-34--31-
Investment Criteria
The foregoing description ofCompany will focus on acquiring properties that meet the Merger Agreement, the Amended and Restated Advisory Agreement and the Termination Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the applicable agreements, each of which is filed with as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on May 31, 2017.following criteria:
Third Amendedproperties that generate current cash flow;
properties that are located in populated metropolitan areas; and Restated Advisory Agreement
while the Company may acquire properties that require renovation, the Company will only do so if the Company anticipates the properties will produce income within 12 months of the Company’s acquisition.
The foregoing criteria are guidelines, and Management and the Company’s board of directors may vary from these guidelines to acquire properties which they believe represent value opportunities.
Management Internalization
On September 21, 2018,March 29, 2019, the Company and the Advisor entered into a Third Amendeddefinitive agreements to internalize the Company’s management function effective April 1, 2019 (the “Internalization”). Since their formation, under the supervision of the board of directors (the “Board of Directors”), the Advisor has been responsible for managing the operations of the Company and Restated Advisory AgreementMVP I, which merged with a wholly owned indirect subsidiary of the Company in December 2017. As part of the Internalization, among other things, the Company agreed with the Advisor andto (i) terminate the Operating Partnership (the "Third Amended Advisory Agreement"), which amends and restates the Second Amended and Restated Advisory Agreement, dated as of May 26, 2017, among and, for the Company, the Advisor and the Operating Partnership. The Third Amended Advisory Agreement will take effect, if at all, only upon the listingavoidance of shares of our common stock on the Nasdaq Global Market. The Third Amended Advisory Agreement was previously approved by our board of directors.
The Third Amended Advisory Agreement addresses a variety of issues, including extending the term of the agreement, clarifying ownership and access to employees and documents, and establishing a path for future internalization of our management whereby we might pay a Internalization Price (as defined in the Third Amended Advisory Agreement") to acquire the Advisor's equipment, software, information and other assets (or all outstanding equity interests in the Advisor) and might hire some or all of the Advisor's employees.
Pursuant to the terms of the amended advisory agreement, the Advisor will continue to be responsible for (a) our day-to-day operations, (b) determining investment criteria and strategy in conjunction with our board of directors, (c) sourcing, analyzing, originating, underwriting, structuring, and acquiring our portfolio investments, (d) maintaining our books and records and control over accounting and financial transactions as is reasonably required to protect the Company's and the Operating Partnership's assets from theft, error or fraudulent activity; and (e) performing other portfolio management duties. The Advisor's role as manager will continue to be under the supervision and direction of our board of directors.
The asset management fee payable underdoubt, the Third Amended and Restated Advisory Agreement, will not change, except that paymentdated as of the subordinated compensation may be acceleratedSeptember 21, 2018, which by its terms would have become effective only upon certain terminations of the Third Amended Advisory Agreement.
The initial term of the Third Amended Advisory Agreement will be five years and, unless a notice of non-renewal has been timely given by either the Company or the Advisor, the term will be automatically renewed for a one year term on each anniversary date thereafter for a maximum of three, one-year renewal terms.
We may elect to terminate the Third Amended Advisory Agreement at any time after the third anniversary of the effective date for unsatisfactory performance of the Advisor, as determined in the sole discretion of two-thirds of our independent directors, by providing 180 days' notice prior to such termination. We may also elect to terminate the Third Amended Advisory Agreement by providing the Advisor with notice of non-renewal no later than 180 days prior to the expiration of the initial term or a renewal term, as applicable. Such non-renewal must be approved by two thirds of our independent directors. The Advisor may elect to terminate this Agreement at any time for an "Advisor Termination Cause," as defined in the Third Amended Advisory Agreement, by providing 30 days' notice prior to such termination. Upon a termination of the Third Amended Advisory Agreement under any of the circumstances described in this paragraph, we will pay the Advisor a termination fee in recognition of the upfront effort required by the Advisor to structure and acquire our assets and the Advisor's commitment of monies and resources to our business and operations for which the Advisor would be entitled to but, has not received, reimbursement from us, and as consideration for the Advisor's release and performance of its other obligations upon termination of the Amended Advisory Agreement The termination fee is also payable to the Advisor upon a change of control of the Company. The termination fee is equal to the greater of: (i) the product of (A) the average of the annual asset management fees (including any subordinated compensation) earned by the Advisor over the two (2) years ending on the last day of the calendar quarter ending immediately prior to the applicable date of termination of the agreement, multiplied by (B) three and one-half (3.5); and (ii) $16 million; provided, however, that in no event will the termination fee exceed $21 million and, to the extent the price determined pursuant to the formula immediately above results in a price greater than $21 million, the termination fee will equal $21 million.
We also may terminate the Third Amended Advisory Agreement immediately upon notice at any time for a "Company Termination Cause," as defined in the Third Amended Advisory Agreement, by the vote of two-third of our independent directors. The Advisor also may elect to terminate the Third Amended Advisory Agreement by providing the Company with notice of non-renewal no later than 180 days prior to the expiration of the initial term or a renewal term, as applicable. No termination fee is due or payable to the Advisor upon a termination of the Third Amended Advisory Agreement for a Company Termination Cause or non-renewal of the Third Amended Advisory Agreement by the Advisor.
The foregoing description of the Third Amended Advisory Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the Third Amended Advisory Agreement, which is filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on September 26, 2018.
Amended Charter
In connection with the Merger, at the Company's annual stockholders' meeting held on September 27, 2017, the Company's stockholders approved, among other matters, the amendment and restatement of its charter (the "Amended Charter"). As described in more detail in the final proxy statement distributed to our stockholders for the annual meeting, the Amended Charter is primarily intended to accomplish two objectives in connection with the possible listing of the Company'sCompany’s common stock after the closing of the Merger: (1) to remove provisions of our charter that the Company believes may unnecessarily restrict our ability to take advantage of further opportunities for liquidity events or are redundant with or otherwise addressed or permitted to be addressed under Maryland law and (2) to amend certain provisions in a manner that the Company believes would be more suitable for becoming a publicly-traded REIT.
The Amended Charter will become effective upon its filing with the State Department of Assessments and Taxation of Maryland. The Company expects to file the proposed Amended Charter immediately before the Company's common stock becomes listed for trading on a national securities exchange. This means thatexchange (collectively, the changes“Management Agreements”), each entered into among the Company, the Advisor and MVP REIT II Operating Partnership, LP (the “Operating Partnership”); (ii) extend employment to the charter will not be effective unlessexecutives and until we complete an exchange listing.other employees of the Advisor; (iii) arrange for the Advisor to continue to provide certain services with respect to outstanding indebtedness of the Company and its subsidiaries; and (iv) lease the employees of the Advisor for a limited period of time prior to the time that such employees become employed by the Company.
ReviewContribution Agreement
On March 29, 2019, the Company entered into a Contribution Agreement (the “Contribution Agreement”) with the Manager, Vestin Realty Mortgage I, Inc. ("VRTA") (solely for purposes of Section 1.01(c) thereof), Vestin Realty Mortgage II, Inc. ("VRTB") (solely for purposes of Section 1.01(c) thereof) and Shustek (solely for purposes of Section 4.03 thereof). In exchange for the Company's PoliciesContribution, the Company agreed to issue to the Manager 1,600,000 shares of Common Stock as the Consideration. The Consideration is issuable in four equal installments. The first installment of 400,000 shares of Common Stock was issued on the Effective Date. The remaining installments will be issued on December 31, 2019, December 31, 2020 and December 31, 2021 (or if December 31st is not a business day, the day that is the last business day of such year). If requested by the Company in connection with any contemplated capital raise by the Company, the Manager has agreed not to sell, pledge or otherwise transfer or dispose of any of the Consideration for a period not to exceed the lock-up period that otherwise would apply to other stockholders of the Company in connection with such capital raise. See the 8-K filed on April 3, 2019 for more information regarding the Management Internalization.
The Company's boardInternalization transaction closed on April 1, 2019, and the first installment of directors, including400,000 shares of Common Stock was issued to the independent directors, has reviewedManager on April 1, 2019. See Note O — Management Internalization in Part I, Item 1 Notes to the policies described inCondensed Consolidated Financial Statements of this Quarterly Report and determined that they are in the best interest of the Company's stockholders because: (1) they increase the likelihood that the Company will be able to acquire a diversified portfolio of income producing properties, thereby reducing risk in its portfolio; (2) the Company's executive officers, directors and affiliates of the Advisor have expertise with the type of real estate investments the Company seeks; and (3) borrowings should enable the Company to purchase assets and earn rental income more quickly, thereby increasing the likelihood of generating income for the Company's stockholders and preserving stockholder capital.additional information.
Results of Operations for the three and nine months ended SeptemberJune 30, 20182019 compared to the three and nine months ended SeptemberJune 30, 2017.2018.
| | For the Three Months Ended June 30, | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Revenues | | | | | | | | | | | | |
Base rent income | | $ | 5,036,000 | | | $ | 4,803,000 | | | $ | 233,000 | | | | 5 | % |
Percentage rent income | | | 410,000 | | | | 391,000 | | | | 19,000 | | | | 5 | % |
Total revenues | | $ | 5,446,000 | | | $ | 5,194,000 | | | $ | 252,000 | | | | 5 | % |
Rental revenue
The majorityincrease of the increaseapproximately $0.3 million in rental revenues and expenses during the comparison periods areis mainly attributable to the Mergeracquisition of a property in June 2018. Additionally, decreases due to properties sold in 2018 were offset by more favorable terms agreed upon for certain leases within the Company and MVP Iportfolio, which closed on December 15, 2017, and to a lesser extent, growth in investments in parking facilities through Septemberwere renewed during 2018. The Company expects that income and expenses related to the Company's portfolio will increase in future years as a result of owning the properties acquired for a full year and as a result of anticipated future acquisitions of real estate and real estate-related assets. The results of operations described below may not be indicative of future results of operations.
| | For the Three Months Ended September 30 | | | For the Nine Months Ended September 30 | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Revenues | | | | | | | | | | | | |
Base rent income | | $ | 4,992,000 | | | $ | 2,206,000 | | | $ | 14,511,000 | | | $ | 5,740,000 | |
Management agreement (a) | | | -- | | | | -- | | | | -- | | | | 518,000 | |
Percentage rent income | | | 1,010,000 | | | | 16,000 | | | | 1,776,000 | | | | 523,000 | |
Total revenues | | $ | 6,002,000 | | | $ | 2,222,000 | | | $ | 16,287,000 | | | $ | 6,781,000 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
Property taxes | | $ | 668,000 | | | | 90,000 | | | | 1,963,000 | | | | 279,000 | |
Property operating expense | | | 305,000 | | | | 273,000 | | | | 1,041,000 | | | | 608,000 | |
Asset management expense – related party | | | 313,000 | | | | 345,000 | | | | 2,000,000 | | | | 839,000 | |
General and administrative | | | 1,246,000 | | | | 400,000 | | | | 6,092,000 | | | | 1,051,000 | |
Merger costs | | | -- | | | | 824,000 | | | | -- | | | | 1,596,000 | |
Acquisition expenses | | | 7,000 | | | | 113,000 | | | | 411,000 | | | | 2,156,000 | |
Acquisition expenses – related party | | | -- | | | | -- | | | | -- | | | | 1,710,000 | |
Depreciation | | | 1,262,000 | | | | 508,000 | | | | 3,653,000 | | | | 1,404,000 | |
Total operating expenses | | | 3,801,000 | | | | 2,553,000 | | | | 15,160,000 | | | | 9,643,000 | |
Income (loss) from operations | | $ | 2,201,000 | | | $ | (331,000 | ) | | $ | 1,127,000 | | | $ | (2,862,000 | ) |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest expense | | $ | (2,170,000 | ) | | $ | (1,297,000 | ) | | $ | (6,337,000 | ) | | $ | (3,146,000 | ) |
Distribution income – related party | | | -- | | | | 75,000 | | | | -- | | | | 174,000 | |
Gain from sale of investment in real estate | | | 962,000 | | | | 1,200,000 | | | | 1,971,000 | | | | 1,200,000 | |
Other income | | | 7,000 | | | | -- | | | | 62,000 | | | | -- | |
Income from DST | | | 52,000 | | | | -- | | | | 154,000 | | | | -- | |
Income from investment in equity method investee | | | -- | | | | 2,000 | | | | -- | | | | 19,000 | |
Total other expense | | $ | (1,149,000 | ) | | $ | (20,000 | ) | | $ | (4,150,000 | ) | | $ | (1,753,000 | ) |
a) | During January 2017, MVP Detroit Center Garage, LLC ("MVP Detroit") received a settlement amount from the previous operator of approximately $408,000 for the operations of the garage until SP+ assumed operations under a longer-term lease agreement. Through February 28, 2017, the San Jose 88 Garage was subject to a parking management agreement and the rental income of $110,000 represents the gross revenues generated by the property. Operating expenses for this property are included in Operations and Maintenance. Starting on March 1, 2017, this property was leased to a national parking operator, with an annual base rent of $450,000 per year. |
During the three and nine months ended September 30, 2018 and 2017 the following properties received percentage rent:
| | For the Three Months Ended September 30 | | | For the Nine months ended September 30 | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Percentage rent income | | | | | | | | | | | | |
MVP St Louis 2013 | | $ | 63,000 | | | $ | -- | | | $ | 80,000 | | | $ | -- | |
Mabley Place Garage | | | 309,000 | | | | -- | | | | 309,000 | | | | -- | |
MVP Ft Worth Taylor | | | -- | | | | -- | | | | 22,000 | | | | -- | |
MVP St Louis Convention | | | -- | | | | -- | | | | 60,000 | | | | -- | |
MVP St Louis Lucas | | | 5,000 | | | | -- | | | | 65,000 | | | | -- | |
MVP Indianapolis Washington | | | 31,000 | | | | -- | | | | 31,000 | | | | -- | |
MVP Milwaukee Arena | | | -- | | | | -- | | | | 25,000 | | | | -- | |
MVP Denver 1935 Sherman | | | -- | | | | -- | | | | 6,000 | | | | -- | |
MVP San Jose 88 Garage | | | -- | | | | -- | | | | 24,000 | | | | -- | |
MCI 1372 Street | | | -- | | | | -- | | | | -- | | | | 9,000 | |
MVP St Paul Holiday | | | 40,000 | | | | -- | | | | 76,000 | | | | -- | |
MVP Louisville Station Broadway | | | 6,000 | | | | -- | | | | 6,000 | | | | -- | |
White Front Garage | | | 6,000 | | | | 16,000 | | | | 6,000 | | | | 16,000 | |
MVP Detroit Center Garage | | | 516,000 | | | | -- | | | | 1,032,000 | | | | 498,000 | |
MVP Raider Park Garage | | | 34,000 | | | | -- | | | | 34,000 | | | | -- | |
Total revenues | | $ | 1,010,000 | | | $ | 16,000 | | | $ | 1,776,000 | | | $ | 523,000 | |
Rental revenue: The increase in rental revenues andOn December 5, 2018 the numberoperating lease of properties held areMVP PF St. Louis 2013, LLC (“MVP St. Louis”) by SP+ expired. Upon the resultexpiration of the Company's planned and continued growth throughoperating lease, MVP St. Louis entered into a new property acquisitions and the Mergermodified triple net (“Mod NNN”) operating lease with SP+. The term of the Company and MVP I. The 25 consolidated parking facilities that were acquired throughlease is 5 years with the Mergeroption of one five-year extension. SP+ will pay annual rent of $450,000. In addition, the lease provides percentage rent with MVP I accountedSt. Louis receiving 70% of gross receipts over $650,000 per lease year. The tenant is responsible for a large portionpaying property taxes up to $60,000.
