | | | | | |
| | Shares | | Common
Stock | | Common Stock Class I | | Common Stock Class S | | Common Stock Class T | | Common Stock Class D | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders' (Deficit) Equity | | Non-controlling Interests | | Total Equity |
| Balance at December 31, 2018 | 20,000 |
| | $ | — |
| | $ | 200 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 250,038 |
| | $ | (367,895 | ) | | $ | (117,657 | ) | | $ | — |
| | $ | (117,657 | ) |
| Amortization of restricted stock grants | 7,000 |
| | — |
| | 70 |
| | — |
| | — |
| | — |
| | 21,019 |
| | — |
| | 21,089 |
| | — |
| | 21,089 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (170,435 | ) | | (170,435 | ) | | — |
| | (170,435 | ) |
| Balance at March 31, 2019 | 27,000 |
| | — |
| | 270 |
| | — |
| | — |
| | — |
| | 271,057 |
| | (538,330 | ) | | (267,003 | ) | | — |
| | (267,003 | ) |
| Amortization of restricted stock grants | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17,644 |
| | — |
| | 17,644 |
| | — |
| | 17,644 |
|
| Contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,657,500 |
| | 1,657,500 |
|
| Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (24,114 | ) | | (24,114 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,044,763 | ) | | (1,044,763 | ) | | (71,534 | ) | | (1,116,297 | ) |
| Balance at June 30, 2019 | 27,000 |
| | — |
| | 270 |
| | — |
| | — |
| | — |
| | 288,701 |
| | (1,583,093 | ) | | (1,294,122 | ) | | 1,561,852 |
| | 267,730 |
|
| Amortization of restricted stock grants | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17,835 |
| | — |
| | 17,835 |
| | — |
| | 17,835 |
|
| Contributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,130,682 |
| | 1,130,682 |
|
| Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31,956 | ) | | (31,956 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,442,451 | ) | | (1,442,451 | ) | | (93,481 | ) | | (1,535,932 | ) |
| Balance at September 30, 2019 | 27,000 |
| | $ | — |
| | $ | 270 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 306,536 |
| | $ | (3,025,544 | ) | | $ | (2,718,738 | ) | | $ | 2,567,097 |
| | $ | (151,641 | ) |
See accompanying notes to financial statements.
Oaktree Real Estate Income Trust, Inc.
Consolidated Statements of Cash Flows (unaudited)
|
| | | | | | | |
| | For the Nine Months Ended September 30, 2019 | | For the Period from
January 10, 2018
through
September 30, 2018 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (2,822,664 | ) | | $ | (193,054 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
| Depreciation | 1,392,072 |
| | — |
|
| Amortization of in-place lease intangibles | 1,404,349 |
| | — |
|
| Amortization of lease origination costs | 45,361 |
| | — |
|
| Amortization of above/below market leases | (1,074 | ) | | — |
|
| Amortization of restricted stock grants | 56,568 |
| | — |
|
| Amortization of deferred financing costs | 22,999 |
| | — |
|
| Amortization of discount | (217,154 | ) | | — |
|
| Changes in assets and liabilities: | | | |
| Increase in other assets | (260,985 | ) | | — |
|
| Increase in accounts and other receivables | (654,857 | ) | | — |
|
| Increase in accounts payable, accrued expenses and other liabilities | 2,629,661 |
| | 97,633 |
|
| Increase in due to affiliates | 453,714 |
| | 130,585 |
|
| Increase in lease origination costs | (343,134 | ) | | — |
|
| Net cash provided by operating activities | 1,704,856 |
| | 35,164 |
|
| | | | |
| Cash flows from investing activities: | | | |
| Acquisition of real estate | (151,989,671 | ) | | — |
|
| Purchase of real estate-related loan | (48,881,160 | ) | | — |
|
| Building improvements | (1,739,989 | ) | | — |
|
| Net cash used in investing activities | (202,610,820 | ) | | — |
|
| | | | |
| Cash flows from financing activities: | | | |
| Borrowings from mortgage loan | 106,371,000 |
| | — |
|
| Due to affiliates | 105,399,717 |
| | — |
|
| Repayments of affiliate line of credit | (6,825,493 | ) | | — |
|
| Payment of deferred financing costs | (664,839 | ) | | — |
|
| Distributions to non-controlling interests | (56,070 | ) | | — |
|
| Contributions from non-controlling interests | 2,788,182 |
| | — |
|
| Net cash provided by financing activities | 207,012,497 |
| | — |
|
| | | | |
| Net change in cash and cash-equivalents and restricted cash | 6,106,533 |
| | 35,164 |
|
| Cash and cash-equivalents and restricted cash, beginning of period | 183,454 |
| | 200,000 |
|
| Cash and cash-equivalents and restricted cash, end of period | $ | 6,289,987 |
| | $ | 235,164 |
|
| Reconciliation of cash and cash equivalents and restricted cash to the consolidated balance sheets: | | | |
| Cash and cash equivalents | $ | 5,357,343 |
| | $ | 235,164 |
|
| Restricted cash | 932,644 |
| | — |
|
| Total cash and cash equivalents and restricted cash | $ | 6,289,987 |
| | $ | 235,164 |
|
See accompanying notes to financial statements.
Oaktree Real Estate Income Trust, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Business PurposeEXPLANATORY NOTE
Oaktree Real Estate Income Trust, Inc. (the “Company”) was formedis filing this Amendment No. 1 (the “Amendment”) on July 27, 2017 as a Maryland corporation and intendsForm 10-Q/A to qualify as a real estate investment trust (“REIT”)amend its Quarterly Report on Form 10-Q for U.S. federal income tax purposes. The Company was organized to invest primarily in well-located, high quality commercial real estate assets that generate strong current cash flow and could further appreciate in value through moderate leasing and repositioning strategies. Moreover, to a lesser extent, the Company plans to invest in real estate-related investments, including private loans and traded real estate-related securities that will help maintain liquidity. The Company anticipates that its investments will be geographically diversified across the top 50 markets in the United States. The Company is externally managed by Oaktree Fund Advisors, LLC (the “Adviser”), an affiliate of Oaktree Capital Management, L.P. ("Oaktree"). On January 9, 2018, the Company was capitalized with a $200,000 investment by an affiliate of the Adviser. On February 14, 2019, the Company began issuing and selling shares of common stock through the Company’s initial public offering.
As of September 30, 2019, the Company owned two property investments and two real estate-related loans secured by real estate assets.
2. Capitalization
As of September 30, 2019, the Company was authorized to issue up to 1,000,000,000 shares of common stock. On April 11, 2018, the Company amended and restated its charter to authorize the following classes of common stock:
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| | | | | | |
| Classification | | No. of Authorized Shares | | Par Value Per Share |
| Preferred stock | | 50,000,000 | | $ | 0.01 |
|
| Class T common stock | | 250,000,000 | | $ | 0.01 |
|
| Class S common stock | | 250,000,000 | | $ | 0.01 |
|
| Class D common stock | | 250,000,000 | | $ | 0.01 |
|
| Class I common stock | | 250,000,000 | | $ | 0.01 |
|
| | | 1,050,000,000 | | |
The Company has registeredquarter ended March 31, 2020, filed with the Securities and Exchange Commission an offeringon May 15, 2020 (the “Original 10-Q”), for the purpose of up to $1,600,000,000 in shares in its primary offeringfiling revised versions of Exhibits 31.1 and up to $400,000,000 in shares pursuant to its distribution reinvestment plan (the “Offering”). The Company intends to sell any combination of the four classes of shares of its common stock, Class T shares, Class S shares, Class D shares and Class I shares, with a dollar value up to the maximum offering amount. The share classes have different upfront selling commissions and ongoing stockholder servicing fees. Until the release of proceeds from escrow, the per share purchase price for shares of the Company’s common stock in its primary offering will be $10.00 per share plus applicable upfront selling commissions and dealer manager fees. Thereafter, the purchase price per share for each class of common stock will vary and will generally equal the Company’s prior month’s net asset value (“NAV”) per share, as determined monthly, plus applicable upfront selling commissions and dealer manager fees. The Company will accept proceeds and hold investors’ funds in an interest bearing escrow account until (i) the Company receives purchase orders for at least $150,000,000, including shares purchased by the Company’s sponsor, its affiliates and its directors and officers, in any combination of classes of shares of our common stock, and (ii) the Company’s board of directors has authorized the release of funds in the escrow account. As of September 30, 2019, the Company has not reached the required threshold from the Offering to release funds from escrow.
