Exhibit 99.2
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Combined Financial Statements
December 31, 2020 and 2019
(With Independent Auditors’ Report Thereon)
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Table of Contents
Page | ||||
Independent Auditors’ Report | 1 | |||
Combined Balance Sheets | 2 | |||
Combined Statements of Income | 3 | |||
Combined Statements of Changes in Parent’s Net Investment | 4 | |||
Combined Statements of Cash Flows | 5 | |||
Notes to Combined Financial Statements | 6 |
KPMG LLP | ||
Suite 1500 15 W. South Temple | ||
Salt Lake City, UT 84101 |
Independent Auditors’ Report
The Board of Directors
Larry H. Miller Automotive Real Estate Properties:
We have audited the accompanying combined financial statements of Larry H. Miller Automotive Real Estate Properties (collectively referred to as the Company), which comprise the combined balance sheets as of December 31, 2020 and 2019, and the related combined statements of income, parent’s net investment, and cash flows for the years then ended, and the related notes to the combined financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Larry H. Miller Automotive Real Estate Properties as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
Emphasis of Matter
We draw attention to Note 1 to the combined financial statements, which describes the Company’s carve-out basis of presentation used in preparing the combined financial statements. Our opinion is not modified with respect to this matter.
Salt Lake City, Utah
October 25, 2021
KPMG LLP, a Delaware limited liability partnership and a member firm of
the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee.
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Combined Balance Sheets
December 31, 2020 and 2019 `
(In thousands)
2020 | 2019 | |||||||
Assets | ||||||||
Real estate: | ||||||||
Land | $ | 189,890 | 186,433 | |||||
Buildings and leasehold improvements | 409,906 | 410,167 | ||||||
Furniture, fixtures, and equipment | 42,820 | 42,835 | ||||||
Construction and equipment in progress | 9,440 | 6,943 | ||||||
Less accumulated depreciation and amortization | (162,419 | ) | (147,673 | ) | ||||
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Real estate, net | 489,637 | 498,705 | ||||||
Due from related parties | 132 | 13 | ||||||
Prepaid expenses and other assets | 6,376 | 428 | ||||||
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Total assets | $ | 496,145 | 499,146 | |||||
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Liabilities and Parent’s Net Investment | ||||||||
Liabilities: | ||||||||
Mortgage notes payable, net | $ | 147,724 | 156,622 | |||||
Notes payable to related party | 47,581 | 54,187 | ||||||
Due to related party | 155,001 | 157,193 | ||||||
Accounts payable and accrued liabilities | 1,662 | 2,538 | ||||||
Other liabilities | 6,601 | 3,889 | ||||||
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Total liabilities | 358,569 | 374,429 | ||||||
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Parent’s net investment: | ||||||||
Parent’s net investment | 137,576 | 124,717 | ||||||
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Total parent’s net investment | 137,576 | 124,717 | ||||||
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Total liabilities and parent’s net investment | $ | 496,145 | 499,146 | |||||
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See accompanying notes to combined financial statements.
2
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Combined Statements of Income
Years ended December 31, 2020 and 2019
(In thousands)
2020 | 2019 | |||||||
Rental revenues, primarily related party | $ | 62,297 | 59,489 | |||||
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Total revenues | 62,297 | 59,489 | ||||||
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Operating expenses: | ||||||||
General and administrative | 10,888 | 7,752 | ||||||
Repairs and maintenance | 143 | 226 | ||||||
Depreciation and amortization | 15,433 | 15,667 | ||||||
Loss on disposal of assets | 13 | 302 | ||||||
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Total operating expenses | 26,477 | 23,947 | ||||||
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Income from operations | 35,820 | 35,542 | ||||||
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Other income (expense): | ||||||||
Interest, investment, and other income | 512 | 655 | ||||||
Interest expense | (16,094 | ) | (16,701 | ) | ||||
Unrealized loss on fair value of derivative instruments | (7,030 | ) | (8,000 | ) | ||||
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Total other expense, net | (22,612 | ) | (24,046 | ) | ||||
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Net income | $ | 13,208 | 11,496 | |||||
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See accompanying notes to combined financial statements.
