UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-K | | | | | | | | |
| (Mark One) | | |
| ☒ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| | | For the fiscal year ended December 31, 2020 |
|
| ☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| | | For the transition period from to |
Commission file number 000-55187
CIM INCOME NAV, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
| Maryland | | 27-3147801 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer Identification Number) |
2398 East Camelback Road, 4th Floor | | | |
| Phoenix, | Arizona | | 85016 |
| (Address of principal executive offices) | | (Zip Code) |
| (602) | | 778-8700 | |
| (Registrant’s telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
| Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
| None | | None | | None |
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Class D Common Stock, $.01 par value
Class T Common Stock, $.01 par value
Class S Common Stock, $.01 par value
Class I Common Stock, $.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ¨ | | Accelerated filer | ¨ | | Non-accelerated filer | x |
| | | | | | | |
| Smaller reporting company | ¨ | | Emerging growth company | ¨ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
There is no established market for the registrant’s shares of common stock. There were approximately 30.7 million shares of common stock held by non-affiliates as of June 30, 2020, for an aggregate market value of $514.8 million, based upon an average net asset value per share of $16.79 as of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter.
As of March 22, 2021, there were approximately 15.2 million shares of Class D common stock, approximately 13.7 million shares of Class T common stock, approximately 7,500 shares of Class S common stock, and approximately 1.1 million shares of Class I common stock, par value $0.01 each, of CIM Income NAV, Inc. outstanding.
Documents Incorporated by Reference:
The Registrant incorporates by reference portions of the CIM Income NAV, Inc. definitive proxy statement to be filed with the SEC with respect to the Registrant’s 2021 Annual Meeting of Stockholders (into Items 10, 11, 12, 13 and 14 of Part III).
TABLE OF CONTENTS
| | | | | | | | | | | |
| | |
| |
| PART I | |
| ITEM 1. | | | |
| ITEM 1A. | | | |
| ITEM 1B. | | | |
| ITEM 2. | | | |
| ITEM 3. | | | |
| ITEM 4. | | | |
| | | |
| PART II | |
| ITEM 5. | | | |
| ITEM 6. | | | |
| ITEM 7. | | | |
| ITEM 7A. | | | |
| ITEM 8. | | | |
| ITEM 9. | | | |
| ITEM 9A. | | | |
| ITEM 9B. | | | |
| | | |
| PART III | |
| ITEM 10. | | | |
| ITEM 11. | | | |
| ITEM 12. | | | |
| ITEM 13. | | | |
| ITEM 14. | | | |
| | | |
| PART IV | |
| ITEM 15. | | | |
| ITEM 16. | | | |
| | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K of CIM Income NAV, Inc. includes “forward-looking statements” (within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that reflect our expectations and projections about our future results, performance, prospects and opportunities. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. In addition, these risks and uncertainties include those associated with (i) the scope, severity and duration of the current pandemic of the current novel coronavirus (“COVID-19”) pandemic and actions taken to contain the pandemic or mitigate its impact, (ii) the potential adverse effect of the COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets, among others, and (iii) general economic, market and other conditions. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. We caution readers not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date this Annual Report on Form 10-K is filed with the U.S. Securities and Exchange Commission (the “SEC”). Additionally, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements:
•We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
•We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties.
•Our properties, intangible assets and other assets may be subject to impairment charges.
•We could be subject to unexpected costs or unexpected liabilities that may arise from dispositions.
•We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties, and we may suffer delays or be unable to acquire, dispose of, or lease properties on advantageous terms.
•We are subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally.
•We have substantial indebtedness, which may affect our ability to pay distributions and expose us to interest rate fluctuation risk and the risk of default under our debt obligations.
•We are affected by the incurrence of additional secured or unsecured debt.
•We may not generate cash flows sufficient to pay our distributions to stockholders or meet our debt service obligations.
•Our continued compliance with debt covenants depends on many factors and could be impacted by current or future economic conditions associated with the COVID-19 pandemic.
•We may be affected by risks resulting from losses in excess of insured limits.
•We may not be able to maintain profitability.
•We may fail to remain qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.
•We are subject to market and regulatory risks that may affect capital raising volume.
•Our advisor has the right to terminate the advisory agreement upon 60 days’ written notice without cause or penalty.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A. Risk Factors within this Annual Report on Form 10-K.
Definitions
We use certain defined terms throughout this Annual Report on Form 10-K that have the following meanings:
The phrase “annualized rental income” refers to the straight-line rental revenue under our leases on operating properties owned as of the respective reporting date, which includes the effect of rent escalations and any tenant concessions, such as free rent, and excludes any contingent rent, such as percentage rent. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance.
Under a “net lease,” the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. The tenant generally agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. There are various forms of net leases, most typically classified as either triple-net or double-net. Triple-net leases typically require the tenant to pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs, including roof, structure and parking lot). Double-net leases typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance).
PART I
ITEM 1. BUSINESS
General Description of the Business and Operations
CIM Income NAV, Inc., (the “Company,” “we,” “our” or “us”) is a monthly priced perpetual life non-exchange traded REIT formed as a Maryland corporation on July 27, 2010. We elected to be taxed, and currently qualify, as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2012. We primarily acquire and operate a diversified portfolio of necessity retail, office and industrial properties that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States. As of December 31, 2020, we owned 123 commercial properties, including two properties through a consolidated joint venture agreement (the “Consolidated Joint Venture”), comprising 5.3 million rentable square feet of commercial space located in 34 states, and which were 98.1% leased, including month-to-month agreements, if any.
Substantially all of our business is conducted through our operating partnership, CIM Income NAV Operating Partnership, LP, a Delaware limited partnership (“CIM Income NAV OP”) of which we are the sole general partner and own, directly or indirectly, 100% of the partnership interests.
We are externally managed by CIM Income NAV Management, LLC, a Delaware limited liability company (“CIM Income NAV Management”), which is an affiliate of CIM Group, LLC (“CIM”). CIM is a community-focused real estate and infrastructure owner, operator, lender and developer. Headquartered in Los Angeles, California, CIM has offices across the United States and in Tokyo, Japan.
We have no paid employees and rely upon our advisor and its affiliates to provide substantially all of our day-to-day management. Pursuant to an advisory agreement with us, CIM Income NAV Management is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf. In addition, pursuant to the advisory agreement, CIM Income NAV Management has fiduciary obligations to us and our stockholders. Our advisory agreement with CIM Income NAV Management is for a one-year term and is considered for renewal on an annual basis by our board of directors (our “Board”). The current term of the advisory agreement expires on November 30, 2021.
CCO Group, LLC owns and controls CIM Income NAV Management, our advisor, and is the indirect owner of CCO Capital, LLC (“CCO Capital”), our dealer manager, and CREI Advisors, LLC (“CREI Advisors”), our property manager. CCO Group, LLC and its subsidiaries (collectively, “CCO Group”) serve as our sponsor and as a sponsor to CIM Real Estate Finance Trust, Inc. (“CMFT”).
On December 6, 2011, we commenced our initial public offering (the “Initial Offering”) on a “best efforts” basis of up to $4.0 billion in shares of our common stock, consisting of $3.5 billion in shares in the primary offering (the “Primary Offering”) and $500.0 million in shares pursuant to a distribution reinvestment plan (the “DRIP”). On August 26, 2013, we commenced our first follow-on offering (the “First Follow-on Offering”), pursuant to which we offered up to $4.0 billion in shares of common stock, consisting of $3.5 billion in shares in the Primary Offering and $500.0 million in shares pursuant to the DRIP. As part of the First Follow-on Offering, we designated the existing shares of our common stock that were sold prior to such date to be Wrap Class shares (“W Shares”) of common stock and registered two new classes of our common stock, Advisor Class shares (“A Shares”) and Institutional Class shares (“I Shares”). On February 10, 2017, we commenced our second follow-on offering (the “Second Follow-on Offering”), pursuant to which we offered up to $4.0 billion in shares of common stock, consisting of $3.5 billion in shares in our Primary Offering and $500.0 million in shares pursuant to the DRIP. On August 7, 2020, we commenced our third follow-on offering, pursuant to which we are offering up to $4.0 billion in shares of common stock (the “Third Follow-on Offering” and collectively with the Initial Offering, the First Follow-on Offering and the Second Follow-on offering, the “Offering”), consisting of $3.5 billion in shares in the Primary Offering and $500.0 million in shares pursuant to the DRIP.
On November 27, 2018, we amended our charter to, among other things, change the name and designation of our W Shares to Class D Common Stock (the “D Shares”), our A Shares to Class T Common Stock (the “T Shares”), respectively, and reclassified a portion of our common stock as Class S Common Stock (the “S Shares”), to be offered alongside our D Shares, T Shares and I Shares in our continuous public offering (the “Share Modifications”). We are offering to sell any combination of D Shares, T Shares, S Shares and I Shares with a dollar value up to the maximum offering amount. Effective April 1, 2020, we modified our Offering and certain other features of our Company from a daily to a monthly NAV REIT. As part of the change from a daily to a monthly NAV REIT, our Board approved, among other things: (1) a change in the frequency of our NAV calculations from daily to monthly and certain other related changes to our valuation policies; and (2) adopted an amended share redemption program that provides for redemptions on a monthly basis.
As a perpetual-life, non-exchange traded REIT, we intend to sell shares of our common stock on a continuous basis and for an indefinite period of time, subject to ongoing regulatory approval of our filings for additional offerings. The Offering must be registered in every state in which we offer or sell shares. Generally, such registrations are for a period of one year. Thus, we may have to stop selling shares in any state in which our registration is not renewed or otherwise extended annually. We reserve the right to terminate the Offering at any time and to extend our offering term to the extent permissible under applicable law.
Investment Strategy and Objectives
Our investment strategy is to primarily acquire a diversified portfolio of necessity commercial properties in the retail, office and industrial sectors that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States and U.S. protectorates, and U.S. government securities, agency securities, corporate debt and other investments for which there is reasonable liquidity. We expect to complement our portfolio of net-lease properties by investing in substantially leased core metropolitan commercial and multi-family properties with growth potential that we believe will help us meet our investment objectives, either directly or through other funds with a proven track record of performance in these investment types, including funds managed by affiliates of our advisor. See “Investment Objectives, Strategy and Policies” for more details regarding our investment strategy. We believe that our organization as a perpetual-life REIT will allow us to acquire and manage our investment portfolio in a more active and flexible manner, as we will not be limited by a pre-determined operational period and the need to provide a “liquidity event” at the end of that period. Our primary investment objectives are:
•to acquire commercial properties, leased under long-term net leases to creditworthy tenants, which provide current operating cash flow;
•to maintain a level of liquid assets as a source of funds to meet redemption requests;
•to provide reasonably stable, current income for stockholders through the payment of distributions; and
•to provide the opportunity to participate in capital appreciation in the value of our investments.
Acquisition and Investment Policies
Our Board, including our independent directors, has adopted investment policies. Our directors will formally review at a duly called meeting our investment policies on an annual basis and our portfolio on a quarterly basis or, in each case, more often as they deem appropriate. Changes to our investment policies must be approved by our Board, including a majority of our independent directors. Our Board may revise our investment policies without the concurrence of our stockholders. However, our Board will not amend our charter, including any investment policies that are provided in our charter, without the concurrence of a majority of our outstanding shares, except for amendments that do not adversely affect the rights, preferences and privileges of our stockholders and are permitted under Maryland law to be made without stockholder approval. Our investment policies delegate to our advisor broad authority to execute real estate property acquisitions and dispositions. Our Board will at all times have ultimate oversight over our investments and may change from time to time the scope of authority delegated to our advisor with respect to acquisition and disposition transactions.
Commercial Net-Lease Real Estate Properties
Our commercial real estate acquisitions will primarily consist of single-tenant, necessity commercial properties, which are leased to creditworthy tenants under long-term net leases and provide current operating cash flow. We use the term necessity commercial properties to describe retail properties that are important to customers and office and industrial properties that are essential to the business operations of a corporate tenant. The actual percentage of our portfolio that is used to acquire retail, office and industrial properties may fluctuate due to market conditions and acquisition opportunities.
Necessity retail describes companies that provide consumers with products that are important to, and part of, their everyday lives. Examples of necessity retail properties include pharmacies, home improvement stores, grocery stores, national superstores, restaurants and regional retailers that provide products considered necessities to that region. Where possible, we will seek tenants with less exposure to e-commerce disruption, including tenants with established omni-channel sales strategies. By focusing our retail investment strategy on necessity retailers subject to long-term net leases, our objective is to provide our stockholders with a relatively stable stream of current income, while avoiding a significant decline in the value of our real estate portfolio.
Necessity office and industrial properties are essential to the business operations of a corporate tenant, typically due to one or more of the following factors:
•difficulty of replacement or prohibitive cost to relocate;
•sole or major location for its distribution or office operations;
•proximity to its distribution, manufacturing, research facilities or customer base;
•lower labor, transportation and/or operating costs;
•more stable labor force;
•optimal access to transportation networks that enable efficient distribution; and/or
•significant amount of tenant-funded capital improvements, such as customized computer systems and information technology infrastructure, racking and sorting systems, and cooling or refrigeration systems.
For example, distribution facilities, warehouses, manufacturing plants and corporate or regional headquarters are often considered to be necessity office and industrial properties. We believe that necessity office and industrial properties provide a relatively greater level of stability than other office and industrial property types because necessity properties typically involve long-term leases and experience relatively low tenant turnover. We also believe that, as a result of recent and ongoing business developments, such as the role of the internet in the distribution of products, globalization of importing and exporting products and consolidation of businesses requiring office buildings to accommodate a single tenant, there is, and we expect there will continue to be, increasing demand by commercial tenants for necessity office and industrial properties.
Our goal is to acquire a portfolio of commercial properties that are diversified by way of property type, location and industry, in order to minimize the potential adverse impact of economic slow-downs or downturns in local markets or a specific industry. There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net proceeds of the Offering that may be used to acquire a single property. The number and mix of properties comprising our portfolio will depend upon real estate market conditions and other circumstances existing at the time we acquire properties, and the amount of proceeds we raise in the Offering. We are not restricted to acquisitions of commercial properties and we will not forgo a high quality asset because it does not precisely fit our expected portfolio composition. We currently target for acquisition properties with lease terms of greater than ten years, and it is our present intention to hold properties with lease terms of ten years or more. Properties with less than ten years remaining lease term will be considered for disposition depending on numerous factors, including the overall performance of our assets, and the specific attributes of the property, including tenant credit, rent increases, renewals, geographic location, as well as general market conditions and other investment opportunities, and other factors that we determine to be relevant.
We intend to incur debt to acquire properties where our advisor determines that incurring such debt is in our best interests. We may seek to utilize asset level debt in addition to unsecured corporate borrowings to finance the acquisition of individual properties. In addition, from time to time, we may acquire some properties without financing and later incur mortgage debt secured by one or more of such properties if favorable financing terms are available. We will use the proceeds from these loans to acquire additional properties and maintain liquidity. See “— Borrowing Policies” below for a more detailed description of our borrowing intentions and limitations.
Retail Net-Lease Real Estate Properties. We expect the portion of our portfolio allocated to retail net-lease real estate properties will focus on regional or national retail businesses with creditworthy and established track records. We will also pursue properties leased to tenants representing a variety of retail industries to avoid concentration in any one industry. These industries include all types of retail establishments, such as big box retailers, convenience stores, drug stores and restaurant properties. We expect that some of these acquisitions will provide long-term value by virtue of their size, location, quality and condition, and lease characteristics. We expect that substantially all of our retail property acquisitions will be in the United States, including U.S. protectorates.
We believe that focusing on the acquisition of necessity retail properties net leased to creditworthy tenants presents lower investment risks and greater stability than many other sectors of today’s commercial real estate market. By acquiring a large number of necessity retail properties, we believe that lower than expected results of operations from one or a few acquisitions will not necessarily preclude our ability to realize our investment objective of cash flow from our overall portfolio. We believe this approach can result in less risk to stockholders than an investment approach that targets other asset classes. In addition, we believe that retail properties under long-term triple-net and double-net leases offer a distinct investment advantage since these properties generally require less management and operating capital, have less recurring tenant turnover and, with respect to single-tenant properties, often offer superior locations that are less dependent on the financial stability of adjoining tenants. In addition, since we intend to acquire properties that are geographically diverse, we expect to minimize the potential adverse impact of economic slowdowns or downturns in local markets.
Certain retail companies today are entering into sale-leaseback arrangements as a strategy for applying capital that would otherwise be applied to their real estate holdings to their core operating businesses. We believe that our investment strategy will enable us to take advantage of the increased emphasis on retailers’ core business operations in today’s competitive corporate environment as various retailers attempt to divest from real estate assets.