On January 31, 2019 the operating lease of MVP PF Ft. Lauderdale 2013, LLC (“MVP Ft. Lauderdale”) by SP+ expired. Upon the expiration of the increase. These 25 properties generated approximately $2.3 and $6.0 million, respectively, in rental income tooperating lease, MVP Ft. Lauderdale entered into a new double net (“NN”) operating lease with Lanier Parking Solutions (“Lanier”). The term of the Companylease is 5 years. Lanier will pay annual rent of $70,000. In addition, the lease provides percentage rent with MVP Ft. Lauderdale receiving 70% of gross receipts over $140,000 per lease year.
On February 28, 2019 the operating lease of MVP PF Memphis Court 2013, LLC (“MVP Memphis Court”) by SP+ was cancelled. Upon the cancellation of the operating lease, MVP Memphis Court entered into a triple net (“NNN”) lease agreement with Premium Parking of Memphis, LLC (“Premium Parking”). The term of the lease will be for 5 years. Premium Parking will pay annual rent of $3,000. In addition, the lease provides percentage rent with MVP Memphis Court receiving 60% of gross receipts over $3,000 per lease year. Should monthly gross receipts exceed $4,500 for six consecutive months during the three and nine months ended September 30, 2018.term, monthly rent shall adjust for the remainder of the term to $2,500 (“Adjusted Minimum Monthly Rent”), plus percentage rent of 65% of gross receipts in excess of the Adjusted Minimum Monthly Rent.
On February 28, 2019 the operating lease of MVP PF Memphis Poplar 2013, LLC (“MVP Memphis Poplar”) by Best Park, Inc. expired. Upon the expiration of the operating lease MVP Memphis Poplar entered into a Mod NNN lease agreement with Premium Parking of Memphis, LLC (“Premium Parking”). The term of the lease is 5 years. Premium Parking will pay annual rent of $320,000. In addition, the lease provides percentage rent with MVP Memphis Poplar receiving 65% of gross receipts over $390,000 per lease year. The tenant is responsible for paying property taxes up to $40,000.
For additional information see Note ID – Acquisitions, Note K - Disposition Investments in Real Estate, Part I, Item 1 - Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
During the three months ended June 30, 2019 and 2018 the Company received percentage rent on the following properties:
| | For the Three Months Ended June 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Percentage rent income | | | | | | | | | | | | |
MVP PF St. Louis 2013 (a) | | $ | -- | | | $ | 16,000 | | | $ | (16,000 | ) | | | (100 | %) |
MVP St. Louis Convention (b) | | | -- | | | | 13,000 | | | | (13,000 | ) | | | (100 | %) |
MVP St. Louis Lucas (b) | | | -- | | | | 51,000 | | | | (51,000 | ) | | | (100 | %) |
MVP Cleveland West 9th (c) | | | 11,000 | | | | -- | | | | 11,000 | | | | 100 | % |
MVP St. Paul Holiday | | | 25,000 | | | | 36,000 | | | | (11,000 | ) | | | (31 | %) |
MVP Detroit Center Garage (d) | | | 374,000 | | | | 275,000 | | | | 99,000 | | | | 36 | % |
Total revenues | | $ | 410,000 | | | $ | 391,000 | | | $ | 19,000 | | | | 5 | % |
a) | New lease terms with increase to monthly base rent and higher breakpoint for percentage rent. |
b) | Property sold during June 2018. |
c) | Improved operations by tenant. |
d) | Increase in collections by tenant on monthly parking contracts. |
| | For the Three Months Ended June 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Operating expenses | | | | | | | | | | | | |
Property taxes | | $ | 727,000 | | | $ | 659,000 | | | $ | 68,000 | | | | 10 | % |
Property operating expense | | | 357,000 | | | | 428,000 | | | | (71,000 | ) | | | (17 | %) |
Asset management expense – related party | | | -- | | | | 855,000 | | | | (855,000 | ) | | | (100 | %) |
General and administrative | | | 1,262,000 | | | | 785,000 | | | | 477,000 | | | | 61 | % |
Professional fees | | | 1,201,000 | | | | 933,000 | | | | 268,000 | | | | 29 | % |
Management internalization | | | 31,866,000 | | | | 100,000 | | | | 31,766,000 | | | | n/a | |
Acquisition expenses | | | 246,000 | | | | 187,000 | | | | 59,000 | | | | 32 | % |
Depreciation and amortization | | | 1,283,000 | | | | 1,197,000 | | | | 86,000 | | | | 7 | % |
Impairment | | | 952,000 | | | | -- | | | | 952,000 | | | | 100 | % |
Total operating expenses | | | 37,894,000 | | | | 5,144,000 | | | | 32,750,000 | | | | 637 | % |
Income (loss) from operations | | $ | (32,448,000 | ) | | $ | 50,000 | | | $ | (32,498,000 | ) | | | n/a | |
To the extent that the Company continues to acquire new properties, the Company expects to see operations and maintenance and depreciation expenses increase.
Property taxes
The increase in property taxes in 2019 compared to 2018 is attributable primarily to the increase of assessed property values or increased tax rates, which resulted in an increase in property tax expense in certain municipalities and the acquisition of a property in June 2018.
Property operating expense
The decrease in property operating expense in 2019 compared to 2018 is attributable primarily to sold properties in the notesprior year, which accounted for lower operating expenses in the three months ended June 30, 2019 compared to the unaudited condensed consolidated financial statements includedsame period in 2018.
Asset management expense – related party
The decrease in asset management fee is due to the Internalization, as a result of which the Company will no longer incur an asset management expense beginning April 1, 2019.
See Note E — Related Party Transactions and Arrangements in Part I, Item 1 -Notes to the Unaudited Condensed Consolidated Financial Statementsof this Quarterly Report.Report for further discussion.
General and administrative
A significant portion of the increase in general and administrative expenses of approximately $0.3 million was attributable to an increase in payroll resulting from the Internalization of the Advisor and the addition of officer salaries. Additionally, due to the Internalization, the Company is now responsible for additional expenses previously paid by the Advisor, including rent, office equipment, utilities and other expenses.
Asset management expense, general and administrative expenses and professional fees, in aggregate, were approximately $2.5 million and $2.6 million during the three months ended June 30, 2019 and 2018, respectively.
Professional fees
The increase in professional fees was primarily due to legal expenses incurred relating to lawsuits filed in 2019 which were not incurred in 2018.
See Note N – Legal in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
Management internalization
The Company was externally managed by the Advisor prior to the management Internalization that became effective on April 1, 2019. These expenses include (i) the Internalization Consideration to be paid in aggregate to the Manager and (ii) professional fees incurred to complete the Internalization of the Company’s management. See Note A — Organization and Business Operations and Note P – Subsequent Events and Note O – Deferred Management Internalization in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
Acquisition expenses
Acquisition expenses related to purchased properties are capitalized with the investment in real estate. Acquisition expenses incurred during the three months ended June 30, 2019 and 2018 relate solely to dead deals.
Depreciation and amortization expenses
The increase in depreciation and amortization expenses was due to the properties acquired during the remaining portion of the second half of 2018 and assets placed in service following the completion of construction projects or general improvements on properties already held.
Impairment
During the three months ended September 30, 2018 total operating expenses were $3.8 million, which is a decrease from the previous two quarters ended March 31, 2018 and June 30, 20182019, the Company recorded asset impairment charges totaling $6.2 millionapproximately $952,000. These impairment charges consisted of $558,000 associated with the Memphis Court lot, $344,000 associated with the San Jose 88 garage and $5.1 million, respectively.$50,000 associated with the St. Louis Washington lot. These charges were recorded to write down the carrying value of these assets to their current appraised values net of estimated closing costs. The cost reductions are primarily attributableCompany recorded no impairment charges for the three months ended June 30, 2018. See Note B — Summary of Significant Accounting Policies in Part I, Item 1 Notes to the absence Condensed Consolidated Financial Statements of non-recurring costs relating to the internal investigation conducted by the audit committee of approximately $1.7 million, a decrease in asset management fees of approximately $0.5 million as the Company reached the $2.0 million annual limit, and a reduction in acquisition related expenses of approximately $0.2 million. The decrease in acquisition expenses are attributable to the adoption of ASU 2017-01 which changed the treatment of acquisition and closing costs which are subsequently included in the investment in real estate. The amounts reported as acquisition costs in 2018 arethis Quarterly Report for costs incurred for proposed acquisitions that were not consummated. Additionally the change to the advisory agreement eliminated the 2.25% acquisition fee.additional information.
| | For the Three Months Ended June 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Other income (expense) | | | | | | | | | | | | |
Interest expense | | $ | (2,433,000 | ) | | $ | (2,219,000 | ) | | $ | (214,000 | ) | | | 10 | % |
Gain from sale of investment in real estate | | | -- | | | | 1,009,000 | | | | (1,009,000 | ) | | | (100 | %) |
Other income | | | -- | | | | 55,000 | | | | (55,000 | ) | | | (100 | %) |
Income from DST | | | 48,000 | | | | 50,000 | | | | (2,000 | ) | | | (4 | %) |
Total other expense | | $ | (2,385,000 | ) | | $ | (1,105,000 | ) | | $ | (1,280,000 | ) | | | 116 | % |
Other income and expense:
Interest expense
The Company’s total debt (long-term debt) was approximately $163 million as of June 30, 2019 compared to approximately $158 million (long-term debt) as of June 30, 2018. The increase in interest expense of approximately $0.2 million for the three and nine months ended SeptemberJune 30, 2018,2019, as compared to the same periodsperiod in 2017,2018, is primarily attributable to the Company'sCompany’s increased use of debt to acquire properties as well as loans assumed through the Merger. on properties.
To maximize the use of cash, the Company will continue to look for opportunities to utilize debt financing onin future acquisitions, including with the use of permanent debt at the time of acquisitions.long-term debt. The interest expense will vary based on the amount of ourthe Company’s borrowings and current interest rates at the time of financing. The Company will seek to secure appropriate leverage with the lowest interest rate available. The terms of the loans will vary depending on the quality of the applicable property, the credit worthiness of the tenant and the amount of income the property is able to generate through parking leases. There is
no assurance, however, that the Company will be able to secure additional financing on favorable terms or at all.
Interest expense recorded for the three months ended June 30, 2019 includes amortization of loan issuance costs. Total amortization of loan issuance cost for the three months ended June 30, 2019 and 2018 was approximately $0.2 million and $0.4 million, respectively.
For additional information see Note J – Notes Payable in Part I, Item 1 – Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
Gain from sale of investment in real estate
During June 2018, the Company sold two surface lots in St. Louis for $8.5 million, which resulted in a gain from sale of investments of real estate of approximately $1.0 million. No sales have occurred during the three or six months ended June 30, 2019.
Other income
During May 2018, the Company received a rebate of approximately $5,000 for the completion of a project to replace and improve the lighting of Cleveland Lincoln Garage. In addition, the Company also received $50,000 from PCAM, LLC for the early termination of the lease of MVP Milwaukee Wells.
Results of Operations for the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
| | For the Six Months Ended June 30, | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Revenues | | | | | | | | | | | | |
Base rent income | | $ | 10,090,000 | | | $ | 9,519,000 | | | $ | 571,000 | | | | 6 | % |
Percentage rent income | | | 711,000 | | | | 766,000 | | | | (55,000 | ) | | | (7 | %) |
Total revenues | | $ | 10,801,000 | | | $ | 10,285,000 | | | $ | 516,000 | | | | 5 | % |
Rental revenue
The increase of approximately $0.5 million in rental revenues is mainly attributable to the acquisition of a property in June 2018. Additionally, decreases due to properties sold in 2018 were offset by more favorable terms agreed upon for certain leases within the portfolio, which were renewed during 2018.
On December 5, 2018 the operating lease of MVP PF St. Louis 2013, LLC (“MVP St. Louis”) by SP+ expired. Upon the expiration of the operating lease, MVP St. Louis entered into a new modified triple net (“Mod NNN”) operating lease with SP+. The term of the lease is 5 years with the option of one five-year extension. SP+ will pay annual rent of $450,000. In addition, the lease provides percentage rent with MVP St. Louis receiving 70% of gross receipts over $650,000 per lease year. The tenant is responsible for paying property taxes up to $60,000.
On January 31, 2019 the operating lease of MVP PF Ft. Lauderdale 2013, LLC (“MVP Ft. Lauderdale”) by SP+ expired. Upon the expiration of the operating lease, MVP Ft. Lauderdale entered into a new double net (“NN”) operating lease with Lanier Parking Solutions (“Lanier”). The term of the lease is 5 years. Lanier will pay annual rent of $70,000. In addition, the lease provides percentage rent with MVP Ft. Lauderdale receiving 70% of gross receipts over $140,000 per lease year.
On February 28, 2019 the operating lease of MVP PF Memphis Court 2013, LLC (“MVP Memphis Court”) by SP+ was cancelled. Upon the cancellation of the operating lease, MVP Memphis Court entered into a triple net (“NNN”) lease agreement with Premium Parking of Memphis, LLC (“Premium Parking”). The term of the lease will be for 5 years. Premium Parking will pay annual rent of $3,000. In addition, the lease provides percentage rent with MVP Memphis Court receiving 60% of gross receipts over $3,000 per lease year. Should monthly gross receipts exceed $4,500 for six consecutive months during the term, monthly rent shall adjust for the remainder of the term to $2,500 (“Adjusted Minimum Monthly Rent”), plus percentage rent of 65% of gross receipts in excess of the Adjusted Minimum Monthly Rent.
On February 28, 2019 the operating lease of MVP PF Memphis Poplar 2013, LLC (“MVP Memphis Poplar”) by Best Park, Inc. expired. Upon the expiration of the operating lease MVP Memphis Poplar entered into a Mod NNN lease agreement with Premium Parking of Memphis, LLC (“Premium Parking”). The term of the lease is 5 years. Premium Parking will pay annual rent of $320,000. In addition, the lease provides percentage rent with MVP Memphis Poplar receiving 65% of gross receipts over $390,000 per lease year. The tenant is responsible for paying property taxes up to $40,000.
For additional information see Note D – Investments in Real Estate, Part I, Item 1 - Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
During the six months ended June 30, 2019 and 2018 the Company received percentage rent on the following properties:
| | For the Six Months Ended June 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Percentage rent income | | | | | | | | | | | | |
MVP PF St. Louis 2013 (a) | | $ | -- | | | $ | 16,000 | | | $ | (16,000 | ) | | | (100 | %) |
MVP Ft Worth Taylor (b) | | | 8,000 | | | | 22,000 | | | | (14,000 | ) | | | (64 | %) |
MVP St. Louis Convention (c) | | | -- | | | | 60,000 | | | | (60,000 | ) | | | (100 | %) |
MVP St. Louis Lucas (c) | | | -- | | | | 60,000 | | | | (60,000 | ) | | | (100 | %) |
MVP Milwaukee Arena (d) | | | 30,000 | | | | 25,000 | | | | 5,000 | | | | 20 | % |
MVP Denver 1935 Sherman (e) | | | 9,000 | | | | 6,000 | | | | 3,000 | | | | 50 | % |
MVP Cleveland West 9th (f) | | | 11,000 | | | | -- | | | | 11,000 | | | | 100 | % |
MVP San Jose 88 Garage (g) | | | -- | | | | 24,000 | | | | (24,000 | ) | | | (100 | %) |
MVP St. Paul Holiday | | | 25,000 | | | | 36,000 | | | | (11,000 | ) | | | (31 | %) |
MVP Detroit Center Garage (h) | | | 590,000 | | | | 517,000 | | | | 73,000 | | | | 14 | % |
MVP New Orleans Rampart (i) | | | 38,000 | | | | -- | | | | 38,000 | | | | 100 | % |
Total revenues | | $ | 711,000 | | | $ | 766,000 | | | $ | (55,000 | ) | | | (7 | %) |
a) | New lease terms with increase to monthly base rent and higher break point for percentage rent. |
b) | Timing of tenant’s collections. |
c) | Property sold during June 2018. |
d) | The new Fiserv Forum Arena became fully operational in late August 2018, which had a positive impact on operations, a trend expected to continue. |
e) | Improved operations by tenant. |
f) | Increased volume in area due to additional multi-tenant apartment complex and decrease in competing surface lots. |
g) | Due to construction on the property the new revenue control system experienced some technical difficulties which have been repaired and are not anticipated to impede percentage rent in the future. |
h) | Heavy snow in the first quarter had impact on transient parking offset by increase in collections by tenant on monthly parking contracts. |
i) | Initial lease year reporting percentage rent. |
| | For the Six Months Ended June 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Operating expenses | | | | | | | | | | | | |
Property taxes | | $ | 1,520,000 | | | $ | 1,295,000 | | | $ | 225,000 | | | | 17 | % |
Property operating expense | | | 736,000 | | | | 736,000 | | | | -- | | | | -- | |
Asset management expense – related party | | | 854,000 | | | | 1,687,000 | | | | (833,000 | ) | | | (49 | %) |
General and administrative | | | 2,112,000 | | | | 1,892,000 | | | | 220,000 | | | | 12 | % |
Professional fees | | | 1,729,000 | | | | 2,854,000 | | | | (1,125,000 | ) | | | (39 | %) |
Management internalization | | | 32,004,000 | | | | 100,000 | | | | 31,904,000 | | | | n/a | |
Acquisition expenses | | | 250,000 | | | | 404,000 | | | | (154,000 | ) | | | (38 | %) |
Depreciation and amortization | | | 2,591,000 | | | | 2,391,000 | | | | 200,000 | | | | 8 | % |
Impairment | | | 952,000 | | | | -- | | | | 952,000 | | | | 100 | % |
Total operating expenses | | | 42,748,000 | | | | 11,359,000 | | | | 31,389,000 | | | | 276 | % |
Income (loss) from operations | | $ | (31,947,000 | ) | | $ | (1,074,000 | ) | | $ | (30,873,000 | ) | | | n/a | |
To the extent that the Company continues to acquire new properties, the Company expects to see operations and maintenance and depreciation expenses increase.