3
LARRY H. MILLER REAL ESTATE ENTITIES PROPERTIES
Combined Statements of Changes in Parent’s Net Investment
Years ended December 31, 2020 and 2019
(In thousands)
Balance, December 31, 2018 | $ | 118,010 | ||
Change in parent’s net investment | (4,789 | ) | ||
Net income | 11,496 | |||
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Balance, December 31, 2019 | 124,717 | |||
Change in parent’s net investment | (349 | ) | ||
Net income | 13,208 | |||
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Balance, December 31, 2020 | $ | 137,576 | ||
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See accompanying notes to combined financial statements.
4
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Combined Statements of Cash Flows
Years ended December 31, 2020 and 2019
(In thousands)
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 13,208 | 11,496 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 15,433 | 15,667 | ||||||
Loss on disposal of assets | 13 | 302 | ||||||
Unrealized loss on fair value of derivative instruments | 7,030 | 8,000 | ||||||
Amortization of deferred financing costs | 95 | 100 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | (119 | ) | 538 | |||||
Prepaid expenses and other assets | (5,949 | ) | 1,010 | |||||
Accounts payable and accrued liabilities | (77 | ) | (254 | ) | ||||
Other liabilities | 13 | (840 | ) | |||||
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Net cash provided by operating activities | 29,647 | 36,019 | ||||||
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Cash flows from investing activities: | ||||||||
Capital expenditures | (16,015 | ) | (47,570 | ) | ||||
Proceeds from sale of properties, furniture, fixtures, and equipment | 8,839 | 7,150 | ||||||
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Net cash used in investing activities | (7,176 | ) | (40,420 | ) | ||||
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Cash flows from financing activities: | ||||||||
Principal payments on mortgage notes payable | (8,823 | ) | (9,274 | ) | ||||
Proceeds from issuance of mortgage notes payable | 169 | 21,828 | ||||||
Payments for loan origination costs | (339 | ) | (47 | ) | ||||
Principal payments on related party notes payable | (6,606 | ) | (5,472 | ) | ||||
Proceeds from issuance of related party notes payable | — | 25,500 | ||||||
Net change in due to related party | (6,523 | ) | (23,345 | ) | ||||
Change in parent’s net investment | (349 | ) | (4,789 | ) | ||||
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Net cash (used in) provided by financing activities | (22,471 | ) | 4,401 | |||||
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Net change in cash and cash equivalents | — | — | ||||||
Cash and cash equivalents, beginning of year | — | — | ||||||
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Cash and cash equivalents, end of year | $ | — | — | |||||
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Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 16,173 | 16,607 | |||||
Supplemental noncash investing and financing activities: | ||||||||
Accrued purchases of properties, furniture, fixtures, and equipment | 18 | 817 |
See accompanying notes to combined financial statements.
5
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
(1) | Nature of Business and Basis of Presentation |
(a) | Nature of Business |
We have prepared the accompanying combined financial statements of real property related to the Larry H. Miller Dealership operations (Larry H. Miller Automotive Real Estate Properties or Company). The real property related to the Larry H. Miller Dealerships has historically operated as part of the Larry H. Miller Real Estate Entities (Parent) and not as a standalone company. The accompanying combined financial statements comprise the combined balance sheets as of December 31, 2020, and 2019, and the related combined statements of income, changes in Parent’s net investment, and cash flows for the years then ended.
(b) | Basis of Presentation |
The combined financial statements of the Parent include the accounts of Miller Family Real Estate LLC (MFRE) and Larry H. Miller Corporation – Boise (Boise), all of which are principally owned by the Larry H. Miller Family (the Miller Family). MFRE is a limited liability company and is treated as a partnership for federal income tax purposes. Boise is a Subchapter S corporation and is taxed as a flow-through entity for federal income tax purposes.