Office and Industrial Net-Lease Real Estate Properties. We expect that our net-lease office properties will include recently constructed, high quality, low, mid- or high-rise office buildings that are necessary to a principal tenant, subject to a long-term net lease, and used for purposes such as a corporate, regional or product-specific headquarters. We also expect that our industrial net-lease property portfolio will include recently constructed, high quality industrial properties that are necessary to a single principal tenant, subject to a long-term net lease, and used for purposes such as warehousing, distribution, light manufacturing, research and development, or industrial flex facilities.
We expect that some of our office and industrial properties will be multi-tenant properties, anchored by one or more principal tenants, who are creditworthy and subject to long-term net leases. We expect that, from time to time, we may invest in corporate development projects, designed to construct an income-producing office or industrial property to serve one or more creditworthy tenants.
Real Estate Underwriting Process. In evaluating potential property acquisitions consistent with our investment objectives, our advisor applies its well-established underwriting process to determine the creditworthiness of potential tenants. Similarly, our advisor will apply its credit underwriting criteria to possible new tenants when we are re-leasing properties in our portfolio. Our advisor’s underwriting process includes analyzing the financial data and other available information about the tenant, such as income statements, balance sheets, net worth, cash flows, business plans, data provided by industry credit rating services, and/or other information our advisor may deem relevant. Generally, these tenants must have a proven track record in order to meet the credit tests applied by our advisor. In addition, we may obtain guarantees of leases by the corporate parent of the tenant, in which case our advisor will analyze the creditworthiness of the guarantor. In many instances, especially in sale-leaseback situations, where we are acquiring a property from a company and simultaneously leasing it back to the company under a long-term lease, we will meet with the tenant’s senior management to discuss the company’s business plan and strategy.
When using debt rating agencies, a tenant typically will be considered creditworthy when the tenant has an “investment grade” debt rating by Moody’s Investors Service (“Moody’s”) of Baa3 or better, a credit rating by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”) of BBB- or better, or its payments are guaranteed by a company with such rating. Changes in tenant credit ratings, coupled with future acquisition and disposition activity, may increase or decrease our concentration of creditworthy tenants in the future.
Moody’s ratings are forward-looking opinions of future relative creditworthiness, which considers, but is not limited to, franchise value, financial statement analysis and management quality. The rating given to a debt obligation describes the level of risk associated with receiving full and timely payment of principal and interest on that specific debt obligation and how that risk compares with that of all other debt obligations. The rating, therefore, provides one measure of the ability of a company to generate cash in the future.
A Moody’s debt rating of Baa3, which is the lowest investment grade rating given by Moody’s, is assigned to companies which, in Moody’s opinion, are subject to moderate credit risk and as such may possess certain speculative characteristics. A Moody’s debt rating of AAA, which is the highest investment grade rating given by Moody’s, is assigned to companies which, in Moody’s opinion, are of the highest quality and subject to the lowest level of credit risk.
Standard & Poor’s assigns a credit rating to companies and to each issuance or class of debt issued by a rated company. A Standard & Poor’s credit rating of BBB-, which is the lowest investment grade rating given by Standard & Poor’s, is assigned to companies that, in Standard & Poor’s opinion, exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the company to meet its financial commitments. A Standard & Poor’s credit rating of AAA+, which is the highest investment grade rating given by Standard & Poor’s, is assigned to companies that, in Standard & Poor’s opinion, have extremely strong capacities to meet their financial commitments.
While we will utilize ratings by Moody’s and Standard & Poor’s as one factor in determining whether a tenant is creditworthy, our advisor will also consider other factors in determining whether a tenant is creditworthy, for the purpose of meeting our investment objectives. Our advisor’s underwriting process will also consider other information provided by third-party analytical services, such as Moody’s CreditEdge, along with our advisor’s own analysis of the financial condition of the tenant and/or the guarantor, the operating history of the property with the tenant, the tenant’s market share and track record within the tenant’s industry segment, the general health and outlook of the tenant’s industry segment, the strength of the tenant’s management team and the terms and length of the lease at the time of the acquisition.
Description of Leases. We expect, in most instances, to acquire tenant properties with existing double-net or triple-net leases. “Net” leases means leases that typically require tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, maintenance, insurance and building repairs related to the property, in addition to the lease payments. Triple-net leases typically require the tenant to pay all costs associated with a property (e.g., real estate taxes, insurance, maintenance and repairs, including roof, structure and parking lot). Double-net leases
typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance). We expect that double-net and triple-net leases will help ensure the predictability and stability of our expenses, which we believe will result in greater predictability and stability of our cash distributions to stockholders. We expect that not all of our leases will be net leases. Since each lease is an individually negotiated contract between two or more parties, each lease will have different obligations of both the landlord and tenant. Many large national tenants have standard lease forms that generally do not vary from property to property. We will have limited ability to revise the terms of leases to those tenants. When spaces in a property become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we anticipate entering into net leases.
Typically, we expect to enter into leases that have terms of ten years or more. We may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is in an attractive location, if the property is difficult to replace, or if the property has other significant favorable real estate attributes. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases also will contain provisions that increase the amount of base rent payable at points during the lease term. We expect that many of our leases will contain periodic rent increases. Generally, the leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. Tenants will be required to provide proof of insurance by furnishing a certificate of insurance to our advisor on an annual basis. The insurance certificates will be tracked and reviewed for compliance by our advisor’s property and risk management departments.
As a precautionary measure, we may obtain, to the extent available, secondary liability insurance, as well as loss of rents insurance that covers one year of annual rent in the event of a rental loss. In addition, some leases require that we procure insurance for both commercial general liability and property damage; however, generally the premiums are fully reimbursable from the tenant. In such instances, the policy will list us as the named insured and the tenant as the additional insured.
We may purchase properties and lease them back to the sellers of such properties. While we intend to use our best efforts to structure any such sale-leaseback transaction (as well as other leases) so that the lease will be characterized as a “true lease” and so that we are treated as the owner of the property for federal income tax purposes, the Internal Revenue Service (“IRS”) could challenge this characterization. In the event that any sale-leaseback transaction (or other leases) is re-characterized as a financing transaction for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed and in certain circumstances we could lose our REIT status. See Part I, Item 1A. — Risk Factors — U.S. Federal Income and Other Tax Risks of this Annual Report on Form 10-K.
Ownership Structure. Our investment in real estate generally takes the form of holding fee title or a long-term leasehold estate. We have acquired, and expect to continue to acquire, such interests either directly through our operating partnership or indirectly through limited liability companies, limited partnerships or other entities owned and/or controlled by our operating partnership. We may acquire properties by acquiring the entity that holds the desired properties. We also may acquire properties through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with third parties, including the developers of the properties or affiliates of our advisor. See the section captioned “Operating Partnership Agreement” in this Annual Report on Form 10-K and the “— Joint Ventures” section below.
Acquisition Decisions. Our advisor has substantial discretion with respect to the selection of our specific assets, subject to our investment and borrowing policies, and our policies are reviewed by our independent directors and approved by our Board. In pursuing our investment objectives and making acquisition decisions on our behalf, our advisor evaluates the proposed terms of the acquisition against all aspects of the transaction, including the condition and financial performance of the asset, the terms of existing leases, the creditworthiness of the tenant or tenants, and property location and characteristics. Because the factors considered, including the specific weight we place on each factor, vary for each potential acquisition, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.
Our advisor procures and reviews an independent valuation estimate on each and every proposed property acquisition. In addition, our advisor, to the extent such information is available, considers the following:
•tenant rolls and tenant creditworthiness;
•a property condition report;
•unit level store performance;
•property location, visibility and access;
•age of the property, physical condition and curb appeal;
•neighboring property uses;
•local market conditions, including vacancy rates;
•area demographics, including trade area population and average household income; and
•neighborhood growth patterns and economic condition.
Our advisor also reviews the terms of each existing lease by considering various factors, including:
•rent escalations;
•remaining lease term;
•renewal option terms;
•tenant purchase options;
•termination options;
•scope of the landlord’s maintenance, repair and replacement requirements;
•projected net cash flow yield; and
•projected internal rates of return.
Conditions to Closing Our Acquisitions. Generally, we condition our obligation to close the purchase of any asset on the delivery and verification of certain documents from the seller or developer, including, where appropriate:
•plans and specifications;
•surveys;
•evidence of marketable title, subject to such liens and encumbrances as are acceptable to our advisor;
•financial statements covering recent operations of properties having operating histories;
•title and liability insurance policies; and
•tenant estoppel certificates.
Environmental Matters. All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. State and federal laws in this area are constantly evolving, and we intend to take commercially reasonable steps, a summary of which is described below, to protect ourselves from the impact of these laws.
We generally will not purchase any property unless and until we also obtain what is generally referred to as a “Phase I” environmental site assessment and are generally satisfied with the environmental status of the property. However, we may purchase a property without obtaining such assessment if our advisor determines the assessment is not necessary because there exists a recent Phase I environmental site assessment that we deem satisfactory. A Phase I environmental site assessment generally consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concerns, visually observing neighboring properties to assess surface conditions or activities that may have an adverse environmental impact on the property, interviewing the key site manager and/or property owner, contacting local governmental agency personnel and performing an environmental regulatory database search in an attempt to determine any known environmental concerns in, and in the immediate vicinity of, the property. A Phase I environmental site assessment does not generally include any sampling or testing of soil, ground water or building materials from the property and may not reveal all environmental hazards on a property.
In the event the Phase I environmental site assessment uncovers potential environmental problems with a property, our advisor will determine whether we will pursue the acquisition opportunity and whether we will have a “Phase II” environmental site assessment performed. The factors we may consider in determining whether to conduct a Phase II environmental site assessment include, but are not limited to, (1) the types of operations conducted on the property and surrounding property, (2) the time, duration and materials used during such operations, (3) the waste handling practices of any tenants or property owners, (4) the potential for hazardous substances to be released into the environment, (5) any history of environmental law violations on the subject property and surrounding property, (6) any documented environmental releases, (7) any observations from the consultant that conducted the Phase I environmental site assessment, and (8) whether any party (i.e., surrounding property owners, prior owners or tenants) may be responsible for addressing the environmental conditions. We will determine whether to conduct a Phase II environmental site assessment on a case by case basis.
We expect that some of the properties that we will acquire may contain, at the time of our acquisition, or may have contained prior to our acquisition, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of petroleum products or other hazardous or toxic substances. Some of our potential properties may be adjacent to or near other properties that have contained or then currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain
of our potential properties may be on or adjacent to or near other properties upon which others, including former owners or tenants of our properties, have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances.
From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable but that the acquisition will yield a superior risk-adjusted return. In such an instance, we will underwrite the costs of environmental investigation, clean-up and monitoring into the cost of acquiring the property. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
We are not aware of any environmental matters which we believe are reasonably likely to have a material effect on our results of operations, financial condition or liquidity.
In addition, we will take such steps as we deem necessary with respect to potential environmental matters. See the section above entitled “— Environmental Matters.”
We may enter into purchase and sale arrangements with a seller or developer of a suitable property under development or construction. In such cases, we will be obligated to purchase the property at the completion of construction, provided that the construction conforms to definitive plans, specifications, and costs approved by us in advance. In such cases, prior to our acquiring the property, we generally would receive a certificate of an architect, engineer or other appropriate party, stating that the property complies with all plans and specifications. If renovation or remodeling is required prior to the purchase of a property, we expect to pay a negotiated maximum amount to the seller upon completion.
In determining whether to purchase a particular property, we may obtain an option to purchase such property. The amount paid for an option, if any, normally is forfeited if the property is not purchased and normally is credited against the purchase price if the property is purchased.
In the purchasing, leasing and developing of properties, we are subject to risks generally incident to the ownership of real estate. See Part I, Item 1A. — Risk Factors — General Risks Related to Real Estate Assets in this Annual Report on Form 10-K.
Disposition Policies. Net lease properties with less than ten years remaining lease term will be considered for disposition depending on numerous factors, including the overall performance of our assets, and the specific attributes of the property, including tenant credit, rent increases, renewals, geographic location, as well as general market conditions and other investment opportunities, and other factors that we determine to be relevant. Holding periods for other real estate-related assets may vary. Regardless of intended holding periods, circumstances might arise that could cause us to determine to sell an asset before the end of the expected holding period if we believe the sale of the asset would be in the best interests of our stockholders. The determination of whether a particular asset should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing and projected economic conditions, current tenant rolls and tenant creditworthiness, whether, depending on the asset’s tax attributes, we could apply the proceeds from the sale of the asset to make other acquisitions, whether disposition of the asset would increase cash flow, and whether the sale of the asset would be a prohibited transaction under the Internal Revenue Code of 1986, as amended (the “Code”) or otherwise impact our status as a REIT. The selling price of a property that is net leased will be determined in large part by the amount of rent payable under the lease and the remaining lease term(s). If a tenant has a repurchase option at a formula price, we may be limited in realizing any appreciation. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale. During the year ended December 31, 2020, we disposed of three retail properties and two anchored shopping centers, for an aggregate gross sales price of $16.8 million and a net gain of $627,000. During the year ended December 31, 2019, we disposed of 25 retail properties and three industrial properties, for an aggregate gross sales price of $91.1 million and a net gain of $10.2 million. During the year ended December 31, 2018, the Company disposed of two anchored shopping centers and four retail properties, for an aggregate gross sales price of $49.1 million and a net gain of $1.0 million.
Other Real Estate-Related Investments
Although it is our expectation that our portfolio will consist primarily of commercial real estate leased under long-term net leases to creditworthy tenants, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a high quality asset because it does not precisely fit our presently expected portfolio composition. Thus, to the extent that our advisor presents us with high quality investment opportunities that allow us to meet the REIT requirements under Code, and that result in an overall real estate portfolio that is consistent with our investment objectives, our portfolio composition may vary from time to time. Such investments may include one or more of the following asset types or other real estate related assets that meet this criteria and our investment objectives:
Core metropolitan commercial real estate investments. We expect to complement our portfolio of net-lease assets by investing in substantially leased core metropolitan commercial and multifamily properties with growth potential that we believe will help us meet our investment objectives. Such investments may be made either directly or indirectly through other funds with a proven track record of performance in these investment types, including funds managed by affiliates of our advisor. These investments will be made in certain metropolitan communities that our advisor has qualified for investment.
On September 27, 2019, we executed a subscription agreement to purchase $50 million of limited partnership interests of CIM UII Onshore, L.P. (“CIM UII Onshore”), which was accepted by the general partner of CIM UII Onshore on September 30, 2019. CIM UII Onshore’s sole purpose is to invest all of its assets in CIM Urban Income Investments, L.P. (“CIM Urban Income”), which is a private institutional fund that acquires, owns and operates substantially stabilized, diversified real estate and real estate-related assets in metropolitan markets, primarily located throughout North America. We presently expect that the majority of our future investments that are not acquisitions of commercial properties leased under long-term net leases to creditworthy tenants will be in limited partnership units of CIM UII Onshore.
Both CIM UII Onshore and CIM Urban Income were formed by CIM, and CIM controls the general partner of both CIM UII Onshore and CIM Urban Income. As such, our subscription for $50 million of limited partnership interests in CIM UII Onshore was approved by all of our independent directors as fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties. The entire $50.0 million of capital was called and funded on March 31, 2020. We expect to evaluate additional investments in CIM UII Onshore from time to time as additional capital becomes available, subject in each case to the prior review and approval of our Board, including a majority of our independent directors.
Joint Ventures. We have entered, and may enter, into joint ventures, partnerships, co-tenancies and other co-ownership arrangements with third parties, including affiliates of our advisor, for the acquisition, development or improvement of properties or the acquisition of other real estate-related assets. We may also enter into such arrangements with real estate developers, owners and other unaffiliated third parties for the purpose of developing, owning and operating real properties. In determining whether to invest in a particular joint venture, our advisor will evaluate the underlying real property or other real estate-related asset using the same criteria described above in “— Acquisition Decisions” for the selection of our real property assets. Our advisor also will evaluate the joint venture or co-ownership partner and the proposed terms of the joint venture or a co-ownership arrangement.
Our general policy is to invest in joint ventures only when we will have a right of first refusal to purchase the co-venturer’s interest in the joint venture if the co-venturer elects to sell such interest. In the event that the co-venturer elects to sell all or a portion of the interests held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the joint venture. It is also possible that joint venture partners may resist granting us a right of first refusal or may insist on a different methodology for unwinding the joint venture if one of the parties wishes to liquidate its interest.