3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance31.2 filed with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management,Original 10-Q.
We are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. However, the results of
operations for the interim period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other future period.
The Company consolidates entities in which it retains a controlling financial interest or entities that meet the definition of a variable interest entity (“VIE”) for which it is deemed to be the primary beneficiary. In performing an analysis of whether it is the primary beneficiary, at initial investment and at each quarterly reporting period, the Company considers whether it individually has the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and also has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, involves significant judgments, including the determination of which activities most significantly affect the entity’s performance, estimates about the current and future fair values and performance of assets held by the entity and/or general market conditions.
If an entity is determined to be a VIE, the Company evaluates whether it is the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and benefits. The Company consolidates a VIE if it has both power and benefits - that is, (i) the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE, or the right to receive benefits from the VIE that potentially could be significant to the VIE. The Company consolidates all VIEs for which it is the primary beneficiary, including the Company’s joint ventures with TruAmerica Multifamily, LLC (“TruAmerica”) and Hines Interests Limited Partnership ("Hines") to hold the Anzio Apartments and Two Liberty Center properties (see Note 4). As of September 30, 2019, the total assets and liabilities of the Company's consolidated VIE, were $155.0 million and $108.1 million, respectively. Such amounts are included on the Company's Consolidated Balance Sheets. For each of our consolidated VIEs, certain assets are pledged as collateral for specific obligations of the VIE. There are no creditors or other partners of our consolidated VIEs that have recourse to our general credit. Our maximum exposure to our consolidated VIEs is limited to our variable interests in each VIE.
If a legal entity fails to meet any of the three characteristics of a VIE (due to insufficiency of equity, existence of non-substantive voting rights, or lack of a controlling financial interest), the Company then evaluates such entity under the voting model. Under the voting model, the Company consolidates the entity if it determines that it, directly or indirectly, has greater than 50% of the voting rights and that other equity holders do not have substantive participating rights.
If the Company has a variable interest in a VIE but is not the primary beneficiary, or if the Company has the ability to exercise significant influence over a voting interest entity but does not have control, it accounts for its investment using the equity method of accounting.
Investments in Real Estate
The Company evaluates each real estate acquisition to determine whether the integrated set of acquired assets and activities meets the definition of a business. Generally, acquisitions of real estate or in-substance real estate are not expected to meet the definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. When evaluating acquired service or management contracts, the Company considers the nature of the services performed, the terms of the contract relative to similar arm’s length contracts, and the availability of comparable service providers in evaluating whether the acquired contract constitutes a substantive process. The acquisitions of the Anzio Apartments and Two Liberty Center properties were accounted for as asset acquisitions because substantially all of the fair value was concentrated in the land, buildings and related intangible assets.
For acquisitions of real estate and in-substance real estate that are accounted for as business combinations, the Company recognizes the assets acquired (including the intangible value of acquired above- or below-market leases, acquired in-place leases, tenant relationships and other intangible assets or liabilities), liabilities assumed, noncontrolling interests, and previously existing ownership interests, if any, at fair value as of the acquisition date. Any excess (deficit) of the consideration transferred relative to the fair value of the net assets acquired is recognized as goodwill (bargain purchase gain). In business combinations, the preliminary purchase price allocation may be subject to change based upon additional information about facts and circumstances that existed as of the acquisition date, with such measurement period extending no later than 12 months from the acquisition date. Acquisition costs related to business combinations are expensed as incurred.
Acquisitions of real estate and in-substance real estate that do not meet the definition of a business are accounted for as asset acquisitions. The accounting model for asset acquisitions is similar to the accounting model for business combinations except
that the consideration transferred (including acquisition costs) is allocated to the acquired assets and assumed liabilities on a relative fair value basis. As a result, asset acquisitions do not result in the recognition of goodwill or a bargain purchase gain.
The results of operations of acquired properties are included in the Company’s results of operations from the respective dates of acquisition. Estimates of future cash flows used to estimate the fair values of identifiable assets acquired and liabilities assumed are based upon a number of factors including the property’s historical operating results, known and anticipated trends, and market and economic conditions. Values of buildings and improvements are determined on an as-if-vacant basis.
The estimated fair value of acquired in-place leases include the costs the Company would have incurred to lease the properties to their occupancy levels at the date of acquisition. Such estimates include the fair value of leasing commissions, legal costs and other direct costs that would be incurred to lease the properties to such occupancy levels. The Company evaluates avoided costs over the time period over which occupancy levels at the date of acquisition would be achieved had the property been acquired vacant. Such evaluation includes an estimate of the net market-based rental revenues and net operating costs (primarily consisting of real estate taxes, insurance and utilities) that would be incurred during the lease-up period. Acquired in-place leases are amortized over the remaining lease terms as a component of depreciation and amortization expense.
For acquired in-place leases, above- and below-market lease values are recorded based on the present value (using an interest rate that reflects the risks associated with the lease acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair market value lease rates for the corresponding in-place leases. The values of acquired above- and below-market leases are amortized over the terms of the related leases and recognized as either increases (for below-market leases) or decreases (for above-market leases) to rental revenue. Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to amortization expense and the unamortized portion of the above- or below-market lease value is charged to rental revenue.
Expenditures that improve or extend the life of an acquired property are capitalized and depreciated over their estimated useful life. Expenditures for ordinary maintenance and repairs are expensed as incurred.
The cost of buildings and improvements includes the purchase price of the Company’s properties and any acquisition-related costs, along with any subsequent improvements to such properties. The Company’s investments in real estate are stated at cost and are generally depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
|
| |
Description | Depreciable Life |
Building | 30-40 years |
Building and improvements | 5-10 years |
Furniture, fixtures and equipment | 1-7 years |
Tenant improvements | Shorter of estimated useful life or lease term |
In-place lease intangibles | Over lease term |
Above and below market leases | Over lease term |
Lease origination costs | Over lease term |
The Company reviews its real estate portfolio on a periodic basis to ascertain if there are any indicators of impairment in the carrying values of any of its real estate assets, including deferred costs and intangibles,filing revised exhibits solely in order to determine if there is any need for an impairment charge. In reviewing the portfolio, the Company examines the type of asset, the economic situationinclude in the area in which the asset is located, the economic situationcertifications set forth in the industry in whichExhibits the tenant is involvedlanguage added to the introductory portion of paragraph 4 and the timelinesslanguage of the payments made by the tenant under its lease, as well as any current correspondence that may have been had with the tenant, including property inspection reports. For each real estate asset forrevised paragraph 4(b), which indicators of impairment are identified, the Company performs a recoverability analysis that compares future undiscounted cash flows expected to resultlanguage was inadvertently omitted from the use and eventual disposition of the asset to its carrying value. If the undiscounted cash flow analysis yields an amount which is less than the assets’ carrying amount, an impairment loss will be recorded equal to the amount by which the carrying value of the asset exceeds its estimated fair value.certifications when originally filed. The estimated fair value is determined using a discounted cash flow model of the expected future cash flows through the useful life of the property. Real estate assets that are expected to be disposed of are valued at the lower of carrying amount or fair value less costs to sell on an individual asset basis. As of September 30, 2019, the Company hadAmendment does not identified any indicators of impairment with respect to its real estate portfolio.
Investments in Real Estate-Related Loans
Loans that the Company has the intent and ability to hold for the foreseeable future are classified as held for investment. Originated loans are recorded at amortized cost, or outstanding unpaid principal balance less net deferred loan fees. Net deferred loan fees include unamortized origination and other fees charged to the borrower less direct incremental loan origination costs incurred by the Company. Purchased loans are recorded at amortized cost, or unpaid principal balance plus purchase premium or less unamortized discount. Costs to purchase loans are expensed as incurred.
Interest income is recognized based upon contractual interest rate and unpaid principal balance of the loans. Net deferred loan fees on originated loans are deferred and amortized as adjustments to interest income over the expected life of the loans using the effective yield method. Premium or discount on purchased loans are amortized as adjustments to interest income over the expected life of the loans using the effective yield method. When a loan is prepaid, prepayment fees and any excess of proceeds over the carrying amount of the loan are recognized as additional interest income.