Property taxes
The increase in property taxes in 2019 compared to 2018 is attributable primarily to the increase of assessed property values or increased tax rates which resulted in an increase in property tax expense in certain municipalities and the acquisition of a property in June 2018.
Property operating expense
The decrease in property operating expense in 2019 compared to 2018 is attributable primarily to sold properties in the six months ended June 30, 2019 compared to same period in 2018.
Asset management expense – related party
The decrease in asset management expense is due to the Internalization, as a result of which the Company will no longer incur an asset management expense beginning April 1, 2019.
See Note E — Related Party Transactions and Arrangements in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for further discussion.
General and administrative
A significant portion of the increase in general and administrative expenses of approximately $0.2 million relating to an internal investigation conducted by the Audit Committee during 2018, see Form 8-K filed by the Company dated April 29, 2018. Additionally, due to the Internalization, the Company is now responsible for additional expenses previously paid by the Advisor, including rent, office equipment, utilities and other expenses.
Asset management expense, general and administrative expenses and professional fees, in aggregate, were approximately $4.7 million and $6.4 million during the six months ended June 30, 2019 and 2018, respectively.
Professional fees
The decrease in professional fees was due to the incurrence of internal investigation costs in 2018, which were not incurred in 2019.
Management internalization
The Company was externally managed by the Advisor prior to the management Internalization that became effective on April 1, 2019. These expenses include (i) the Internalization Consideration to be paid in aggregate to the Manager and (ii) professional fees incurred to complete the Internalization of the Company’s management. See Note A — Organization and Business Operations and Note P – Subsequent Events and Note O – Deferred Management Internalization in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
Acquisition expenses related to purchased properties are capitalized with the investment in real estate. Acquisition expenses incurred during the three months ended March 31, 2019 and 2018 relate solely to dead deals. The decrease in cost from the six months ended June 30, 2018 to the same period in 2019 of approximately $0.2 million is a result of reduced acquisition activity.
Depreciation and amortization expenses
The increase in depreciation and amortization expenses was due to the properties acquired during the second half of 2018 and assets placed in service following the completion of construction projects or general improvements on properties already held.
Impairment
During the six months ended June 30, 2019, the Company recorded asset impairment charges totaling approximately $952,000. These impairment charges consisted of $558,000 associated with the Memphis Court lot, $344,000 associated with the San Jose 88 garage and $50,000 associated with the St. Louis Washington lot. These charges were recorded to write down the carrying value of these assets to their current appraised values net of estimated closing costs. The Company recorded no impairment charges for the six months ended June 30, 2018. See Note B — Summary of Significant Accounting Policies in Part I, Item 1 Notes to the Condensed Consolidated Financial Statements of this Quarterly Report for additional information.
| | For the Six Months Ended June 30 | |
| | 2019 | | | 2018 | | | $ Change | | | % Change | |
Other income (expense) | | | | | | | | | | | | |
Interest expense | | $ | (4,789,000 | ) | | $ | (4,167,000 | ) | | $ | (622,000 | ) | | | 15 | % |
Gain from sale of investment in real estate | | | -- | | | | 1,009,000 | | | | (1,009,000 | ) | | | (100 | %) |
Other income | | | 31,000 | | | | 55,000 | | | | (24,000 | ) | | | (44 | %) |
Income from DST | | | 118,000 | | | | 102,000 | | | | 16,000 | | | | 16 | % |
Total other expense | | $ | (4,640,000 | ) | | $ | (3,001,000 | ) | | $ | (1,639,000 | ) | | | 55 | % |
Interest expense
The Company’s total debt (long-term debt) was approximately $163 million as of June 30, 2019 compared to approximately $158 million (long-term debt) as of June 30, 2018. The increase in interest expense of approximately $0.6 million for the six months ended June 30, 2019, as compared to the same period in 2018, is primarily attributable to the Company’s increased use of debt on properties.
To maximize the use of cash, the Company will continue to look for opportunities to utilize debt financing in future acquisitions, including use of long-term debt. The interest expense will vary based on the amount of the Company’s borrowings and current interest rates at the time of financing. The Company will seek to secure appropriate leverage with the lowest interest rate available. The terms of the loans will vary depending on the quality of the applicable property, the credit worthiness of the tenant and the amount of income the property is able to generate through parking leases. There is no assurance, however, that the Company will be able to secure additional financing on favorable terms or at all.
Interest expense recorded for the threesix months ended SeptemberJune 30, 20182019 includes amortization of loan amortizationissuance costs. Total amortization of loan amortizationissuance cost for the threesix months ended SeptemberJune 30, 20182019 and 20172018 was approximately $151,000$0.4 million and $170,000, respectively. Total loan amortization cost for the nine months ended September 30, 2018 and 2017 was approximately $647,000 and $409,000,$0.5 million, respectively.
For additional information see Note J – -37-Notes Payable in Part I, Item 1 – Notes to the Condensed Consolidated Financial Statements of this Quarterly Report.
investment in real estate
During June 2018, the Company sold two surface lots in StSt. Louis for $8.5 million, which resulted in a gain from sale of investments of real estate of approximately $1.0 million. No sales have occurred during the three or six months ended June 30, 2019.
Other income
Upon completion of a project to replace and improve the lighting of the property located in Hawaii, the Company received a rebate of approximately $31,000 from Hawaii Energy.
Income from DST
During August 2018,the Six months ended June 30, 2019, the Company sold two surface lots in Kansas Cityrecorded a one-time accrual of $18,000 for $4.0 million, which resulted in a gainincome from sale of investments of real estate of approximately $1.0 million.DST.
For additional information see Note K – Disposal of Investment in Real Estate, Note L – Line of CreditRental Income and Note M – Notes Payable in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 –Notes to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report.Property Gross Revenues
Since a majority of the Company'sCompany’s property leases call for additional percentage rent, the Company monitors the gross revenue generated by each property on a monthly basis. The higher the property'sproperty’s gross revenue the higher the Company'sCompany’s potential percentage rent. The graph below shows the comparison of the Company's monthlyCompany’s quarterly rental income to the gross revenue generated by the properties.
Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
The AdvisorManagement believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, the Company believes that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.
In order to provide a more complete understanding of the operating performance of a REIT, NAREIT promulgated a measure known as FFO. FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, the Company believes that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of the Company'sCompany’s performance relative to the Company'sCompany’s competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than the Company does, making comparisons less meaningful.
The Investment Program Association ("IPA"(“IPA”) issued Practice Guideline 2010-01 (the "IPA“IPA MFFO Guideline"Guideline”) on November 2, 2010, which extended financial measures to include modified funds from operations ("MFFO"(“MFFO”). In computing MFFO, FFO is adjusted for certain non-operating cash items such as acquisition fees and expenses and certain non-cash items such as straight-line rent, amortization of in-place lease valuations, amortization of discounts and premiums on debt investments, nonrecurring impairments of real estate-related investments, mark-to-market adjustments included in net income (loss), and nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Management is responsible for managing interest rate, hedge and foreign exchange risk. To achieve the Company'sCompany’s objectives, the Company may borrow at fixed rates or variable rates. In order to mitigate the Company'sCompany’s interest rate risk on certain financial instruments, if any, the Company may enter into interest rate cap agreements and in order to mitigate the Company'sCompany’s risk to foreign currency exposure, if any, the Company may enter into foreign currency hedges. The Company views fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. Additionally, the Company believes it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations, assessments regarding general market conditions, and the specific performance of properties owned, which can change over time.
No less frequently than annually, the Company evaluates events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present, the Company assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) expected from the use of the assets and the eventual disposition. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of MFFO as described above, investors are cautioned that due to the fact thatbecause impairments are based on estimated future undiscounted cash flows and the relatively limited term of the Company'sCompany’s operations, it could be difficult to recover any impairment charges through operational net revenues or cash flows prior to any liquidity event. The Company adopted the IPA MFFO Guideline as management believes that MFFO is a helpful indicator of the Company'sCompany’s on-going portfolio performance. More specifically, MFFO isolates the financial results of the REIT'sREIT’s operations. MFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings.earnings in accordance with GAAP. Further, since the measure is based on historical financial information, MFFO for the period presented may not be indicative of future results or the Company'sCompany’s future ability to pay the Company'sCompany’s dividends. By providing FFO and MFFO, the Company presents information that assists investors in aligning their analysis with management'smanagement’s analysis of long-term operating activities. MFFO also allows for a comparison of the performance of the Company'sCompany’s portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of the Company'sCompany’s performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and the Company believebelieves it is often used by analysts and investors for comparison purposes. As explained below, management'smanagement’s evaluation of the Company'sCompany’s operating performance excludes items considered in the calculation of MFFO based on the following economic considerations:
· | Straight-line rent. Most of the Company's leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company'sStraight-line rent. Most of the Company’s leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company’s portfolio. |
· | Amortization of in-place lease valuation. As this item is a cash flow adjustment made to net income in calculating the cash flows provided by (used in) operating activities, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company's portfolio.
|
Amortization of in-place lease valuation. As this item is a cash flow adjustment made to net income in calculating the cash flows provided by (used in) operating activities, it is added back to FFO to arrive at MFFO as a means of determining operating results of the Company’s portfolio.
· | Acquisition-related costs. The Company was organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to the Company's stockholders. In the process, the Company incursAcquisition-related costs. The Company was organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to the Company’s stockholders. In the process, with respect to periods prior to the Internalization, the Company incurred non-reimbursable affiliated and non-affiliated acquisition-related costs, which, in accordance with GAAP, are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss). These costs have been and will continue to be funded with cash proceeds from the Offering or included as a component of the amount borrowed to acquire such real estate. If the Company acquires a property after all offering proceeds from the Offering have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, unless the Advisor determines to waive the payment of any then-outstanding acquisition-related costs otherwise payable to the Advisor, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. In evaluating the performance of the Company's portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments' revenues and expenses. Acquisition-related costs may negatively affect the Company's operating results, cash flows from operating activities and cash available to fund distributions during periods in which properties are acquired, as the proceeds to fund these costs would otherwise be invested in other real estate related assets. By excluding acquisition-related costs, MFFO may not provide an accurate indicator of the Company's operating performance during periods in which acquisitions are made. However, it can provide an indication of the Company's on-going ability to generate cash flow from operations and continue as a going concern after the Company ceases to acquire properties on a frequent and regular basis, which can be compared to the MFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to the Company. These costs have been funded with cash proceeds from the Common Stock and Preferred Offerings or included as a component of the amount borrowed to acquire such real estate. If the Company acquires a property after all offering proceeds from the Common Stock and Preferred Offerings have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. In evaluating the performance of the Company’s portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses. Acquisition-related costs may negatively affect the Company’s operating results, cash flows from operating activities and cash available to fund distributions during periods in which properties are acquired, as the proceeds to fund these costs would otherwise be invested in other real estate related assets. By excluding acquisition-related costs, MFFO may not provide an accurate indicator of the Company’s operating performance during periods in which acquisitions are made. However, it can provide an indication of the Company’s on-going ability to generate cash flow from operations and continue as a going concern after the Company ceases to acquire properties on a frequent and regular basis, which can be compared to the MFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to the Company. Management believes that excluding these costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management. |
For all of these reasons, the Company believes the non-GAAP measures of FFO and MFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of the Company'sCompany’s real estate portfolio. However, a material limitation associated with FFO and MFFO is that they are not indicative of the Company'sCompany’s cash available to fund distributions since other uses of cash, such as capital expenditures at the Company'sCompany’s properties and principal payments of debt, are not deducted when calculating FFO and MFFO. Additionally, MFFO has limitations as a performance measure in an offering such as the Company'sCompany’s prior Common Stock Offering where the price of a share of common stock is a stated value. The use of MFFO as a measure of long-term operating performance on value is also limited if the Company does not continue to operate under the Company'sCompany’s current business plan as noted above. MFFO is useful in assisting management and investors in assessing the Company'sCompany’s ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods, and, in particular, afternow that the Common Stock Offering and acquisition stages are complete, and NAV is disclosed. However, MFFO is not a useful measure in evaluating NAV because impairments are taken into accountconsidered in determining NAV but not in determining MFFO. Therefore, FFO and MFFO should not be viewed as a more prominent a measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
None of the SEC, NAREIT or any other organization has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and the Company may have to adjust the calculation and characterization of this non-GAAP measure.
The Company'sCompany’s calculation of FFO and MFFO attributable to common shareholders is presented in the following table for the three and ninesix months ended SeptemberJune 30,, 2018 2019 and 2017:2018:
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Net Income (loss) attributable to The Parking REIT, Inc. common shareholders | | $ | 261,000 | | | $ | (604,000 | ) | | $ | (5,127,000 | ) | | $ | (5,157,000 | ) |
Add (Subtract): | | | | | | | | | | | | | | | | |
Gain on Sale of real estate | | | (962,000 | ) | | | (1,200,000 | ) | | | (1,971,000 | ) | | | (1,200,000 | ) |
Depreciation and Amortization of real estate assets | | | 1,262,000 | | | | 508,000 | | | | 3,653,000 | | | | 1,404,000 | |
FFO | | $ | 561,000 | | | $ | (1,296,000 | ) | | $ | (3,445,000 | ) | | $ | (4,953,000 | ) |
Add: | | | | | | | | | | | | | | | | |
Acquisition fees and expenses to non-affiliates | | | 7,000 | | | | 113,000 | | | | 411,000 | | | | 2,156,000 | |
Acquisition fees and expenses to affiliates | | | -- | | | | -- | | | | -- | | | | 1,710,000 | |
Acquisition / Merger costs | | | -- | | | | 824,000 | | | | -- | | | | 1,596,000 | |
Subtract: | | | | | | | | | | | | | | | | |
Deferred Rental Assets | | | (11,000 | ) | | | (1,000 | ) | | | (53,000 | ) | | | (1,000 | ) |
MFFO attributable to The Parking REIT, Inc. shareholders | | $ | 557,000 | | | $ | (360,000 | ) | | $ | (3,087,000 | ) | | $ | 508,000 | |
Distributions paid to Common Shareholders | | $ | -- | | | $ | 484,000 | | | $ | 807,000 | | | $ | 1,421,000 | |
| | For the Three Months Ended June 30, | | | For the Six Months Ended June 30, | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Net loss attributable to The Parking REIT, Inc. common shareholders | | $ | (35,584,000 | ) | | $ | (1,800,000 | ) | | $ | (38,087,000 | ) | | $ | (5,388,000 | ) |
Add (Subtract): | | | | | | | | | | | | | | | | |
Gain on Sale of real estate | | | -- | | | | (1,009,000 | ) | | | -- | | | | (1,009,000 | ) |
Impairment of real estate | | | 952,000 | | | | -- | | | | 952,000 | | | | -- | |
Depreciation and amortization expenses of real estate assets | | | 1,283,000 | | | | 1,197,000 | | | | 2,591,000 | | | | 2,391,000 | |
FFO | | $ | (33,349,000 | ) | | $ | (1,612,000 | ) | | $ | (34,544,000 | ) | | $ | (4,006,000 | ) |
Add (subtract): | | | | | | | | | | | | | | | | |
Acquisition fees and expenses to non-affiliates | | | 246,000 | | | | 187,000 | | | | 250,000 | | | | 404,000 | |
Change in Deferred Rental Assets | | | (7,000 | ) | | | (19,000 | ) | | | (22,000 | ) | | | (43,000 | ) |
MFFO attributable to The Parking REIT, Inc. shareholders | | $ | (33,110,000 | ) | | $ | (1,444,000 | ) | | $ | (34,316,000 | ) | | $ | (3,645,000 | ) |
Distributions paid to Common Shareholders | | $ | -- | | | $ | -- | | | $ | -- | | | $ | 817,000 | |
Liquidity and Capital Resources
The Company commenced operations on December 30, 2015.
