Exhibit 99.1
Carve-out Financial Statements
The Acquired Manager of Broadstone Net Lease, Inc. and Subsidiaries
Year Ended December 31, 2019
With Report of Independent Auditors
INDEPENDENT AUDITORS’ REPORT
To the Board of Managers of Broadstone Real Estate, LLC.
We have audited the accompanying carve-out financial statements of specific operations of the Acquired Manager of Broadstone Net Lease, Inc. and subsidiaries (the "Company"), which comprise the carve-out balance sheet as of December 31, 2019, and the related carve-out statement of operations, net parent deficit, and cash flows for the year then ended and the related notes to the financial statements (the “financial statements”).
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of 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 financial statements based on our audit. We conducted our audit 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 financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the 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 Company'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 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 financial statements referred to above present fairly, in all material respects, the financial position of the Acquired Manager of Broadstone Net Lease, Inc. and subsidiaries as of December 31, 2019, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
We draw attention to Note 1 to the financial statements, which describes the basis of presentation has been prepared from the separate books and records maintained by Broadstone Real Estate, LLC and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Acquired Manager of Broadstone Net Lease, Inc. and subsidiaries had been operated as an unaffiliated company. Portions of certain expenses represent allocations made from Broadstone Real Estate, LLC applicable to the Acquired Manager of Broadstone Net Lease, Inc. and subsidiaries as a whole.
/S/ DELOITTE & TOUCHE LLP
Rochester, New York
February 27, 2020
CARVE-OUT BALANCE SHEET
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
| | | |
| | | |
| | December 31, 2019 | |
Assets | | | |
Due from Broadstone Net Lease, Inc. | $ | 4,972 | |
Prepaid expenses and other assets | | 1,123,124 | |
Total current assets | | 1,128,096 | |
Property and equipment, net | | 517,318 | |
Total assets | $ | 1,645,414 | |
| | | |
| | | |
Liabilities and net parent deficit | | | |
Liabilities | | | |
Accounts payable | $ | 22,663 | |
Accrued payroll and bonuses | | 336,204 | |
Accrued expenses and other liabilities | | 23,693 | |
Total current liabilities | | 382,560 | |
Interest rate swap | | 1,707,122 | |
Term note, net | | 89,715,500 | |
Total liabilities | | 91,805,182 | |
| | | |
Commitments and contingencies (Note 8) | | | |
| | | |
Net parent deficit | | (90,159,768 | ) |
| | | |
Total liabilities and net parent deficit | $ | 1,645,414 | |
The accompanying notes are an integral part of these carve-out financial statements.
1
CARVE-OUT STATEMENT OF OPERATIONS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
| | | |
| | | |
| | Year Ended December 31, 2019 | |
Revenues | | | |
Revenues from Broadstone Net Lease, Inc. (see Note 4) | $ | 43,045,580 | |
| | | |
Operating expenses | | | |
Compensation and related costs | | 13,259,211 | |
General and administrative expenses | | 7,159,052 | |
Total operating expenses | | 20,418,263 | |
| | | |
Other expenses | | | |
Interest expense | | 6,562,992 | |
| | | |
Net income | $ | 16,064,325 | |
The accompanying notes are an integral part of these carve-out financial statements.
2
CARVE-OUT STATEMENT OF CHANGES IN NET PARENT DEFICIT
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
| | | |
| | | |
| | Net Parent Deficit | |
Balance, January 1, 2019 | $ | (99,157,634 | ) |
Net income | | 16,064,325 | |
Equity-based compensation expense | | 1,289,902 | |
Net transfers to parent | | (8,356,361 | ) |
Balance, December 31, 2019 | $ | (90,159,768 | ) |
The accompanying notes are an integral part of these carve-out financial statements.