Loans that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual. Interest receivable is reversed against interest income when loans are placed on nonaccrual status. Interest collected on a nonaccrual loan is either recognized as income on a cash basis or applied as a reduction to the loan’s carrying value, depending on the ultimate collectability of the loan. Loans may be restored to accrual status when all principal and interest are current and full repayment of the remaining contractual principal and interest are reasonably assured.
Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due in accordance with contractual terms, including consideration of the underlying collateral value. As of September 30, 2019, each of the Company’s real-estate related loans was performing in accordance with its contractual terms and management has not established an allowance for loan losses.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities and accrued expenses atreflect events occurring after the date of the balance sheet. Actual results could differ from those estimates.
Revenue Recognition
The Company’s sources of revenue and the related revenue recognition policies are as follows:
Rental revenue primarily consists of base rent arising from tenant leases at the Company’s properties. Rental revenue is recognized on a straight-line basis over the lifefiling of the lease, includingOriginal 10-Q or modify or update any rent steps or abatement provisions. The Company begins to recognize revenue upon the acquisition of the related property or when a tenant takes possession ofother disclosures contained therein in any way. Accordingly, the leased space. Other rental revenues include amounts due from tenants for costs related to common area maintenance, real estate taxes, and other recoverable costs included in lease agreements. The Company recognizes the reimbursement of such costs incurred as tenant reimbursement income.
The Company periodically reviews tenant receivables and unbilled rent receivables to determine whether they are collectible. In making this determination, the Company considers each tenant’s payment history and financial condition. If a receivable is deemed to be uncollectible, the Company will either reserve for the receivable through an allowance, or write-off the receivable. As of September 30, 2019, the Company did not have any allowances for doubtful accounts.
Cash and Cash Equivalents
Cash and cash equivalents represent cash held in banks, cash on hand, and liquid investments with original maturities of three months or less. The Company may have bank balances in excess of federally insured amounts; however, the Company deposits its cash and cash equivalents with high credit-quality institutions to minimize credit risk exposure. The Company did not hold cash equivalents as of September 30, 2019 or December 31, 2018.
Restricted Cash
Restricted cash of $932,644 as of September 30, 2019 consisted of tax impounds of $289,076, tenant security deposits of $134,040, cash reserved for interest payments of $67,795 and cash reserved for capital expenditures of $441,733. There were no restricted cash balances as of December 31, 2018.
Non-Controlling Interests
Non-controlling interests of $2,567,097 as of September 30, 2019 represent interests held by TruAmerica and Hines, our joint venture partners in Anzio Apartments and Two Liberty Center, respectively. There were no non-controlling interests as of December 31, 2018.
Fair Value Measurement
Under normal market conditions, the fair value of an investment is the amount that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). Additionally, there is a hierarchal framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment and the state of the marketplace, including the existence and transparency of transactions between market participants. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following levels within the fair value hierarchy:
Level 1 — quoted prices are available in active markets for identical investments as of the measurement date. The Company does not adjust the quoted price for these investments.
Level 2 — quoted prices are available in markets that are not active or model inputs are based on inputs that are either directly or indirectly observable as of the measurement date.
Level 3 — pricing inputs are unobservable and include instances where there is minimal, if any, market activity for the investment. These inputs require significant judgment or estimation by management or third parties when determining fair value and generally represent anything that does not meet the criteria of Levels 1 and 2. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had a ready market for these investments existed.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable and other receivables, accounts payable, accrued liabilities and other liabilities approximate fair value because of the short-term nature of these instruments and falls under the Level 2 hierarchy. The estimated fair values of the Company's real estate-related loan, mortgage loan and line of credit approximate their fair values since they bear interest at floating rates and were recently originated and falls under the Level 2 hierarchy.
The Company uses significant judgement to estimate fair values of investments in real estate, and other intangible assets. In estimating their values, we consider significant unobservable inputs such as estimated cash flow projections that utilize appropriate discount and capitalization rates and available comparable market information. Estimates of future cash flows are based on a number of factors, including the historical operating results, known and anticipated trends, and market/economic conditions that may affect the property. These inputs are Level 3 inputs.
Income Taxes
The Company intends to make an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31 for the year in which the Offering proceeds are released from escrow. If the Company qualifies for taxation as a REIT, the Company generally will not be subject to federal corporate income tax to the extent it distributes 90% of its taxable income to its stockholders. Any deferred tax assets arising from the Company's taxable loss carryforwards during periods prior to making a REIT election have been fully reserved, since it is unlikely such benefits will be realized. REITs are subject to a number of other organizational and operational requirements.
Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.
Organization and Offering Expenses
The Adviser has agreed to advance organization and offering expenses on behalf of the Company (including legal, accounting, and other expenses attributable to the organization, but excluding upfront selling commissions, dealer manager fees and stockholder servicing fees) through the first anniversary of the date on which escrow for the Offering is released. The Company will reimburse the Adviser for all such advanced expenses ratably over a 60 month period following the first anniversary of the date escrow for the Offering is released.
As of September 30, 2019 and December 31, 2018, the Adviser and its affiliates had incurred organization and offering expenses on the Company’s behalf of approximately $4.7 million and $4.3 million, respectively. These organization and offering expenses are not recorded in the accompanying financial statements because such costs are not the Company’s liability until the date on which the escrow is released.
When recorded by the Company, organizational expenses will be expensed as incurred, and offering expenses will be reflected as a reduction of additional paid-in capital as such amounts will be reimbursed to the Adviser or its affiliates from the gross proceeds of the Offering. Any amount due to the Adviser but not paid will be recognized as a liability on the balance sheet.
Earnings Per Share
Nonvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the computation of basic EPS pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends declared (or accumulated) and their respective participation rights in undistributed earnings.
Basic EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period.
Diluted EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding determined for the basic EPS computation plus the effect of any dilutive securities. We include unvested shares of restricted stock in the computation of diluted EPS by using the more dilutive of the two-class method or treasury stock method. Any anti-dilutive securities are excluded from the diluted EPS calculation. For the three months ended September 30, 2019 and 2018, the nine months ended September 30, 2019 and the period from January 10, 2018 through September 30, 2018, there were no dilutive common stock equivalents as the Company incurred net losses for each period.
Segment Reporting
The Company currently operates as a single reportable segment based upon its method of internal reporting and its allocation of capital and resources.
Share-Based Compensation
Equity-classified stock awards granted to employees and non-employees that have a service condition are measured at fair value at date of grant and re-measured at fair value only upon a modification of the award.
The Company recognizes compensation expense on a straight-line basis over the requisite service period of each award, with the amount of compensation expense recognized at the end of a reporting period at least equal the portion of fair value of the respective award at grant date or modification date, as applicable, that has vested through that date. Compensation expense, which is adjusted for actual forfeitures upon occurrence, is included as a component of general and administrative expense on the statements of operations.
Recent Accounting Pronouncements
In May 2014, the FASB issued a new revenue recognition standard which will supersede nearly all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for
those goods or services. Companies will likely need to use more judgment and make more estimates than under previous revenue recognition guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration, if any, to include in the transaction price and allocating the transaction price to each separate performance obligation. The new standard may be applied retrospectively to each prior period presented or prospectively with the cumulative effect, if any, recognized as of the date of adoption. We adopted the new standard effective January 1, 2019, the effective date for private companies. While we expect that the majority of our revenues will be derived from leasing activities, to the extent there are nonlease components that are within the scope of the new revenue recognition standard, we expect that the pattern of revenue recognition under the new standard will be substantially similar to the pattern of revenue recognition under existing accounting standards.