The Company'sCompany’s principal demand for funds is for the acquisition of real estate assets, the payment of operating expenses, capital expenditures, principal and interest on the Company'sCompany’s outstanding indebtedness and the payment of distributions to the Company'sCompany’s stockholders. Over time, the Company intends to generally fund its operating expenses from its cash flow from operations. The cash required for acquisitions and investments in real estate is funded primarily from the sale of shares of the Company'sCompany’s common stock and preferred stock, and common stock, including those shares offered for sale through the Company'sCompany’s distribution reinvestment plan, dispositions of properties in the Company'sCompany’s portfolio and through third party financing and the assumption of debt on acquired properties.
As disclosed in Note N - Legal in Part I, Item 1 – Notes to the Condensed Consolidated Financial Statements of this Quarterly Report, Nasdaq has informed the Company that (i) the Company’s common stock will not be approved for listing currently on the Nasdaq Global Market, and (ii) it is highly unlikely that the Company’s common stock would be approved for listing while the SEC investigation is ongoing. There can be no assurance that the Company’s common stock will ever be approved for listing on the Nasdaq Global Market or any other stock exchange, even if the SEC investigation referred to above is completed and no wrongdoing is found and no action is taken in connection therewith against the Company, Mr. Shustek or any other person. In addition, there can be no assurance that cash distributions to the Company’s common stockholders will be resumed in the future. As a result, our ability to raise equity capital will be limited in the future and the Company may seek to raise additional funds through additional debt financings and the sale of assets.
On December 31, 2016, the Company ceased all selling efforts for its initial public offering of shares of its common stock at $25.00 per share, pursuant to a registration statement on Form S-11 (No. 333-205893). The Company accepted additional subscriptions through March 31, 2017, the last day of the initial public offering, and raised approximately $61.3 million in the initial public offering before payment of deferred offering costs of approximately $1.1 million, contribution from an affiliate of the Advisor of approximately $1.1 million and cash distributions of approximately $1.8 million.
The Company raised approximately $2.5 million, net of offering costs, in funds from the private placements of Series A Convertible Redeemable Preferred Stock and approximately $36.0 million, net of offering costs, in funds from the private placements of Series 1 Convertible Redeemable Preferred Stock.
As of SeptemberJune 30, 2018,2019, the Company'sCompany’s debt consisted of approximately $117.1$123.4 million in fixed rate debt and $38.5$39.5 million in variable rate debt, net of loan issuance costs.
The Company may seek to raise additional funds through equity financings, as well as through additional debt financing. Sources and Uses of Cash
OurThe following table summarizes the Company’s cash flows for the six months ended June 30, 2019 and 2018:
| | For the Six Months Ended June 30, | |
| | 2019 | | | 2018 | |
Net cash used in operating activities | | $ | (2,214,000 | ) | | $ | (1,521,000 | ) |
Net cash used in investing activities | | | (762,000 | ) | | | (27,757,000 | ) |
Net cash provided by financing activities | | | 2,733,000 | | | | 23,723,000 | |
Comparison of the six months ended June 30, 2019, to the six months ended June 30, 2018
The Company’s cash and cash equivalents and restricted cash were approximately $9.2 million as of SeptemberJune 30, 2018,2019, which was an approximatea decrease of $7.5approximately $2.0 million from the balance at December 31, 2017.June 30, 2018.
Cash flows from operating activities
Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 2018 totaled2019 was approximately $0.9 million. Operating cash flows were used$2.2 million, compared to approximately $1.5 million for the paymentsame period in 2018. The increase in cash used was primarily due to an increase in cash used of normal operatingapproximately $1.2 million to pay down accounts payable and accrued liabilities, an increase of approximately $1.2 million of cash used to fund an increase in prepaid expenses such as management fees,including approximately $1.8 million of prepaid directors and officers insurance accounting feespremiums, other assets and legal bills. accounts receivable partially offset by an increase in net loss and adjustments to reconcile net loss to cash of approximately $2.0 million.
Cash flows from investing activities
Net cash used in investing activities totaledfor the six months ended June 30, 2019 was approximately $25.7$0.8 million, and mainly consistedcompared to approximately $27.8 million of the purchase of investments in real estate totaling $28.9 million and building improvements of approximately $4.6 million. Netnet cash used, to acquire investments, for the same period in investing2018. The reduction in cash used was due primarily to the fact that no investments were acquired during the six months ended June 30, 2019.
Cash flows from financing activities also had an approximate $7.5 million offset from proceeds from the sale of an investment.
Net cash provided by financing activities totaled approximately $19.0 million and consisted of proceeds from issuance of preferred stock of approximately $9.1 million and proceeds from the Company's KeyBank line of credit of approximately $23.1 million, netted with payments on the KeyBank line of credit of approximately $13.8 million, proceeds from notes payable of approximately $5.5 million, netted with payments on notes payable of approximately $1.5 million, share redemptions of approximately $0.7 million and distributions to stockholders of approximately $2.6 million.
Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 2017 totaled2019 was approximately $4.1 million. Operating cash flows were used for$2.7 million compared to approximately $23.7 million during the payment of normal operating expenses such as management fees, insurance, accounting fees and legal bills. Net cash usedsame period in investing activities totaled approximately $76.1 million and mainly consisted of purchase of investments2018. The reduction in real estate totaling $81.2 million (which proceeds from non-controlling interest totaled $5.1 million and use of deposits from prior periods totaled $4.2 million) and the purchase of an investment in a DST for $2.8 million. Net cash provided by financing activities totaledwas primarily due to the fact that no preferred stock or other equity was issued during the six months ended June 30, 2019 compared to approximately $83.1$9.1 million and mainly consisted of proceeds from notes payable of approximately $75.8 million, proceeds from the Company's KeyBank line of credit of approximately $32.6 million, payments on the KeyBank line of credit of approximately $39.5 million. In addition, financing activities consisted of proceeds from issuance of common stock of approximately $5.8 million and issuance of preferred stock issued during the same period in 2018 and a decrease in net proceeds from long term debt of approximately $14.3 million.$12.7 million partially offset by a decrease of approximately $0.8 million in stock redemptions and distributions paid to shareholders during the six months ended June 30, 2019 compared to the same period in 2018.
On October 5, 2016,February 8, 2019, subsidiaries of the Company, through its Operating Partnership,consisting of MVP PF St. Louis 2013, LLC (“MVP St. Louis”), and MVP I (the "REITs"PF Memphis Poplar 2013 (“MVP Memphis Poplar”), through a wholly owned subsidiary (the "Borrowers"),LLC entered into a creditloan agreement, (the "Unsecureddated as of February 8, 2019, with LoanCore Capital Credit Agreement"REIT LLC (“LoanCore”) with KeyBank, National Association ("KeyBank") as. Under the administrative agent and KeyBank Capital Markets ("KeyBank Capital Markets") as the lead arranger. Pursuant to the Unsecured Credit Agreement, the Borrowers were provided with a $30 million unsecured credit facility (the "Unsecured Credit Facility"), which could be increased up to $100 million, in minimum increments of $10 million. The Unsecured Credit Facility had an initial term of two years, maturing on October 5, 2018, and could be extended for a one-year period if certain conditions were met and upon payment of an extension fee. The Unsecured Credit Facility had an interest rate calculated based on LIBOR Rate plus 2.25% or Base Rate plus 1.25%, both as provided in the Unsecured Credit Agreement. The Base Rate was calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus ½ of 1%. Payments under the Unsecured Credit Facility were interest only and were due on the first day of each quarter. The obligationsterms of the BorrowersLoan Agreement, LoanCore agreed to loan MVP St. Louis and MVP Memphis Poplar $5.5 million to repay and discharge the outstanding KeyBank loan agreement. The loan is secured by a Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing on each of the Unsecured Credit Agreement were jointproperties owned by MVP St. Louis and several. The REITs entered into cross-indemnification provisions with respect to their joint and several obligations under the Unsecured Credit Agreement.
On June 26, 2017, the REITs, each through25, 2019, MVP Ft Lauderdale PF 2013, LLC issued a wholly owned subsidiary, the Operating Partnership and MVP Real Estate Holdings, LLC (together, the "Borrowers"), entered into a credit agreement (the "Working Capital Credit Agreement") with KeyBank as the administrative agent and KeyBanc Capital Markets as the lead arranger. Pursuantpromissory note to the Working Capital Credit Agreement, the Borrowers were provided with a $6.0 million credit facility (the "Total Commitment"), which could be increased up to $10 million, in minimum increments of $1 million. The Total Commitment had an initial term of six months, maturing on December 26, 2017. In October 2017, the term was extended to March 31, 2018. The Working Capital Credit Agreement had an interest rate calculated based on LIBOR Rate plus 4.5% or Base Rate plus 3.5%, both as providedmultiple lenders in the Working Capital Credit Agreement. The Base Rate was calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus ½ of 1%. Payments under the Working Capital Credit Facility require 100% of the net proceeds of all capital events and equity issuances by the REITs within five business days of receipt. The obligations of the Borrowers of the Unsecured Credit Agreement were joint and several. The REITs entered into cross-indemnification provisions with respect to their joint and several obligations under the Unsecured Credit Agreement.
On December 29, 2017, in connection with entering into the New Credit Agreement (as such term is defined below), the Operating Partnership and the Company terminated the existing credit facilities. The Operating Partnership repaid in full all amounts outstanding under the existing credit facilities with the proceeds from the New Credit Agreement. No prepayments fees or early termination penalties were incurred in connection with terminating the existing credit facilities.
On December 29, 2017, the Operating Partnership entered into a Credit Agreement (the "New Credit Agreement") with the lenders party thereto (the "Lenders"), KeyBank as administrative agent (the "Administrative Agent"), and KeyBanc Capital Markets as lead arranger. The New Credit Agreement provides for a $50 million senior secured revolving credit facility (the "Revolving Credit Facility"), which consists of a borrowing base revolving credit facility (the "BB Revolving Credit Facility") and a working capital revolving credit facility (the "WC Revolving Credit Facility"). The New Credit Agreement also provides the Operating Partnership with the option to increase the size of the Revolving Credit Facility and/or establish one or more new pari passu term loan facilities (each, a "Term Loan Facility") up to an aggregate commitment or principal amount of up to $350 million, subject to certain limitations. The BB Revolving Credit Facility and any Term Loan Facility mature on January 3, 2021, with two twelve-month extension options subject to certain conditions set forth in the New Credit Agreement, which, if exercised by the Operating Partnership, would extend the maturity date to January 3, 2023. The WC Revolving Credit Facility matures on January 4, 2019, unless earlier terminated by the Operating Partnership.
In connection with our Unsecured Credit Agreement, the Borrowers were required to maintain a minimum liquidity requirement of $2.0 million. The Company maintained compliance to this lender requirement through December 29, 2017, when the amount outstanding under the Unsecured Credit Agreement was paid in full.note is a twelve month note with an interest rate of 8% and monthly interest only payments.
In addition, theThe loan with Bank of America for the MVP Detroit garage requires the Company to maintain $2.3 million in liquidity at all times, which is defined as unencumbered cash and cash equivalents. As of November 9, 2018,the date of this filing, the Company was in compliance with this lender requirement.
Borrowings underThe Company’s secured mortgage debt of approximately $54.3 million and $58.6 million as of June 30, 2019 and December 31, 2018, respectively, require Mr. Shustek and the former Manager to continue to provide guarantees. In connection with the Contribution Agreement and the Internalization, Mr. Shustek and the former Manager will continue to provide such guarantees. For additional information regarding the Company’s indebtedness, please see Note J – Notes PayableNew Credit Agreement bear interest at a rate equal in Part I, Item 1 Notes to the sumCondensed Consolidated Financial Statements of a Margin (as such term is defined below) plus either a rate based on LIBOR for 1, 2 or 3 months or a base rate determined by reference to the highest of (1) the Administrative Agent's prime lending rate, (2) the federal funds effective rate plus 0.50% and (3) the LIBOR rate that would be payable on such day for a LIBOR rate loan with a one-month interest period plus 1.00%. For the BB Revolving Credit Facility and any Term Loan Facility, the Margin is determined by the consolidated leverage ratio until the Operating Partnership achieves a senior unsecured credit rating of BBB-/Baa3 from S&P or Moody's at which time the Operating Partnership may elect to use an alternative pricing grid. The Margin for the BB Revolving Credit Facility ranges from 0.75% to 1.50% in the case of base rate loans, and 1.75% to 2.50%, in the case of LIBOR rate loans. The Margin for the Term Loan Facility ranges from 0.70% to 1.45%, in the case of base rate loans, and 1.70% to 2.450%, in the case of LIBOR rate loans. The Margin as of the date of effectiveness of the New Credit Agreement is (1) in respect of BB Revolving Credit Facility, 1.50%, in the case of base rate loans, and 2.50%, in the case of LIBOR rate loans, and (2) in respect of any Term Loan Facility, 1.45%, in the case of base rate loans, and 2.45%, in the case of LIBOR rate loans. For the WC Revolving Credit Facility, the Margin is 3.00% in the case of base rate loans, and 4.00% in the case of LIBOR rate loans.this Quarterly Report.
The Company will experience a relative decrease in liquidity as proceeds from its debt or equity financings are used to acquire and operate assets and may experience a temporary, relative increase in liquidity if and when investments are sold, to the extent such sales generate proceeds that are available for additional investments. The AdvisorManagement may, but is not required to, establish working capital reserves from proceeds from the Common Stock Offering ofany common or preferred stock offering or cash flow generated by the Company'sCompany’s investments or out of proceeds from the sale of investments. The Company does not anticipateanticipates establishing a general working capital reserve;reserve in the future but is not required to as previously mentioned; however, the Company may establish capital reserves with respect to particular investments. The Company also may, but is not required to, establish reserves out of cash flow generated by investments or out of net sale proceeds in non-liquidating sale transactions. Working capital reserves are typically utilized to fund tenant improvements, leasing commissions and major capital expenditures. The Company'sCompany’s lenders also may require working capital reserves.
In connection with the Company's New Credit Agreement, the Borrowers are required to maintain a minimum liquidity requirement of $2.0 million or 1.0% of the parking asset value, which was defined as the sum of unencumbered cash and cash equivalents of the Borrowers and their Subsidiaries.