Our advisor’s officers, and key persons may have conflicts of interest in determining which program sponsored by CCO Group should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our advisor’s officers and key persons may face a conflict in structuring the terms of the relationship between our interests and the interests of the co-venturer and in managing the joint venture. Since some or all of our advisor’s officers and key persons will also advise the co-venturer, agreements and transactions between us or any other co-venturer sponsored by CCO Group will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
We may enter into joint ventures with other CCO Group real estate programs, or with our sponsor, our advisor, one or more of our directors, or any of their respective affiliates, but only if a majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction approve the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by unaffiliated joint venturers, and the cost of our investment must be supported by a current appraisal of the asset.
Development and Construction Properties. We may acquire properties on which improvements are to be constructed or completed or which require substantial renovation or refurbishment. We expect that joint ventures would be the exclusive vehicle through which we would acquire build-to-suit properties. Any such joint ventures will make up no more than 20% of our total assets and our general policy is to structure them as follows:
•we may enter into a joint venture with third parties who have an executed lease with the developer who has an executed lease in place with the future tenant whereby we will provide a portion of the equity or debt financing;
•we would accrue a preferred return during construction on any equity investment;
•the properties will be developed by third parties; and
•consistent with our general policy regarding joint ventures, we would have a right of first refusal to purchase the co-investor’s interest.
In the event that we elect to engage in development or construction projects, in order to help ensure performance by the builders of properties that are under construction, completion of such properties will be guaranteed at the contracted price by a completion guaranty, completion bond or performance bond. Our advisor may rely upon the substantial net worth of the contractor or developer or a personal guarantee accompanied by financial statements showing a substantial net worth provided by an affiliate of the person entering into the construction or development contract as an alternative to a completion bond or performance bond. Development of real estate properties is subject to risks relating to a builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables. Refer to Part I, Item 1A. Risk Factors — General Risks Related to Real Estate Assets in this Annual Report on Form 10-K.
We may make periodic progress payments or other cash advances to developers and builders of our properties prior to completion of construction only upon receipt of an architect’s certification as to the percentage of the project then completed and as to the dollar amount of the construction then completed. We intend to use such additional controls on disbursements to builders and developers as we deem necessary or prudent. We may directly employ one or more project managers, to plan, supervise and implement the development of any unimproved properties that we may acquire. Such persons would be compensated directly by us.
In addition, we may acquire unimproved properties or originate or invest in mortgage loans secured by such properties, provided that we will not invest more than 10% of our total assets in unimproved properties or in mortgage loans secured by such properties. We will consider a property to be an unimproved property if it was not acquired for the purpose of producing rental or other operating cash flows, has no development or construction in process at the time of acquisition and no development or construction is planned to commence within one year of the acquisition.
Investing in and Originating Loans. The criteria that our advisor will use in making or investing in loans on our behalf is substantially the same as those involved in acquiring our properties. We do not intend to make loans to other persons, to underwrite securities of other issuers or to engage in the purchase and sale of any types of assets other than those relating to real estate. However, unlike our property acquisitions, which we expect to hold for an extended period, we expect that the average duration of loans will typically be one to five years. We are not limited as to the amount of gross offering proceeds that we may apply to mortgage loan investments.
We do not expect to make or invest in loans that are not directly or indirectly secured by real estate. We will not make or invest in mortgage loans on any one property if the aggregate amount of all mortgage loans outstanding on the property, including our loan, would exceed an amount equal to 85% of the appraised value of the property, as determined by a certified independent appraiser, unless we find substantial justification due to other underwriting criteria. We may find such justification in connection with the purchase of loans in cases in which we believe there is a high probability of our foreclosure upon the property in order to acquire the underlying assets and in which the cost of the loan investment does not exceed the fair market value of the underlying property. We will not invest in or make loans unless an appraisal has been obtained concerning the underlying property, except for those loans insured or guaranteed by a government or government agency.
We may invest in commercial mortgage loans, mezzanine loans and other loans related to commercial real estate assets. However, we will not make or invest in any loans that are subordinate to any mortgage or equity interest of our advisor or any of our directors or any of its or our affiliates. Commercial mortgage loans are loans secured by a first mortgage lien on commercial properties providing mortgage financing to commercial property developers or owners. These investments may include whole loan participations and/or pari passu participations within such loans. A mezzanine loan is a loan made in respect of certain real property that is secured by a lien on the ownership interests of the entity that, directly or indirectly, owns the real property. We may also opportunistically invest in or originate other commercial real estate-related debt instruments such as subordinated mortgage interests, preferred equity, note financing, unsecured loans to owners and operators of real estate assets, and secured real estate securities such as commercial mortgage-backed securities (“CMBS”) and commercial real estate collateralized loan obligations (“CRE CLOs”). We may also invest in or originate certain syndicated corporate loans, often but not necessarily of real estate operating or finance companies.
In evaluating prospective loan investments, our advisor will consider factors such as the following:
•current and projected cash flows of the property;
•expected levels of rental and occupancy rates;
•potential for rent increases;
•the property’s income-producing capacity;
•the property’s potential for capital appreciation;
•the ratio of the investment amount to the underlying property’s value;
•the degree of liquidity of the investment;
•the quality, experience and creditworthiness of the borrower;
•general economic conditions in the area where the property is located;
•in the case of mezzanine loans, the ability to acquire the underlying real property; and
•other factors that our advisor believes are relevant.
Because the factors considered, including the specific weight we place on each factor, will vary for each prospective loan investment, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.
We may originate loans from mortgage brokers or personal solicitations of suitable borrowers, or may purchase existing loans that were originated by other lenders. Our advisor will evaluate all potential loan investments to determine if the security for the loan and the loan-to-value ratio meets our investment criteria and objectives. Most loans that we will consider for investment would provide for monthly payments of interest and some may also provide for principal amortization, although many loans of the nature that we will consider provide for payments of interest only and a payment of principal in full at the end of the loan term. We will not originate loans with negative amortization provisions.
We do not have any policies directing the portion of our assets that may be invested in construction loans, mezzanine loans, bridge loans, loans secured by leasehold interests and second, third and wraparound mortgage loans. However, we recognize that these types of loans are riskier than first deeds of trust or first priority mortgages on income-producing, fee-simple properties, and we expect to minimize the amount of these types of loans in our portfolio, to the extent that we make or invest in loans at all. Our advisor will evaluate the fact that these types of loans are riskier in determining the rate of interest on the loans. We do not have any policy that limits the amount that we may invest in any single loan or the amount we may invest in loans to any one borrower. We are not limited as to the amount of gross offering proceeds that we may use to invest in or originate loans.
Our loan investments may be subject to regulation by federal, state and local authorities and subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, including among other things, regulating credit granting activities, establishing maximum interest rates and finance charges, requiring disclosures to customers, governing secured transactions and setting collection, repossession and claims handling procedures and other trade practices. In addition, certain states have enacted legislation requiring the licensing of mortgage bankers or other lenders, and these requirements may affect our ability to effectuate our proposed investments in loans. Commencement of operations in these or other jurisdictions may be dependent upon a finding of our financial responsibility, character and fitness. We may determine not to make loans in any jurisdiction in which the regulatory authority determines that we have not complied in all material respects with applicable requirements.
Liquid Investment Portfolio
Investment in Liquid Securities. To the extent permitted by the REIT rules, we intend for our liquid investment portfolio to primarily consist of U.S. government securities, agency securities and corporate debt. We use the term “agency” to refer to a U.S. government agency such as the Government National Mortgage Association, or Ginnie Mae, or a federally-chartered corporation such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac.
We may also invest in liquid real estate-related securities, including equity and debt securities of companies whose shares are listed for trading on a national securities exchange and are engaged in real estate activities. Listed companies engaged in real estate activities may include, for example, REITs. Our investments in securities of companies engaged in activities related to real estate will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer.
We may also make investments in CMBS to the extent permitted by the REIT rules. CMBS are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. CMBS are generally pass-through certificates that represent beneficial ownership interests in common law trusts whose assets consist of defined portfolios of one or more commercial mortgage loans. They are typically issued in multiple tranches whereby the more senior classes are entitled to priority distributions from the trust’s income. Losses and other shortfalls from expected amounts to be received on the mortgage pool are borne by the most subordinate classes, which receive payments only after the more senior
classes have received all principal and/or interest to which they are entitled. CMBS are subject to all of the risks of the underlying mortgage loans. We may invest in investment grade and non-investment grade CMBS classes.
Additionally, we may acquire exchange traded funds, or ETFs, and mutual funds focused on REITs and real estate companies. To a lesser extent we may also invest in traded securities that are unrelated to real estate and make other investments or enter into transactions designed to limit our exposure to market volatility, illiquidity, interest rate or other risks related to our real-estate related, equity or debt, securities subject to complying with the REIT rules.
Cash, Cash Equivalents and Other Short-Term Investments. Our cash, cash equivalents and other short-term investments may include investments in money market instruments, cash and other cash equivalents (such as high-quality short-term debt instruments, including commercial paper, certificates of deposit, bankers’ acceptances, repurchase agreements and interest-bearing time deposits), to the extent consistent with our qualification as a REIT.
Borrowing Policies
Our advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to stockholders and providing us with added liquidity. By operating on a leveraged basis, we have more funds available to acquire properties. This allows us to make more acquisitions than would otherwise be possible, resulting in a more diversified portfolio.
At the same time, our advisor believes in utilizing leverage in a moderate fashion. Under our charter, we may not make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property would exceed an amount equal to 85% of the appraised value of such property unless substantial justification exists for exceeding such limit because of the presence of other underwriting criteria. Additionally, our charter limits our aggregate borrowings to 75% of the greater of cost (or 300% of net assets) (before deducting depreciation, reserves for bad debts, or other non-cash reserves) or market value of our gross assets, unless excess borrowing is approved by a majority of the independent directors and disclosed to our stockholders in the next quarterly report along with the justification for such excess borrowing. Consistent with our advisor’s approach toward the moderate use of leverage, our Board has adopted a policy to further limit our borrowings to 60% of the greater of cost (before deducting depreciation, reserves for bad debts, or other non-cash reserves) or market value of our gross assets unless excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in the next quarterly report along with a justification for such excess borrowing. Our advisor will generally target a leverage of 50% of the greater of cost (before deducting depreciation, reserves for bad debts, or other non-cash reserves) or fair market value of our gross assets. Fair market value is based on the estimated market value of our real estate assets as of December 31, 2020 used to determine our estimated per share NAV. As of December 31, 2020, our ratio of debt to total gross assets net of gross intangible lease liabilities was 49.6% (48.6% including adjustments to debt for cash and cash equivalents), and our ratio of debt to the fair market value of our gross assets was 50.9%.
Our advisor uses its best efforts to obtain financing on the most favorable terms available to us. Lenders may have recourse to assets not securing the repayment of the indebtedness. Our advisor may refinance properties during the term of a loan, only in limited circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures or if an attractive asset becomes available and the proceeds from the refinancing can be used to purchase such asset. The benefits of the refinancing may include increased cash flow resulting from reduced debt service requirements, an increase in dividend distributions from proceeds of the refinancing, if any, and an increase in property ownership if some refinancing proceeds are reinvested in real estate.
Our ability to increase our diversification through borrowing may be adversely impacted if banks and other lending institutions reduce the amount of funds available for loans secured by real estate. When interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. To the extent that we do not obtain mortgage loans on our properties, our ability to acquire additional properties will be restricted and we may not be able to adequately diversify our portfolio. Refer to Part I, Item 1A. Risk Factors — Risks Associated with Debt Financing in this Annual Report on Form 10-K.
In an effort to have adequate cash available to support our redemption plan, our advisor may determine to reserve borrowing capacity under our line of credit. Our advisor could then elect to borrow against this line of credit in its discretion in order to fund redemption requests.
Acquisition of Properties from Affiliates of CIM Income NAV Management
We may acquire properties or interests in properties from, or in co-ownership arrangements with, entities affiliated with CIM Income NAV Management, including properties acquired from affiliates of CIM Income NAV Management engaged in construction and development of commercial real properties. We will not acquire any property from an affiliate of CIM Income NAV Management unless a majority of our directors (including a majority of our independent directors) not otherwise
interested in the transaction determine that the transaction is fair and reasonable to us. The purchase price that we will pay for any property we acquire from affiliates of CIM Income NAV Management, including property developed by an affiliate of CIM Income NAV Management as well as property held by such an affiliate that has already been developed, will not exceed the current appraised value of the property. In addition, the price of the property we acquire from an affiliate of CIM Income NAV Management may not exceed the cost of the property to the affiliate, unless a majority of our directors (including a majority of our independent directors) determine that substantial justification for the excess exists and the excess is reasonable. During the year ended December 31, 2020, we did not purchase any properties from affiliates of our advisor.
Conflicts of Interest
We are subject to various conflicts of interest arising out of our relationship with our advisor and its affiliates, including conflicts related to the arrangements pursuant to which we compensate our advisor and its affiliates. Certain conflict resolution procedures are set forth in our charter and disclosed in our prospectus with respect to the Offering.
The officers and affiliates of our advisor will try to balance our interests with the interests of CIM and its affiliates and other programs sponsored or operated by CCO Group to whom they owe duties. However, to the extent that these persons take actions that are more favorable to other entities than to us, these actions could have a negative impact on our financial performance and, consequently, on distributions to our stockholders and the value of their investments. In addition, our directors and our officers may engage for their own account in business activities of the types conducted or to be conducted by our subsidiaries and us.
Our independent directors have an obligation to act on our behalf and on behalf of our stockholders in all situations in which a conflict of interest may arise.
Interests in Other Real Estate Programs and Other Concurrent Offerings
Richard S. Ressler, the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates including CIM Income NAV Management, is the chairman of the board, chief executive officer and president of CMFT. One of our directors, Avraham Shemesh, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates including CIM Income NAV Management, serves as a director of CMFT. One of our directors, Elaine Y. Wong, who is also a principal of CIM, serves as a director of CMFT. One of our independent directors, W. Brian Kretzmer, also serves as an independent director of CMFT. Our chief financial officer and treasurer, Nathan D. DeBacker, who is also an officer of other real estate programs sponsored by CCO Group, is a vice president of CIM Income NAV Management and is an officer of certain of its affiliates. In addition, affiliates of CIM Income NAV Management act as advisors to CMFT, which is a public, non-listed REIT sponsored by our sponsor, CCO Group CMFT’s acquisition strategy includes the acquisition and management of commercial properties in the retail sector, subject to long-term net leases to creditworthy tenants, permitting them to purchase certain properties that may also be suitable for our portfolio.
CMFT’s initial public offering of up to $2.975 billion in shares of common stock was declared effective by the SEC on January 26, 2012. CMFT is no longer offering shares for investment to the public as of the date of this Annual Report on Form 10-K.
Former programs sponsored by CCO Group and managed by affiliates of our advisor were: Cole Office & Industrial REIT (CCIT II), Inc., which merged with Griffin Capital Essential Asset REIT, Inc., an unaffiliated public non-exchange traded REIT, on March 1, 2021; Cole Credit Property Trust V, Inc. and Cole Office & Industrial REIT (CCIT III), Inc., which merged with CMFT on December 21, 2020.
Other real estate programs sponsored or operated by CIM or CCO Group, including other real estate offerings in registration, could compete with us in the sale or operation of our assets. We will seek to achieve any operating efficiencies or similar savings that may result from affiliated management of competitive assets. However, to the extent such programs own or acquire property that is adjacent, or in close proximity, to a property we own, our property may compete with another program’s property for tenants or purchasers.
Property acquisition opportunities will be allocated among the real estate programs sponsored by CCO Group pursuant to an asset allocation policy. In the event that an acquisition opportunity has been identified that may be suitable for one or more of the other programs sponsored by CCO Group, and for which more than one of such entities has sufficient uninvested funds, then an allocation committee, which is comprised of employees of CIM, CCO Group or their respective affiliates (the “Allocation Committee”), will examine the following factors, among others, in determining the entity for which the acquisition opportunity is most appropriate:
•the investment objective of each entity;
•the anticipated operating cash flows of each entity and the cash requirements of each entity;
•the effect of the acquisition both on diversification of each entity’s investments by type of property, geographic area and tenant concentration;
•the amount of funds available to each program and the length of time such funds have been available to deploy;
•the policy of each entity relating to leverage of properties;
•the income tax effects of the purchase to each entity; and
•the size of the investment.
If, in the judgment of the Allocation Committee, the acquisition opportunity may be equally appropriate for more than one program, then the entity that has had the longest period of time elapse since it was allocated an acquisition opportunity of a similar size and type (e.g., office, industrial or retail properties) will be allocated such acquisition opportunity.