In February 2016, the FASB issued a new leasing standard which requires lessees to clarify leases as either finance or operating leases based on certain criteria and record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard also eliminates current real estate-specific provisions and changes of initial direct costs and lease executory costs for all entities. The new guidance will require lessees and lessors to capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease, with any other costs incurred, including allocated indirect costs, expensed as incurred. In addition, the new standard requires that lease and nonlease components of a contract be bifurcated, with nonlease components (including reimbursements for real estate taxes, utilities, insurance and other common area maintenance and other executory costs) subject to the new revenue recognition standard effective upon adoption of the new leasing standard. In July 2018, the FASB issued an amendment to the leasing standard that allows lessors to elect, as a practical expedient, not to allocate the total consideration in a contract to lease and non-lease components based on their relative standalone selling prices. Rather, this practical expedient allows lessors to elect to account for the combined component as an operating lease if (i) the timing and pattern of transfer of the lease component and nonlease component(s) are the same; (ii) the lease component would be classified as an operating lease if accounted for separately; and (iii) the lease component is the predominant component of the arrangement. If we elect this practical expedient subsequent to adoption, tenant recoveries and other components that would otherwise quality as non-lease components would be accounted for as lease components and recognized in rental revenues. The amendment also provided an optional transition method to make the initial application date of the new lease standard the date of adoption, with a cumulative-effect adjustment recognized to the opening balance of retained earnings. Consequently, for an entity that elects the optional transition method, the entity’s reporting and disclosures for comparative historical periods presented in the financial statements will continue to be in accordance with current GAAP. In August 2018, the FASB proposed a narrow-scope amendment that would preclude a lessor from having to recognize lessor costs paid by a lessee directly to a third-party when the lessor cannot reasonably estimate such costs. The FASB has not yet finalized the amendment as of the date of this filing. We expect to adopt the new leasing standard effective January 1, 2020, the effective date for private companies. We are still evaluating the effects of adoption, including whether to elect the practical expedients or optional transition method, but do not expect the new standard to have a significant effect on our total revenues.
In June 2016, the FASB issued guidance on the measurement of credit losses on financial instruments. The standard will replace the incurred loss impairment methodology pursuant to GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We expect to adopt the new standard effective December 31, 2020, the effective date for private companies. The guidance is required to be applied using a modified-retrospective approach to all periods presented. We are still evaluating the effects of adopting this standard on our financial statements..
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amendments add to or clarify guidance on a number of cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, distributions received from equity-method investees and beneficial interests in securitization transactions. We adopted the new standard effective January 1, 2019, the effective date for private companies. The adoption of the new standard did not have any impact on the financial statements.
In November 2016, the FASB issued guidance on the presentation of restricted cash in the statement of cash flows. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted the new standard effective January 1, 2019, the effective date for private companies. As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated cash flow statements.
4. Investments in Real Estate
As of September 30, 2019, investments in real estate, net, consisted of the following:
|
| | | | |
| Building and building improvements | | $ | 132,865,904 |
|
| Land | | 9,180,070 |
|
| Tenant improvements | | 3,811,716 |
|
| Furniture, fixtures and equipment | | 1,405,157 |
|
| Total | | 147,262,847 |
|
| Accumulated depreciation | | (1,392,072 | ) |
| Investments in real estate, net | | $ | 145,870,775 |
|
On April 11, 2019, the Company partnered with TruAmerica, through a joint venture (the “Anzio Joint Venture”) to acquire a fee simple interest in Anzio Apartments (the "Anzio Apartments"), a multifamily asset located in Lawrenceville, Georgia, for $59.2 million (excluding transaction costs). The Anzio Joint Venture acquired the property through a combination of $44.4 million of property-level debt from the Federal Home Loan Mortgage Corporation, $14.9 million of borrowings under a Line of Credit with an affiliate of Oaktree (the "Line of Credit") which were funded as an equity contribution into the Anzio Joint Venture and $1.7 million funded by TruAmerica. The Company owns a 90% interest in the Anzio Joint Venture and TruAmerica owns a 10% interest in the Anzio Joint Venture. The Company has control of the Anzio Joint Venture and TruAmerica acts as the day-to-day property manager.
On August 20, 2019, the Company partnered with Hines Interests Limited Partnership (“Hines”) through a joint venture (the “Liberty Joint Venture”) to acquire a fee simple interest in Two Liberty Center (the “Two Liberty Center”), a class “A” office asset located in Ballston, Virginia, for $91.2 million (excluding transaction costs). The Liberty Joint Venture acquired Two Liberty Center through a combination of $62.0 million of property-level debt from Bank of America Merrill Lynch and equity of $33.5 million funded from the Liberty Joint Venture (consisting of $32.3 million funded by the Company using borrowings under the Line of Credit and $1.1 million funded by Hines). The Company owns 96.5% interest in the Liberty Joint Venture and Hines owns a 3.5% interest in the Liberty Joint Venture. The Company has control of the Liberty Joint Venture and Hines acts as the day-to-day property manager.
The following table provides detail of the Company's properties:
|
| | | | | | | | | | |
| Investment | | Location | | Type | | Acquisition Date | | Purchase Price(1) |
| Anzio Apartments | | Lawrenceville, Georgia | | Multifamily | | April 2019 | | $ | 59,785,956 |
|
| Two Liberty Center | | Ballston, Virginia | | Office | | August 2019 | | $ | 92,203,715 |
|
(1) Purchase price is inclusive of closing costs.
The following table summarizes the purchase price allocations of Anzio Apartments and Two Liberty Center:
|
| | | | | | | | |
| | | Anzio Apartments | | Two Liberty Center |
| Building and building improvements | | $ | 50,820,175 |
| | $ | 80,305,740 |
|
| Land | | 6,105,370 |
| | 3,074,700 |
|
| Tenant improvements | | — |
| | 3,811,716 |
|
| Furniture, fixtures and equipment | | 1,405,157 |
| | — |
|
| In-place lease intangibles | | 1,455,254 |
| | 5,024,572 |
|
| Above-market lease intangibles | | — |
| | 58,585 |
|
| Below-market lease intangibles | | — |
| | (71,598 | ) |
| Total | | $ | 59,785,956 |
| | $ | 92,203,715 |
|
5. Intangibles
The Company recorded in-place lease and above and below market lease intangibles as a result of the Anzio Apartment and Two Liberty Center acquisitions. The gross carrying amount and accumulated amortization of the Company's intangible assets consisted of the following as of September 30, 2019:
|
| | | |
| Intangible assets: | |
| In-place lease intangibles | $ | 4,978,397 |
|
| Lease origination costs | 1,844,563 |
|
| Above-market lease intangibles | 58,585 |
|
| Total intangible assets | 6,881,545 |
|
| Accumulated amortization: | |
| In-place lease intangibles | (1,404,349 | ) |
| Lease origination costs | (45,361 | ) |
| Above-market lease intangibles | (3,478 | ) |
| Total accumulated amortization | (1,453,188 | ) |
| Intangible assets, net | $ | 5,428,357 |
|
| | |
| Intangible liabilities: | |
| Below-market lease intangibles | $ | (71,598 | ) |
| Accumulated amortization | 4,552 |
|
| Intangible liabilities, net | $ | (67,046 | ) |
The weighted average amortization periods of the acquired in-place lease intangibles, above-market lease intangibles and below-market lease intangibles is 54 months.
The following table details the Company's future amortization of intangible assets and liabilities:
|
| | | |
| Amortization | |
| For the year ended: | |
| 2019 (remaining) | $ | 740,959 |
|
| 2020 | 1,395,968 |
|
| 2021 | 820,018 |
|
| 2022 | 799,574 |
|
| 2023 | 651,574 |
|
| Thereafter | 953,218 |
|
| Total | $ | 5,361,311 |
|
6. Investments in Real Estate-Related Loans
On June 14, 2019, the Company acquired a $25 million principal amount of a second loss mezzanine loan (the “Atlantis Mezzanine Loan”) by assuming ownership of a special purpose vehicle from an affiliate of Oaktree and contemporaneously borrowed under the Company’s Line of Credit to finance the investment. The Atlantis Mezzanine Loan is secured by the equity interests of the entity owning Atlantis Paradise Island Resort, a 2,917 room oceanfront resort located on Paradise Island in the Bahamas.
The Atlantis Mezzanine Loan matures in July 2020 with five 12-month extension options for the borrower, provided there has not been an event of default. The Atlantis Mezzanine Loan bears interest at a floating rate of 6.67% over the one-month London Interbank Offered Rate, subject to an interest rate increase in the event the borrower exercises its fourth 12-month extension.
On September 4, 2019, the Company acquired a $25 million principal amount of bonds (the “IMC/AMC Bond Investment”) collateralized by a term loan (the “Term Loan”) by assuming ownership of a special purpose vehicle from an affiliate of Oaktree and contemporaneously borrowed $25 million under the Company’s Line of Credit to finance the investment. The Term Loan is cross-collateralized by and senior to equity interests of the owners in International Markets Center (“IMC”) and AmericasMart Atlanta (“AMC”). IMC and AMC are two of the leading national furniture showroom companies with a combined 14.4 million square feet of showroom space located in Las Vegas, Nevada, High Point, North Carolina and Atlanta, Georgia.