The Company's existing credit agreement also requires the Company to comply with various financial and other covenants. In addition, the failure of Mr. Shustek to be a non-member manager of the Advisor or for the Advisor to continue to manage the Company is an event of default under approximately $71 million of the Company's secured mortgage debt.
On June 19, 2018, the Company (as "Guarantor"), the Borrowers and the Lenders entered into an amendment and waiver to the New Credit Agreement. Pursuant to the amendment and waiver, the Lenders agreed to waive the Borrowers' breach of the fixed charge coverage ratio for the period ended March 31, 2018, and the Borrowers' requirement to comply with the fixed charge coverage ratio for the period ended June 30, 2018 and September 30, 2018, and the Guarantor's breach of the financial reporting obligations under the credit agreement for the periods ended December 31, 2017 and March 31, 2018. Pursuant to the amendment and waiver, the Lenders, the Borrowers and the Company (as Guarantor) also agreed to the following, among other changes:
· | the Fixed Charge Coverage Ratio shall not be less than (i) at any time on or prior to June 30, 2019, 1.35:1.00, and (ii) at any time thereafter, 1.60:1.00; |
· | the Lenders shall advance approximately $27.4 million to fund the Borrowers' acquisition costs of pending property purchases; |
· | the Borrowers shall make mandatory principal payments on the WC Revolving Credit Facility in the amounts and at the times scheduled therein; |
· | the WC Revolving Credit Facility shall be reduced to $16.1 million and the Lenders' obligations to make WC Revolving Loans shall be terminated; |
· | the Company filed to list and register its common stock on a recognized exchange in the United States on July 13, 2018, and intends to obtain approval of such listing application by August 31, 2018 and complete the listing by September 30, 2018; |
· | the Company shall redeem all of its outstanding Series A and Series 1 preferred stock and pay the entire redemption price in the form of shares of the Company's common stock (as is permitted by the articles supplementary governing each series of preferred stock), within 30 days after the completion of the listing of its common stock on a national securities exchange; |
· | the Company shall make no cash distributions to its preferred shareholders after the earlier of (i) 30 days after the completion of the public listing or (ii) September 30, 2018; |
· | the collateral under the existing credit facility shall include certain recently purchased properties and Borrowers shall not be entitled to release any collateral prior to the retirement in full of the WC Revolving Credit Facility; and |
· | prior to the retirement of the WC Revolving Credit Facility, management fees paid by the Company to the Advisor shall not exceed $200,000 per quarter. |
On September 28, 2018, the Company (as "Guarantor"), the Borrowers and the Lenders entered into an amendment and waiver to the Credit Agreement.Pursuant to the amendment and waiver, the Lenders agreed to waive the requirement that the Company complete a listing of its shares of common stock on the New York Stock Exchange or another recognized exchange in the United States by September 30, 2018 and also the prohibition on the Company making distributions to holders of the Company's preferred stock from and after September 30, 2018. As a result of the amendment and waiver, the Company's credit agreement no longer requires the Company to list its shares of common stock on a national securities exchange or redeem its shares of outstanding Series A and Series 1 preferred stock.
The amendment and waiver further provides for the maturity of the loans under the Credit Agreement on the earliest of: (a) with regard to the borrowing base loans, (i) November 30, 2018, or (ii) the closing of a loan from LoanCore Capital Funding Corporation LLC or its affiliate or another lender in an amount sufficient to satisfy in full all of the obligations of the Borrower under the Credit Agreement; and (b) with regard to the working capital revolving commitments, (i) November 30, 2018, (ii) the closing of a loan from LoanCore Capital Funding Corporation LLC or its affiliate or another lender in an amount sufficient to satisfy in full all of the obligations of the Borrower under the Credit Agreement, or (iii) the date the working capital revolving commitments are paid in full. The amendment and waiver also prohibits further borrowings under the credit facility.
To the extent that the working capital reserve is insufficient to satisfy the Company'sCompany’s cash requirements, additional funds may be provided from cash generated from operations or through short-term borrowing. In addition, subject to certain exceptions and limitations, the Company may incur indebtedness in connection with the acquisition of any real estate asset, refinance the debt thereon, arrange for the leveraging of any previously unfinancedunencumbered property or reinvest the proceeds of financing or refinancing in additional properties.
Going Concern Evaluation
In connection with preparing condensed consolidated financial statements for the three and nine months ended September 30, 2018, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company's ability to continue as a going concern within one year from the date that the financial statements are issued.
The Company considered the following:
· | Net losses of approximately $3.0 million for the nine months ended September 30, 2018 and approximately $11.4 million and $4.3 million for the years ended December 31, 2017 and 2016, respectively. |
· | Negative cash flow from operating activities for 2018, 2017 and 2016. |
Ordinarily, conditions or events that raise substantial doubt about an entity's ability to continue as a going concern relate to the entity's ability to meet its obligations as they become due.
The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements issued by considering the following:
· | Net income of approximately $1.0 million for the three months ended September 30, 2018. |
· | The Company raised approximately $28.6 million and $9.1 million of debt and equity financing, respectively, during the nine months ended September 30, 2018 and $142 million and $34 million of debt and equity financing, respectively, during the year ended December 31, 2017. |
· | The Company has historically raised funds from debt and equity financings. |
· | The Company realized approximately $7.5 million proceeds from the sale of four real estate investments during the nine months ended September 30, 2018 and $1.6 million proceeds from the sale of one real estate investment during the year ended December 31, 2017. |
· | The Company has approximately $162.1 million in total shareholders' equity and $326.9 million total assets. |
· | As a result of the Company's restructurings that were implemented during the year ended December 31, 2017, the Company's cost structure is now in line with its future revenue projections. |
In addition to the recent net income and capital raised, management also believes that the Company will generate enough cash from operations to satisfy its obligations for the next twelve months from the issuance date.
The Company will take one or more of the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:
· | Implement additional restructuring and cost reductions. |
· | Raise additional capital through short-term loans. |
· | Raise additional capital by placing secured mortgage debt on unencumbered assets. |
· | Raise additional capital through a private placement. |
· | Dispose of one or more assets. |
· | List the Company and raise additional capital through common or preferred equity offerings. |
In previous quarters the Company has referenced being out of compliance with its fixed charge coverage ratio and financial reporting requirement covenants of its line of credit with KeyBank. On September 28, 2018, the Company (as "Guarantor"), the Borrowers and the Lenders entered into the third amendment and waiver to the Credit Agreement which, along with the second amendment and waiver to the credit agreement dated June 19, 2018 waives the fixed charge coverage ratio requirements for the current period. On August 10, 2018 with the filing of the SEC form 10-Q for the period ending June 30, 2018, the Company is in compliance with the financial reporting requirements of its line of credit with KeyBank. It is for these reasons that management believes there is no going concern related to the line of credit with KeyBank.
At September 30, 2018, the Company had $5.3 million in cash and cash equivalents.
Management is not aware of any additional material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting the Company's targeted portfolio, the U.S. parking facility industry, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of the Company's assets.
In addition to making investments in accordance with the Company's investment objectives, the Company expects to use its capital resources to make certain payments to the Advisor and the selling agent(s). During the acquisition and development stage, the Company expects to make payments to the Advisor in connection with the management of the Company's assets and costs incurred by the Advisor in providing services to us. For a discussion of the compensation to be paid to the Advisor, see"Fees Paid in Connection with the Operations of the Company", included in Note E – Related Party Transactions and Arrangements – Fees Paid in Connection With the Operations of the Company in Part I, Item 1 Notes to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report for more information. The Amended and Restated Advisory Agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and the Company's board of directors.
Management Compensation Summary
The following table summarizes all compensation and fees incurred by us and paid or payable to the Advisor and its affiliates in connection with the Company'sCompany’s organization operations for the three and ninesix months ended SeptemberJune 30,, 2018 2019 and 2017.2018.
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended June 30, | | | For the Six Months Ended June 30, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Acquisition Fees | | $ | -- | | | $ | -- | | | $ | -- | | | $ | 1,710,000 | | |
Asset Management Fees | | | 313,000 | | | | 345,000 | | | | 2,000,000 | | | | 839,000 | | | $ | -- | | | $ | 855,000 | | | $ | 854,000 | | | $ | 1,687,000 | |
Total | | $ | 313,000 | | | $ | 345,000 | | | $ | 2,000,000 | | | $ | 2,549,000 | | | $ | -- | | | $ | 855,000 | | | $ | 854,000 | | | $ | 1,687,000 | |
The Company ceased payment of asset management fees effective April 1, 2019, as a result of the Internalization.
Distributions and Stock Dividends
TheOn March 22, 2018 the Company intends to make regular cash and stocksuspended the payment of distributions toon its common stockholders andstock. There can be no assurance that cash distributions to its Series A preferred stock and Series 1 preferred stock, typically on a monthly basis.the Company’s common stockholders will be resumed in the future. The actual amount and timing of distributions, if any, will be determined by the Company'sCompany’s board of directors in its discretion and typically will depend on the amount of funds available for distribution, which is impacted by current and projected cash requirements, tax considerations and other factors. As a result, the Company'sCompany’s distribution rate and payment frequency may vary from time to time and could be reduced from current levels.time. However, to qualify as a REIT for federal income tax purposes, the Company must make distributions equal to at least 90% of its REIT taxable income each year.year (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). In addition, the Company will be subject to corporate income tax to the extent the Company distributes less than 100% of the net taxable income including any net capital gain.
The Company is not currently and may not in the future generate sufficient cash flow from operations to fully fund distributions. All or a portion of the distributions may be paid from other sources, such as cash flows from equity offerings, financing activities, borrowings, or by way of waiver or deferral of fees. The Company has not established any limit on the extent to which distributions could be funded from these other sources. Accordingly, the amount of distributions paid may not reflect current cash flow from operations and distributions may include a return of capital, (rather than a return on capital). If the Company pays distributions from sources other than cash flow from operations, the funds available to the Company for investments would be reduced and the share value may be diluted. The level of distributions will be determined by the board of directors and depend on several factors including current and projected liquidity requirements, anticipated operating cash flows and tax considerations, and other relevant items deemed applicable by the board of directors.
Common Stock
On October 23, 2015, the Company announced that its board of directors has approved a plan for payment of initial monthly cash distributions of $0.0625 per share and monthly stock dividends $0.0625 per share, based on a purchase price of $25.00 per common share, commencing after the Company breaks escrow upon receiving subscriptions for the minimum offering amount of $2 million. The initial cash distribution and stock dividend were paid on February 10, 2016 to stockholders of record as of January 24, 2016. The initial cash distributions were paid from offering proceeds rather than funds from operations and therefore may represent a return of capital. There can be no assurance that distributions and dividends will continue to be paid at this rate. The Company's board of directors may at any time change the distribution and dividend rate or suspend payment of distributions and dividends if it determines that such action is in the best interest of the Company and its stockholders. The Company has not established a minimum distribution level, and its charter does not require that it make distributions to its stockholders; however, if the Company reinstates the payment of distributions, the Company anticipates the payment of monthly distributions. The Company may also make special stock dividends.
From inception through SeptemberJune 30, 2018,2019, the Company had paid approximately $1.8 million in cash, issued 83,437 shares of its common stock as DRIP and issued 153,827153,826 shares of its common stock as dividend in distributions to the Company'sCompany’s stockholders. All of the cash distributions were paid from offering proceeds and constituted a return of capital. On March 22, 2018 the Company suspended payment of distributions and as such there are currently no distributions to invest in the DRIP.
The Company'sCompany’s total distributions paid for the period presented, the sources of such distributions, the cash flows provided by (used in) operations and the number of shares of common stock issued pursuant to the Company'sCompany’s DRIP are detailed below.
To date, all distributions were paid from offering proceeds and therefore may representrepresented a return of capital.
| | Distributions Paid in Cash | | | Distributions Paid through DRIP | | | Total Distributions Paid | | | Cash Flows Generated from (used in) Operations (GAAP basis) | |
1st Quarter, 2018 | | $ | 806,000 | | | $ | 418,000 | | | $ | 1,224,000 | | | $ | (1,015,000 | ) |
2nd Quarter, 2018 | | | -- | | | | -- | | | | -- | | | | (506,000 | ) |
3rd Quarter, 2018 | | | -- | | | | -- | | | | -- | | | | 663,000 | |
Total 2018 | | $ | 806,000 | | | $ | 418,000 | | | $ | 1,224,000 | | | $ | (858,000 | ) |
| | Distributions Paid in Cash | | | Distributions Paid through DRIP | | | Total Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
1st Quarter, 2017 | | $ | 161,000 | | | $ | 285,000 | | | $ | 446,000 | | | $ | (2,647,000 | ) |
2nd Quarter, 2017 | | | 168,000 | | | | 306,000 | | | | 474,000 | | | | (296,000 | ) |
3rd Quarter, 2017 | | | 172,000 | | | | 309,000 | | | | 481,000 | | | | (1,753,000 | ) |
4th Quarter, 2017 | | | 178,000 | | | | 310,000 | | | | 488,000 | | | | (6,518,000 | ) |
Total 2017 | | $ | 679,000 | | | $ | 1,210,000 | | | $ | 1,889,000 | | | $ | (11,214,000 | ) |
| | Distributions Paid in Cash | | Distributions Paid through DRIP | | Total Distributions Paid | | Cash Flows Provided by (used in) Operations (GAAP basis) |
1st Quarter, 2019 | $ | -- | $ | -- | $ | -- | $ | (1,272,000) |
2nd Quarter, 2019 | | -- | | -- | | -- | | (942,000) |
Total 2019 | $ | -- | $ | -- | $ | -- | $ | (2,214,000) |
| | Distributions Paid in Cash | | Distributions Paid through DRIP | | Total Distributions Paid | | Cash Flows Provided by (used in) Operations (GAAP basis) |
1st Quarter, 2018 | $ | 806,000 | $ | 418,000 | $ | 1,224,000 | $ | (1,015,000) |
2nd Quarter, 2018 | | -- | | -- | | -- | | (506,000) |
3rd Quarter, 2018 | | -- | | -- | | -- | | 663,000 |
4th Quarter, 2018 | | -- | | -- | | -- | | (813,000) |
Total 2018 | $ | 806,000 | $ | 418,000 | $ | 1,224,000 | $ | (1,671,000) |
Preferred Series A Stock
The Company offered up to $50 million in shares of the Company'sCompany’s Series A Convertible Redeemable Preferred Stock ("(“Series A"A”), par value $0.0001 per share, together with warrants to acquire the Company'sCompany’s common stock, in a Regulation D 506(c) private placement to accredited investors. In connection with the private placement, on October 27, 2016, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 50,000 shares of Series A Convertible Redeemable Preferred Stock. The Company commenced the private placement of the Shares to accredited investors on November 1, 2016 and closed the offering on March 24, 2017. The Company raised approximately $2.5 million, net of offering costs, in the Series A private placements.
The offering price was $1,000 per share. In addition, each investor in the Series A received, for every $1,000 in shares subscribed by such investor, 30 detachable warrants to purchase shares of the Company'sCompany’s common stock if the Company'sCompany’s common stock is listed on a national securities exchange. The warrants'warrants’ exercise price is equal to 110% of the volume weighted average closing stock price of the Company'sCompany’s common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of November 9, 2018,August 12, 2019, there were 84,510 detachable warrants that may be exercised after the 90th day following the occurrence of a listing event. These warrants will expire five years from the 90th day after the occurrence of a listing event.