3
CARVE-OUT STATEMENT OF CASH FLOWS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
| | | |
| | | |
| | Year Ended December 31, 2019 | |
Operating activities | | | |
Net income | $ | 16,064,325 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation expense | | 169,242 | |
Debt related charges included in interest expense | | 180,000 | |
Equity-based compensation expense | | 1,289,902 | |
Fair value adjustments to interest rate swap included in interest expense | | 1,707,122 | |
Changes in assets and liabilities: | | | |
Due from Broadstone Net Lease, Inc. | | 111,638 | |
Prepaid expenses and other assets | | (984,026 | ) |
Accounts payable | | (15,595 | ) |
Accrued payroll and bonuses | | (1,291,499 | ) |
Accrued expenses and other liabilities | | (200,374 | ) |
Net cash provided by operating activities | | 17,030,735 | |
| | | |
Investing activities | | | |
Capital expenditures | | (49,874 | ) |
Net cash used for investing activities | | (49,874 | ) |
| | | |
Financing activities | | | |
Repayments on term note | | (8,624,500 | ) |
Net transfers to parent | | (8,356,361 | ) |
Net cash used for financing activities | | (16,980,861 | ) |
| | | |
Net increase in cash | | — | |
Cash, at beginning of year | | — | |
Cash, at end of year | $ | — | |
| | | |
Supplemental Cash Flow Disclosures | | | |
Cash paid for interest | $ | 5,073,147 | |
The accompanying notes are an integral part of these carve-out financial statements.
4
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
1. | Business Description and Basis of Presentation |
Description of Business
Broadstone Real Estate, LLC (“BRE”), was formed on September 13, 2005, as a New York limited liability company, and operated as a full-service asset manager in the real estate industry that was primarily engaged in overseeing the strategic planning, investment and financing activities for related parties and other real estate investors. As of and for the year ended December 31, 2019, BRE served as the sponsor and manager of three different entities: Broadstone Net Lease, Inc. (“BNL”), a SEC reporting company and non-traded real estate investment trust that acquires, owns, and manages primarily single-tenant, commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants; Broadtree Residential, Inc. (“BTR”), a private real estate investment trust that invests in multifamily apartment communities; and Broadstone Real Estate Access Fund (“BDREX”), an investment company that is operated as a non-diversified, closed-ended interval fund and registered under the Investment Company Act of 1940, as amended.
On November 11, 2019, BRE entered into a definitive merger agreement with BNL, Broadstone Net Lease, LLC, BNL’s operating company (the “OP”), and certain other affiliates, providing for the internalization of the external management functions previously performed for BNL and the OP by BRE (the “Internalization”). On February 7, 2020, the Internalization closed pursuant to the merger agreement.
Basis of Presentation and Accounting
The accompanying carve-out financial statements consist of the specific external management functions performed by BRE for BNL and subsidiaries that are being acquired by BNL (the “Acquired Manager”). Accordingly, these accompanying carve-out financial statements consist of the acquired operations, assets and liabilities of the Acquired Manager pursuant to the Internalization. Such financial statements exclude the operations, assets and liabilities of BRE’s external management functions of BTR and BDREX, and BRE’s historic investment in BNL which are not part of the external management function performed by BRE for BNL. The assets and liabilities in the accompanying carve-out financial statements have been carved out of BRE’s books and records at their historical carrying amounts.
The accompanying carve-out financial statements have been prepared on a carve-out basis in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenues and expenses during the reporting periods. Actual results could differ from these estimates.
Management believes that the accompanying carve-out financial statements appropriately represent the discrete activity of the Acquired Manager for which assets and liabilities are specifically identifiable and a reasonable basis exists to allocate those items that are not specifically identifiable to the Acquired Manager. The accompanying carve-out financial statements include an allocation of certain corporate and shared service level general and administrative expenses, compensation costs and related costs, and the associated assets and liabilities that were attributable to the Acquired Manager. The accompanying carve-out financial statements also include an allocation of interest expense related to corporate level debt that was assumed by BNL as part of the Internalization. These allocations were made on a specific identification basis where possible or by using relative percentages of headcount or other methods management considered to be a reasonable reflection of the utilization of services provided.
BRE used a centralized approach to cash management of its operations. As such, the Acquired Manager was dependent upon BRE for its working capital requirements. Accordingly, none of BRE’s cash has been included in the accompanying carve-out financial statements.
Net parent deficit, which includes accumulated deficit, represents BRE’s interest in the recorded net assets of the Acquired Manager. All significant transactions between the Acquired Manager and BRE have been included in the accompanying carve-out financial statements and are accounted for through the net parent investment account of the Acquired Manager.
Management believes the assumptions utilized in the accompanying carve-out financial statements are reasonable. However, the accompanying carve-out financial statements may not be indicative of the future performance of the Acquired Manager following Internalization, and do not necessarily reflect what the Acquired Manager’s carve-out
5
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
results of operations, financial position and cash flows would have been had the Acquired Manager operated on a stand-alone basis.