The Term Loan matures in December 2023. The IMC/AMC Bond Investment bears interest at a floating rate of 6.15% over the one-month London Interbank Offered Rate.
The following table details the Company's real estate-related loan investments:
|
| | | | | | | | | | | | |
| Collateral | | Interest Rate(1) | | Maturity Date | | Face Amount | | Amortized Cost Basis |
| Atlantis Paradise Island Resort | | L + 6.67% | | July 2020 | | $ | 25,000,000 |
| | $ | 24,454,538 |
|
International Markets Center AmericasMart Atlanta | | L + 6.15% | | December 2023 | | 25,000,000 |
| | 24,643,776 |
|
| | | | | | | $ | 50,000,000 |
| | $ | 49,098,314 |
|
(1) The term "L" refers to the one-month US dollar-denominated London Interbank Offer Rate ("LIBOR"). As of September 30, 2019 and December 31, 2018, one-month LIBOR was equal to 2.02% and 2.50%, respectively.
The following table summarizes the Company's real estate-related loan investments as of September 30, 2019:
|
| | | |
| Atlantis Mezzanine Loan | $ | 25,000,000 |
|
| IMC/AMC Bond Investment | 25,000,000 |
|
| Unamortized Discount | (901,686 | ) |
| Investments in real estate-related loans, net | $ | 49,098,314 |
|
7. Mortgage Loans
In connection with the acquisition of the Anzio Apartments, the Anzio Joint Venture obtained a $44.4 million mortgage loan from the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The mortgage loan is secured by the Anzio Apartments and bears interest at a rate of LIBOR plus a spread of 159 basis points, payable as interest-only for the first 60 months, then principal and interest payable for the remaining term based on a 360 month amortization period. The term of the mortgage loan is 120 months. Amounts prepaid under the mortgage loan are subject to a 1% penalty following a one year lockout period. The mortgage loan is subject to customary terms and conditions.
In connection with the acquisition of Two Liberty Center, the Liberty Joint Venture obtained a $62.0 million mortgage loan from Bank of America Merrill Lynch ("BAML"). The mortgage loan is secured by Two Liberty Center and bears interest at a rate of LIBOR plus a spread of 150 basis points, payable as interest-only for the initial term of 60 months. The term of the mortgage loan is 60 months with two one-year extension options. The mortgage loan is subject to customary terms and conditions, and the Liberty Joint Venture was in compliance with all financial covenants it is subject to under the mortgage loan as of September 30, 2019.
The following table summarizes the Company's mortgage loans:
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | Principal Balance Outstanding |
| Indebtedness | | Interest Rate(1) | | Maturity Date | | Deferred Financing Costs, net | | September 30, 2019 | | December 31, 2018 |
| Anzio Apartments mortgage loan | | L + 1.59% | | April 2029 | | $ | 303,869 |
| | $ | 44,400,000 |
| | $ | — |
|
| Two Liberty Center mortgage loan | | L + 1.50% | | August 2024 | | 337,972 |
| | 61,971,000 |
| | $ | — |
|
| | | | | | | $ | 641,841 |
| | $ | 106,371,000 |
| | |
(1) The term "L" refers to the one-month US dollar-denominated LIBOR. As of September 30, 2019 and December 31, 2018, one-month LIBOR was equal to 2.02% and 2.50%, respectively.
The following table presents the future principal payments due under the Company's mortgage loan as of September 30, 2019:
|
| | | | |
| Year | | Amount |
| 2019 (remaining) | | $ | — |
|
| 2020 | | — |
|
| 2021 | | — |
|
| 2022 | | — |
|
| 2023 | | — |
|
| Thereafter | | 106,371,000 |
|
| Total | | $ | 106,371,000 |
|
8. Due to Affiliates
Due to affiliates of $99,226,119 as of September 30, 2019 consisted of $98,574,224 of principal due under the Company's Line of Credit with Oaktree, $188,482 of interest payable related to the Line of Credit and $463,413 due to Oaktree for reimbursement of operating expenses. As of December 31, 2018, due to affiliates consisted of $198,181 due to Oaktree for reimbursement of operating expenses.
Line of Credit
On April 11, 2019, the Company entered into the Line of Credit with Oaktree Fund GP I, L.P. (“Lender”), an affiliate of Oaktree, providing for an unsecured, uncommitted credit facility in a maximum aggregate principal amount of $150 million. The Line of Credit expires on the earlier of: (i) 10 business days following the date the Company breaks escrow for the Offering and (ii) April 10, 2020, subject to three-month extension options requiring Lender approval. Borrowings under the Line of Credit will bear interest at a rate of LIBOR plus 2.50% per annum, compounded quarterly, which may be paid in kind at the Company’s election. The Company may request drawdowns of amounts under the Line of Credit periodically and in sizes determined by the Company. Requests for drawdowns will be funded at the discretion of Lender based on, among other factors, details of the purpose of the drawdowns and the property features of investments towards which the proceeds will be used. Amounts due under the Line of Credit (inclusive of accrued interest) are freely pre-payable without penalty.
The following table is a summary of the Company's Line of Credit:
|
| | | | | | | | | | | | | | | | |
| | | | | | | Maximum | | Principal Outstanding Balance |
| Indebtedness | | Interest Rate(1) | | Maturity Date | | Facility Size | | September 30, 2019(2) | | December 31, 2018 |
| Line of Credit | | L + 2.50% | | April 10, 2020 | | $ | 150,000,000 |
| | $ | 98,574,224 |
| | $ | — |
|
(1) The term "L" refers to the one-month US dollar-denominated LIBOR. As of September 30, 2019 and
December 31, 2018, one-month LIBOR was equal to 2.02% and 2.50%, respectively.
(2) Principal outstanding balance as of September 30, 2019 is inclusive of $887,759 in paid-in-kind interest.
9. Related Party Transactions
The Company has entered into an advisory agreement with the Adviser. Pursuant to the advisory agreement between the Company and the Adviser, the Adviser is responsible for sourcing, evaluating and monitoring the Company’s investment opportunities and making decisions related to the acquisition, management, financing and disposition of the Company’s assets, in accordance with the Company’s investment objectives, guidelines, policies and limitations, subject to oversight by the Company’s board of directors.
Certain affiliates of the Company, including the Adviser, will receive fees and compensation in connection with the offering and ongoing management of the assets of the Company. The Adviser will be paid a management fee equal to 1.00% of NAV per annum, payable monthly. The management fee will be paid, at the Adviser’s election, in cash or Class I shares. The Adviser has agreed to waive its management fee for the first six months following the date on which the initial proceeds from the Offering are released from escrow.
The Company may retain certain of the Adviser’s affiliates for necessary services relating to the Company’s investments or its operations, including any administrative services, construction, special servicing, leasing, development, property oversight and other property management services, as well as services related to mortgage servicing, group purchasing, healthcare, consulting/brokerage, capital markets/credit origination, loan servicing, property, title and/or other types of insurance, management consulting and other similar operational matters. Any such arrangements will be at market terms and rates. As of September 30, 2019, the Company had not retained an affiliate of the Adviser for any such services.
The Company will pay the Adviser a performance fee equal to 12.5% of the annual Total Return, subject to a 5% annual Hurdle Amount (each term as defined in the advisory agreement) and a high water mark, with a catch-up. Such performance fee will be made annually and accrue monthly. No performance fees were earned by the Adviser during the three or nine months ended September 30, 2019 or for the period from January 10, 2018 through September 30, 2018.
The Company will be dependent on the Adviser and its affiliates for certain services that are essential to it, including acquisition and disposition decisions, and certain other responsibilities. In the event that the Adviser and its affiliates are unable to provide such services, the Company would be required to find alternative service providers.
On April 11, 2019, the Company entered into the Line of Credit with an affiliate of Oaktree, providing for an unsecured, uncommitted credit facility in a maximum aggregate principal amount of $150 million.
On June 14, 2019, the Company acquired a the Atlantis Mezzanine Loan by assuming ownership of a special purpose vehicle from an affiliate of Oaktree and contemporaneously borrowed under the Company’s Line of Credit with an affiliate of Oaktree to finance the investment.