The accompanying combined financial statements representing the historical operations of the Parent’s automotive real estate business have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The combined financial statements have been derived from the combined financial statements and accounting records of the Parent using the historical results of operations and historical cost basis of the assets and liabilities that comprise the Company to demonstrate the Company’s combined historical financial position, results of operations, and cash flows on a carve-out basis. All intercompany balances and transactions within the Company’s combined financial statements have been eliminated. Transactions and balances between the Company and the Parent that are not included in these combined financial statements are reflected as related party balances and transactions within these financial statements. Transactions between the Company and the Parent are reflected as change in Parent’s net investment.
The combined financial statements include the assets, liabilities, revenues, and expenses that are specifically identifiable to the Company. As part of Parent, the Company is dependent upon Parent for all of its working capital and financing requirements as Parent uses a centralized approach to cash management and financing of its operations. Financial transactions relating to the Company are accounted for through the Parent’s net investment account and due to related parties account. Accordingly, none of Parent’s cash or cash equivalents at the corporate level have been allocated to the Company in the combined financial statements. Debt balances that are directly related to the Company’s financing have been included in the combined financial statements. Parent’s net investment represents Parent’s interest in the recorded net assets of the Company. The combined financial statements also include allocations of certain administrative, accounting, legal, human resources and information technology expenses from the Parent based on the percentage of revenue recognized by the Company divided by total revenue recognized by the Parent. These allocated costs are primarily related to corporate general and administrative expenses and employee related costs for corporate and shared employees. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred had the Company operated as a standalone company during the periods presented and may not reflect the combined results of operation, financial
6 | (Continued) |
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
position and cash flows had the Company operated as a standalone business during the periods presented. Actual costs that would have been incurred if the Company had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. The Company also may incur additional costs associated with being a standalone company that were not included in the expense allocations and therefore would result in additional costs that are not reflected in the combined historical results of operations, financial position, and cash flows. Consequently, future results of operations should the Company operate separately from the Parent could include costs and expenses that may be materially different than the Company’s historical results of operations, financial position, and cash flows. Accordingly, the combined financial statements for the periods presented may not be indicative of the Company’s future results of operations, financial position, and cash flows.
(2) | Summary of Significant Accounting Principles |
These combined financial statements are prepared in accordance with U.S. GAAP, and the accounting policies generally accepted by the industry in which the Company operates.
(a) | Real Estate |
Real estate is recorded at cost and consists of land, buildings, leasehold improvements, furniture, fixtures, and equipment. Significant expenditures that improve or extend the life of an asset are capitalized, while minor replacements, maintenance, and repairs that do not increase the useful life of an asset are expensed as incurred.
Depreciation is calculated using the straight-line method over the useful lives of the assets. Leasehold and tenant improvements are amortized using the straight-line method over the shorter of the useful lives or the term of the lease.
The range of estimated useful lives is as follows:
Buildings and leasehold improvements | 25 to 39 years | |||
Furniture, fixtures, and equipment | 5 to 10 years |
When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or debited to income from operations. The Company recorded $15.4 million and $15.7 million in depreciation expense for 2020 and 2019, respectively.
(b) | Accounts Receivable |
Accounts receivable include amounts due from tenants and miscellaneous receivables generated in the ordinary course of business. The Company determines an allowance for doubtful accounts based on historical write-off experience, current market and industry conditions, aging of the accounts receivable, and the nature of the receivable. No allowance for doubtful accounts has been recorded as of December 31, 2020 and 2019.
7 | (Continued) |
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
(c) | Prepaid Expenses and Other Assets |
Other assets primarily consist of pre-paid real estate commissions, funds held in escrow for 1031 exchanges and development bonds relating to projects under construction and refundable by the applicable city once the project is complete.