If a subsequent development, such as a delay in the closing of the acquisition or a delay in the construction of a property, causes any such acquisition opportunity, in the opinion of the Allocation Committee, to be more appropriate for an entity other than the entity that committed to make the acquisition opportunity, the Allocation Committee may determine that another program sponsored by CCO Group will be allocated the acquisition opportunity. Our Board has a duty to ensure that the method used for the allocation of the acquisition of properties by other programs sponsored by CCO Group seeking to acquire similar types of properties is applied fairly to us.
Although our Board has adopted a policy limiting the types of transactions that we may enter into with CIM Income NAV Management and its affiliates, including other real estate programs sponsored by CCO Group, we may enter into certain such transactions, which are subject to inherent conflicts of interest. Similarly, joint ventures involving affiliates of CIM Income NAV Management also give rise to conflicts of interest. In addition, our Board may encounter conflicts of interest in enforcing our rights against any affiliate of CIM Income NAV Management in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and CIM Income NAV Management, any of its affiliates, or another real estate program sponsored by CCO Group.
Other Activities of CIM Income NAV Management and Its Affiliates
We rely on our advisor, CIM Income NAV Management, for the day-to-day operation of our business. As a result of the interests of certain members of this entity’s management in CIM or its affiliates, and/or other real estate programs sponsored by CCO Group, and the fact that such persons also are engaged, and will continue to engage, in other business activities, CIM, our advisor and their respective officers, key persons and affiliates may have conflicts of interest in allocating their time and resources among us, CIM, its affiliates and other real estate programs sponsored by CCO Group, as applicable. However, our advisor believes that it, CIM and their respective affiliates, have sufficient personnel to discharge fully their responsibilities to all of the other programs sponsored or operated by CIM, CCO Group or their respective affiliates, and the other ventures in which they are involved.
Richard S. Ressler, the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates including CIM Income NAV Management, is the chairman of the board, chief executive officer and president of CMFT. One of our directors, Avraham Shemesh, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates including CIM Income NAV Management, serves as a director of CMFT. One of our directors, Elaine Y. Wong, who is also a principal of CIM, serves as a director of CMFT. In addition, our chief financial officer and treasurer, Nathan D. DeBacker, who is also an officer of other real estate programs sponsored by CCO Group, is a vice president of CIM Income NAV Management and is an officer of certain of its affiliates. As a result, Messrs. Ressler, Shemesh and DeBacker may owe duties to these other entities and their stockholders or equity owners, as applicable, which may from time to time conflict with the duties that they owe to us and our stockholders.
From time to time, our advisor may direct certain of its affiliates to acquire properties that would be suitable assets for us or may create special purpose entities to acquire properties for the specific purpose of selling the properties to us at a later time. Subsequently, we may acquire such properties from such affiliates, but any and all acquisitions from affiliates of our advisor must be approved by a majority of our directors, including a majority of independent directors, not otherwise interested in such transactions as being fair and reasonable to us. In addition, our purchase price in any such transaction will be limited to the cost of the property to the affiliate, including acquisition-related expenses, unless a majority of the independent directors determines that there is substantial justification for any amount that exceeds such cost and that the difference is reasonable. Further, our charter provides that in no event will the purchase price of any asset acquired from an affiliate exceed its current appraised value as determined by an independent appraiser.
From time to time, we may borrow funds from affiliates of our advisor, including our sponsor, as bridge financing to
enable us to acquire a property or for the purpose of providing short term financing as necessary to satisfy valid redemption requests under the Company’s share redemption plan, in either case when offering proceeds alone are insufficient to do so and third party financing has not been arranged. Any and all such transactions must be approved by a majority of our directors (including a majority of our independent directors) not otherwise interested in such transaction as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties. Our advisor or its affiliates may pay costs on our behalf, pending our reimbursement, or we may defer payment of fees to our advisor or its affiliates, but neither of these transactions would be considered a loan.
Our charter does not prohibit us from entering into transactions other than those described above with our directors, our advisor, our operator or any of their affiliates, subject to compliance with the requirements set forth under “— Certain Conflict Resolution Procedures,” including approval by a majority of our directors (including a majority of the independent directors), not otherwise interested in such transactions as being fair and reasonable to us and no less favorable to us than comparable terms and conditions available from unaffiliated third parties. Although we do not currently anticipate entering into any such transactions, we may sell assets to or acquire assets from affiliates of our advisor, make loans to or borrow from affiliates of our advisor and lease assets to or from affiliates of our advisor. In addition, we would not be precluded from internalizing our advisor if our Board were to determine an internalization transaction to be in the best interests of our stockholders.
Competition in Acquiring, Leasing and Reselling of Properties
There is a risk that a potential acquisition would be suitable for one or more programs operated by CCO Group, in which case the officers of our advisor will have a conflict of interest allocating the acquisition opportunity to us or another program. There is a risk that our advisor will choose a property that provides lower returns to us than a property purchased by another program operated by CCO Group. However, in such event, our advisor, with oversight by our Board, will determine which program will be first presented with the opportunity. Additionally, our advisor may cause a prospective tenant to enter into a lease for property owned by another program operated by CCO Group.
Conflicts of interest will also exist to the extent that we may acquire, or seek to acquire, properties in the same geographic areas where properties owned by CIM or its affiliates or other programs operated by CCO Group are located. In such a case, a conflict could arise in the acquisition or leasing of properties in the event that we and CIM or its affiliates or another program operated by CCO Group were to compete for the same properties or tenants, or a conflict could arise in connection with the resale of properties in the event that we and CIM or its affiliates or another program operated by CCO Group were to attempt to sell similar properties at the same time, including, in particular, in the event CIM or its affiliates or another program operated by CCO Group liquidates at approximately the same time as us. Conflicts of interest may also exist at such time as we or our affiliates managing property on our behalf seek to employ developers, contractors or building managers, as well as under other circumstances.
Dealer Manager
Since CCO Capital, our dealer manager, is an affiliate of our advisor, we will not have the benefit of an independent due diligence review and investigation of the type normally performed by an unaffiliated, independent underwriter in connection with the Offering. Accordingly, stockholders will have to rely on their own financial intermediary to make an independent review of the terms of the Offering. If a stockholder’s financial intermediary conducts an independent review of the Offering, and/or engages an independent due diligence reviewer to do so on its behalf, we expect that we will pay or reimburse the expenses associated with such review, which may create conflicts of interest. If a stockholder’s financial intermediary does not conduct such a review, the stockholder will not have the benefit of an independent review of the terms of the Offering. In addition, the sale of our shares of common stock in the Offering will result in dealer manager fees and ongoing stockholder servicing fees to CCO Capital, our dealer manager and an affiliate of our advisor.
Property Manager
Our properties are, and we anticipate that substantially all the properties we acquire in the future will be, managed and leased by our property manager, CREI Advisors, an affiliate of our advisor, pursuant to property management and leasing agreements with our subsidiaries that hold title to our properties. We expect CREI Advisors to also serve as property manager for properties owned by other real estate programs sponsored by CCO Group, some of which may be in competition with our properties.
Receipt of Fees and Other Compensation by CIM Income NAV Management and Its Affiliates
Our advisor receives substantial fees from us. These compensation arrangements could influence our advisor’s advice to us, as well as the judgment of the personnel of our advisor who serve as our officers or directors. Among other matters, the compensation arrangements could affect the judgment of our advisor’s personnel with respect to:
•the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the advisory agreement and the dealer manager agreement, and the amounts we pay under such agreements;
•the advisory fee and performance fee that we pay to our advisor, which are based upon our NAV, given that our advisor will be involved in estimating certain accrued fees and expenses that are part of our NAV;
•our advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance that would entitle our advisor to incentive compensation; and
•the decision to buy or sell an asset based on whether it will increase or decrease our NAV as opposed to whether it is the most suitable acquisition for our portfolio.
We will pay advisory fees to our advisor regardless of the quality of the services it provides during the term of the advisory agreement. Our advisor, however, has a fiduciary duty to us. The advisory agreement may be terminated by us or our advisor on 60 days’ notice.
Human Capital Resources
We are operated by affiliates of CIM and have no direct employees. We have entered into the advisory agreement with CIM Income NAV Management, an affiliate of CIM, pursuant to which CIM Income NAV Management has agreed to provide, or arrange for other service providers to provide, management and administrative services to us and our subsidiaries.
Competition
As we purchase properties, we are in competition with other potential buyers for the same properties and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our acquisition criteria. Regarding the leasing efforts of our owned properties, the leasing of real estate is highly competitive in the current market, and we may continue to experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we may also be in competition with sellers of similar properties to locate suitable purchasers for our properties.
Property Concentrations
As of December 31, 2020, no single tenant accounted for greater than 10% of our 2020 annualized rental income. Tenants in the manufacturing and grocery industries accounted for 17% and 10%, respectively, of our 2020 annualized rental income. Additionally, we have certain geographic concentrations in our property holdings. In particular, as of December 31, 2020, 17 of our properties were located in Ohio, five were located in Arizona and eight were located in Illinois, with the properties in each state accounting for 13%, 11% and 10%, respectively, of our 2020 annualized rental income.
Available Information
We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the SEC. We also file registration statements, amendments to our registration statements, and/or supplements to our prospectus in connection with any of our offerings with the SEC. Copies of our filings with the SEC are available on our sponsor’s website, http://www.cimgroup.com, free of charge. The information on our sponsor’s website is not incorporated by reference into this Annual Report on Form 10-K. Copies of our filings with the SEC may also be obtained from the SEC’s website at http://www.sec.gov. Access to these filings is free of charge.
ITEM 1A.RISK FACTORS
Risk Factor Summary
Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face and stockholders should carefully consider the following summary, together with the full risk factors contained below in this “Risk Factors” section and all the other information included in this Annual Report on Form 10-K, in evaluating the Company and our business. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and stockholders may lose all or part of their investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risks Related to Our Business
•We have not identified all of the specific properties that we may purchase with future offering proceeds. Therefore, this is a “blind pool” offering and stockholders will not be able to evaluate our additional acquisitions prior to the time of purchase.
•There is no public market for our shares of common stock, and our charter does not require us to effect a liquidity event at any point in time in the future.
•Our redemption plan will be subject to available liquidity and other potential restrictions.
•During certain periods, we have, and may in the future, pay distributions and fund redemptions, in whole or in part, from sources other than cash flow from operations, including borrowings and proceeds from the sale of our securities or asset sales, and we have no limits on the amounts we may pay from such other sources.
•Valuation methodologies used by our independent valuation expert in arriving at the estimates of value of each of our commercial real estate assets, related liabilities, and notes receivable secured by real estate (one of the components of our NAV) set forth in individual appraisal reports, each of which are prepared in accordance with valuation policies reviewed by the advisor and approved by our board of directors, involve subjective judgments and estimates. These estimated values are then reflected by our independent fund accountant in the calculation of our NAV. As a result, our NAV may not accurately reflect the actual prices at which our commercial real estate assets, related liabilities and notes receivable secured by real estate could be liquidated on any given day.
Risks Related to Conflicts of Interest
•There are conflicts of interest between us and our advisor and its affiliates, including our payment of substantial fees to our advisor and its affiliates.
•We depend on our advisor and we may not be able to find a suitable replacement if our advisor terminates the advisory agreement.
•Our future success depends to a significant degree upon certain key personnel of our advisor. If our advisor loses or is unable to attract and retain key personnel, our ability to achieve our investment objectives could be delayed or hindered, which could adversely affect our ability to pay distributions to our stockholders and the value of their investment.
Risks Related to Our Corporate Structure
•Our stockholders’ interest will be diluted if we issue additional shares.
•Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
General Risks Related to Real Estate Assets
•If we are not able to raise a substantial amount of capital in the near term, we may have difficulties acquiring properties and our ability to achieve our investment objectives could be adversely affected.
•We may suffer from delays in identifying suitable assets, which may adversely impact our results of operations and the value of our stockholders’ investments.
•Adverse economic, regulatory and geographical conditions that have an impact on the real estate market in general, including the effects of the COVID-19 pandemic, may prevent us from being profitable or from realizing growth in the value of our real estate properties, and could have a significant negative impact on us.
Risks Associated With Debt Financing
•We have incurred mortgage indebtedness and other borrowings, which may increase our business risks, could hinder our ability to make distributions, and decrease the value of our stockholders’ investment.
•Our continued compliance with debt covenants depends on many factors and could be impacted by current or future economic conditions associated with the COVID-19 pandemic.
U.S. Federal Income and Other Tax Risks
•If we do not remain qualified as a REIT, our NAV and cash available for distribution to our stockholders could materially decrease.
•Dividends payable by REITs generally do not qualify for reduced tax rates available for some dividends.
•Compliance with REIT requirements may cause us to forgo otherwise attractive opportunities or to liquidate otherwise attractive assets.
Risks Related to Our Business
We are considered to be a “blind pool,” as we currently have not identified all of the specific properties and real estate-related assets that we may purchase with future offering proceeds. For this and other reasons, an investment in our shares is speculative.
Since we have not identified all of the specific properties that we may purchase with future offering proceeds, this is a “blind pool.” Our stockholders will not be able to evaluate the economic merit of our additional acquisitions until after these acquisitions have been made. As a result, an investment in our shares is speculative.
To be successful in this market, we and our advisor must, among other things:
•identify and acquire assets that further our investment objectives;
•increase awareness of the CIM Income NAV, Inc. name within the investment products market;
•expand and maintain our network of licensed broker-dealers and others who sell shares on our behalf and other agents;
•rely on our advisor and its affiliates to attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;
•respond to competition for our targeted real estate and other assets, as well as for potential stockholders;
•rely on our advisor and its affiliates to continue to build and expand our operations structure to support our business; and
•rely on our advisor, who relies on its sub-advisor, and its affiliates and our Board to be continuously aware of, and interpret, marketing trends and conditions.
We may not succeed in achieving these goals, and our failure to do so could cause our stockholders to lose a significant portion of their investment.
The purchase and redemption of our shares is based on our NAV per share for each class, and the monthly determination of our NAV per share is based upon subjective judgments, assumptions and opinions about future events that may or may not turn out to be correct. As a result, our monthly NAV per share may not reflect the precise amount that might be paid to stockholders for their shares in a market transaction.
The purchase and redemption price for shares of our common stock is based on our NAV per share for each class as determined each month, which requires an estimate of the value of our assets and liabilities – consisting principally of illiquid commercial real estate and illiquid commercial real estate mortgages. Although periodic valuations of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate are performed by our independent valuation expert, our advisor also monitors our commercial real estate assets for events that may be expected to have a material impact on the most recent estimated values provided by our independent valuation expert. The valuation methodologies used to estimate the value of our commercial real estate assets, related liabilities, notes receivable secured by real estate, and certain other assets and liabilities, involve subjective judgments, assumptions and opinions about future events, which may or may not turn out to be correct. Any resulting potential disparity in our NAV per share may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders.
It may be difficult to reflect, fully and accurately, material events that may impact our monthly NAV between valuations.
Since our independent fund accountant’s determination of our monthly NAV per share for each class is based in part on annual (or more frequent, in the discretion of the Board) estimates of the values of each of our commercial real estate assets, and quarterly estimated values of related liabilities and notes receivable secured by real estate provided periodically by the independent valuation expert in individual appraisal reports in accordance with valuation policies approved by our Board, our published NAV per share on any given day may not fully reflect any or all changes in value that may have occurred since the most recent valuation. Our advisor reviews appraisal reports and monitors our commercial real estate assets, limited partnership units and notes receivable assets, notes receivable secured by real estate and related real estate liabilities, but it may be difficult to reflect fully and accurately rapidly changing market conditions or material events that may impact the value of our commercial real estate assets, limited partnership units and notes receivable secured by real estate or related real estate liabilities between periodic valuations, or to quickly obtain complete information regarding any such events. For example, an unexpected termination or renewal of a material lease, a material change in vacancies or an unanticipated structural or environmental event at a property may cause the value of a commercial real estate asset to change materially, yet obtaining sufficient relevant information after the occurrence has come to light and/or analyzing fully the financial impact of such an event may be difficult to do and may require some time. Additionally, the impact of the outbreak of COVID-19 on commercial real estate values may be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 outbreak, the success of actions taken to contain or treat the outbreak, and reactions by consumers, companies, governmental entities and capital markets. As a result, the NAV per share may not reflect a material event until such time as sufficient information is made available and can be analyzed, and the financial impact is fully evaluated, such that our NAV may be appropriately adjusted in accordance with our valuation policies. Any resulting disparity may be to the detriment of a purchaser of our shares or a stockholder selling shares pursuant to our share redemption plan.
NAV calculations are not governed by governmental or independent securities, financial or accounting rules or standards.