On August 20, 2019, the Company entered into an amendment (the "Amendment") to the Line of Credit with an affiliate of Oaktree. The Amendment reduces the rate at which borrowings under the Line of Credit bear interest from LIBOR plus 3.25% per annum to LIBOR plus 2.50% per annum. The reduction reflects a review of the existing interest rate in light of current interest rates offered in the market. No other material terms of the Line of Credit were changed as a result of the Amendment. However, the Lender waived interest otherwise due under the Line of Credit such that the interest rate between April 11, 2019 and the date of the Amendment will effectively be LIBOR plus 2.50%.
On September 4, 2019, the Company acquired the IMC/AMC Bond Investment by assuming ownership of a special purpose vehicle from an affiliate of Oaktree and contemporaneously borrowed under the Company’s Line of Credit with an affiliate of Oaktree to finance the investment.
Repurchase Arrangement for Oaktree Investor
On September 11, 2019, the board of directors of the Company, including a majority of the independent directors, adopted an arrangement to repurchase any shares of the Company’s Class I common stock that Oaktree Fund GP I, L.P. (the “Oaktree Investor”), an affiliate of the Company’s sponsor, acquires prior to the breaking of escrow in the Company’s initial public offering. The board of directors approved the repurchase arrangement in recognition of the Oaktree Investor’s intent to subscribe for shares of the Company’s Class I common stock in an amount such that, together with all other subscriptions for the Company’s common stock, the escrow minimum offering amount will be satisfied. If the other subscriptions for the Company’s common stock already meet or exceed the escrow minimum offering amount, the Oaktree Investor does not intend to subscribe for any shares of the Company’s common stock. The Company currently expects to satisfy its escrow minimum offering amount on or about December 6, 2019, although there can be no assurance that the escrow break will occur by that
date or at all. Investors that have submitted purchase orders in good order prior to the escrow break will be admitted as stockholders upon any escrow break.
Under the repurchase arrangement, after the Company breaks escrow for its initial public offering, subject to certain limitations, on the last calendar day of each month the Company will offer to repurchase shares of its common stock from the Oaktree Investor in an aggregate dollar amount (the “Monthly Repurchase Amount”) equal to (i) the net proceeds from new subscriptions that month less (ii) the aggregate repurchase price (excluding any amount of the aggregate repurchase price paid using cash flow from operations not used to pay distributions) of shares repurchased by the Company that month from investors pursuant to the Company’s existing share repurchase plan. In addition to the Monthly Repurchase Amount for the applicable month, the Company will offer to repurchase any Monthly Repurchase Amounts from prior months that have not yet been repurchased. The price per share for each repurchase from the Oaktree Investor will be the lesser of (a) the $10.00 per share initial cost of the shares and (b) the transaction price in effect for the Class I shares at the time of repurchase. The repurchase arrangement is not subject to any time limit and will continue until the Company has repurchased all of the Oaktree Investor’s shares.
Other than the Monthly Repurchase Amount limitation, the share repurchase arrangement for the Oaktree Investor is not subject to any volume limitations, including those in the Company’s existing share repurchase plan. Notwithstanding the foregoing, no repurchase offer will be made to the Oaktree Investor for any month in which (1) the 2% monthly or 5% quarterly repurchase limitations in the Company’s existing share repurchase plan have been decreased or (2) the full amount of all shares requested to be repurchased under the Company’s existing share repurchase plan is not repurchased. Additionally, the Company may elect not to offer to repurchase shares from the Oaktree Investor, or may offer to purchase less than the Monthly Repurchase Amount, if, in its judgment, the Company determines that offering to repurchase the full Monthly Repurchase Amount would place an undue burden on its liquidity, adversely affect its operations or risk having an adverse impact on the Company as a whole. Further, the Company’s board of directors may modify, suspend or terminate this share repurchase arrangement if it deems such action to be in the Company’s best interests and the best interests of the Company’s stockholders. The Oaktree Investor will not request that its shares be repurchased under the Company’s existing share repurchase plan. Under the Company’s charter, the Oaktree Investor may not vote on the removal of any of its affiliates (including the Adviser), and may not vote regarding any transaction between the Company and Oaktree or any of its affiliates.
10. Stockholders' Equity
Repurchase Arrangement for Oaktree Investor
On September 11, 2019, the board of directors of the Company adopted an arrangement to repurchase any shares of the Company’s Class I common stock that the Oaktree Investor acquires prior to the breaking of escrow in the Company’s initial public offering. The board of directors approved the repurchase arrangement in recognition of the Oaktree Investor’s intent to subscribe for shares of the Company’s Class I common stock in an amount such that, together with all other subscriptions for the Company’s common stock, the escrow minimum offering amount will be satisfied. Please refer to Note 9, "Related Party Transactions" for a more detailed discussion of the repurchase agreement.
Restricted stock awards
In March 2018, the Company granted 7,000 shares of restricted stock to its non-employee directors at a fair value of $10.00 per share, which vested on March 20, 2019. In March 2019, the Company granted 7,000 shares of restricted stock to its non-employee directors at a fair value of $10.00 per share, which vest on March 20, 2020. For the three and nine months ended September 30, 2019, the Company recognized compensation expense of $17,835 and $56,568, respectively, related to the restricted stock awards, which is included in general and administrative expense. For the period from January 10, 2018 through September 30, 2018, the Company's compensation expense related to the restricted stock awards was $32,403.
11. Commitments and Contingencies
From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2019, the Company was not subject to any material litigation nor was the Company aware of any material litigation threatened against it.
12. Subsequent Events
The Company’s management has evaluated subsequent events from September 30, 2019 through the filing date of this Form 10-Q. There have been no subsequent events during such period that would require recognition or disclosure in the interim financial statements as of and for the three months ended September 30, 2019.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References herein to “Oaktree Real Estate Income Trust,” “Oaktree REIT,” the “Company,” “we,” “us,” or “our” refer to Oaktree Real Estate Income Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.
The following discussion should be read in conjunction with the unaudited financial statements and notes thereto appearing elsewhere in this quarterly report on FormOriginal 10-Q.
Forward-Looking Statements
Statements contained in this Form 10-Q that are not historical facts are based on our current expectations, estimates, projections, opinions, and/or beliefs. Such statements are not facts and involve known and unknown risks, uncertainties, and other factors. Investors should not rely on these statements as if they were fact. Certain information contained in this Form 10-Q constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “target,” “estimate,” “intend,” “continue,” “forecast,” or “believe” or the negatives thereof or other variations thereon or other comparable terminology. Due to various risks and uncertainties, including those described under “Risk Factors” in the Company’s Registration Statement on Form S-11 (File No. 333-223022), as amended, under Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 and elsewhere in this Form 10-Q, actual events or results or our actual performance may differ materially from those reflected or contemplated in such forward-looking statements. No representation or warranty is made as to future performance or such forward-looking statements. In light The Amendment consists solely of the significant uncertainties inherent in these forward looking statements,preceding cover page, this explanatory note, the inclusionsignature page and paragraphs 1, 2, 4 and 5 of this information should not be regardedeach of the revised certifications filed as a representation by us or any other person that our objectives and plans, which we considerexhibits to be reasonable, will be achieved. We do not undertake to revise or update any forward-looking statements.
Overview
We are a Maryland corporation formed on July 27, 2017 to invest in commercial real estate assets. We are externally managed by Oaktree Fund Advisors, LLC (the “Adviser”), a subsidiary of Oaktree Capital Management, L.P. (together with its affiliates, “Oaktree”).
We have registered with the Securities and Exchange Commission (the “SEC”) an offering of up to $2.0 billion in shares of common stock (in any combination of purchases of Class S, Class T, Class D and Class I shares of our common stock) (the “Offering”). The share classes have different upfront selling commissions and ongoing stockholder servicing fees.
We intend to qualify as a REIT for U.S. federal income tax purposes beginning with our taxable year ending December 31 in the year in which proceeds from the Offering are released from escrow.
We are not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate generally, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from acquiring properties or real estate-related securities, other than those referred to in the latest prospectus for the Offering (File No. 333-220322).
Q3 2019 Highlights
Acquisition of Two Liberty Center
On August 20, 2019, the Company partnered with Hines Interests Limited Partnership (“Hines”) through a joint venture (the “Liberty Joint Venture”) to acquire a fee simple interest in Two Liberty Center (the “Two Liberty”), a class “A” office asset located in Ballston, Virginia, for $91.2 million (exclusive of closing costs). The Liberty Joint Venture acquired Two Liberty through a combination of $62.0 million of property-level debt from Bank of America Merrill Lynch and equity of $33.5 million funded from the Liberty Joint Venture (consisting of $32.3 million funded by the Company using borrowings under the Company’s Line of Credit (as defined below) and $1.1 million funded by Hines).