(d) | Fair Value of Financial Instruments |
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
(e) | Management Estimates |
The preparation of the combined financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at December 31, 2020 and 2019, and revenues and expenses reported for the years then ended. The actual outcome could differ from the estimates made in the preparation of these combined financial statements.
Estimates are used in the calculation of various expenses, accruals, and reserves, including the assessment of the recoverability of long-lived assets.
(f) | Impairment of Long-Lived Assets |
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment is recognized when estimated future cash flows (undiscounted and without interest charges) are less than the carrying amount of the asset. The estimation of future net cash flows is inherently uncertain and relies to a considerable extent on assumptions regarding current and future economic and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the long-lived assets. To the extent that an impairment has occurred, the excess of the carrying amount of the asset over its estimated fair value is charged to income from operations.
(g) | Derivative Instruments |
The Company’s derivative instruments consist of interest rate swap agreements to manage the Company’s exposure to interest rate volatility. The interest rate swap agreements mitigate the cash flow effects of interest rate fluctuations on interest expense for variable-rate debt instruments.
All derivatives are recognized at their current fair value. Changes in the fair value of derivative financial instruments are recorded in the combined statements of income unless specific hedge accounting criteria are met. If such criteria are met for cash flow hedges, the effective portion of the change in the fair value is recorded directly to accumulated other comprehensive income, a component of equity, until the hedged transaction occurs. The ineffective portion of the change in fair value is recorded in the combined statements of income. The Company’s derivative instruments did not qualify as a hedge, and accordingly, the Company has recorded the gains and losses from the interest rate swaps in the combined statements of income.
8 | (Continued) |
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
(h) | Revenue Recognition |
The Company’s primary source of revenue is derived from tenant rents. The majority of the Company’s revenue contracts are classified as leases and accounted for in accordance with ASC 840 – Leases. The Company leases its property with lease terms of generally five to fifteen years. Rental revenue is recognized monthly as earned. Rent received in advance is deferred and recognized in income when earned. Rent concessions and escalating payments are recognized on a straight-line basis as an offset to revenues over the term of the underlying lease.
The Company recognizes revenue on professional services in accordance with Topic 606 when the performance obligation is satisfied which typically occurs over time when the services are rendered. Revenue is recognized based on contractual rates and payment is typically due in full within thirty days of delivery.
(i) | Income Taxes |
The income of the Parent flows directly to its owners. Accordingly, there are no liabilities or provisions for income taxes recorded in the Parent’s combined financial statements; therefore, there are no liabilities or provisions for income taxes recorded in the accompanying combined financial statements.
The Parent evaluates the tax positions taken or expected to be taken in the course of preparing the Parent’s tax returns to determine whether the tax positions are more likely than not of being sustained by the applicable tax authority. The Parent has determined that there is no tax liability resulting from unrecognized tax benefits related to uncertain income tax positions taken or expected to be taken on the tax return for the years ended December 31, 2020 and 2019. There are no tax returns that are currently under examination. Tax years that remain subject to examination are years 2017 and forward.