2. | Summary of Significant Accounting Policies |
Use of Estimates
The preparation of carve-out financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the carve-out financial statements and the reported amounts of revenues and expenses, during the reporting period. Significant estimates include, but are not limited to, the value of long-lived assets, the depreciable lives of property and equipment, the fair value of equity-based compensation and the determination of any uncertain tax positions. Accordingly, actual results could differ from those estimates.
Property and Equipment
Property and equipment are recorded at cost. Gains or losses upon sale or other dispositions of fixed assets are included in the accompanying Carve-Out Statement of Operations.
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which are as follows:
| |
Computer and office equipment | 5-7 years |
Furniture and fixtures | 5-7 years |
Leasehold improvements | Shorter of lease term or asset life |
Revenue Recognition
Revenues based on the related party management agreements are recognized in the period in which the services have been provided and the earnings process is complete. Based upon the new revenue recognition guidance, see Note 3, the Acquired Manager determined that services including property and asset management, acquisition, disposition, leasing and other services needed to be evaluated for each separate performance obligation included in the contract in order to determine timing of revenue recognition. Revenues from contracts within the scope of the new revenue recognition guidance were $43,045,580 for the year ended December 31, 2019. The Acquired Manager determined that property and asset management fees are recognized over time as the services are provided, whereas acquisition, disposition, leasing and other fees charged are recognized when the related transaction is completed.
Due from Broadstone Net Lease, Inc, Allowance for Doubtful Accounts
Due from Broadstone Net Lease, Inc. consists of amounts due under the asset management and property management agreements with BNL (see Note 4). Management periodically reviews the sufficiency of the allowance for doubtful accounts, taking into consideration its historical losses and existing economic conditions, and adjusts the allowance as it considers necessary. At December 31, 2019, there was no allowance for doubtful accounts recorded.
Debt Issuance Costs
Debt issuance costs incurred in connection with the Acquired Manager’s unsecured term note have been deferred and are being amortized over the term of the loan commitment using the straight-line method, which approximates the effective interest method, and are recorded in Term note, net on the accompanying Carve-out Balance Sheet.
6
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
The following table summarizes debt issuance costs on the accompanying Carve-out Balance Sheet at December 31, 2019:
| | | |
Debt issuance costs – Term Note | $ | 900,000 | |
Less accumulated amortization | | (240,000 | ) |
| $ | 660,000 | |
Income Taxes
BRE is a New York limited liability company taxed as a partnership for federal and state income tax purposes and is not subject to U.S. federal income tax on taxable income generated.
BRE files U.S. federal and state income tax returns. The tax years open to examination by tax authorities include 2016, 2017, and 2018. The Acquired Manager has determined that it has no uncertain tax positions.
Derivative Instruments
The Acquired Manager has an interest rate swap agreement to manage risks related to interest rate movements on its variable-rate debt. The Acquired Manager did not designate its interest rate swap as a hedge instrument upon inception. Therefore the interest rate swap is reported at fair value with the fair value adjustments recorded to interest expense in the accompanying Carve-out Statement of Operations.
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market of the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in Level 1 are marketable, available-for-sale equity securities that are traded in an active exchange market.
Level 2 – Pricing inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Instruments included in this category are derivative contracts whose value is determined using a pricing model with inputs (such as yield curves and credit spreads) that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 includes assets and liabilities whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The balance of the financial instruments measured at fair value on a recurring basis as of December 31, 2019 are as follows:
| | | | | | | | | | | |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 |
Interest rate swap, liability | $ | 1,707,122 | | $ | — | | $ | 1,707,122 | | $ | — |
Interest rate swaps are derivative instruments that have no quoted readily available Level 1 inputs, and therefore are measured at fair value using inputs that are directly observable in active markets and are classified within Level 2 of the valuation hierarchy, using an income approach. Specifically, the fair value of the interest rate swap is determined using a discounted cash flow analysis on the expected future cash flows of each instrument. This analysis utilizes observable market data including yield curves and implied volatilities to determine the market’s expectation of the
7
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
future cash flows of the variable component. The fixed and variable components of the interest rate swap is then discounted using calculated discount factors developed based on the overnight indexed swap (“OIS”) curve and are aggregated to arrive at a single valuation for the period. The Acquired Manager also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement. Although the Acquired Manager has determined that the majority of the inputs used to value its interest rate swap fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its interest rate swap utilizes Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. At December 31, 2019, the Acquired Manager has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Acquired Manager has determined that its interest rate swap valuation in its entirety is appropriately classified within Level 2 of the fair value hierarchy.