Two Liberty is a 179,000-square foot, class “A” office building, located in the Ballston neighborhood of Arlington, Virginia. Built in 2007, Two Liberty offers efficient 20,500-square foot floor plates that are conducive to both single and multi-tenant use. The Property is located across the street from over 500,000 square feet of new and refurbished retail and entertainment options opening throughout 2019. The Property is also a short walk to two metro stations that connect to Washington D.C.Amendment.
The Liberty Joint Venture is governed by a limited liability company agreement dated August 20, 2019 by and between one of the Company’s subsidiaries and Hines, containing customary terms and conditions. The Company owns a 96.5% interest in the Liberty Joint Venture, and Hines owns a 3.5% interest in the Liberty Joint Venture. The Company will generally control all major decisions of the Liberty Joint Venture (subject to Hines’s consent with respect to certain limited decisions) and has the ability to trigger a sale of Two Liberty at any time. The Company will have control, and Hines will act as the day-to-day property manager.
Mortgage Loan
The Bank of America Merrill Lynch debt described above (the “Mortgage Loan”) is secured by a mortgage on Two Liberty. The Mortgage Loan bears interest at a rate of LIBOR plus a spread of 150 basis points, payable as interest-only for the initial term of five years. The term of the Mortgage Loan is five years with two one-year extension options. The Mortgage Loan is subject to customary terms and conditions.
Amendment to Line of Credit
On August 20, 2019, the Company entered into an amendment (the “Amendment”) to that certain Promissory Note, dated as of April 11, 2019 (the “Line of Credit”) with Oaktree Fund GP I, L.P. (the “Lender”), an affiliate of the Company’s sponsor, Oaktree Capital Management, L.P.
The Amendment reduces the rate at which borrowings under the Line of Credit bear interest from LIBOR plus 3.25% per annum to LIBOR plus 2.50% per annum. The reduction reflects a review of the existing interest rate in light of current interest rates offered in the market. No other material terms of the Line of Credit were changed as a result of the Amendment. However, the Lender waived interest otherwise due under the Line of Credit such that the interest rate between April 11, 2019 and the date of the Amendment will effectively be LIBOR plus 2.50%.
Acquisition of International Markets Center Bond Investment
On September 4, 2019, the Company acquired $25 million principal amount of bonds (the "IMC/AMC Bond Investment”) collateralized by a term loan described in more detail below (the “Term Loan”) by assuming ownership of a special purpose vehicle from an affiliate of Oaktree, and contemporaneously assumed a $25 million borrowing under the Company’s line of credit with an affiliate of Oaktree that was used to finance the investment. The Term Loan was originated by Citigroup Corporation and is cross-collateralized by and senior to equity interests of the owners in International Markets Center (“IMC”) and AmericasMart Atlanta (“AMC”).
IMC and AMC are two of the leading national furniture showroom companies with a combined 14.4 million square feet of showroom space located in Las Vegas, Nevada, High Point, North Carolina and Atlanta, Georgia.
The Term Loan matures in December 2023. The IMC/AMC Bond Investment bears interest at a floating rate of 6.15% over one-month LIBOR. The Term Loan is structurally subordinate to a $1.15 billion first mortgage on properties owned by IMC (the “IMC Senior Loan”) and a $493 million first mortgage on properties owned by AMC (the “AMC Senior Loan”). The Term Loan, the IMC Senior Loan and the AMC Senior Loan total a loan-to-appraised real estate value ratio of approximately 67.1%.
Results of Operations
Revenues
Revenues of $2,472,826 for the three months ended September 30, 2019 related to Anzio Apartments (the "Anzio Apartments"), and Two Liberty Center properties and consisted of $2,179,439 of rental revenues, $119,301 of tenant reimbursements and $174,086 of ancillary income and fees. There were no comparable revenues for the three months ended September 30, 2018.
Revenues of $3,701,548 for the nine months ended September 30, 2019 related to Anzio Apartments and Two Liberty Center properties and consisted of $3,369,905 of rental revenues, $170,535 of tenant reimbursements and $161,108 of ancillary income and fees. There were no comparable revenues for the period from January 10, 2018 through September 30, 2018.
Rental Property Operating Expenses
Rental property operating expenses of $956,906 for the three months ended September 30, 2019 related to the Anzio Apartments and Two Liberty Center properties and consisted of property expenses, real estate taxes, utilities, property management fees and insurance expense. There were no comparable rental property operating expenses for the period from January 10, 2018 through September 30, 2018.
Rental property operating expenses of $1,437,279 for the nine months ended September 30, 2019 related to the Anzio Apartments and Two Liberty Center properties and consisted of property expenses, real estate taxes, utilities, property management fees and insurance expense. There were no comparable rental property operating expenses for the period from January 10, 2018 through September 30, 2018.
General and Administrative Expenses
General and administrative expenses of $649,722 for the three months ended September 30, 2019 consisted of legal fees, audit fees, professional tax fees, board of director fees and miscellaneous expenses. General and administrative expenses of $80,575 for the three months ended September 30, 2018 consisted of audit fees and board of director fees.
General and administrative expenses of $1,099,118 for the nine months ended September 30, 2019 consisted of legal fees, audit fees, professional tax fees, board of director fees and miscellaneous expenses. General and administrative expenses for the period from January 10, 2018 through September 30, 2018 consisted of audit fees and board of director fees.
Depreciation and Amortization
Depreciation and amortization expense of $1,798,506 for the three months ended September 30, 2019 related to the Anzio Apartments and Two Liberty Center properties. There was no comparable depreciation and amortization expense for the three months ended September 30, 2018.
Depreciation and amortization expense of $2,841,782 for the nine months ended September 30, 2019 related to the Anzio Apartments and Two Liberty Center properties. There was no comparable depreciation and amortization expense for the period from January 10, 2018 through September 30, 2018.
Interest Income
Interest income of $910,192 for the three months ended September 30, 2019 related primarily to interest income earned on the Atlantis Mezzanine Loan of $569,373, interest earned on the IMC/AMC Bond Investment of $153,886, interest earned on cash held in bank accounts of $2,661 and discount accretion of $184,272. There was no comparable interest income for the three months ended September 30, 2018.
Interest income of $1,051,580 for the nine months ended September 30, 2019 related primarily to interest income earned on the Atlantis Mezzanine Loan of $675,995, interest earned on the IMC/AMC Bond Investment of $153,886, interest earned on cash held in bank accounts of $4,545 and discount accretion of $217,154. There was no comparable interest income for the period from January 10, 2018 through September 30, 2018.
Interest Expense
Interest expense of $1,513,816 for the three months ended September 30, 2019 consisted of $693,235 of mortgage loan interest, $804,611 of Line of Credit interest and $15,970 of loan fee amortization. There was no comparable interest expense for the three months ended September 30, 2018.
Interest expense of $2,197,613 for the nine months ended September 30, 2019 consisted of $1,098,373 of mortgage loan interest, $1,076,241 of Line of Credit interest and $22,999 of loan fee amortization. There was no comparable interest expense for the period from January 10, 2018 through September 30, 2018.
Net Loss Attributable to Non-Controlling Interests
Net loss attributable to non-controlling interests of $93,481 for the three months ended September 30, 2019 related to losses allocable to the interests held by the Company's joint venture partner in Anzio Apartments of $86,995 and losses allocable to the interests of the Company's joint venture partner in Two Liberty Center of $6,486. There were no comparable non-controlling interests for the period from January 10, 2018 through September 30, 2018.
Net loss attributable to non-controlling interests of $165,016 for the nine months ended September 30, 2019 related to losses allocable to the interests held by the Company's joint venture partner in Anzio Apartments of $158,530 and losses allocable to the interests of the Company's joint venture partner in Two Liberty Center of $6,486. There were no comparable non-controlling interests for the period from January 10, 2018 through September 30, 2018.