The method for calculating our NAV, including the components that are used in calculating our NAV, is not prescribed by rules of the SEC or any state securities regulatory agency. Further, there are no accounting rules or standards that prescribe which components should be used in calculating NAV, and our NAV is not audited by our independent registered public accounting firm. We calculate and publish NAV solely for purposes of establishing the monthly price at which we will sell and redeem classes of shares of our common stock and our stockholders should not view our NAV as a measure of our historical or future financial condition or performance. The components and methodology that are used by our independent fund accountant in calculating our NAV may differ from those used by other companies now or in the future.
In addition, our NAV calculations, to the extent that they incorporate valuations of our assets and liabilities, are not prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These valuations, which are based on market values that assume a willing buyer and seller, may differ from liquidation values that could be realized in the event that we were forced to sell assets.
An investment in shares of our common stock has limited liquidity and we are not required, through our charter or otherwise, to provide for a liquidity event. There is no public market for our shares of common stock and our limited redemption plan may not have sufficient liquidity at all times to redeem stockholders’ shares. As a result, our stockholders should purchase their shares as a long-term investment.
There is no current public market for shares of our common stock, we do not expect that a public market will ever develop and our charter does not require a liquidity event at a fixed time in the future. Therefore, redemption of shares by us will likely be the only way for our stockholders to dispose of their shares. While we designed our redemption plan to allow stockholders to request redemptions, on a monthly basis, of all or any portion of their shares, our ability to fulfill redemption requests is subject to a number of limitations. Most significantly, the vast majority of our assets consist, and will consist in the future, of commercial real estate properties, which cannot generally be readily liquidated without impacting our ability to realize full value upon their disposition. Further, the redemption plan is subject to quarterly redemption limits and to protect our operations, our status as a REIT, and our non-redeeming stockholders, our Board may modify or suspend our redemption plan or limit stockholder redemptions. Additionally, subject to limited exceptions, shares of our common stock redeemed within 365 days of the date of purchase may be subject to a short-term trading fee of 5% of the aggregate NAV per share of such shares redeemed. As a result, our stockholders’ ability to have their shares redeemed by us may be limited, and our shares should be considered a potentially long-term investment with limited liquidity.
Our business and/or operations and the businesses of our tenants could be materially and adversely affected by the risks, or the public perception of the risks, related to a pandemic or other health crisis, such as the recent outbreak of COVID-19.
The COVID-19 outbreak and the associated “shelter-in-place” or “stay-at-home” orders or other quarantine mandates or public health guidance issued by local, state or federal authorities has adversely affected a number of our tenants’ businesses. The extent to which the COVID-19 pandemic will impact our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the COVID-19 pandemic, the actions taken to contain the COVID-19 pandemic or mitigate its impact, and the direct and indirect economic effects of the COVID-19 pandemic and the related containment measures. Management is evaluating rent relief requests on a case-by-case basis and not all requests for rent relief may be granted. To the extent we grant additional requests for rent relief, either in the form of rent deferral or abatement, or to the extent our tenants default on their lease obligations, it may have a negative impact on our rental revenue and net income. Management will continue to monitor the impact to our business, financial condition, results of operations, cash flow, and occupancy. Accordingly, we cannot predict the significance, extent or duration of any adverse impact of the COVID-19 pandemic on our business, financial condition, results of operations or cash flows.
Our Board may modify or suspend our redemption plan, which may limit our stockholders’ ability to redeem their shares.
Our Board may modify or suspend our redemption plan in its discretion if it believes that such action is in the interests of our stockholders. For instance, our Board may modify or suspend our redemption plan to prevent an undue burden on our liquidity or to preserve our status as a REIT. As a result, our stockholders may not always be able to redeem their shares and an investment in our shares should be considered a potentially long-term investment with limited liquidity.
Economic events that may cause our stockholders to seek redemption of their shares may materially adversely affect our cash flow and our ability to achieve our investment objectives.
Economic events affecting the U.S. economy, such as the general negative performance of the real estate sector or the negative performance of the U.S. economy as a whole, could cause our stockholders to seek to redeem their shares. Even if we are able to satisfy all resulting redemption requests, our cash flow could be materially adversely affected. In addition, if we elect to sell valuable assets to satisfy redemption requests, our ability to achieve our investment objectives, including, without limitation, diversification of our real estate property portfolio by property type and location, moderate financial leverage, conservative operating risk and an attractive level of current income, could be materially adversely affected.
The amount and source of distributions we may make to our stockholders is uncertain and we may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at any time in the future.
We have not established a minimum distribution payment level, and our ability to make distributions to our stockholders may be adversely affected by a number of factors, including the risk factors described herein. Our Board will make determinations regarding distributions based upon, among other factors, our financial performance, our debt service obligations, our debt covenants, and capital expenditure requirements. Among the factors that could impair our ability to make distributions to our stockholders are:
•the limited size of our real estate portfolio;
•our inability to invest, on a timely basis and in attractive investments, the proceeds from sales of our shares;
•our inability to realize attractive risk-adjusted returns on our investments;
•unanticipated expenses or reduced revenues that reduce our cash flow or non-cash earnings;
•defaults in our portfolio or decreases in the value of our investments; and
•the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
As a result, we may not be able to make distributions to our stockholders at any time in the future, and the level of any distributions we do make to our stockholders may not increase or even be maintained over time.
We may suffer adverse tax consequences if the amount of distributions do not comply with certain tax requirements, and we expect that a substantial portion of our distributions will be taxed as ordinary income to our stockholders.
To continue to qualify for taxation as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding certain non-cash items and net capital gains. To the extent we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be
subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code.
In addition, dividends that we pay to our stockholders will generally be taxable to our stockholders as ordinary income. However, a portion of our distributions may be designated by us as long-term capital gains to the extent that they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. Pursuant to the Tax Cuts and Jobs Act, non-corporate recipients of dividends from a REIT (other than capital gains dividends and dividends eligible for treatment as qualified dividends) may deduct up to 20% of such REIT dividends for taxable years beginning after December 31, 2017 and before January 1, 2026. A return of capital distribution is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock, until the distribution exceeds the stockholder’s basis. Distributions in excess of our earnings and a stockholder’s tax basis in our shares will be treated as gain from the sale of shares.
We have paid, and may continue to pay, some or all of our distributions, and fund some or all redemptions, from sources other than cash flows from operations, including borrowings, proceeds from asset sales or the sale of securities, which may reduce the amount of capital we ultimately deploy in our real estate operations and may negatively impact the value of our common stock.
To the extent that cash flows from operations are insufficient to pay our distributions or fund redemptions, we may pay all or some of our distributions and fund all or some of our redemptions from borrowings by the REIT, proceeds from asset sales or the sale of our securities. We have no limits on the amounts we may use to pay distributions from sources other than cash flows from operations. The payment of distributions and redemptions from sources other than cash flow from operations may reduce the amount of proceeds available for acquisitions, negatively impact the value of our common stock and reduce the overall return. We expect that, from time to time, we may declare distributions and/or fund redemptions that exceed our cash flows from operations and in anticipation of future cash flows. For more information regarding the sources of distributions for the years ended December 31, 2020 and December 31, 2019, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.
An inability to restore selected dealer agreements with key broker-dealers would impact our ability to raise capital in the near term.
In the wake of the economic disruption caused by the COVID-19 pandemic, our dealer manager was advised by several of the broker-dealers participating in our Offering that they would suspend their selected dealer agreements with our dealer manager with respect to such Offering until such time as the impacts from the COVID-19 pandemic on our real estate values and liquidity, including our ability to redeem shares, are better known. These suspensions were implemented by certain broker-dealers across all non-traded REIT and interval fund programs, and we are actively working to respond to their concerns, including by announcing a plan to maintain our liquidity position and redeem our shares in accordance with the limits set forth in our share redemption program by selling assets in addition to raising capital. The suspension of selected dealer agreements by broker-dealers participating in our Offering has had a negative impact on our ability to raise capital. If our efforts are not successful and broker-dealers do not reinstate their selected dealer agreements with our dealer manager, we may not be able to raise a substantial amount of additional capital. If we are not able to raise a substantial amount of capital, we may have difficulty in identifying and purchasing additional suitable properties on attractive terms in order to meet our investment objectives and may be unable to reduce our leverage profile. Additionally, this could impact our ability to obtain financing. This could also adversely affect our ability to pay regular distributions from cash flow from operations to investors, and could impact our ability to redeem shares pursuant to our share redemption program.
If we are not able to raise a substantial amount of capital in the near term, we may have difficulties making additional investments and/or repaying or refinancing indebtedness and our ability to achieve our investment objectives, including diversification of our portfolio by property type and location, could be adversely affected.
The Offering is being made on a “best efforts” basis, which means that the dealer manager and the broker-dealers participating in the Offering are only required to use their best efforts to sell the shares and have no firm commitment or obligation to purchase any of the shares. As a result, we may not be able to raise a substantial amount of additional capital in the near term. If we are not able to accomplish this goal, we may have difficulty in identifying and making further suitable investments on attractive terms in order to meet our investment objectives. Therefore, there could be a delay between the time we receive net proceeds from the sale of shares of our common stock in the Offering and the time we invest the net proceeds. This could cause a substantial delay in the time it takes for our stockholders’ investment to realize its full potential return and could adversely affect our ability to pay regular distributions of cash flow from operations to our stockholders. If we fail to timely invest the net proceeds of the Offering, our ability to achieve our investment objectives, including further diversification of our portfolio by asset type and location, could be adversely affected. Failure to raise substantial capital also could hamper our ability to repay or refinance indebtedness. In addition, subject to our investment policies and applicable law, we are not limited
in the number or size of our acquisitions or the percentage of net proceeds that we may dedicate to a single asset. If we use all or substantially all of the future proceeds from the Offering to acquire one or a few assets, the likelihood of our profitability being affected by the performance of any one of our assets will increase, and an investment in our shares will be subject to greater risk.
We have experienced losses in the past, and we may experience additional losses in the future.
We have experienced net losses in the past (calculated in accordance with GAAP), and we may not be profitable or realize growth in the value of our assets. Many of our losses can be attributed to start-up costs, general and administrative expenses, depreciation and amortization, as well as acquisition expenses incurred in connection with purchasing properties or making other investments. Our ability to sustain profitability is uncertain and together depends on the demand for, and value of, our portfolio of properties. For a further discussion of our operational history and the factors affecting our losses, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K and our accompanying consolidated financial statements and notes thereto.
Our Board may change certain of our investment policies without stockholder approval, which could alter the nature of an investment in our common stock.
Except for changes to the investment objectives and investment restrictions contained in our charter, which require stockholder consent to amend, our Board, a majority of whom are independent, may change our investment and operational policies, including our policies with respect to acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our stockholders, which could result in our making acquisitions that are different from, and possibly riskier than, the types of acquisitions described in this Annual Report on Form 10-K. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk and commercial real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.
Our participation in a co-ownership arrangement may subject us to risks that otherwise may not be present in other real estate assets.
We may enter into co-ownership arrangements with respect to a portion of the properties we acquire. Co-ownership arrangements involve risks generally not otherwise present with an investment in real estate, such as the following:
•the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
•the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies, objectives or status as a REIT;
•the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents, result in a foreclosure and the loss of all or a substantial portion of the investment made by the co-owner, or allow the bankruptcy court to reject the agreements entered into by the co-owners owning interests in the property;
•the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the applicable mortgage loan financing documents and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
•the risk that a co-owner could breach agreements related to the property, which may cause a default under, and possibly result in personal liability in connection with, any mortgage loan financing documents applicable to the property, violate applicable securities laws, result in a foreclosure or otherwise adversely affect the property and the co-ownership arrangement;
•the risk that we could have limited control and rights, with management decisions made entirely by a third-party; and
•the possibility that we will not have the right to sell the property at a time that otherwise could result in the property being sold for its maximum value.
In the event that our interests become adverse to those of the other co-owners, we may not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.
We might want to sell our co-ownership interests in a given property at a time when the other co-owners in such property do not desire to sell their interests. Therefore, because we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright, we may not be able to sell our co-ownership interest in a property at the time we would like to sell.
Cybersecurity risks and cyber incidents may adversely affect our business in the event we or our advisor, dealer manager, our transfer agent or any other party that provides us with essential services experiences cyber incidents, including system failures, or has a deficiency in cybersecurity that causes a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
We, as well as our advisor, our dealer manager, our transfer agent and other parties that provide us with services essential to our operations, are vulnerable to service interruptions or damages from any number of sources, including computer viruses, malware, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and stockholder relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. We have implemented processes, procedures and internal controls to help mitigate cyber incidents, but these measures do not guarantee that a cyber incident will not occur or that attempted security breaches or disruptions would not be successful or damaging. A cyber incident could materially adversely impact our business, financial condition, results of operations, cash flows, or our ability to satisfy our debt service obligations or to maintain our level of distributions on common stock. There also may be liability for any stolen assets or misappropriated Company funds or confidential information. Any material adverse effect experienced by the Advisor, the Dealer Manager, our transfer agent and other parties that provide us with services essential to our operations could, in turn, have an adverse impact on us.
The SEC standard of conduct for investment professionals could impact our ability to raise additional capital.
On June 5, 2019, the SEC adopted “Regulation Best Interest,” a new standard of conduct for broker-dealers under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that includes: (i) the requirement that a broker-dealer or associated person, when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer, act in the best interests of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer or associated person ahead of the interest of the retail customer, (ii) a new disclosure document, the consumer or client relationship summary, or Form CRS, which would require both investment advisers and broker-dealers to provide disclosure highlighting details about their services and fee structures and (iii) interpretative guidance that establishes a federal fiduciary standard for investment advisers.
Regulation Best Interest is complex and therefore provided a transition period until June 30, 2020 to give firms sufficient time to come into compliance. Accordingly, no cases or administrative proceedings were brought under Regulation Best Interest before the end of the transition period, and therefore the scope of its applicability and substantive provisions is unknown. You are urged to consult with your own advisors regarding the impact that Regulation Best Interest may have on purchasing and holding interests in our Company. In addition, no cases or administrative proceedings have been brought pursuant to Regulation Best Interest. Regulation Best Interest, and any cases or administrative proceedings brought pursuant thereto, or any other legislation or regulations that may be introduced or become law in the future, could (i) have negative implications on our ability to raise capital from potential investors, including those investing through IRAs, and (ii) impact whether broker-dealers or their associated persons decide to recommend our securities to retail customers, thus impacting our ability to raise funds and our ability to achieve the investment objectives disclosed in this Annual Report on Form 10-K.
Risks Related to Conflicts of Interest
We are subject to conflicts of interest arising out of our relationships with our advisor and its affiliates, including the material conflicts discussed below. The “Conflicts of Interest” section of Part I, Item 1. of this Annual Report on Form 10-K provides a more detailed discussion of the conflicts of interest between us and our advisor and its affiliates, and our policies to reduce or eliminate certain potential conflicts.
Our advisor and its affiliates, including our dealer manager, face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.
Our advisor and its affiliates, including our dealer manager, are entitled to substantial fees from us under the terms of the advisory agreement and the dealer manager agreement. These fees could influence the judgment of our advisor and its affiliates in performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:
•the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the advisory agreement and the dealer manager agreement;
•the advisor’s role in estimating accruals of expenses for our independent fund accountant’s calculation of our monthly NAV, as the fees of our advisor and its affiliates are based on our NAV; however, any intentionally inaccurate estimation of our monthly net operating revenues, expenses and fees by our advisor could constitute a breach of its fiduciary duty to us and our stockholders, and may subject our advisor to significant liability; and
•the amount of fees paid to our advisor and its affiliates. While the fees must be approved on an annual basis by our independent directors, the approval process may be constrained, to some extent, because the independent directors are likely to consider, among other factors, our stockholders’ expectation that affiliates of CIM Income NAV Management will serve in management roles at our advisor and our dealer manager.
Our advisor is responsible for estimating amounts of certain liabilities that will affect the calculation of our NAV.
Our advisor is responsible for estimating the amounts of certain liabilities that are used by our independent fund accountant to determine our monthly NAV per share. These estimated amounts will include estimates of accrued fees and expenses attributable to the Offering, accrued operating fees and expenses and accrued distributions. To the extent that these liabilities are based on estimates, this could lead to conflicts of interest with our advisor because the advisor’s fee is based on a percentage of our NAV, although any intentionally inaccurate estimation of our monthly net operating revenues, expenses and fees by our advisor could constitute a breach of its fiduciary duty to us and our stockholders, and may subject our advisor to significant liability.
Our advisor has engaged its sub-advisor to select and manage our liquid investments. Our advisor relies on the performance of its sub-advisor in implementing the liquid investments portion of our investment strategy.