The Acquired Manager has estimated that the carrying amount of Cash, Due from Broadstone Net Lease, Inc., Prepaid expenses and other assets, Accounts payable, Accrued payroll and bonuses, and Accrued expenses and other liabilities approximates their fair values due to their short-term nature.
The Acquired Manager’s debt approximates fair value as interest payments are variable, based on a base rate plus the London Inter-Bank Offered Rate (“LIBOR”) and the Acquired Manager’s credit profile has not changed since issuance. The carrying value of such debt, excluding debt issuance costs was $90,375,500 on the Cave-out Balance Sheet at December 31, 2019.
Equity Based Compensation
The Acquired Manager recognizes equity-based compensation in accordance with ASC 718, Compensation - Stock Compensation. The Acquired Manager measures the costs of employee services received in exchange for awards of equity instruments based on the awards’ grant date fair value. The Acquired Manager recognizes this cost over the period during which an employee is required to provide service in exchange for the award, and accounts for forfeitures as they occur. See Note 9 for additional information on equity-based compensation.
3. | Recent Accounting Pronouncements |
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers, for all entities by one year. With the deferral, ASU 2014-09 was effective for annual periods beginning after December 15, 2018, with early application permitted. The Acquired Manager adopted the guidance effective January 1, 2019 on a modified retrospective basis. The adoption had no effect on the Acquired Manager’s accompanying carve-out financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets. This new guidance was required to be adopted concurrently with the amendments in ASU 2014-09. The new pronouncement added guidance for partial sales of nonfinancial assets, including real estate. In adopting ASU 2017-05, companies could use either a full retrospective or a modified retrospective approach. Upon adoption of ASU 2014-09, as discussed above, and therefore ASU 2017-05, the Acquired Manager evaluates any separate contract or performance obligation to determine proper timing of revenue recognition, as well as sales price allocation when a performance obligation is identified. The Acquired Manager adopted the guidance effective January 1, 2019 which did not have an impact on its accompanying carve-out financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provided classification guidance for eight specific topics including debt extinguishment costs, contingent
8
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
consideration payments made after a business combination, and distributions received from equity method investees. ASU 2016-18 was effective, on a prospective basis, for annual periods beginning after December 15, 2018, with early adoption permitted. The Acquired Manager adopted the guidance effective January 1, 2018 which did not have an impact on its accompanying carve-out financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, under ASC 840. ASU 2016-02 requires lessees to recognize a right-of-use asset and a corresponding lease liability, initially measured at the present value of lease payments, for both operating and financing leases. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. In adopting the new guidance, companies are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The amendments were effective for annual periods beginning after December 15, 2019, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements which provides an optional transition method where an entity can initially apply the guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. An entity’s reporting for the comparative periods presented will continue to be in accordance with current GAAP (ASC 840), including the required disclosures. ASU 2016-02 is effective for the Acquired Manager on January 1, 2020. The Acquired Manager is currently assessing the impact that adoption of this guidance will have on its accompanying carve-out financial statements and footnote disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses which changes how entities measure credit losses for most financial assets. Financial assets that are measured at amortized cost will be required to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis. The guidance requires an entity to utilize broader information in estimating the expected credit loss, including forecasted information. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, which provides entities with an option to irrevocably elect the fair value option for eligible instruments upon adoption of Topic 326. ASU 2016-13 is effective for the Acquired Manager on January 1, 2020. The Acquired Manager is currently assessing the impact that adoption of this guidance will have on its accompanying carve-out financial statements and footnote disclosures.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 amends the designation and measurement guidance for qualifying hedging transactions and the presentation of hedge results in an entity’s financial statements. The new guidance removes the concept of separately measuring and reporting hedge ineffectiveness and requires a company to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. Disclosure requirements will be modified to include a tabular disclosure related to the effect of hedging instruments on the income statement and eliminate the requirement to disclose the ineffective portion of the change in fair value of such instruments. ASU 2017-12 provides companies with a modified retrospective transition method. This adoption method will require a company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the update. The amended presentation and disclosure guidance will be applied prospectively. The Acquired Manager adopted ASU 2017-12 as of January 1, 2019, however the Acquired Manager did not have any derivative or hedging instruments that were designated and adoption of this guidance did not materially impact the accompanying carve-out financial statements and footnote disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments under ASU 2018-13 remove, add, and modify certain disclosure requirements on fair value measurements in ASC 820. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Acquired Manager will adopt the guidance on a prospective basis effective January 1, 2020. The Acquired Manager does not expect adoption of this guidance to materially impact its accompanying carve-out financial statements and footnote disclosures.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge
9
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
Accounting Purposes. Currently under Topic 815, the eligible benchmark interest rates in the United States are the interest rates on direct Treasury obligations of the U.S. government (UST), the LIBOR swap rate, the OIS Rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate, which was introduced in ASU 2017-12. The amendments in ASU 2018-16 permit the use of the OIS rate based on SOFR as a benchmark interest rate for hedge accounting purposes under Topic 815. The amendments in this update are effective at the same time as ASU 2017-12 (noted above), and adoption of this guidance did not materially impact the accompanying carve-out financial statements and footnote disclosures.