(j) | Legal Matters |
The Company recognizes a liability for loss contingencies related to litigation, claims, assessments, and other legal matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
9 | (Continued) |
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
(3) | Mortgage Notes Payable |
Mortgage notes payable consisted of the following at December 31, 2020 and 2019 (in thousands):
Description* | Rate | Monthly payment | Maturity date | Collateral | 2020 | 2019 | ||||||||||||||||
MLIBOR + 2% | 3.00 | % | prin + int | 6/5/2024 | Secured by Land and Buildings | $ | 23,840 | 25,334 | ||||||||||||||
MLIBOR + 1.6% | 1.75 | % | prin + int | 6/1/2022 | Secured by Land and Buildings | 19,280 | 20,192 | |||||||||||||||
DLIBOR + 2.15% | 2.90 | % | prin + int | 10/31/2022 | Secured by Land and Buildings | 25,992 | 26,959 | |||||||||||||||
Fixed | 4.46 | % | prin + int | 12/1/2027 | Secured by Land and Buildings | 7,842 | 8,117 | |||||||||||||||
MLIBOR + 1.75% | 1.89 | % | prin + int | 1/1/2031 | Secured by Buildings | 6,162 | 6,689 | |||||||||||||||
5 yr LIBOR + 1.75% | 4.42 | % | prin + int | 3/28/2038 | Secured by Land and Buildings | 8,908 | 9,368 | |||||||||||||||
MLIBOR + 1.9% | 2.05 | % | prin + int | 3/31/2025 | Secured by Land and Buildings | 7,944 | 8,283 | |||||||||||||||
MLIBOR + 1.95% | 2.10 | % | prin + int | 6/1/2025 | Secured by Land and Buildings | 14,315 | 16,481 | |||||||||||||||
MLIBOR + 1.6% | 1.75 | % | prin + int | 9/5/2023 | Secured by Land and Buildings | 13,716 | 14,415 | |||||||||||||||
MLIBOR + 1.7% | 1.85 | % | prin + int | 3/31/2026 | Secured by Land and Buildings | 20,308 | 21,122 | |||||||||||||||
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148,307 | 156,960 | |||||||||||||||||||||
Less unamortized debt issuance costs |
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Mortgage notes payable, net |
| $ | 147,724 | 156,622 | ||||||||||||||||||
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* | MLIBOR equals 30-day LIBOR |
* | DLIBOR equals daily LIBOR |
The mortgage notes payable agreements contain covenants including debt service coverage ratios, lease sufficiency ratios, loan-to-value ratios, and minimum average liquidity requirements.
As of December 31, 2020, the expected principal payments are scheduled to be paid as follows (in thousands):
Year: | ||||
2021 | $ | 8,134 | ||
2022 | 48,481 | |||
2023 | 17,319 | |||
2024 | 23,114 | |||
2025 | 20,328 | |||
Thereafter | 30,931 | |||
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$ | 148,307 | |||
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(4) | Related Party Transactions |
(a) | Rental Revenues |
The Company’s rental revenue is generated from lease agreements with related entities owned by the Miller Family. Revenue recognized by the Company during the years ended December 31, 2020 and 2019 from related entities totaled $60.8 million and $58.8 million, respectively.
10 | (Continued) |
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
(b) | Notes Payable to Related Party |
The Company has secured notes payable to Larry H. Miller Management Corporation (MMC). Interest expense recorded on notes payable to related parties was $2.5 million and $2.4 million for the years ended December 31, 2020 and 2019, respectively. Notes payable to related party consisted of the following at December 31, 2020 and 2019 (in thousands):
2020 | 2019 | |||||||
A note payable bearing interest at 3.28%. Secured by furniture, fixtures, and equipment. Monthly payments of principal and interest of $18. Matures June 2020. | — | 42 | ||||||
A note payable bearing interest at 3.43%. Secured by real property. Monthly payments of principal and interest of $163. Matures April 2030. | 15,427 | 16,833 | ||||||
A note payable bearing interest at 3.18%. Secured by furniture, fixtures, and equipment. Monthly payments of principal and interest of $3. Matures May 2020. | — | 13 | ||||||
A note payable bearing interest at 3.43%. Secured by real property. Monthly payments of principal and interest of $15. Matures August 2031. | 1,617 | 1,744 | ||||||
A note payable bearing interest at 4.29%. Secured by real property. Monthly payments of principal and interest of $34. Matures December 2032. | 3,815 | 4,053 | ||||||
A note payable bearing interest at 4.76%. Secured by real property. Monthly payments of principal and interest of $53. Matures August 2033. | 3,006 | 3,793 | ||||||
A note payable bearing interest at 4.42%. Secured by real property. Monthly payments of principal and interest of $68. Matures April 2034. | 8,266 | 8,711 | ||||||