Our advisor has engaged its sub-advisor to select liquid investments pursuant to a sub-advisory agreement between our advisor and its sub-advisor. The sub-advisor has, and will continue to have substantial discretion, within our investment guidelines, to make decisions related to the acquisition, management and disposition of our liquid assets. If the sub-advisor does not succeed in implementing the liquid investments portion of our investment strategy, our performance will suffer. In addition, even though our advisor has the ability to terminate the sub-advisor at any time, it may be difficult and costly to terminate and replace the sub-advisor.
We do not have a direct contractual relationship with the sub-advisor. Therefore, it may be difficult for us to take enforcement action against the sub-advisor if its actions, performance or non-performance do not comply with the agreement.
We are not a party to the agreement with the sub-advisor pursuant to which the sub-advisor selects liquid investments. Therefore, we are dependent upon our advisor to manage and monitor the sub-advisor effectively. The sub-advisor may take actions that are not in our best interest, which could cause our performance to suffer, and as we are not a party to the agreement with the sub-advisor, we are limited in our ability to enforce that agreement.
Payment of fees to our advisor and our dealer manager will reduce the cash available for acquisitions and distribution and will increase the risk that a stockholder will not be able to recover the amount of their investment in our shares.
Our advisor and our dealer manager perform services for us in connection with the distribution of our shares, the selection and acquisition of our assets, and the management of our assets. We pay our advisor and our dealer manager fees for these services, which will reduce the amount of cash available for acquisitions or distributions to our stockholders. The fees we pay to our advisor and its affiliates decrease the value of our portfolio and increase the risk that stockholders may receive a lower price when they request redemption of their shares than the purchase price they initially paid for their shares.
Our advisor faces conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Pursuant to the terms of our advisory agreement, our advisor is entitled to fees that are structured in a manner intended to provide incentives to our advisor to perform in our best interests and in the best interests of our stockholders. For example, the
advisory fee is based on our NAV, and not on the costs or book value of our assets, and our advisor is entitled to an incentive fee, based on the annual performance of our stock. Nevertheless, our advisor could be motivated to recommend riskier or more speculative acquisitions in order for us to generate the specified levels of performance that would entitle our advisor to incentive compensation.
Other real estate programs sponsored by CCO Group, as well as CIM and certain of its affiliates, use investment strategies that are similar to ours; therefore, our executive officers and the officers and key personnel of our advisor and its affiliates may face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor.
CMFT and CIM and its affiliates may have investment objectives, strategy and criteria, including targeted asset types, substantially similar to ours. As a result, we may be seeking to acquire properties and real estate-related assets, including mortgage loans, at the same time as CIM or its affiliates, or one or more of the other real estate programs sponsored by CCO Group or its affiliates. Certain of our executive officers and certain officers of our advisor also are executive officers of CIM or its affiliates and other programs sponsored by CCO Group or its affiliates, the general partners of other private investment programs sponsored by CCO Group or its affiliates and/or the advisors or fiduciaries of other real estate programs sponsored by CCO Group or its affiliates. Accordingly, there is a risk that the allocation of acquisition opportunities may result in our acquiring a property that provides lower returns to us than a property purchased by another real estate program sponsored by CCO Group or its affiliates.
In addition, we have acquired, and may continue to acquire, properties in geographic areas where CIM or its affiliates or other real estate programs sponsored by CCO Group or its affiliates own properties. If one of these other real estate programs attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant.
Our officers, certain of our directors and our advisor, including its key personnel and officers, face conflicts of interest related to the positions they hold with affiliated and unaffiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to our stockholders.
Richard S. Ressler, the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, is the chairman of the board, chief executive officer and president of CMFT and vice president of our advisor, CIM Income NAV Management. One of our directors, Avraham Shemesh, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, serves as a director of CMFT and is president and treasurer of CIM Income NAV Management. One of our directors, Elaine Y. Wong, who is also a principal of CIM, serves as a director of CMFT. One of our independent directors, W. Brian Kretzmer, also serves as an independent director of CMFT. Our chief financial officer and treasurer, Nathan D. DeBacker, who is also an officer of certain affiliates of CIM and other real estate programs sponsored by CCO Group, is a vice president of CIM Income NAV Management and is an officer of certain of its affiliates. In addition, affiliates of CIM Income NAV Management act as an advisor to CMFT, which is a public, non-listed REIT sponsored or operated by our sponsor, CCO Group. In addition, this program primarily focuses on the acquisition and management of commercial properties in the retail sector, subject to long-term net leases to creditworthy tenants and have acquired or may acquire assets similar to ours. Nevertheless, the investment strategy used by CMFT would permit them to purchase certain properties that may also be suitable for our portfolio.
Conflicts with our business and interests are most likely to arise from involvement in activities related to (1) allocation of new acquisition opportunities, management time and operational expertise among us and the other entities, (2) our purchase of properties or other assets, or sale of properties or other assets, affiliated entities, (3) the timing and terms of the acquisition or sale of an asset, (4) development of our properties by affiliates, (5) investments with affiliates of our advisor, (6) compensation to our advisor and its affiliates, and (7) our relationship with, and compensation to, our dealer manager. Even if these persons do not violate their duties to us and our stockholders, they will have competing demands on their time and resources and may have conflicts of interest in allocating their time and resources among us and these other entities and persons. Should such persons devote insufficient time or resources to our business, returns on our acquisitions may suffer.
We depend on our advisor, and we may not be able to find a suitable replacement if our advisor terminates the advisory agreement.
We depend on our advisor, and we may not be able to find a suitable replacement if our advisor terminates the advisory agreement. Our ability to make distributions and achieve our investment objectives is dependent upon the performance of our advisor in the acquisition of real estate properties and other real estate-related assets, the management of our portfolio, the selection of tenants for our properties and the determination of any financing arrangements. If our advisor suffers or is distracted by adverse financial or operational problems in connection with its operations unrelated to us, our advisor may be unable to allocate sufficient time and resources to our operations. If our advisor is unable to allocate sufficient resources to
oversee and perform our operations for any reason, we may be unable to achieve our investment objectives or pay distributions to our stockholders.
Our future success depends to a significant degree upon certain key personnel of our advisor. If our advisor loses or is unable to attract and retain key personnel, our ability to achieve our investment objectives could be delayed or hindered, which could adversely affect our ability to pay distributions to our stockholders and the value of their investment.
Our success depends to a significant degree upon the contributions of certain executive officers and other key personnel of CCO Group and our advisor. We cannot guarantee that all of these key personnel, or any particular person, will remain affiliated with us, CCO Group and/or our advisor. If any of our key personnel were to cease their affiliation with our advisor, our operating results could suffer. We believe that our future success depends, in large part, upon our advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure our stockholders that CCO Group or our advisor will be successful in attracting and retaining such skilled personnel. If our advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of our stockholders’ investment may decline.
The termination or replacement of our advisor could trigger an event under our mortgage loans for some of our properties and the credit agreement governing for any line of credit we obtain.
Lenders may request provisions in the loan documentation that would make the termination or replacement of our advisor, without first obtaining the prior consent of the lender, an event of default. If an event of default occurs with respect to any of our financings, our ability to achieve our investment objectives could be adversely affected.
Our Board generally will not approve, in advance, the acquisition decisions made by our advisor.
Our Board has approved investment guidelines that delegate to our advisor the authority to (1) execute (i) real estate property acquisitions and dispositions and (ii) investments in other real estate-related assets, and to (2) contract with a sub-advisor to purchase and sell liquid assets, liquid real estate-related securities, cash and cash equivalents, in each case so long as such investments are consistent with our investment guidelines. As a result, our advisor has substantial latitude within these broad parameters in determining the types of assets that are proper acquisitions for us. Our directors generally do not review, in advance, the acquisition decisions made by our advisor or sub-advisor. Instead, our directors review our investment guidelines on an annual basis and our portfolio on a quarterly basis or, in each case, as often as they deem appropriate. In conducting these periodic reviews, our directors rely primarily on information provided to them by our advisor. Furthermore, transactions entered into on our behalf by our advisor may be costly, difficult or impossible to unwind when they are subsequently reviewed by our Board.
Our dealer manager is an affiliate of our advisor and, therefore, our stockholders will not have the benefit of an independent review of the prospectus or of us that customarily is performed in underwritten offerings.
Our dealer manager, CCO Capital, is an affiliate of our advisor and, as a result, is not in a position to make an independent review of us or of this offering. Accordingly, our stockholders will have to rely on their own broker-dealer or financial advisor to make an independent review of the terms of this offering. If their broker-dealer or financial advisor conducts an independent review of this offering, and/or engages an independent due diligence reviewer to do so on its behalf, we expect that we will pay or reimburse the expenses associated with such review, which may create conflicts of interest. If their broker-dealer or financial advisor does not conduct such a review, our stockholders will not have the benefit of an independent review of the terms of this offering.
Our charter permits us to acquire assets and borrow funds from affiliates of our advisor and sell or lease our assets to affiliates of our advisor, and any such transaction could result in conflicts of interest.
Our charter permits us to acquire assets and borrow funds from affiliates of our advisor on a limited basis and any such transaction could result in a conflict of interest. Such transactions are subject to compliance with the requirements set forth under “Conflicts of Interest – Certain Conflict Resolution Procedures”, including approval by a majority of our directors, including a majority of the independent directors, not otherwise interested in such transactions as being fair and reasonable to us and no less favorable to us than comparable terms and conditions available from unaffiliated third parties.
Our advisor may create special purpose entities to acquire properties for the specific purpose of selling the properties to us, and we may acquire such properties, provided that any and all acquisitions from affiliates of our advisor must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in such transaction, as being fair and reasonable to us and either the purchase price to us is no greater than the cost of the property to the affiliate of our advisor, including acquisition-related expenses, or a majority of our independent directors determines that there is substantial justification for any amount above such cost and that the difference is reasonable. Further, we will not acquire a
property from an affiliate of our advisor if the cost to us would exceed the property’s current appraised value as determined by an independent appraiser.
From time to time, we may borrow funds from affiliates of our advisor, including our sponsor, as bridge financing to enable us to acquire a property or for the purpose of providing short term financing as necessary to satisfy valid redemption requests under the Company’s share redemption plan, in either case when offering proceeds alone are insufficient to do so and third party financing has not been arranged or is insufficient. Any and all such transactions must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in such transaction as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties under the same circumstances. Finally, our advisor or its affiliates may pay costs on our behalf, pending our reimbursement, or we may defer payment of fees to our advisor or its affiliates, but neither of these transactions would be considered a loan under our charter.
Our advisor faces conflicts of interest relating to joint ventures or other co-ownership arrangements that we may enter into with CIM or its affiliates, or another real estate program sponsored or operated by CCO Group, which could result in a disproportionate benefit to CIM or its affiliates, or another real estate program sponsored by CCO Group.
We may enter into joint ventures or co-ownership arrangements (including co-investment transactions) with CIM or its affiliates, or another real estate program sponsored or operated by CCO Group for the acquisition, development or improvement of properties as well as the acquisition of real estate-related assets. Since one or more of the officers of our advisor are officers of CIM or its affiliates, including CCO Group and/or the advisors to other real estate programs sponsored by CCO Group, our advisor may face conflicts of interest in determining which real estate program should enter into any particular joint venture or co-ownership arrangement. These persons also may have a conflict in structuring the terms of the relationship between us and any affiliated co-venturer or co-owner, as well as conflicts of interests in managing the joint venture, which may result in the co-venturer or co-owner receiving benefits greater than the benefits that we receive.
In the event we enter into joint venture or other co-ownership arrangements with CIM or its affiliates, or another real estate program sponsored by CCO Group, our advisor and its affiliates may have a conflict of interest when determining when and whether to buy or sell a particular property, or to make or dispose of another real estate-related asset. In addition, if we become listed for trading on a national securities exchange, we may develop more divergent goals and objectives from any affiliated co-venturer or co-owner that is not listed for trading. In the event we enter into a joint venture or other co-ownership arrangement with another real estate program sponsored by CIM or its affiliates, or another real estate investment program sponsored by CCO Group that has a term shorter than ours, the joint venture may be required to sell its properties earlier than we may desire to sell the properties. Even if the terms of any joint venture or other co-ownership agreement between us and CIM or its affiliates, or another real estate program sponsored by CCO Group grants us the right of first refusal to buy such properties, we may not have sufficient funds or borrowing capacity to exercise our right of first refusal under these circumstances. We have adopted certain procedures for dealing with potential conflicts of interest as further described in Part I, Item 1. Business — Conflicts of Interest in this Annual Report on Form 10-K.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results.
An effective system of internal control over financial reporting is necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. As part of our ongoing monitoring of internal controls, we may discover material weaknesses or significant deficiencies in our internal controls that we believe require remediation. If we discover such weaknesses, we will make efforts to improve our internal controls in a timely manner. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and can only provide reasonable, not absolute, assurance that the objectives of the system are met. Any failure to maintain effective internal controls, or implement any necessary improvements in a timely manner, could have a material adverse effect on our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock, or cause us to not meet our reporting obligations. Ineffective internal controls could also cause holders of our securities to lose confidence in our reported financial information, which would likely have a negative effect on our business.
Risks Related to Our Corporate Structure
Our stockholders’ interest in us will be diluted if we issue additional shares.
Our stockholders will not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue up to 500,000,000 shares of capital stock. Of the total number of shares of capital stock authorized (a) 490,000,000 shares are designated as common stock, 122,500,000 of which are classified as D Shares, 122,500,000 of which are classified as T Shares, 122,500,000 of which are classified as S Shares and 122,500,000 of which are classified as I Shares, and (b) 10,000,000 shares
are designated as preferred stock. Our Board may amend the charter from time to time to increase or decrease the aggregate number of authorized shares of capital stock or the number of authorized shares of capital stock of any class or series without stockholder approval. After our stockholders purchase shares of our common stock, our Board may elect, without stockholder approval, to: (1) sell additional shares of these classes of shares, or future classes of shares in our current or future public offerings; (2) issue equity interests in private offerings; (3) issue shares upon the exercise of the options we may grant to our independent directors or future employees; (4) issue shares to our advisor, its successors or assigns, in payment of an outstanding fee obligation; or (5) issue shares to sellers of properties we acquire in connection with an exchange of limited partnership interests of our operating partnership. To the extent we issue additional shares after a stockholder’s purchase, such stockholder will not experience dilution in the value of their shares given that each class of our common stock is valued monthly based on our NAV. However, to the extent we issue additional shares after a stockholder’s purchase, such stockholder’s percentage ownership interest will be diluted.
Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our Board to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted prospectively or retroactively by our Board, no person may beneficially or constructively own more than 9.8% in value or number of shares, whichever is more restrictive, of our outstanding capital stock or more than 9.8% in value or number of shares, whichever is more restrictive, of our outstanding common stock pursuant to our charter. A person that did not acquire beneficially or constructively more than the applicable ownership limitations may become subject to such restrictions if redemptions by other stockholders cause such person’s holdings to exceed the applicable limits. Our ownership limitations may have the effect of delaying, deferring or preventing a change in control of the Company, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for our stockholders.
Our charter permits our Board to authorize the issuance of stock with terms that may subordinate the rights of the holders of our common stock or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.
Subject to its fiduciary duties to stockholders, our Board may classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms or conditions of redemption of any such stock without stockholder approval. Thus, our Board in the exercise of its business judgment could authorize the issuance of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price to holders of our common stock.
The power of our Board to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
Our organizational documents permit our Board to revoke or otherwise terminate our REIT election, without the approval of our stockholders, if our Board determines that it is no longer in our best interest to continue to qualify as a REIT. In such a case, we would become subject to U.S. federal, state and local income tax on our net taxable income and we would no longer be required to distribute most of our net taxable income to our stockholders, which could have adverse consequences on the total return to holders of our common stock.
Our rights and the rights of our stockholders to recover claims against our directors and officers are limited, which could reduce our stockholders’ and our recovery against them if they cause us to incur losses.
The Maryland General Corporation Law (“MGCL”) provides that a director will not have any liability in such capacity if he or she performs his or her duties in accordance with the applicable standard of conduct. In addition, subject to any limitations required by the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (which we refer to as the “NASAA REIT Guidelines”), Maryland law and our charter provide that no director or officer shall be liable to us or our stockholders for monetary damages unless the director or officer (1) actually received an improper benefit or profit in money, property or services or (2) was actively and deliberately dishonest as established by a final judgment. Moreover, our charter requires us to indemnify our directors and officers, subject to any limitations required by the NASAA REIT Guidelines and Maryland law. As a result, we and our stockholders may have more limited rights against our directors or officers than might otherwise exist under common law, which could reduce our stockholders’ and our recovery from these persons if they act in a manner that causes us to incur losses.
Certain provisions of Maryland law could inhibit transactions or changes of control under circumstances that could otherwise provide stockholders with the opportunity to realize a premium.