For additional information see Note PM — Preferred Stock and Warrants in Part I, Item 1 Notes to the Unaudited Condensed Consolidated Financial Statementsof this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
From initial issuance through SeptemberJune 30, 2018,2019, the Company had declared distributions of approximately $293,000$450,000 of which approximately $274,000$436,000 had been paid to Series A stockholders.
| | Total Series A Distributions Paid | | | Cash Flows Generated from (used in) Operations (GAAP basis) | |
1st Quarter, 2018 | | $ | 41,000 | | | $ | (1,015,000 | ) |
2nd Quarter, 2018 | | | 51,000 | | | | (506,000 | ) |
3rd Quarter, 2018 | | | 54,000 | | | | 663,000 | |
Total 2018 | | $ | 146,000 | | | $ | (858,000 | ) |
| | Total Series A Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
1st Quarter, 2017 | | $ | 5,000 | | | $ | (2,647,000 | ) |
2nd Quarter, 2017 | | | 41,000 | | | | (296,000 | ) |
3rd Quarter, 2017 | | | 41,000 | | | | (1,753,000 | ) |
4th Quarter, 2017 | | | 41,000 | | | | (6,518,000 | ) |
Total 2017 | | $ | 128,000 | | | $ | (11,214,000 | ) |
| | Total Series A Distributions Paid | | Cash Flows Provided by (used in) Operations (GAAP basis) |
1st Quarter, 2019 | $ | 54,000 | $ | (1,272,000) |
2nd Quarter, 2019 | | 54,000 | | (942,000) |
Total 2019 | $ | 108,000 | $ | (2,214,000) |
| | Total Series A Distributions Paid | | Cash Flows Provided by (used in) Operations (GAAP basis) |
1st Quarter, 2018 | $ | 41,000 | $ | (1,015,000) |
2nd Quarter, 2018 | | 51,000 | | (506,000) |
3rd Quarter, 2018 | | 54,000 | | 663,000 |
4th Quarter, 2018 | | 54,000 | | (813,000) |
Total 2018 | $ | 200,000 | $ | (1,671,000) |
Preferred Series 1 Stock
On March 29, 2017, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary to the charter of the Company classifying and designating 97,000 shares of its authorized capital stock as shares of Series 1 Convertible Redeemable Preferred Stock ("Series 1"), par value $0.0001 per share. On April 7, 2017, the Company commenced the Regulation D 506(b) private placement of shares of Series 1, together with warrants to acquire the Company'sCompany’s common stock, to accredited investors. On January 31, 2018, the Company closed this offering. As of November 9, 2018,August 12, 2019, the Company had raised approximately $36.0$36.5 million, net of offering costs, in the Series 1 private placements and had 39,811 shares of Series 1 issued and outstanding.
The offering price is $1,000 per share. In addition, each investor in the Series 1 will receive, for every $1,000 in shares subscribed by such investor, 35 detachable warrants to purchase shares of the Company'sCompany’s common stock if the Company'sCompany’s common stock is listed on a national securities exchange. The warrants'warrants’ exercise price is equal to 110% of the volume weighted average closing stock price of the Company'sCompany’s common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of November 9, 2018,August 12, 2019, there were 1,382,675 detachable warrants that may be exercised after the 90th day following the occurrence of a listing event. These warrants will expire five years from the 90th day after the occurrence of a listing event.
For additional information see Note PM — Preferred Stock and Warrants in Part I, Item 1 Notes to the Unaudited Condensed Consolidated Financial Statementsof this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
From issuance date through SeptemberJune 30, 2018,2019, the Company had declared distributions of approximately $2.4$4.5 million of which approximately $2.2$4.3 million had been paid to Series 1 stockholders.
| | Total Series 1 Distributions Paid | | | Cash Flows Generated from (used in) Operations (GAAP basis) | |
1st Quarter, 2018 | | $ | 477,000 | | | $ | (1,015,000 | ) |
2nd Quarter, 2018 | | | 639,000 | | | | (506,000 | ) |
3rd Quarter, 2018 | | | 697,000 | | | | 663,000 | |
Total 2018 | | $ | 1,813,000 | | | $ | (858,000 | ) |
| | Total Series 1 Distributions Paid | | Cash Flows Provided by (used in) Operations (GAAP basis) |
1st Quarter, 2019 | $ | 697,000 | $ | (1,272,000) |
2nd Quarter, 2019 | | 695,000 | | (942,000) |
Total 2019 | $ | 1,392,000 | $ | (2,214,000) |
| | Total Series 1 Distributions Paid | | | Cash Flows Used in Operations (GAAP basis) | |
1st Quarter, 2017 | | $ | -- | | | $ | (2,647,000 | ) |
2nd Quarter, 2017 | | | 14,000 | | | | (296,000 | ) |
3rd Quarter, 2017 | | | 98,000 | | | | (1,753,000 | ) |
4th Quarter, 2017 | | | 268,000 | | | | (6,518,000 | ) |
Total 2017 | | $ | 380,000 | | | $ | (11,214,000 | ) |
The Company may not generate sufficient cash flow from operations to fully fund distributions. All or a portion-45-
| | Total Series 1 Distributions Paid | | Cash Flows Provided by (used in) Operations (GAAP basis) |
1st Quarter, 2018 | $ | 477,000 | $ | (1,015,000) |
2nd Quarter, 2018 | | 639,000 | | (506,000) |
3rd Quarter, 2018 | | 697,000 | | 663,000 |
4th Quarter, 2018 | | 697,000 | | (813,000) |
Total 2018 | $ | 2,510,000 | $ | (1,671,000) |
Related-Party Transactions and Arrangements
ThePrior to the Internalization, the Company hashad entered into agreements with affiliates of its Sponsor, whereby the Company willwould pay certain fees or reimbursements to the Advisor or its affiliates in connection with, among other things, acquisition and financing activities, asset management services and reimbursement of operating and offering related costs. For additional information see Note E — Related Party Transactions and Arrangements and in Note P — Subsequent Eventsin Part I, Item 1 Notes to the Unaudited Condensed Consolidated Financial Statementsof this Quarterly Report for a discussion of the various related party transactions, agreements and fees.fees and the Internalization.
On November 5, 2016, the Company purchased 338,409 shares of MVP I'sI’s common stock from an unrelated third party for $3.0 million or $8.865 per share. During the nine monthsyear ended September 30,December 31, 2017, the Company received approximately $99,000,$189,000, in stock distributions, related to the Company'sCompany’s ownership of MVP I common stock.
At the effective time of the Merger, 174,026 shares of MVP I Common Stock held by the Company was retired.
On March 29, 2019, the Company and the Advisor entered into definitive agreements to internalize the Company's management function effective April 1, 2019. As a result of the Internalization, the Management Agreements were retired.terminated.
Inflation
The Company expects to include provisions in its tenant leases designed to protect the Company from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market.
TheCommencing with the taxable year ended December 31, 2017, the Company isbelieves it has been organized and conducts operations to qualify as a REIT under Sections 856 to 860 of the Code and to comply with the provisions of the Code with respect thereto.Code. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income, which is distributed to its stockholders, provided that at least 90% of such taxable income is distributed and provided that certain other requirements are met. OurThe Company’s REIT taxable income may substantially exceed or be less than our netthe income as determined based on GAAP because differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.
Ifcalculated according to GAAP. In addition, the Company ceaseswill be subject to qualify as a REIT for federalcorporate income tax purposes, it will file as a C corporation and deferred tax assets and liabilities will be established forto the temporary differences betweenextent that less than 100% of the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for the deferred tax assetsnet taxable income is provided if the Company believes that it is more likely than not that it will not realize the tax benefit of deferred tax assets based on the available evidence at the time the determination is made.
The Company has elected to be treated as a REIT for the tax year beginning January 1, 2017 and ending December 31, 2017 and believes that it has been organized and has operated during 2017 in such a manner to meet the qualifications to be treated as a REIT for federal and state income tax purposes. During 2016, the Company was subject to U.S. federal and state income taxes and filed income tax returns as a C corporation. As such, the Company accounted for income taxes under the asset and liability method, which required the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities were determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.distributed, including any net capital gain.
The Company uses a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. The Company believes that its income tax filing positions and deductions would be sustained upon examination; thus, the Company has not recorded any uncertain tax positions as of December 31, 2017.June 30, 2019.
A full valuation allowance for deferred tax assets as of December 31, 2016 was provided since the Company believes that it is more likely than not that it will not realize the benefits of its deferred tax assets. A change in circumstances may cause the Company to change its judgment about whether deferred tax assets willshould be recorded, and further whether any such assets would more likely than not be realized. The Company would generally report any change in the valuation allowance through its income statement in the period in which such changes in circumstances occur.
As Because the Company is a REIT, the Companyit will generally not be subject to corporate level federal income taxes on earnings distributed to ourthe Company’s stockholders and therefore may not realize any benefit from deferred tax assets arising during the Company's pre-2017 periods before the Company became2019 or any prior period in which a REIT.valid REIT election was in effect. The Company intends to distribute at least 90%100% of its taxable income annually.annually and intends to do so for the tax year ending December 31, 2019 and in all future periods. The Company owns and rents real estate in various states and municipalities within the United States, and, as a result, the Company or one or more of its subsidiaries may have income or other tax return filing requirements, and may be subject to income or franchise taxes, in state and municipal jurisdictions.
The Company had a net deferred tax asset of $1.6 million which is subject tohas placed a full valuation allowance on all of its deferred tax assets, and thus no asset is not recorded on the Company'sCompany’s balance sheet. The deferred tax asset is primarily made up
REIT Compliance
The Company qualifies as a REIT for federal income tax purposes for the year ended December 31, 2017, and thereforeAs discussed above, the Company generally will not be subject to federal income tax on incomebelieves that it has been organized and have operated in a manner that has enabled the Company distributes to its stockholders. If the Company fails to qualify as a REIT in anycommencing with the taxable year the Company will be subject to federal income tax on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is denied. Failing to qualify as a REIT could materially and adversely affect the Company's net income.
ended December 31, 2017. To qualify as a REIT for tax purposes, the Company is required to distribute at least 90% of its REIT taxable income to the Company's stockholders.Company’s stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). In addition, the Company will be subject to corporate income tax to the extent that the Company distributes less than 100% of the net taxable income including any net capital gain. The Company must also meet certain asset and income tests, as well as other requirements. The Company will monitor the business and transactions that may potentially impact the Company'sCompany’s REIT status. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on the taxable income at regular corporate rates.
Off-Balance Sheet Arrangements
Series A Preferred Stock
Each investor in the Series A received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 30 shares of the Company'sCompany’s common stock if the Company'sCompany’s common stock is listed on a national securities exchange. The warrants'warrants’ exercise price is equal to 110% of the volume weighted average closing stock price of the Company'sCompany’s common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of SeptemberJune 30, 2018,2019, there were detachable warrants that may be exercised for 84,510 shares of the Company'sCompany’s common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at SeptemberJune 30, 20182019 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, gross proceeds to usthe Company would be approximately $2.1 million and we would as a result issue an additional 84,510 shares of common stock.stock and would receive gross proceeds of approximately $2.1 million.
For additional information see "—“— Liquidity and Capital Resources"Resources” and "—“—Preferred Series A Stock"Stock” above and Note PM — Preferred Stock and Warrants in in Part I, Item 1 - Notes to the Unaudited Condensed Consolidated Financial Statementsof this Quarterly Report for a discussion of the various related party transactions, agreements and fees.
Series 1 Preferred Stock
Each investor in the Series 1 received, for every $1,000 in shares subscribed by such investor, detachable warrants to purchase 35 shares of the Company'sCompany’s common stock if the Company'sCompany’s common stock is listed on a national securities exchange. The warrants'warrants’ exercise price is equal to 110% of the volume weighted average closing stock price of the Company'sCompany’s common stock over a specified period as determined in accordance with the terms of the warrant; however, in no event shall the exercise price be less than $25 per share. As of SeptemberJune 30, 2018,2019, there were detachable warrants that may be exercised for approximately 1,382,675 shares of the Company'sCompany’s common stock after the 90th day following the occurrence of a listing event. These potential warrants will expire five years from the 90th day after the occurrence of a listing event. If all the potential warrants outstanding at SeptemberJune 30, 20182019 became exercisable because of a listing event and were exercised at the minimum price of $25 per share, wethe Company would issue an additional 1,382,675 shares of common stock and would receive gross proceeds of approximately $34.6 million.
For additional information see "—“— Liquidity and Capital Resources"Resources” and "—“—Preferred Series A Stock"Stock” above and Note PM — Preferred Stock and Warrants in in Part I, Item 1 - Notes to the Unaudited Condensed Consolidated Financial Statementsof this Quarterly Report for a discussion of the various related party transactions, agreements and fees.further discussion.
Critical Accounting Policies
The Company'sCompany’s accounting policies have been established in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management'smanagement’s judgment or interpretation of the facts and circumstances relating to various transactions is different, it is possible that different accounting policies will be applied, or different amounts of assets, liabilities, revenues and expenses will be recorded, resulting in a different presentation of the financial statements or different amounts reported in the financial statements.
Additionally, other companies may utilize different estimates that may impact comparability of the Company'sCompany’s results of operations to those of companies in similar businesses. Below is a discussion of the accounting policies that management considers to be most critical once the Company commences significant operations. These policies require complex judgment in their application or estimates about matters that are inherently uncertain.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
The Company is required to make subjective assessments as to the useful lives of the Company'sCompany’s properties for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company'sCompany’s investments in real estate. These assessments have a direct impact on the Company'sCompany’s net income because if the Company were to shorten the expected useful lives of the Company'sCompany’s investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
The Company is required to present the operations related to properties that have been sold, or properties that are intended to be sold, as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as "held for sale" on the balance sheet.
Purchase Price Allocation
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company'sCompany’s analysis of comparable properties in the Company'sCompany’s portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.
The aggregate value of intangible assets related to in-place leases is primarily the difference between the property valued with existing in-place leases adjusted to market rental rates and the property valued as if vacant. Factors considered by the Company in its analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into accountconsidering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company will include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period. Estimates of costs to execute similar leases including leasing commissions, legal and other related expenses are also utilized. Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management'smanagement’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease intangibles are amortized as a decrease to rental income over the remaining term of the lease. The capitalized below-market lease values will be amortized as an increase to rental income over the remaining term and any fixed rate renewal periods provided within the respective leases. In determining the amortization period for below-market lease intangibles, the Company initially will consider, and periodically evaluate on a quarterly basis, the likelihood that a lessee will execute the renewal option. The likelihood that a lessee will execute the renewal option is determined by taking into consideration the tenant'stenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on the Company'sCompany’s evaluation of the specific characteristics of each tenant'stenant’s lease and the Company'sCompany’s overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of the Company'sCompany’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant'stenant’s credit quality and expectations of lease renewals, among other factors.
The value of in-place leases is amortized to expense over the initial term of the respective leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event, does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
In making estimates of fair values for purposes of allocating purchase price, the Company will utilize a number ofseveral sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company will also consider information obtained about each property as a result of the pre-acquisition due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Deferred Costs
Deferred costs may consist of deferred financing costs, deferred offering costs and deferred leasing costs. Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Contractual Obligations
As of SeptemberJune 30, 2018, our2019, the Company’s contractual obligations consisted of the mortgage notes secured by ourthe acquired properties and the Revolving Credit Facilities:properties:
Contractual Obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
Long-term debt obligations | | $ | 118,549,000 | | | $ | 539,000 | | | $ | 12,758,000 | | | $ | 4,310,000 | | | $ | 100,942,000 | | | $ | 162,880,000 | | | $ | 7,989,000 | | | $ | 46,191,000 | | | $ | 4,750,000 | | | $ | 103,950,000 | |
Lines of credit: | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
Interest | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
Principal | | | 39,120,000 | | | | 39,120,000 | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
Total | | $ | 157,669,000 | | | $ | 39,659,000 | | | $ | 12,758,000 | | | $ | 4,310,000 | | | $ | 100,942,000 | | | $ | 162,880,000 | | | $ | 7,989,000 | | | $ | 46,191,000 | | | $ | 4,750,000 | | | $ | 103,950,000 | |
Contractual obligations table amount does not reflect the unamortized loan issuance costs of approximately $1.5$2.3 million for notes payable and approximately $0.6 million for the line of credit as of SeptemberJune 30, 2018.2019.