4. | Related Party Transactions |
Asset Management Agreement
The Acquired Manager entered into an asset management agreement (“AMA”) with BNL and the OP, pursuant to which the Acquired Manager was responsible for, among other things, BNL’s acquisition, initial leasing, and disposition strategies, financing activities, and providing support to BNL’s Independent Directors Committee (“IDC”) for its valuation functions and other duties. The Acquired Manager also nominated two individuals to serve on the Board of Directors (“BOD”) of BNL.
Under the terms of the AMA, the Acquired Manager was compensated as follows:
| a. | a quarterly asset management fee equal to 0.25% of the aggregate value of common stock, based on the per share value as determined by BNL’s IDC each quarter, on a fully diluted basis as if all interests in the OP had been converted to shares of BNL’s common stock; |
| b. | 1% of the gross purchase price paid for each rental property acquired (other than acquisitions described in “c” below), including any property contributed in exchange for membership interests in the OP; |
| c. | 2% of the gross purchase price paid for each rental property acquired in the event that the acquisition of a rental property requires a new lease (as opposed to the assumption of an existing lease), such as a sale-leaseback transaction; |
| d. | 1% of the gross sale price received for each rental property disposition; and |
| e. | 1% of the Aggregate Consideration, as defined in the AMA, received in connection with a Disposition Event, as defined in the AMA. |
The AMA was terminated upon completion of the Internalization. The Internalization was not considered a termination event under the AMA. Therefore, no termination fees were received from BNL as a result of the Internalization.
Property Management Agreement
The Acquired Manager entered into a property management agreement (“PMA”) with BNL and the OP, pursuant to which the Acquired Manager managed and coordinated certain aspects of the leasing of BNL’s rental property.
In exchange for services provided under the PMA, the Acquired Manager was compensated as follows:
| a. | 3% of gross rentals collected each month from the rental property for property management services (other than one property, which has a separate fee of 5% of gross rentals); and |
| b. | re-leasing fees for existing rental property equal to one month’s rent for a new lease with an existing tenant and two months’ rent for a new lease with a new tenant. |
The PMA was terminated upon completion of the Internalization. The Internalization was not considered a termination event under the PMA. Therefore, no termination fees were received from BNL as a result of the Internalization.
10
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
Related Party Revenues
Management fee revenue under the AMA and PMA with BNL for the year ended December 31, 2019 are as follows:
| | | | | | |
Type of Revenue | | Agreement | | | Amount | |
Management Fee Revenues | | | | | | |
Asset management fee revenue | | AMA | | $ | 21,863,338 | |
Property management fee revenue | | PMA | | | 8,255,648 | |
Total management fee revenue | | | | | 30,118,986 | |
| | | | | | |
Acquisition fee revenue | | AMA | | | 10,318,806 | |
Leasing fee revenue | | AMA | | | 832,558 | |
Disposition fee revenue | | AMA | | | 1,764,605 | |
Re-leasing fee revenue | | PMA | | | 10,625 | |
Total revenues from related party | | | | $ | 43,045,580 | |
Related Party Lease Agreement
The Acquired Manager has a lease agreement with Clinton Asset Holding Associates, L.P. (“CAHA”), a related party in which certain members of BRE have ownership interest in CAHA. The lease agreement, which matures August 31, 2023, requires base monthly rental expense equal to $47,450 per month with annual rent escalators of 2% each January 1. Under this lease agreement, rent expense amounted to $569,394 for the year ended December 31, 2019.
The Acquired Manager is also obligated to pay a portion of the real estate taxes as additional rent and shares in the increase in operating and energy costs as well as for utilities, taxes and insurance expense.