Certain provisions of the MGCL applicable to us prohibit “business combinations” between a Maryland corporation and:
•any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding voting stock, which we refer to as an “interested stockholder;”
•an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was an interested stockholder; or
•an affiliate of an interested stockholder.
These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination with the interested stockholder or an affiliate of the interested stockholder must be recommended by our Board and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of outstanding shares of our voting stock, and two-thirds of the votes entitled to be cast by holders of our outstanding shares other than shares of voting stock held by the interested stockholder. These requirements could have the effect of inhibiting a change in control even if a change in control were in our stockholders’ best interests. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our Board prior to the time that someone becomes an interested stockholder.
Our Umbrella Partnership Real Estate Investment Trust (“UPREIT”) structure may result in potential conflicts of interest with limited partners in our operating partnership whose interests may not be aligned with those of our stockholders.
Our directors and officers have duties to our corporation and our stockholders under Maryland law in connection with their management of the corporation. At the same time, we, as general partner, have fiduciary duties under Delaware law to our operating partnership and to the limited partners in connection with the management of our operating partnership. If we admit outside limited partners to our operating partnership, our duties as general partner of our operating partnership and its partners may come into conflict with the duties of our directors and officers to the corporation and our stockholders. Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership agreement. The partnership agreement of our operating partnership provides that, for so long as we own a controlling interest in our operating partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners will be resolved in favor of our stockholders.
Additionally, the partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees, will not be liable or accountable to our operating partnership for losses sustained, liabilities incurred or benefits not derived if we or our officers, directors, agents or employees acted in good faith. In addition, our operating partnership is required to indemnify us and our officers, directors, employees, agents and designees to the extent permitted by applicable law from and against any and all claims arising from operations of our operating partnership, unless it is established that: (1) the act or omission was committed in bad faith, was fraudulent or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful.
The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties.
If we seek to internalize our management functions, we may be unable to obtain key personnel, which could adversely affect our operations and the value of an investment.
If our Board determines that it is in our best interest to internalize our management functions, certain key employees of the advisor may not become our employees, but may instead remain employees of our advisor or its affiliates. An inability to manage an internalization transaction effectively could thus result in our incurring additional costs, including potentially significant litigation costs; or experiencing operational issues that could divert our management’s attention from management of our assets and negatively impact the value of an investment.
An investment return may be reduced if we are deemed to be an investment company under the Investment Company Act of 1940 as amended (the “Investment Company Act”).
We do not intend, or expect to be required, to register as an investment company under the Investment Company Act. Rule 3a-1 under the Investment Company Act generally provides that an issuer will not be deemed to be an “investment
company” provided that (1) it does not hold itself out as being engaged primarily, or propose to engage primarily, in the business of investing, reinvesting or trading securities and (2) no more than 45% of the value of its assets (exclusive of government securities and cash items) and no more than 45% of its net income after taxes (for the past four fiscal quarters combined) is derived from securities other than government securities, securities issued by employees’ securities companies, securities issued by certain majority owned subsidiaries of such company and securities issued by certain companies that are controlled primarily by such company. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:
•limitations on capital structure;
•restrictions on specified investments;
•requirements that we add directors who are independent of us, our advisor and its affiliates;
•restrictions or prohibitions on retaining earnings;
•restrictions on leverage or senior securities;
•restrictions on unsecured borrowings;
•requirements that our income be derived from certain types of assets;
•prohibitions on transactions with affiliates; and
•compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.
If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Registration with the SEC as an investment company would be costly, would subject our Company to a host of complex regulations, and would divert the attention of management from the conduct of our business. In addition, the purchase of real estate that does not fit our investment guidelines and the purchase or sale of investment securities or other assets to preserve our status as a company not required to register as an investment company could materially adversely affect our NAV, the amount of funds available for investment, and our ability to pay distributions to our stockholders.
General Risks Related to Real Estate Assets
To the extent we acquire industrial properties, the demand for and profitability of our industrial properties may be adversely affected by fluctuations in manufacturing activity in the United States.
We may acquire industrial properties that share some of the same core characteristics as our other commercial properties. To the extent we acquire industrial properties, such properties may be adversely affected if manufacturing activity decreases in the United States. Trade agreements with foreign countries have given employers the option to utilize less expensive non-U.S. manufacturing workers. The outsourcing of manufacturing functions could lower the demand for our industrial properties. Moreover, an increase in the cost of raw materials or decrease in the demand for housing could cause a slowdown in manufacturing activity, such as furniture, textiles, machinery and chemical products, and our profitability may be adversely affected.
If a major tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which could have a material adverse effect on our financial condition and ability to pay distributions to our stockholders.
The bankruptcy or insolvency of our tenants may adversely affect the income produced by our properties. Under bankruptcy law, a tenant cannot be evicted solely because of its bankruptcy and has the option to assume or reject any unexpired lease. If the tenant rejects the lease, any resulting claim we have for breach of the lease (excluding collateral securing the claim) will be treated as a general unsecured claim. Our claim against the bankrupt tenant for unpaid and future rent will be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant that rejects its lease would pay in full amounts it owes us under the lease. Even if a lease is assumed and brought current, we still run the risk that a tenant could condition lease assumption on a restructuring of certain terms, including rent, that would have an adverse impact on us. Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
In addition, the financial failure of, or other default by, one or more of the tenants to whom we have exposure could have an adverse effect on the results of our operations. While we evaluate the creditworthiness of our tenants by reviewing available financial and other pertinent information, there can be no assurance that any tenant will be able to make timely rental payments
or avoid defaulting under its lease. If any of our tenants’ businesses experience significant adverse changes, they may fail to make rental payments when due, close a number of stores, exercise early termination rights (to the extent such rights are available to the tenant) or declare bankruptcy. A default by a significant tenant or multiple tenants could cause a material reduction in our revenues and operating cash flows. In addition, if a tenant defaults, we may incur substantial costs in protecting our assets.
If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback might be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our financial condition, cash flows and the amount available for distributions to our stockholders.
If the sale-leaseback were re-characterized as a financing, we would not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property.
We have assumed, and may in the future assume, liabilities in connection with our property acquisitions, including unknown liabilities.
In connection with the acquisition of properties, we may assume existing liabilities, some of which may have been unknown or unquantifiable at the time of the transaction. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of tenants or other persons dealing with the sellers prior to our acquisition of the properties, tax liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. If the magnitude of such unknown liabilities is high, either singly or in the aggregate, it could adversely affect our business, financial condition, liquidity and results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
We are primarily dependent on single-tenant leases for our revenue and, accordingly, if we are unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire on favorable terms or at all, our financial condition could be adversely affected.
Our portfolio is primarily comprised of freestanding, single-tenant commercial properties that are net leased to a single tenant. Therefore, the financial failure of, or other default in payment by, a single tenant under its lease may cause a significant reduction in our operating cash flows from that property and could cause a significant reduction in our revenues. In addition, to the extent that we enter into a master lease with a particular tenant, the termination of such master lease could affect each property subject to the master lease, resulting in the loss of revenue from all such properties.
We cannot assure our stockholders that our leases will be renewed or that we will be able to lease or re-lease the properties on favorable terms, or at all, or that lease terminations will not cause us to sell the properties at a loss. Any of our properties that incur a vacancy could be difficult to re-lease or sell. We have and may continue to experience vacancies either by the continued default of a tenant under its lease or the expiration of one of our leases. Upon the expiration of leases at our properties, we may be required to make rent or other concessions to tenants, or accommodate requests for renovations, build-to-suit remodeling and other improvements, in order to retain and attract tenants. Certain of our properties may be specifically suited to the particular needs of a tenant (e.g., a retail bank branch or distribution warehouse) and major renovations and expenditures may be required in order for us to re-lease the space for other uses. If the vacancies continue for a long period of time, we may suffer reduced revenues, resulting in less cash available for distribution to our stockholders. If we are unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire on favorable terms or at all, our financial condition could be adversely affected.
We are subject to geographic and industry concentrations that make us more susceptible to adverse events with respect to certain geographic areas or industries.
As of December 31, 2020, we derived approximately:
•13%, 11% and 10% of our 2020 gross annualized rental revenues from tenants in Ohio, Arizona and Illinois, respectively; and
•17% and 10% of our 2020 gross annualized rental revenues from tenants in the manufacturing and grocery industries, respectively.
Any adverse change in the financial condition of a tenant to whom we may have a significant credit concentration now or in the future, or any downturn of the economy in any state or industry in which we may have a significant credit concentration now or in the future, could result in a material reduction of our cash flows or material losses to us.
Our portfolio of properties includes retail properties. Our performance, therefore, is linked to the market for retail space generally and a downturn in the retail market could have an adverse effect on the value of an investment in our common stock.
The market for retail space has been and could be adversely affected by weaknesses in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, excess amounts of retail space in a number of markets and competition for tenants with other shopping centers in our markets. Customer traffic to these shopping areas may be adversely affected by the closing of stores in the same shopping center, or by a reduction in traffic to these stores resulting from a regional economic downturn, a general downturn in the local area where our store is located, or a decline in the desirability of the shopping environment of a particular shopping center. A reduction in customer traffic could have a material adverse effect on our business, financial condition and results of operations.
Adverse economic, regulatory and geographical conditions that have an impact on the real estate market in general including the effects of the COVID-19 pandemic, may prevent us from being profitable or from realizing growth in the value of our real estate properties, and could have a significant negative impact on us.
We are subject to risks generally attributable to the ownership of real property, including:
•changes in global, national, regional or local economic, demographic or capital market conditions (including as a result of the outbreak of COVID-19 that began in the fourth quarter of 2019);
•current and future adverse national real estate trends, including increasing vacancy rates, which may negatively impact resale value, declining rental rates and general deterioration of market conditions;
•changes in supply of or demand for similar properties in a given market or metropolitan area that will result in changes in market rental rates or occupancy levels;
•increased competition for real property assets targeted by our investment strategy;
•bankruptcies, financial difficulties or lease defaults by our tenants;
•changes in interest rates and availability of financing; and
•changes in government rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws.
The outbreak of COVID-19 that began in the fourth quarter of 2019 has led to an economic slowdown and recession in the United States. During periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. The extent to which federal, state or local governmental authorities grant rent relief or other relief or enact amnesty programs applicable to our tenants in response to the COVID-19 outbreak will exacerbate the negative impacts that a slow down or recession will have on us. If we cannot operate our properties so as to meet our financial expectations, because of these or other risks, we may be prevented from being profitable or growing the values of our real estate properties, and our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions to our stockholders may be significantly negatively impacted.
All of these factors are beyond our control. Any negative changes in these factors could affect our ability to meet our obligations and make distributions to stockholders.
Increased competition from alternative retail channels could adversely impact our retail tenants’ profitability and ability to make timely lease payments to us.
Traditional retailers face increasing competition from alternative retail channels, including factory outlet centers, wholesale clubs, mail order catalogs, television shopping networks and various forms of e-commerce.
The increasing competition from such alternative retail channels could adversely impact our retail tenants’ profitability and ability to make timely lease payments to us. If our retail tenants are unable to make timely lease payments to us, our operating cash flows could be adversely affected.
Uninsured losses or losses in excess of our insurance coverage could materially adversely affect our financial condition and cash flows, and there can be no assurance as to future costs and the scope of coverage that may be available under insurance policies.
We carry comprehensive liability, fire, extended coverage, and rental loss insurance covering all of the properties in our portfolio under one or more blanket insurance policies with policy specifications, limits and deductibles customarily carried for similar properties. In addition, we carry professional liability and directors’ and officers’ insurance, and cyber liability insurance. While we select policy specifications and insured limits that we believe are appropriate and adequate given the relative risk of loss, insurance coverages provided by tenants, the cost of the coverage and industry practice, there can be no assurance that we will not experience a loss that is uninsured or that exceeds policy limits. In addition, we may reduce or discontinue terrorism, earthquake, flood or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. Our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases.
Further, we do not carry insurance for certain losses, including, but not limited to, losses caused by earthquakes, riots or acts of war because such losses may be either uninsurable or not economically insurable. If we experience a loss that is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. In addition, we carry several different lines of insurance, placed with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. As a result of any of the situations described above, our financial condition and cash flows may be materially and adversely affected.
We may be unable to secure funds for future leasing commissions, tenant improvements or capital needs, which could adversely impact our ability to pay cash distributions to our stockholders.
When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for leasing commissions, tenant improvements and tenant refurbishments to the vacated space. In addition, although we expect that our leases with tenants will require tenants to pay routine property maintenance costs and other expenses, we could be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops. If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain funds from available sources, if any, including operating cash flows, borrowings sales from offerings of our securities, or property sales. The use of cash from these sources may reduce the amount of capital we have available to acquire real estate, negatively impact the value of an investment in our common stock and reduce overall return. If additional capital is not available, this may adversely impact the value of the properties and our ability to attract new tenants.
We may face potential difficulties or delays renewing leases or re-leasing space, which could adversely impact our cash flows and our ability to pay distributions.
We derive a significant portion of our rental income from rent received from our tenants. We seek to lease the rentable square feet at our real estate properties to creditworthy tenants. However, if a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Also, when our tenants decide not to renew their leases or terminate early, we may not be able to re-let the space. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms. As a result, our net income or loss and ability to pay distributions to stockholders could be materially adversely affected. In addition, the presence of hazardous or toxic substances on our real estate properties may adversely affect our ability to lease such property.
Our properties where the underlying tenant has a below investment grade credit rating, as determined by major credit rating agencies, or has an unrated tenant may have a greater risk of default.
As of December 31, 2020, approximately 70.5% of our tenants were not rated or did not have an investment grade credit rating from a major ratings agency or were not affiliates of companies having an investment grade credit rating. Our properties with such tenants may have a greater risk of default and bankruptcy than properties leased exclusively to investment grade tenants. When we acquire properties where the tenant does not have a publicly available credit rating, we will use certain credit assessment tools as well as rely on our own estimates of the tenant’s credit rating which includes reviewing the tenant’s financial information (e.g., financial ratios, net worth, revenue, cash flows, leverage and liquidity, if applicable). If our ratings estimates are inaccurate, the default or bankruptcy risk for the subject tenant may be greater than anticipated. If our lender or a credit rating agency disagrees with our ratings estimates, we may not be able to obtain our desired level of leverage or our financing costs may exceed those that we projected. This outcome could have an adverse impact on our returns on that asset and hence our operating results.
Joint ventures could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We have invested, and may continue to co-invest in the future, with third parties through partnerships or other entities, which we collectively refer to as joint ventures, acquiring non-controlling interests in or sharing responsibility for managing the affairs of the joint venture. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.
In addition, our current joint venture is, and additional joint ventures may be, considered variable interest entities, which may not be consolidated for purposes of financial reporting and may be reflected under the equity method of accounting on our balance sheets contained in our annual and quarterly reports. Consequently, this non-consolidation could be material for the purpose of analyzing our financial position.
The financial performance of equity method investments that we acquire could adversely impact our results of operations.
For real estate-related investments that we account for under the equity method of accounting, we report our proportionate share of the net earnings or losses of our equity affiliates in our consolidated statements of operations. If the earnings or losses of our equity investments are material in any year, those earnings or losses may have a material effect on our net income and financial condition and liquidity. We do not control the day-to-day operations of our equity method investments or have the ability to cause them to pay distributions or make other payments or advances to their stockholders, including us, and thus the management of these businesses could impact our results of operations. Additionally, these businesses are subject to laws, regulations, market conditions and other risks inherent in their operations. Any of these factors could adversely impact our results of operations and the value of our investment.
Terrorist attacks, acts of violence or war or public health crises may affect the markets in which we operate and have a material adverse effect on our financial condition, results of operations and ability to pay distributions to our stockholders.
The strength and profitability of our business depends on demand for and the value of our properties. Terrorist attacks, acts of war and public health crises (including the COVID-19 outbreak) may result in declining economic activity, which could harm the demand for and the value of our properties and may negatively affect our operations and our stockholders’ investments. We may acquire real estate assets located in areas that are susceptible to terrorist attacks or acts of war. These attacks may directly impact the value of our assets through damage, destruction, loss or increased security costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Further, certain losses resulting from these types of events are uninsurable or not insurable at reasonable costs.
More generally, any terrorist attack, other act of violence or war, or public health crisis (such as the COVID-19 outbreak) could result in increased volatility in, or damage to, the United States and worldwide financial markets and economy, all of which could adversely affect our tenants’ ability to pay rent on their leases or our ability to borrow money or issue capital stock
at acceptable prices, which could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to our stockholders.
Ownership of real estate is subject to risks from adverse weather, natural disasters and climate events.