Subsequent Events
See Note QP — Subsequent Eventsin Part I, Item 1 - Notes to the Unaudited Condensed Consolidated Financial Statementsof this Quarterly Report for a discussion of the various subsequent events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for a smaller reporting company.Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing the Company’s business plan, the Company expects that the primary market risk to which the Company will be exposed is interest rate risk. The Company’s primary interest rate exposure will be the one-month LIBOR.
As of June 30, 2019, the Company’s debt consisted of approximately $123.4 million in fixed rate debt and $39.5 million in variable rate debt, net of loan issuance costs. The Company’s variable interest rate debt is related to the LoanCore loan, where the floating rate loan is set at one-month LIBOR plus 3.65%, with a LIBOR floor of 1.95% and the Company has purchased a rate cap that caps LIBOR at 3.50%. Changes in interest rates have different impacts on the fixed rate and variable rate debt. A change in interest rates on fixed rate debt impacts its fair value but has no impact on interest incurred or cash flows. A change in interest rates on variable rate debt could impact the interest incurred and cash flows and its fair value. Assuming no increase in the level of the Company’s variable debt, if interest rates increased by 1.0%, or 100 basis points, cash flow would decrease by approximately $0.4 million per year. At June 30, 2019 LIBOR was approximately 2.43%. Assuming no increase in the level of variable rate debt, if LIBOR were reduced to 1.95%, cash flow would increase by approximately $0.2 million per year.
The following tables summarizes gross annual debt maturities, average interest rates and estimated fair values on the Company’s outstanding debt as of June 30, 2019:
Debt Maturity Schedule as of June 30, 2019 |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total | | Fair Value |
Fixed rate debt | $ | 7,989,000 | $ | 44,133,000 | $ | 2,058,000 | $ | 2,252,000 | $ | 2,498,000 | $ | 103,950,000 | $ | 162,880,000 | $ | 158,147,000 |
| | | | | | | | | | | | | | | | |
Average interest rate | | 6.70% | | 6.08% | | 4.87% | | 4.88% | | 4.89% | | 4.97% | | | | |
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Interim Chief Financial Officer have evaluated the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the thirdsecond quarter of 2018,2019, that have materially affected, or are reasonably likely to materially affect, the company'scompany’s internal control over financial reporting.
During the Company's two most recent fiscal years ended December 31, 2016 and 2017 and the period from January 1, 2018 through November 9, 2018, the Company did not consult with RBSM on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company's consolidated financial statements, and RBSM did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) any matter that was the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
PART II OTHER INFORMATION
None.
ITEM 1. LEGAL PROCEEDINGS
From timeSee Note N — Legal in Part I, Item 1 Notes to timethe Condensed Consolidated Financial Statements of this Quarterly Report for a description of a purported class action lawsuit that was filed on March 12, 2019.
The nature of the Company’s business exposes its properties, the Company, its Operating Partnership and its other subsidiaries to the risk of claims and litigation in the normal course of business. Other than as noted above or routine litigation arising out of the ordinary course of business, the Company or its subsidiaries may becomeis not presently subject to legal proceedings, claims or disputes. As of November 9, 2018, neither the Company nor any of its subsidiaries was a party to any material pending legal proceedings.litigation nor, to its knowledge, is any material litigation threatened against the Company.
There have been noThe following risk factors are material changes fromonly and should be read in conjunction with the risk factors set forth in our Annual Reportthe Company’s annual report on Form 10-K for the year ended December 31, 2017.2018.
Risks Related to an Investment in the Company
There are a number of pending legal matters involving us and our affiliates, which could distract our officers from attending to the Company's business and could have a material adverse effect on the Company.
The pending investigations and legal proceedings involving us and our affiliates could harm the reputation of the Company and may distract our management from attending to the Company's business. The adverse publicity arising out of the pendency of such investigations or proceedings could impair our ability to raise additional capital or purse liquidity transactions. The loss of key personnel or circumstances causing such personnel to otherwise become unavailable to manage our business, would result in the loss of experience, skill, resources, relationships and contacts of individuals that we believe are important to our investment and operating strategies.
On March 12, 2019, stockholder SIPDA Revocable Trust (“SIPDA”) filed a purported class action complaint in the United States District Court for the District of Nevada, against the Company and certain of its current and former officers and directors. The complaint purports to assert class action claims on behalf of all public shareholders of the Company and MVP I between August 11, 2017 and December 15, 2017 in connection with the proxy statements filed with the SEC to obtain shareholder approval for the merger of the Company and MVP I (the "proxy statements"). The complaint alleges, among other things, that the proxy statements failed to disclose that two major reasons for the merger and certain charter amendments implemented in connection therewith were (i) to facilitate the execution of an amended advisory agreement that allegedly is designed to benefit Mr. Shustek financially in the event of an internalization and (ii) to give Mr. Shustek the ability to cause the Company to internalize based on terms set forth in the amended advisory agreement.
The complaint alleges, among other things, (i) that all defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, by disseminating proxy statements that allegedly contain false and misleading statements or omit to state material facts; (ii) that the director defendants violated Section 20(a) of the Exchange Act; (iii) that the director defendants breached their fiduciary duties to the members of the class and to the Company; and (iv) that the internalization transaction will unjustly enrich certain directors and officers of the Company.
The complaint seeks, among other things, unspecified damages; an order enjoining the Company's listing on Nasdaq; declaratory relief; and the payment of reasonable attorneys' fees, accountants' and experts' fees, costs and expenses.
On June 13, 2019, the court granted SIPDA’s motion for Appointment as Lead Plaintiff. The litigation is still at a preliminary stage. The Company and the Board of Directors have reviewed the allegations in the complaint and believe the claims asserted against them in the complaint are without merit and intend to vigorously defend this action.
On May 31, 2019, and June 27, 2019, alleged stockholders filed class action lawsuits alleging direct and derivative claims against the Company, certain of our officers and directors, MVP Realty Advisors, Vestin Realty Mortgage I, and Vestin Realty Mortgage II in the Circuit Court for Baltimore City, captioned Arthur Magowski v. The Parking REIT, Inc., et. al, No. 24-C-19003125 (filed on May 31, 2019) (the “Magowski Complaint”) and Michelle Barene v. The Parking REIT, Inc., et. al, No. 24-C-19003527 (filed on June 27, 2019) (the “Barene Complaint”).
The Magowski Complaint asserts direct claims on behalf of all stockholders (other than the defendants and persons or entities related to or affiliated with any defendant) for breach of fiduciary duty and unjust enrichment arising from the Company’s decision to internalize its advisory function. The Barene Complaint asserts both direct and derivative claims for breach of fiduciary duty arising from substantially similar allegations as those contained in the Magowski Complaint.
The Magowski and Barene Complaints seek, among other things, damages; declaratory relief; equitable relief to reverse and enjoin the internalization transaction; and the payment of reasonable attorneys' fees, accountants' and experts' fees, costs and expenses. The actions are at a preliminary stage. The Company and the board of directors intend to vigorously defend against these lawsuits.
The Magowski Complaint also previewed that a stockholder demand would be made on the Board to take action with respect to claims belonging to the Company for the alleged injury to the Company, and that if the Board refused such demand, Magowski would pursue the claims in the Complaint derivatively on behalf of the Company. On June 19, 2019, Magowski submitted a formal demand letter to the Board asserting the same alleged wrongdoing as alleged in the Magowski Complaint and demanding that the Board investigate the alleged wrongdoing and take action to remedy the alleged injury to the Company. The letter demands, among other things, that claims be initiated against the same defendants as are named in the Magowski Complaint. In response to this stockholder demand letter, on July 16, 2019, the Board established a demand review committee of two independent directors to investigate the allegations of wrongdoing made in the letter and to make a recommendation to the Board for a response to the letter. The work of the demand review committee is ongoing.
On June 5, 2019, our chairman and chief executive officer, Michael V. Shustek, received a subpoena from the San Francisco Office of the Division of Enforcement of the Securities and Exchange Commission (the “SEC”), requesting the production of documents related to the Company and certain other entities and properties affiliated with Mr. Shustek, the Company, the Company’s sponsor and the Company’s former external manager in connection with a formal investigation being conducted by the SEC involving the Company. On June 17, 2019, the Company received a substantially similar subpoena from the SEC, as did certain other entities affiliated with Mr. Shustek, the Company, the Company’s sponsor and the Company’s former external manager. On July 1, 2019, Mr. Shustek received a second subpoena from the SEC requesting related documents on the same topics and entities. In connection with each subpoena, the SEC stated that: “this investigation is a non-public, fact-finding inquiry. We are trying to determine whether there have been any violations of the federal securities laws. The investigation and the subpoena do not mean that we have concluded that the recipient of the subpoena or anyone else has violated the law. Also, the investigation does not mean that we have a negative opinion of any person, entity or security.”
The Company and Mr. Shustek intend to cooperate with the SEC in this matter. However, the Company cannot predict the outcome or the duration of the SEC investigation or any other legal proceedings or any enforcement actions or other remedies, if any, that may be imposed on Mr. Shustek, the Company or any other entity arising out of the SEC investigation.
Shares of our common stock are illiquid. No public market currently exists for our shares, and our charter does not require us to liquidate our assets or list our shares on an exchange by any specified date, or at all. It will be difficult for stockholders to sell shares, and if stockholders are able to sell shares, it will likely be at a substantial discount.
There is no current public market for our shares, and our charter does not require us to liquidate our assets or list our shares on an exchange by any specified date, or at all. Our charter limits stockholders' ability to transfer or sell shares unless the prospective stockholder meets the applicable suitability and minimum purchase standards. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of our outstanding capital stock or more than 9.8% in value or number, whichever is more restrictive, of the aggregate of our outstanding common stock unless exempted prospectively or retroactively by our board of directors. These restrictions may inhibit large investors from desiring to purchase stockholders' shares. Moreover, our share repurchase program was suspended in May 2018, other than with respect to hardship repurchases in connection with a shareholders’ death. It will be difficult for stockholders to sell shares promptly or at all. If stockholders are able to sell shares, stockholders will likely have to sell them at a substantial discount to their purchase price. It is also likely that stockholders' shares would not be accepted as the primary collateral for a loan.
In addition, Nasdaq has informed us that (i) our common stock will not be approved for listing currently on the Nasdaq Global Market, and (ii) it is highly unlikely that our common stock would be approved for listing while the SEC investigation is ongoing. There can be no assurance that our common stock will ever be approved for listing on the Nasdaq Global Market or any other stock exchange, even if the SEC investigation referred to above is completed and no wrongdoing is found and no action is taken in connection therewith against us, Mr. Shustek or any other person. Even if we are successful in listing our shares of common stock on a national securities exchange, we cannot assure stockholders that the market price of our common stock will not fluctuate or decline significantly after listing, including as a result of factors unrelated to our operating performance or prospects. From time to time our board of directors evaluates actions that could provide liquidity for our stockholders. However, our ability to achieve liquidity for our stockholders is subject to market conditions and legal requirements, and there can be no assurance that we will affect a liquidity event. If we do not successfully implement a liquidity event, our shares of common stock may continue to be illiquid and stockholders may, for an indefinite period of time, be unable to convert their investments to cash easily and could suffer losses on their investments.
We have a limited operating history which makes our future performance difficult to predict.
We were formed on May 4, 2015 and merged with MVP REIT, Inc., which was formed on April 3, 2012, on December 15, 2017. In addition, our management function was internalized effective April 1, 2019. Accordingly, we have a limited operating history, particularly as an internally managed company. Stockholders should not assume that our performance will be similar to the past performance of other real estate investment programs sponsored by an affiliate of the former Advisor. Our lack of an operating history increases the risk and uncertainty that stockholders face in making or holding an investment in our shares.
Our cash distributions are not guaranteed and may fluctuate.
The Company's board of directors unanimously authorized a suspension of our cash distributions and stock dividends to holders of our common stock, effective as of March 22, 2018. Our board is focused on preserving capital in order to maintain sufficient liquidity to continue to operate the business and maintain compliance with debt covenants, including minimum liquidity covenants and to seek to enhance our value for stockholders through potential future acquisitions or other transactions. We expect that cash retained by the suspension of cash distributions will allow us to continue to pursue investment opportunities while also preparing for a possible liquidity event in the future. Our board will continue to evaluate our performance and expects to assess our distribution policy quarterly. There can be no assurance that we will resume payment of distributions to common stockholders at any time in the future, that any acquisitions will be completed on an attractive basis, or at all, or that any liquidity event will occur or when such event may occur.
We have paid, and may continue to pay, our distributions from sources other than cash flow from operations, which has reduced the funds available for the acquisition of properties and may reduce our stockholders' overall return.
Prior to suspending our payment of cash distributions to holders of our common stock, we had paid all of our cash distributions from sources other than cash flow from operations, including proceeds from issuance of our common and preferred shares. Our organizational documents permit us to pay distributions from any source, including offering proceeds, borrowings or sales of assets. We have not placed a cap on the use of offering or other proceeds to fund distributions. Our long-term objective is to fund the payment of regular distributions to our stockholders from cash flow from our operations. However, we may not generate sufficient cash flow from operations to fund distributions. Therefore, if distributions resume, we may need to continue to utilize proceeds from the sale of securities or incur indebtedness to pay distributions. We can give no assurance that we will be able to pay distributions solely from our funds from operations in the future. If we pay distributions from sources other than our cash flow from operations, we will have fewer funds available for investments and stockholders' overall return may be reduced.
We depend on our management team. The loss of key personnel could have a material adverse effect upon our ability to conduct and manage our business.
Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of our management team in the identification and acquisition of investments, the determination of any financing arrangements, the management of our assets and operation of our day-to-day activities. The loss of services of one or more members of our key personnel or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, parking facility operators and managers and other industry personnel, which could materially and adversely affect our business, financial condition, results of operations and ability to make distributions to stockholders in the future and the value of our common stock.
Stockholders should not rely on the estimated NAV per share as being an accurate measure of the current value of our shares of common stock.
Our board of directors, including all of our independent directors, approves and establishes at least annually an estimated per share NAV of our common stock, which is based on an estimated market value of our assets less the estimated market value of our liabilities, divided by the number of shares of our common stock outstanding. The objective of our board of directors in determining the estimated NAV per share was to arrive at a value, based on the most recent data available, that it believed was reasonable based on methodologies that it deemed appropriate. However, the market for real estate can fluctuate quickly and substantially and the value of our assets is expected to change in the future and may decrease. In addition, as with any valuation method, the methods used to determine the estimated NAV per share were based upon a number of assumptions, estimates and judgments that may not be accurate or complete.
Our assets have been valued based upon appraisal standards and the values of our assets using these methods are not required to reflect market value under those standards and will not necessarily result in a reflection of fair value under generally accepted accounting principles. Further, different parties using different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive a different estimated NAV per share, which could be significantly different from the estimated NAV per share determined by our board of directors. The estimated NAV per share is not a representation or indication that, among other things: a stockholder would be able to realize the estimated NAV per share if he or she attempts to sell shares; a stockholder would ultimately realize distributions per share equal to the estimated NAV per share upon liquidation of assets and settlement of our liabilities or upon a sale of our company; shares of our common stock, if listed, would trade at the estimated NAV per share on a national securities exchange; a third party would offer the estimated NAV per share in an arms-length transaction to purchase all or substantially all of our shares of common stock; or the methodologies used to determine the estimated NAV per share would be acceptable to FINRA, the Employee Retirement Income Security Act of 1974, as amended, or ERISA, or other regulatory authorities (including state regulators), with respect to their respective requirements. Further, the estimated NAV per share was calculated as of a specific time and the value of our shares will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and changes in the real estate and capital markets.
Moreover, we issued shares of our common stock under our distribution reinvestment plan and purchase shares of our common stock under our share repurchase plan (to the limited extent still in effect) based on the estimated NAV per share. Stockholders may pay more than realizable value when they purchase shares under our distribution reinvestment plan or receive less than realizable value for their investment when selling their shares under our share repurchase plan.