Estimated future minimum rental payments required under the CAHA lease for the years ending December 31, are as follows:
| | |
2020 | $ | 580,782 |
2021 | | 592,398 |
2022 | | 604,246 |
2023 | | 410,887 |
| $ | 2,188,313 |
Property and equipment consisted of the following at December 31, 2019:
| | | |
Computers and equipment | $ | 424,834 | |
Furniture and fixtures | | 844,798 | |
Leasehold improvements | | 107,255 | |
| | 1,376,887 | |
Less: Accumulated depreciation | | (859,569 | ) |
Property and equipment, net | $ | 517,318 | |
Depreciation expense amounted to $169,242 for the year ended December 31, 2019 and is recorded in General and administrative expenses in the accompanying Carve-out Statement of Operations.
11
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
In September 2018, the Acquired Manager entered into a term loan agreement with Capital One National Association as Administrative Agent, as described below. At closing, the Acquired Manager borrowed an aggregate of $100,000,000, of which $80,000,000 was used to fund a one-time distribution to equity holders as part of a dividend recapitalization, repay a preexisting term note in full, pay transaction costs and for general corporate purposes. The remaining $20,000,000 was used to seed BRE’s investment in BDREX.
The Term note consists of the following at December 31, 2019:
| | | | | | | | | | | |
Lender | | Origination Date (Month/
Year) | | Maturity Date (Month/
Year) | | Interest Rate | | | Balance | | |
Capital One National Association | | Sept-18 | | Sept-23 | | 5.26% | | $ | 90,375,500 | (a)(b)(c) |
Debt issuance costs, net | | | | | | | | | (660,000 | ) | |
Term note, net | | | | | | | | $ | 89,715,500 | | |
| (a) | The agreement is with Capital One National Association, as Administrative Agent, and Manufacturers & Traders Trust Company, Bank of Montreal Capital Markets, SunTrust Bank, and Royal Bank of Canada as participating lenders. |
| (b) | The interest rate is based on one-month LIBOR plus a margin ranging between 3.0% and 3.5% based on the Acquired Manager’s leverage ratio. The one-month LIBOR was 1.76% at December 31, 2019, and the Acquired Manager’s applicable rate was 3.5% based on its leverage ratio, for an all-in rate of 5.26%. |
| (c) | The term loan requires the Acquired Manager to comply with certain financial covenants. The Acquired Manager was in compliance with those covenants at December 31, 2019. |
For the year ended December 31, 2019, $180,000 of debt issuance costs were amortized and recorded as interest expense in the accompanying Carve-out Statement of Operations.
Prepayments on the term note are permitted without prepayment penalties or yield maintenance fees. Estimated future principal payments to be made under the term note for the years ending December 31, are as follows:
| | | |
2020 | $ | 5,625,000 | |
2021 | | 7,500,000 | |
2022 | | 8,125,000 | |
2023 | | 69,125,500 | |
| $ | 90,375,500 | |
During 2019, the Acquired Manager entered into an interest rate swap agreement with a financial institution that serves as a swap counterparty in order to mitigate the impact of interest rate variability over the term of the term note described in Note 6. Under the agreement, the Acquired Manager receives monthly payments from the counterparty on the interest rate swap equal to the related variable interest rate multiplied by the outstanding notional amount. In turn, the Acquired Manager pays the counterparty an amount equal to a fixed rate multiplied by the related outstanding notional amount monthly. The intended net impact of these transactions is that the Acquired Manager pays a fixed interest rate on its variable-rate borrowings.
The following is a summary of the Acquired Manager’s outstanding interest rate swap agreement at December 31, 2019:
| | | | | | | | | | | | | | |
Counterparty | | Maturity Date | | Fixed Rate | | | Variable Rate Index | | | Notional Amount | | | Fair Value | |
Capital One National Association | | September 2023 | | 2.505 | % | | one-month LIBOR | | $ | 50,000,000 | | $ | (1,707,122) | |
Subsequent to December 31, 2019, the Acquired Manager terminated the interest rate swap agreement and settled with the counterparty for $1,936,000 (see Note 10).
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NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
8. | Commitments and Contingencies |
Leasing Commitment
The Acquired Manager leases office space under various lease arrangements, which expire on various dates through 2023. As these leases expire, it can be expected that in the normal course of business, they will be renewed or replaced. Certain lease agreements contain renewal options and rent escalation provisions based on certain costs incurred under the lease.