A note payable bearing interest at 4.32%. Secured by real property. Monthly payments of principal and interest of $123. Matures April 2029. | 10,341 | 11,351 | ||||||
A note payable bearing interest at 4.32%. Secured by real property. Monthly payments of principal and interest of $32. Matures November 2034. | 4,249 | 4,480 | ||||||
A note payable bearing interest at 4.69%. Secured by real property. Monthly payments of principal and interest of $167. Matures December 2027. | 860 | 3,167 | ||||||
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$ | 47,581 | 54,187 | ||||||
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11 | (Continued) |
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
As of December 31, 2020, the principal payments are scheduled to be paid as follows (in thousands):
Year: | ||||
2021 | $ | 4,694 | ||
2022 | 3,988 | |||
2023 | 4,148 | |||
2024 | 4,315 | |||
2025 | 4,489 | |||
Thereafter | 25,947 | |||
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$ | 47,581 | |||
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(c) | Due to Related Party |
The Company has a net payable due to related parties of $155.0 million and $157.2 million as of December 31, 2020 and 2019, respectively. Included in these amounts are a net payable due to MMC for loans from MMC of $9.0 million and $5.1 million as of December 31, 2020 and 2019, respectively, which is due on demand.
Also included in these amounts are a net payable due to the Parent for financing provided by the Parent. The Company has debt under credit agreements to which it is the legal obligor as described in Note (3) Mortgage Notes Payable and Note (4) Notes Payable to Related Party. In addition, although the Company is not the obligor, the Parent has mortgage notes payable that are secured by the assets of the Company of $137.7 million and $148.1 million as of December 31, 2020 and 2019, respectively. The Parent’s mortgage notes payable includes a line of credit with a borrowing capacity of $50 million bearing interest at LIBOR + 1.7% and had no amounts outstanding as of the end of each period presented.
As of December 31, 2020, the expected principal payments to the Parent are scheduled to be paid as follows (in thousands):
Year: | ||||
2021 | $ | 11,450 | ||
2022 | 11,450 | |||
2023 | 11,450 | |||
2024 | 104,313 | |||
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$ | 138,663 | |||
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In addition, as of December 31, 2020 and 2019, the net payable due to the Parent included a net payable due to the Parent of $8.3 million and $4.0 million, respectively, for the Parent’s interest rate swap derivatives related to the Parent’s mortgage notes payable.
The Parent’s mortgage notes payable include debt service coverage ratios, lease sufficiency ratios, loan-to-value ratios, and minimum average liquidity requirements. The mortgage notes payable mature June 2024. In the event of a change in control, the Company would be required to repay the outstanding balance to the Parent.
12 | (Continued) |
LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
(d) | Management Services |
The Company paid management services fees to MMC. The Company paid MMC $0.6 million for the affiliate management services provided during the years ended December 31, 2020 and 2019. The expenses are included as a component of general and administrative expense in the accompanying combined statements of income.
(5) | Lease Commitments |
The Company is a party to several lease agreements expiring on various dates through 2034. Lease terms generally include combined initial and option terms of 15 to 30 years. The option terms are typically in five-year increments. Rental payments include minimum rentals. Rental expense for operating leases during the years ended December 31, 2020 and 2019 totaled $6.4 million and $4.7 million, respectively.
Future minimum lease payments under operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2020 are as follows (in thousands):
Year ending December 31: | ||||
2021 | $ | 6,370 | ||
2022 | 6,080 | |||
2023 | 5,840 | |||
2024 | 4,409 | |||
2025 | 3,439 | |||
Thereafter | 7,481 | |||
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$ | 33,619 | |||
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(6) | Commitments and Contingencies |
(a) | Legal Matters |
The Company is party to certain legal matters arising in the ordinary course of business. In the opinion of management, the resolution of legal proceedings arising in the normal course of business will not have a material adverse effect on its combined business, results of operations, financial condition, or cash flows.