Liquidity and Capital Resources
Our primary needs for liquidity and capital resources are to fund our investments, to make distributions to our stockholders, to repurchase shares of our common stock pursuant to our share repurchase plan, to pay our offering and operating fees and expenses and to pay interest on any outstanding indebtedness we may incur. We anticipate our offering and operating fees and expenses will include, among other things, the management fee we will pay to the Adviser, stockholder servicing fees we will pay to the dealer manager, legal, audit and valuation expenses, federal and state securities filing fees, printing expenses, transfer agent fees, marketing and distribution expenses and fees related to acquiring, financing, appraising and managing our properties. We do not have any office or personnel expenses as we do not have any employees. The Adviser has agreed to advance all of our organization and offering expenses on our behalf (other than upfront selling commissions and stockholder servicing fees) through the first anniversary of the date on which we break escrow for the Offering. We will reimburse the Adviser for such advanced expenses ratably over the 60 months following the first anniversary of the date on which we break escrow for the Offering. As of September 30, 2019, the Adviser and its affiliates had incurred approximately $4.7 million of organization and offering expenses on our behalf.
We intend to make an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with our taxable year ending December 31 of the year in which the escrow period concludes. In order to maintain our qualification as a REIT, we are required to, among other things, distribute as dividends at least 90% of our REIT taxable income, determined without regard to the dividends-paid deduction and excluding net capital gains, to our stockholders and meet certain tests regarding the nature of our income and assets.
Over time, we generally intend to fund our cash needs for items other than asset acquisitions from operations. Our cash needs for acquisitions will be funded primarily from the sale of shares of our common stock and through the assumption or incurrence of debt.
We intend to use advances under the Line of Credit along with property level debt to acquire real estate investments. The Line of Credit provides for an unsecured, uncommitted credit facility in a maximum aggregate principal amount of $150 million. We intend to repay the Line of Credit in full with offering proceeds promptly after breaking escrow for the Offering. We may in the future enter into additional lines of credit. We would expect that any such line of credit would afford us borrowing availability to fund repurchases. As our assets increase, however, it may not be commercially feasible or we may not be able to secure an adequate line of credit to fund share repurchases. Moreover, actual borrowing availability may be reduced at any given time if we use borrowings under a line of credit to fund share repurchases or for other corporate purposes.
Other potential future sources of capital include secured or unsecured financings from banks or other lenders and proceeds from the sale of assets. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. Other than the Line of Credit described above, we have not yet identified any sources for these types of financings.
Cash Flows
Net cash provided by operating activities of $1,704,856 for the nine months ended September 30, 2019 relates primarily to the Anzio Apartments and Two Liberty Center property acquisitions, discount accretion of the Atlantis Mezzanine Loan offset by restricted stock expense and increases in due to affiliates. For the period from January 10, 2018 (date of our initial capitalization) through September 30, 2018, net cash used in operating activities of $35,164 related to advances to fund the Company's general and administrative operations.
Net cash used in investing activities of $202,610,820 for the nine months ended September 30, 2019 relates primarily to the Anzio Apartments and Two Liberty Center property acquisitions, the Atlantis Mezzanine Loan and IMC/AMC Bond Investment acquisitions and capital improvements. There were no investing activities for the period from January 10, 2018 (date of our initial capitalization) through September 30, 2018.
Net cash provided by financing activities of $207,012,497 for the nine months ended September 30, 2019 consisted of proceeds from mortgage loans, proceeds from the Line of Credit, contributions from non-controlling interests offset by financing costs, repayments under the Line of Credit and investment distributions paid. There were no financing activities for the period from January 10, 2018 (date of our initial capitalization) through September 30, 2018.
As of September 30, 2019, we had not declared or paid any distributions to shareholders.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with GAAP. In applying certain of these accounting principles, we may need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. Our application of our critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments.
Please refer to Note 3, “Summary of Significant Accounting Policies” to our financial statements in this quarterly report on Form 10-Q for a summary of our critical accounting policies related to consolidation, recognition and impairment of acquired real estate assets and revenue recognition for our investments in real estate and real estate-related loans.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We intend to take advantage of the extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to subsequently elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
Income Taxes
As a REIT, we will not be subject to federal corporate income tax with respect to the portion of our income that meets certain criteria and is distributed annually to stockholders. We intend to operate in a manner that allows us to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. We will monitor the business and transactions that may potentially impact our REIT status. If we were to fail to meet these requirements, we could be subject to federal income tax on our taxable income at regular corporate rates. We would not be able to deduct distributions paid to stockholders in any year in which we fail to qualify as a REIT. We would also be disqualified for the four taxable years following the year during which qualification was lost unless we were entitled to relief under specific statutory provisions.
Related Party Transactions
The Company has, and is expected to continue to engage in, transactions with related parties, including Oaktree, the Adviser and their affiliates. The results of the Company’s operations may be different if similar transactions were conducted with non-related parties. The Company’s independent members of the Board of Directors oversee and annually review the Company’s related party relationships and are required to approve any significant modifications to existing relationships, as well as any significant new related party transactions.
See Note 9 titled “Related Party Transactions” to our financial statements in this quarterly report on Form 10-Q for additional information concerning our related party transactions.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
See Note 3 titled “Summary of Significant Accounting Policies” to our financial statements in this quarterly report on Form 10-Q for a discussion concerning recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Indebtedness
We expect that our primary market risk exposure will be interest rate risk with respect to our indebtedness and credit risk and market risk with respect to use of derivative financial instruments. As of September 30, 2019, the outstanding principal balance of our variable rate indebtedness was $204,945,224 and consisted of two mortgage loans and Line of Credit.
Our Line of Credit and mortgage loans are variable rate and indexed to the one-month and daily U.S. Dollar denominated LIBOR. For the three and nine months ended September 30, 2019, a 10% increase in one-month and daily U.S. Dollar denominated LIBOR would have resulted in increased interest expense of $78,984 and $109,578, respectively.
Investment in real estate-related loans
As of September 30, 2019, we held $50 million of investments in two real estate-related loans. Our investments are floating-rate and indexed to one-month U.S. denominated LIBOR and as such, exposed to interest rate risk. Our net income will increase or decrease depending on interest rate movements. While we cannot predict factors which may or may not affect interest rates, for the three and nine months ended September 30, 2019, a 10% increase or decrease in the one-month U.S. denominated LIBOR rate would have resulted in an increase or decrease to income from our real estate-related loans of $18,182 and $21,233, respectively.
We may be exposed to interest rate changes primarily as a result of long-term debt used to maintain liquidity, fund capital expenditures and expand our investment portfolio and operations. Market fluctuations in real estate financing may affect the availability and cost of funds needed to expand our investment portfolio. In addition, restrictions upon the availability of real estate financing or high interest rates for real estate loans could adversely affect our ability to dispose of real estate in the future. We will seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets.
Credit risk includes the failure of the counterparty to perform under the terms of a derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We will seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties.
Market risk includes the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. With regard to variable rate financing, we will assess our interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We will maintain risk management control systems to monitor interest rate cash flow risk attributable to both our outstanding and forecasted debt obligations as well as our potential offsetting hedge positions. While this hedging strategy will be designed to minimize the impact on our net income and funds from operations from changes in interest rates, the overall returns on your investment may be reduced.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this quarterly report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based upon this evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (a) were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms and (b) included, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
There have been no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2019, we were not involved in any legal proceedings.
ITEM 1A. RISK FACTORS
We have disclosed under the heading “Risk Factors” in our Registration Statement on Form S-11 (File No. 333-223022), as amended or supplemented from time to time, filed with the SEC, risk factors which materially affect our business, financial condition or results of operations. There have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth in the Registration Statement and the other information set forth elsewhere in this quarterly report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds
On April 30, 2018, our Registration Statement on Form S-11 (File No. 333-223022), covering our public offering of up to $2.0 billion of common stock, was declared effective under the Securities Act. A post effective amendment to this Registration Statement was declared effective on April 30, 2019. As of September 30, 2019, we had not received subscriptions for our common stock sufficient to allow us to break escrow and, therefore, we had not received any proceeds from the Offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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4.1 | | |
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10.1 | | |
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31.1 | | |
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31.2 | | |
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32.1+ | | |
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32.2+ | | |
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.SCH | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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+ | This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act or the Exchange Act. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | OAKTREE REAL ESTATE INCOME TRUST, INC. |
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November 14, 2019May 29, 2020 | | /s/ John Brady |
| Date | | John Brady |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
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November 14, 2019 | | /s/ Brian Grefsrud |
Date | | Brian Grefsrud |
| | Chief Financial Officer and Treasurer |
| | (Principal Financial Officer and |
| | Principal Accounting Officer) |