Risks Related to Conflicts of Interest
Our executive officers face conflicts of interest related to their positions and interests in our affiliates, which could hinder our ability to implement our business strategy and to generate returns to stockholders.
Our executive officers are also executive officers, directors, managers and key professionals of other affiliated entities. As a result, they owe duties to each of these entities, their members and limited partners and these investors, which duties may from time to time conflict with the duties that they owe to us. Their loyalties to these other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (a) allocation of new investments and management time and services between us and the other entities, (b) the timing and terms of the investment in or sale of an asset, (c) development of our properties by such affiliates, and (d) investments with such affiliates. The loyalties of these individuals to other entities and investors could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to stockholders and to maintain or increase the value of our assets.
Further, our directors and officers and any of their respective affiliates are not prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition or sale of real estate investments or that otherwise compete with us.
The issuance of common stock as consideration in the Internalization has and will have a dilutive effect and we could incur other significant costs associated with the Internalization.
The issuances of shares of Common Stock as the consideration in connection with the Internalization had and will have a dilutive effect and will reduce the voting power and relative ownership percentage interests of holders of Common Stock prior to the Internalization.
In addition, following the Internalization, our direct expenses continue to include increased general and administrative costs. We also employ personnel are subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances as well as incur the compensation and benefits costs of our officers and other employees and consultants. We have issued and may issue additional equity awards to officers, employees and consultants, which awards would decrease our net income and FFO and may further dilute a stockholder's investment.
Our independent board members reviewed and analyzed the estimated costs of Internalization and the anticipated and perceived benefits and savings associated therewith and compared them against the estimated costs of continuing to be externally managed. The costs of Internalization and cost savings estimates, however, were based upon certain assumptions, including regarding future growth, and may prove to be incorrect. If so, our income per share could be lower as a result of the Internalization than it otherwise would have been, potentially decreasing the amount of cash available to distribute to our stockholders and the value of our shares.
The Internalization was only recently completed. We could have difficulty integrating these functions as a stand-alone entity, which could result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management's attention could be diverted from most effectively managing our investments.
As noted above, the Internalization is already the subject of litigation. Although we believe that the related claims are without merit, we could be forced to spend significant amounts of money defending such claims or other claims, which would reduce the amount of cash available for us to acquire assets and to pay distributions.
Stockholders' interest in us could be diluted if we issue additional shares, which could reduce the overall value of their investment.
Stockholders do not have preemptive rights to any shares issued by us in the future and generally have no appraisal rights. Our charter currently has authorized 100,000,000 shares of capital stock. Of the total number of shares of capital stock authorized, 98,999,000 shares are classified as common stock, par value $0.0001 per share; and 1,000,000 shares are classified as preferred stock, par value $0.0001 per share, within which (i) 97,000 shares are classified and designated as Series 1 Convertible Redeemable Preferred Stock, and (ii) 50,000 shares are classified and designated as Series A Convertible Redeemable Preferred Stock, and 1,000 shares are classified as convertible stock, par value $0.0001 per share. Subject to any limitations set forth under Maryland law, a majority of our board of directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, or classify or reclassify any unissued shares into other classes or series of stock without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our board of directors. A stockholder's interest in us may be diluted in the event that we (1) sell additional shares in the future, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of our common stock to the Advisor, its successors or assigns, in payment of an outstanding fee obligation as set forth under our Amended and Restated Advisory Agreement or (5) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our operating partnership. In connection with the Internalization, we issued the former manager 400,000 shares of Common Stock and agreed to issue the former Advisor 400,000 additional shares of Common Stock on each of December 31, 2019, 2020 and 2021. We have the option to repurchase up to 1,100,000 of such shares at a price equal to $17.50 but there can be no assurance that we will do so. Because of these and other reasons described in this "Risk Factors" section, stockholders should not expect to be able to own a significant percentage of our shares. In addition, depending on the terms and pricing of any additional offerings and the value of our investments, stockholders also may experience dilution in the book value and fair mark value of, and the amount of distributions paid on, their shares.
Our charter also authorizes our board of directors, without stockholder approval, to designate and issue any classes or series of preferred stock (including equity or debt securities convertible into preferred stock) and to set or change the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions and qualifications or terms or conditions of redemption of each class or series of shares so issued. Because our board of directors has the power to establish the preferences and rights of each class or series of preferred stock, it may afford the holders of any series or class of preferred stock preferences, powers, and rights senior to the rights of holders of common stock or preferred stock.
Under this power, our board of directors has created the Series A preferred stock and the Series 1 preferred stock, each of which ranks senior to our common stock with respect to the payment of dividends and rights upon liquidation, dissolution or winding up. Specifically, payment of any distribution preferences on the Series A preferred stock, Series 1 preferred stock, or any future series of preferred stock would reduce the amount of funds available for the payment of distributions on our common stock. Further, holders of our preferred stock are entitled to receive a preference payment if we liquidate, dissolve, or wind up before any payment is made to the common stockholders, likely reducing the amount common stockholders would otherwise receive upon such an occurrence. Holders of our preferred stock will have the right to require us to convert their shares into shares of our common stock. The conversion of our preferred stock into common stock may further dilute the ownership interest of our common stockholders. Following a Listing Event (as defined below), we also have the right, but not the obligation, to redeem the Series A preferred stock and Series 1 preferred stock and pay the redemption payments in the form of shares of our common stock, which may further dilute the ownership interest of our common stockholders. Although the dollar amounts of such payments are unknown, the number of shares to be issued in connection with such payments may fluctuate based on the price of our common stock. If we elect to redeem any of our preferred stock with cash, the exercise of such rights may reduce the availability of our funds for investment purposes or to pay for distributions on our common stock. A Listing Event is defined in the Articles Supplementary for the Series A preferred stock and Series 1 preferred stock as a liquidity event involving the listing of our shares of common stock on national securities exchange or a merger or other transaction in which our stockholders will receive shares listed on a national securities exchange as consideration in exchange for their shares in us.
Any sales or perceived sales in the public market of shares of our common stock issuable upon the conversion or redemption of our preferred stock could adversely affect prevailing market prices of shares of our common stock. The issuance of common stock upon any conversion or redemption of our preferred stock also may have the effect of reducing our net income per share (or increasing our net loss per share). In addition, if a Listing Event occurs, the existence of our preferred stock may encourage short selling by market participants because the existence of redemption payments could depress the market price of shares of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
The Company did not sell any of its equity securities during the quarter ended SeptemberJune 30, 20182019 that were not registered under the Securities Act.
Use of Offering Proceeds
On October 22, 2015, the Company's registration statement on Form S-11 (No. 333-205893) registering a public offering of up to $550,000,000 in shares of the Company's common stock was declared effective under the Securities Act, and the Company commenced the Common Stock Offering. The Company offered up to 20,000,000 shares of its common stock to the public in the Common Stock Offering at $25.00 per share and continues to offer up to 2,000,000 shares of its common stock pursuant to the distribution reinvestment plan at $25.00 per share. The Company entered into selling agreements with AMS and other non-affiliated selling agents to distribute shares of the Company's common stock to its clients. As of December 31, 2016, the Company ceased all selling efforts for the Common Stock Offering but accepted additional subscriptions through March 31, 2017.
As of filing date,August 12, 2019, the Company had 6,545,366 6,933,254 shares of common stock issued and outstanding, 2,862 shares of preferred Series A stock outstanding and 39,811 shares of preferred Series 1 stock outstanding for total grossnet proceeds of approximately $202.2$188.7 million, less offering costs.
The following is a table of summary of offering proceeds from inception through SeptemberJune 30, 2018:2019:
Type | | Number of Shares Preferred | | | Number of Shares Common | | | Value | | | Number of Shares Preferred | | | Number of Shares Common | | | Value | |
Issuance of common stock | | | -- | | | | 2,451,237 | | | $ | 61,281,000 | | | -- | | | 2,851,238 | | | $ | 68,281,000 | |
Redeemed Shares | | | -- | | | | (28,037 | ) | | | (685,000 | ) | | -- | | | (42,080 | ) | | (1,029,000 | ) |
DRIP shares | | | -- | | | | 83,437 | | | | 2,086,000 | | | -- | | | 83,437 | | | 2,086,000 | |
Issuance of Series A preferred stock | | | 2,862 | | | | -- | | | | 2,544,000 | | | 2,862 | | | -- | | | 2,544,000 | |
Issuance of Series 1 preferred stock | | | 39,811 | | | | -- | | | | 35,981,000 | | | 39,811 | | | -- | | | 35,981,000 | |
Dividend shares | | | -- | | | | 153,827 | | | | 3,845,000 | | | -- | | | 153,826 | | | 3,845,000 | |
Distributions | | | -- | | | | -- | | | | (6,554,000 | ) | | -- | | | -- | | | (8,805,000 | ) |
Deferred offering costs | | | -- | | | | -- | | | | (1,086,000 | ) | | -- | | | -- | | | (1,086,000 | ) |
Contribution from Advisor | | | -- | | | | -- | | | | 1,147,000 | | | -- | | | -- | | | 1,147,000 | |
Shares added for Merger | | | -- | | | | 3,887,513 | | | | 85,701,000 | | | | -- | | | | 3,887,513 | | | | 85,701,000 | |
Total | | | 42,673 | | | | 6,547,977 | | | $ | 184,260,000 | | | | 42,673 | | | | 6,933,934 | | | $ | 188,665,000 | |
From October 22, 2015 through SeptemberJune 30, 2018,2019, the Company incurred organization and offering costs in connection with the issuance and distribution of the registered securities of approximately $1.1 million, which were paid to unrelated parties by the Sponsor. From October 22, 2015 through SeptemberJune 30, 2018,2019, the net proceeds to the Company from its offerings, after deducting the total expenses and deferred offering costs incurred and paid by the Company as described above, were $185.0approximately $187.8 million. A majority of these proceeds were used, along with other sources of debt financing, to make investments in parking facilities, andof which the Company'sCompany’s portion of the total purchase price for these parking facilities was approximately $299.0$320.0 million, which includes its $2.8 million investment in the DST. In addition, a portion of these proceeds were used to make cash distributions of approximately $1.8 million to the Company's stockholders. The ratio of the costs of raising capital to the capital raised is approximately 0.59%0.6%.
Share Repurchase Program
On February 7, 2018, the Company filed a Current Report on Form 8-K stating that the board of directors has determined that the Merger and the issuance of the Company's common stock as consideration for the Merger qualifies as an involuntary exigent circumstance under the SRP. As a result, shares of common stock that, when combined with the holding period of the related MVP I Common Stock, have been held for the Two-Year Holding Period (as such term is defined in the SRP), are eligible to participate in the SRP subject to the other requirements and limitations of the SRP. In addition, the issuance date for any shares of MVP I Common Stock issued pursuant to the MVP REIT, Inc. Distribution Reinvestment Plan shall be deemed to be the same date as the issuance of the shares of MVP I Common Stock to which such shares relate.
On May 29, 2018 the Company filed a Current Report on Form 8-K stating that the Company's board of directors suspended its SRP, other than for repurchases in connection with a shareholder's death. In accordance with the SRP, the suspension of the SRP took effect on June 28, 2018, which is the 30th day after the date of the Form 8-K providing notice of the suspension. The Company plans to utilize the cash savings to further its business operations. In the event the Company does not complete its listing of shares, the Company's Board of Directors may in the future reinstate the SRP, although there is no assurance as to if or when this will happen.
As of the date of this filing, 25,815 shares have been redeemed
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE AND SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
DuringAs disclosed in Note P — Subsequent Events in Part I, Item 1 Notes to the third quarter Condensed Consolidated Financial Statements of 2018,this Quarterly Report, on August 8, 2019, the Board of Directors (the “Board”) of the Parking REIT, Inc. received a letter from Hilda Delgado pursuant to which she resigned as an independent director from the Board, effective immediately. At the time of her resignation, Ms. Delgado served as a member of the Audit Committee of the Board and as a member of the Compensation Committee of the Board.
In connection with her resignation, Ms. Delgado indicated that she is no longer able to devote the time and effort required to adequately fulfill her duties as a member of the Board, and that her resignation is in no part due to any disagreement with the Company. A copy of Ms. Delgado’s resignation letter is attached as Exhibit 17.1 to this Quarterly Report.
The Company is not aware of any information that was required to be disclosed in a report on Form 8-K during the second quarter of 2019, that was not disclosed in a report on Form 8-K.
Exhibit No. | Description |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Amended and Restated EscrowContribution Agreement, dated October 5, 2015, between MVP REITas of March 29, 2019 and effective as of April 1, 2019, among the Company, the Manager, VRM I (solely for purposes of Section 1.01(c) thereof), VRM II Inc.(solely for purposes of Section 1.01(c) thereof) and UMB Bank, N.A.Michael V. Shustek (solely for purposes of Section 4.03 thereof). |
| Second Amended and Restated EscrowEmployee Leasing Agreement, dated November 30, 2015,as of March 29, 2019, by and among MVP REIT II, Inc., MVP American Securities, LLC,between the Company and UMB Bank, N.A.the Advisor |
| |
| |
| |
| Third Amendment to CreditEmployment Agreement, and Omnibus Amendment to Loan Documents, dated as of September 28, 2018,March 29, 2019, by and among MVP REIT II Operating Partnership, LP, The Parking REIT, Inc.,between the lenders party thereto,Company and KeyBank, National AssociationDaniel Huberty. |
| |
| |
| |
| |
| |
101(*) | The following materials from the Company'sCompany’s Quarterly Report on Form 10-Q for the three and nine months ended SeptemberJune 30, 2018,2019, formatted in XBRL (extensible Business Reporting Language (i) Balance Sheets; (ii) Statements of Operations; (iii) Statement of Stockholder'sStockholder’s Equity; (iv) Statements of Cash Flows; and (v) Notes to Financial Statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
* | Filed concurrently herewith. |
(1) | Filed previously with Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 on September 24, 2015 and incorporated herein by reference. |
(2) | Filed previously on Form 8-K on December 18, 20182017 and incorporated herein by reference. |
(3) | Filed previously with the Registration Statement on Form S-11 on July 28, 2015 and incorporated herein by reference. |
(4A)(4) | Filed previously on Form 8-K on October 27,28, 2016 and incorporated herein by reference. |
(4B)(5) | Filed previously on Form 8-K on March 30, 2017 and incorporated herein by reference. |
(6) | Filed previously on Form 8-K on October 28, 2016 and incorporated herein by reference. |
(7) | Filed previously on Form 8-K on May 15, 2017 and incorporated herein by reference. |
(5) | Filed previously on Form 8-K on March 30, 2017 and incorporated herein by reference. |
(6) | Filed previously as Exhibit A to Supplement No. 1 to the Registrant's prospectus filed December 3, 2015, and incorporated herein by reference. |
(7) | Filed previously as Appendix D to the Registrant's prospectus filed October 23, 2015, and incorporated herein by reference. |
(8) | Filed previously with Pre-Effective Amendment No. 3 to the Registration Statement on Form S-11 on October 6, 2015 and incorporated herein by reference. |
(9) | Filed previously on Form 8-K on DecemberApril 3, 2015, and incorporated herein by reference. |
(10) | Filed previously on Form 8-K on September 26, 2018 and incorporated herein by reference. |
(11) | Filed previously on Form 8-K on October 2, 2018 and incorporated herein by reference. |
(12) | Filed previously in a Prospectus Supplement on Form 424B3 (File No. 333-20593), filed on December 18, 2017,2019 and incorporated herein by reference.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| The Parking REIT, Inc. |
| | |
| By: | /s/ Michael V. Shustek | |
| | Michael V. Shustek |
| | Chief Executive Officer and PresidentChairman |
| Date: | November 9, 2018 August 12, 2019 |
| | |
| By: | /s/ Brandon WelchJ. Kevin Bland | |
| | Brandon WelchJ. Kevin Bland |
| | Interim Chief Financial Officer |
| Date: | November 9, 2018 August 12, 2019 |
| | |