Estimated future minimum lease payments required under non-cancelable leases for the years ending December 31, including the CAHA lease (see Note 4), are as follows:
| | |
2020 | $ | 629,344 |
2021 | | 627,344 |
2022 | | 604,246 |
2023 | | 410,887 |
| $ | 2,271,821 |
Litigation
From time to time the Acquired Manager is a party to various legal matters incidental to the conduct of the Acquired Manager’s business. The Acquired Manager does not believe that the outcome of any of these matters will have a material adverse effect on its carve-out financial position, results of operations or liquidity.
9. | Equity-based Compensation and Benefit Plans |
Equity-based compensation
In June 2015, Trident BRE, LLC (“Trident”), an affiliate of Stone Point Capital, LLC, acquired an equity investment in BRE. In connection with that transaction, on June 30, 2015, employees who were employed as of the transaction date were awarded certain vested and unvested non-voting ordinary common units with a grant date of the transaction. Employees hired after this transaction date have been awarded unvested non-voting ordinary common units, generally as of the quarter-end after reaching six months of employment with BRE.
The unvested non-voting ordinary common units for employees vest either at the time of the sale of BRE or after a requisite service period of ten years and are valued at the market value of the units on the grant date. The Acquired Manager recognizes compensation expense over the requisite service period for awards expected to vest. The compensation expense for equity-based awards are adjusted as actual forfeitures occur. Total compensation expense for equity-based awards recorded to Compensation and related costs in the accompanying Carve-out Statement of Operations was $865,242 for the year ended December 31, 2019. The Acquired Manager recorded $184,757 of forfeitures for the year ended December 31, 2019, which was recorded as an offset to Compensation and related costs in the accompanying Carve-out Statement of Operations.
Dividends paid on unvested awards are treated as an equity transaction and recorded within net parent deficit in the accompanying Carve-out Balance Sheet. Cumulative dividends in relation to forfeited awards that were previously paid are reclassed out of Net parent deficit and recognized as compensation expense within the accompanying Carve-out Statement of Operations at the time of forfeiture. For the year ended December 31, 2019, the Acquired Manager recorded $609,417 of cumulative distributions as a result of forfeitures.
13
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
THE ACQUIRED MANAGER OF BROADSTONE NET LEASE, INC. AND SUBSIDIARIES
A summary of the total activity under the equity-based compensation plan for the year ended December 31, 2019 is as follows:
| Number of Unvested share awards | | | | Weighted Average Grant Price | |
Non-voting share awards outstanding at January 1, 2019 | 115,068 | | | $ | 112.14 | |
Granted | 16,009 | | | | 124.18 | |
Vested | — | | | | — | |
Forfeited | (7,555 | ) | | | 111.48 | |
Total unvested, non-voting share awards outstanding at December 31, 2019 | 123,522 | | | $ | 113.74 | |
The total fair value of shares vested during the year ended December 31, 2019 was $0. At December 31, 2019, the unamortized value of previously issued share awards was approximately $9,830,000, which is expected to be amortized over a weighted average period of 6.93 years.
The activity under the equity-based compensation plan presented in the table above, the unamortized value and weighted average amortization period are not presented on a carve-out basis. The plan in place is for BRE and were allocated to the Acquired Manager, which did not operate as a separate legal entity during the year ended December 31, 2019.
At the time of the Internalization, the unvested non-voting ordinary common units under the equity-based compensation plan fully vested. See Note 10.
401(k) Retirement Plan
The Acquired Manager sponsors a 401(k)-retirement plan which covers substantially all of its employees. The plan allows for employees’ salary deferrals under Section 401(k) of the Internal Revenue Code. Discretionary matching contributions are at a rate of 75% of the first 4% of employee contributions up to 3% of eligible compensation. The Acquired Manager made discretionary matching contributions of $263,689 for the year ended December 31, 2019, recorded in compensation and related costs in the accompanying Carve-out Statement of Operations.
The Acquired Manager has evaluated subsequent events through February 27, 2020, which is the date the accompanying carve-out financial statements were available to be issued.
On January 7, 2020, the Acquired Manager terminated and settled the interest rate swap agreement with Capital One National Association for $1,936,000 (see Note 7).
On February 7, 2020, the Internalization was completed pursuant to the merger agreement between BRE, BNL and the OP (see Note 1). As a result of the Internalization, the unvested non-voting ordinary common units under the equity-based compensation plan fully vested and the total unamortized value was recorded as compensation expense for BRE (see Note 9)
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