(b) | Environmental Matters |
The Company monitors for the presence of hazardous or toxic substances. Management is not aware of any environmental liability with respect to the Company that would have a material adverse effect on the Company’s combined business, assets, or results of operations; however, there can be no assurance that such a material environmental liability does not exist. The existence of any such environmental liability could have an adverse effect on the Company’s combined financial position, results of operations, or cash flows.
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LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
(c) | General Uninsured Losses |
The Company carries comprehensive liability, fire, flood, environmental, extended coverage, and rental loss insurance with policy specifications, limits, and deductibles that management believes are adequate and appropriate under the circumstances given the relative risk of loss, the cost of such coverage, and industry practice. There are, however, certain types of losses that may be either uninsurable or not economically insurable. Should an uninsured loss occur, it could have an adverse effect on the Company’s combined financial position, results of operations, or cash flows.
(d) | Future Construction Projects |
As of December 31, 2020, the Company did not have any commitments for construction projects. Due to the COVID-19 pandemic, all projects planned for 2020 were discontinued and existing contracts were terminated by right of owner convenience.
(7) | Rentals Receivable under Operating Leases |
The following is a schedule by years of minimum future rental income on noncancelable operating leases as of December 31, 2020 (in thousands):
Year ending December 31: | ||||
2021 | $ | 56,782 | ||
2022 | 48,834 | |||
2023 | 35,887 | |||
2024 | 28,847 | |||
2025 | 22,894 | |||
Thereafter | 8,661 | |||
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| |||
$ | 201,905 | |||
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(8) | Retirement Plan Expenses |
The Parent participates in the Larry H. Miller Employees’ Retirement Plan and Trust (the Plan), filed under Section 401(k) of the Internal Revenue Code. This plan covers eligible employees who complete one year of continuous service, work more than 1,000 hours, and have attained the age of 21. The Plan allows each participant to contribute up to 50% of the participant’s total annual salary, or the maximum amount allowed by the Internal Revenue Code, whichever is less.
The Parent has agreed to match 50% of each participant’s contribution, up to 6% of each participant’s total annual salary, with a total salary limit of $0.3 million for the years ended December 31, 2020 and 2019. Contributions are vested 20% each year based on each participant’s hire date with the Parent. The Parent has the right under the Plan to discontinue matching the salary deferral at any time or to terminate their participation in the plan. In the event of the termination of the plan, the net assets of the Plan are available for payment of benefits to the participants.
The Company incurred an insignificant amount of expenses for matching contributions during the years ended December 31, 2020 and 2019.
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LARRY H. MILLER AUTOMOTIVE REAL ESTATE PROPERTIES
Notes to Combined Financial Statements
December 31, 2020 and 2019
(9) | Fair Value of Financial Instruments |
GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability.
Level 1 | inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that Company had the ability to access. | |
Level 2 | inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. | |
Level 3 | inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. |
The following table presents the Company’s fair value hierarchy for the above assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019 (in thousands):
Quoted market prices in active markets (Level 1) | Other observable inputs (Level 2) | Unobservable inputs (Level 3) | ||||||||||
2020: | ||||||||||||
Financial liabilities: | ||||||||||||
Derivatives | $ | — | 6,532 | — | ||||||||
2019: | ||||||||||||
Financial liabilities: | ||||||||||||
Derivatives | — | 3,834 | — |
Interest rate swaps that are in an asset position are recorded as a component of prepaid expenses and other assets, and interest rate swaps that are in a liability position are recorded as a component of other liabilities.
(10) | Subsequent Events |
The Company has evaluated subsequent events through October 25, 2021, which is the date these combined financial statements were available to be issued.
On September 29, 2021, it was announced that the Asbury Automotive Group entered into a definitive agreement to acquire the Company from the Miller Family as part of a broader transaction for the Larry H. Miller automotive business.
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