The physical effects of climate change could have a material adverse effect on our properties, operations, and business. To the extent climate change causes changes in weather patterns, our markets could experience increases in storm intensity, rising sea-levels, and changes in precipitation, temperature, and air quality. Over time, these conditions could result in physical damage to, or declining demand for, our properties or our inability to operate the properties at all. Climate change may also indirectly affect our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable, increasing the cost of energy and increasing the risk of flooding at our properties. Should the impact of climate change be severe or occur for lengthy periods of time, our financial condition or results of operations could be adversely impacted.
The declaration, amount and payment of future cash distributions on our common stock are subject to uncertainty due to current market conditions.
All distributions will be declared at the discretion of our Board and will depend on our earnings, our financial condition, REIT distribution requirements, and other factors as our Board may deem relevant from time to time. The economic impacts resulting from the COVID-19 pandemic could adversely affect our ability to pay distributions. Our Board is under no obligation or requirement to declare future distributions and will continue to assess our common stock distribution rate on an ongoing basis, as market conditions and our financial position continue to evolve. We cannot assure you that we will achieve results that will allow us to pay distributions on our common stock or that the level of distributions will be maintained or increased.
We are subject to risks that affect the retail real estate environment generally.
Our business has historically focused on retail real estate. As such, we are subject to certain risks that can affect the ability of our retail properties to generate sufficient revenue to meet our operating and other expenses, including debt service, to make capital expenditures and to make distributions to our shareholders. We face continuing challenges because of changing consumer preferences and because the conditions in the economy affect employment growth and cause fluctuations and variations in retail sales and in business and consumer confidence and consumer spending on retail goods. In general, a number of factors can negatively affect the income generated by a retail property or the value of a property, including: a downturn in the national, regional or local economy; a decrease in employment or consumer confidence or spending; increases in operating costs, such as common area maintenance, real estate taxes, utility rates and insurance premiums; higher energy or fuel costs resulting from adverse weather conditions, natural disasters, geopolitical concerns, terrorist activities and other factors; changes in interest rate levels and the cost and availability of financing; a weakening of local real estate conditions, such as an oversupply of, or a reduction in demand for, retail space or retail goods, and the availability and creditworthiness of current and prospective tenants; trends in the retail industry; seasonality; changes in perceptions by retailers or shoppers of the safety, convenience and attractiveness of a retail property; perceived changes in the convenience and quality of competing retail properties and other retailing options such as internet shopping or other strategies, such as using smartphones or other technologies to determine where to make and to assist in making purchases; the ability of our tenants to meet shoppers’ demands for quality, variety, and product availability, which may be impacted by supply chain disruptions; and changes in laws and regulations applicable to real property, including tax and zoning laws.
Changes in one or more of the aforementioned factors can lead to a decrease in the revenue or income generated by our properties and can have a material adverse effect on our financial condition and results of operations. Many of these factors could also specifically or disproportionately affect one or more of our tenants, which could decrease operating performance, reduce property revenue and affect our results of operations. If the estimated future cash flows related to a particular property are significantly reduced, we may be required to reduce the carrying value of the property.
Downturns in the retail industry likely will have a direct adverse impact on our revenues and cash flow.
Our retail properties currently owned consist primarily of necessity retail properties and anchored shopping centers. Our retail performance therefore is generally linked to economic conditions in the market for retail space. The market for retail space could be adversely affected by any of the following:
•weakness in the national, regional and local economies, and declines in consumer confidence which could adversely impact consumer spending and retail sales and in turn tenant demand for space and could lead to increased store closings;
•changes in market rental rates;
•changes in demographics (including the number of households and average household income) surrounding our shopping centers;
•adverse financial conditions for anchored shopping centers and other retail, service, medical or restaurant tenants;
•continued consolidation in the retail and grocery sector;
•excess amount of retail space in our markets;
•reduction in the demand by tenants to occupy our shopping centers as a result of reduced consumer demand for certain retail formats;
•increase in e-commerce and alternative distribution channels may negatively affect out tenant sales or decrease the square footage our tenants require and could lead to margin pressure on our anchored shopping centers, which could lead to store closures;
•the impact of an increase in energy costs on consumers and its consequential effect on the number of shopping visits to our centers;
•a pandemic or other health crisis, such as the outbreak of COVID-19; and
•consequences of any armed conflict involving, or terrorist attack against, the United States.
To the extent that any of these conditions occur, they are likely to impact market rents for retail space, occupancy in our retail properties, our ability to sell, acquire or develop retail properties, and our cash available for distributions to stockholders.
In some instances, our advisor may rely on third party property managers to operate our properties and leasing agents to lease vacancies in our properties.
Under our advisory agreement, our advisor is obligated to manage our properties and find tenants to lease our vacant properties. We expect that, in some instances, our advisor will rely on third party property managers and leasing agents. The third party property managers will have significant decision-making authority with respect to the management of our properties. Our ability to direct and control how our properties are managed may be limited. We will not supervise any of the property managers or leasing agents or any of their respective personnel on a day-to-day basis. Thus, the success of our business may depend in part on the ability of our third party property managers to manage the day-to-day operations and the ability of our leasing agents to lease vacancies in our properties. Any adversity experienced by our property managers or leasing agents could adversely impact the operation and profitability of our properties and, consequently, our ability to achieve our investment objectives, including, without limitation, diversification of our real estate properties portfolio by property type and location, moderate financial leverage, conservative levels of operating risk and an attractive level of current income.
Our net leases may require us to pay property-related expenses that are not the obligations of our tenants.
Under the terms of the majority of our net leases, in addition to satisfying their rent obligations, our tenants will be responsible for the payment or reimbursement of property expenses such as real estate taxes, insurance and ordinary maintenance and repairs. However, under the provisions of certain existing leases and leases that we may enter into in the future with our tenants, we may be required to pay some or all of the expenses of the property, such as the costs of environmental liabilities, roof and structural repairs, real estate taxes, insurance, certain non-structural repairs and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations may be adversely affected and the amount of cash available to meet expenses and to pay distributions to stockholders may be reduced.
Changes in accounting standards may adversely impact our financial condition and/or results of operations.
We are subject to the rules and regulations of the Financial Accounting Standards Board (“FASB”) related to GAAP. Various changes to GAAP are constantly being considered, some of which could materially impact our reported financial condition and/or results of operations. Also, to the extent that public companies in the United States would be required in the future to prepare financial statements in accordance with International Financial Reporting Standards instead of the current GAAP, this change in accounting standards could materially affect our financial condition or results of operations.
Compliance with the Americans with Disabilities Act of 1990, as amended, and fire, safety and other regulations may require us to make unanticipated expenditures that could significantly reduce the cash available for distributions on our common stock.
Our properties are subject to regulation under federal laws, such as the Americans with Disabilities Act of 1990, as amended (the “ADA”), pursuant to which all public accommodations must meet federal requirements related to access and use by disabled persons. Although we believe that our properties substantially comply with present requirements of the ADA, we have not conducted an audit or investigation of all of our properties to determine our compliance. If one or more of our properties or future properties are not in compliance with the ADA, we might be required to take remedial action, which would
require us to incur additional costs to bring the property into compliance. Noncompliance with the ADA could also result in imposition of fines or an award of damages to private litigants.
Additional federal, state and local laws also may require modifications to our properties or restrict our ability to renovate our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation.
In addition, our properties are subject to various federal, state and local regulatory requirements, such as state and local earthquake, fire and life safety requirements. If we were to fail to comply with these various requirements, we might incur governmental fines or private damage awards. If we incur substantial costs to comply with the ADA or any other regulatory requirements, our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock could be materially adversely affected. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties.
Risks Associated with Debt Financing
We have incurred mortgage indebtedness and other borrowings, which may increase our business risks, could hinder our ability to make distributions, and decrease the value of our stockholders’ investment.
We have financed, and intend to continue to finance, a portion of the purchase price of properties by borrowing funds. Under our charter, we have a limitation on borrowing which precludes us from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts or other non-cash reserves, less total liabilities. Generally speaking, the preceding calculation is expected to approximate 75% of the cost of our properties before non-cash reserves and depreciation. Our Board, including our independent directors, has adopted a policy limiting our borrowing to 60%, absent special approval by a majority of our independent directors.
In addition, we may incur mortgage debt and pledge some or all of our properties as security for that debt to obtain funds to acquire additional properties or for working capital. We may also obtain lines of credit to provide a flexible borrowing source which generally will allow us to borrow funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. Furthermore, we may borrow under lines of credit if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes or avoid taxes on undistributed income.
High debt levels will cause us to incur higher interest charges, which would result in higher debt service payments and could be accompanied by restrictive covenants. If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on that property, then the amount available for distributions to our stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of an investment in our common stock. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we will recognize taxable income on foreclosure, but we would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to qualify and maintain our qualification as a REIT. We may give full or partial guarantees to lenders of recourse mortgage debt to the entities that own our properties. If we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgage contains cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected, which could result in us losing our REIT status and would result in a decrease in the value of our stockholders’ investment.
If we draw on a line of credit to fund redemptions or for any other reason, our leverage will increase.
We have obtained a line of credit which could provide for a ready source of liquidity to fund redemptions of shares of our common stock, in the event that redemption requests exceed our operating cash flows, liquid assets and net proceeds from our continuous offering. There can be no assurances that we will be able to obtain future lines of credit on reasonable terms given the recent volatility in the capital markets. In addition, we may not be able to obtain additional lines of credit of an appropriate size for our business until such time as we have a substantial portfolio, or at all. If we borrow under a line of credit to fund
redemptions of shares of our common stock, our leverage will increase until we receive additional net proceeds from our continuous offering, additional operating cash flows or sell some of our assets to repay outstanding indebtedness.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.
We have incurred, and in the future may incur additional, indebtedness, that bears interest at a variable rate. To the extent that we incur variable rate debt and do not hedge our exposure thereunder, increases in interest rates would increase the amounts payable under such indebtedness, which could reduce our operating cash flows and our ability to pay distributions to our stockholders. In addition, if our existing indebtedness matures or otherwise becomes payable during a period of rising interest rates, we could be required to liquidate one or more of our properties at times that prevent realization of the maximum return on such assets.
We may not be able to generate sufficient cash flows to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness, and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash. To a certain extent, our cash flows are subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors, many of which are beyond our control.
We cannot assure our stockholders that our business will generate sufficient cash flows from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.
Additionally, if we incur additional indebtedness in connection with any future deployment of capital or development projects or for any other purpose, our debt service obligations could increase. We may need to refinance all or a portion of our indebtedness before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
•our financial condition and market conditions at the time;
•restrictions in the agreements governing our indebtedness;
•general economic and capital market conditions;
•the availability of credit from banks or other lenders; and
•our results of operations
As a result, we may not be able to refinance our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flows from operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity, or delaying any strategic acquisitions and alliances or capital expenditures, any of which could have a material adverse effect on our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or maintain our level of distributions on our common stock.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property or discontinue insurance coverage. In addition, loan documents may limit our ability to replace the property manager or terminate certain operating or lease agreements related to the property. These or other limitations imposed by a lender may adversely affect our flexibility and our ability to pay distributions on our common stock.
If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to make distributions to our stockholders.
Some of our financing arrangements may require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the particular property. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the particular property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to our stockholders and the projected time of disposition of our assets.
Failure to hedge effectively against interest rate changes may materially adversely affect our ability to achieve our investment objectives.
Subject to limitations required to maintain qualification as a REIT, we may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest rate cap or collar agreements and interest rate swap agreements. These agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements and that these arrangements may not be effective in reducing our exposure to interest rate changes. These interest rate hedging arrangements may create additional assets and/or liabilities from time to time that may be held or liquidated separately from the underlying property or loan for which they were originally established. Hedging may reduce the overall returns on our investments. Failure to hedge effectively against interest rate changes may have a material adverse effect on our ability to achieve our investment objectives.
Changes in banks’ inter-bank lending rate reporting practices or the method pursuant to which the London Interbank Offered Rate (“LIBOR”) is determined may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.
LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. Some of these reforms are already effective while others are still to be implemented. These reforms may cause such benchmarks to perform differently than in the past, or have other consequences which cannot be predicted. It currently appears that, over time, U.S. Dollar LIBOR may be replaced by the Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank of New York. However, the manner and timing of this shift is currently unknown. Market participants are still considering how various types of financial instruments and securitization vehicles would react to a discontinuation of LIBOR. It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time, and it is possible that not all of our assets and liabilities will transition to the same alternative reference rate, in each case increasing the difficulty of hedging. For example, switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread. Industry organizations are attempting to structure the spread calculation in a manner that minimizes the possibility of value transfer between counterparties, borrowers, and lenders by virtue of the transition, but there is no assurance that the calculated spread will be fair and accurate or that all asset types and all types of securitization vehicles will use the same spread. Our Company and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management. The process of transition involves operational risks. It is also possible that no transition will occur for many financial instruments. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be implemented. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the market for or value of any securities on which the interest or dividend is determined by reference to LIBOR, loans, derivatives and other financial obligations or on our overall financial condition or results of operations. More generally, any of the above changes or any other consequential changes to LIBOR or any other “benchmark” as a result of international, national or other proposals for reform or other initiatives, or any further uncertainty in relation to the timing and manner of implementation of such changes, could have a material adverse effect on the value of and return on any securities based on or linked to a “benchmark.”
Risks Associated with Real Estate-Related Assets
The real estate-related equity securities in which we may invest are subject to specific risks relating to the particular issuer of the securities and may be subject to the general risks of investing in subordinated real estate securities.
We may invest in equity securities of both publicly traded and private real estate companies, which involves a higher degree of risk than debt securities due to a variety of factors, including that such investments are subordinate to creditors and are not secured by the issuer’s property. Our investments in real estate-related equity securities will involve special risks relating to the particular issuer of the equity securities, including the financial condition and business outlook of the issuer. Issuers of real estate-related equity securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate, including risks relating to rising interest rates.
The value of the real estate-related securities in which we may invest may be volatile.
The value of real estate-related securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Different parts of the market and different types of equity securities can react differently to these developments and they can affect a single issuer, multiple issuers within an industry or economic sector or geographic region or the market as a whole. The real estate industry is sensitive to economic downturns. The value of securities of companies engaged in real estate activities can be affected by changes in real estate values and rental income, property taxes, interest rates and tax and regulatory requirements.
CMBS in which we may invest are subject to several types of risks that may adversely impact our performance.
CMBS are bonds that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the mortgage-backed securities we invest in are subject to all the risks of the underlying mortgage loans, including the risks of prepayment or default.
In a rising interest rate environment, the value of CMBS may be adversely affected when repayments on underlying mortgage loans do not occur as anticipated, resulting in the extension of the security’s effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated assets but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying CMBS to make principal and interest payments or to refinance may be impaired. In this case, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities. The value of CMBS also may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities markets as a whole. In addition, CMBS are subject to the credit risk associated with the performance of the underlying mortgage properties.
CMBS are also subject to several risks created through the securitization process. Certain subordinate CMBS are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes a large percentage of delinquent loans, there is a risk that interest payment on subordinate CMBS will not be fully paid. Subordinate securities of CMBS are also subject to greater risk than those CMBS that are more highly rated.
The mortgage instruments in which we may invest may be impacted by unfavorable real estate market conditions, which could result in losses to us.
If we make investments in mortgage loans or mortgage-backed securities, we will be at risk of loss on those investments, including losses as a result of defaults on mortgage loans. These losses may be caused by many conditions beyond our control, including general prevailing local, national and global economic conditions, economic conditions affecting real estate values, tenant defaults and lease expirations, interest rate levels and the other economic and liability risks associated with real estate described above under the heading “— Risks Related to Investments in Real Estate,” as well as, among other things:
•competition from comparable types of properties;
•success of tenant businesses;
•property management decisions;
•changes in use of property;
•shift of business processes and functions offshore;
•property location and condition;
•changes in specific industry segments;
•declines in regional or local real estate values, or rental or occupancy rates; and
•increases in interest rates, real estate tax rates and other operating expenses.
If we acquire a property by foreclosure following defaults under our mortgage loan investments, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our ability to achieve our investment objectives. We do not know whether the values of the property securing any of our real estate securities investments will remain at the levels existing on the dates we initially make the related investment. If the values of the underlying properties drop, our risk will increase and the values of our interests may decrease.
Delays in liquidating defaulted mortgage loan investments could reduce our investment returns.
If there are defaults under our mortgage loan investments, we may not be able to foreclose on or obtain a suitable remedy with respect to such investments. Specifically, we may not be able to repossess and sell the underlying properties quickly, which could reduce the value of our investment. For example, an action to foreclose on a property securing a mortgage loan is regulated by state statutes and rules and is subject to many of the delays and expenses of lawsuits if the defendant raises defenses or counterclaims. Additionally, in the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.
The mezzanine loans in which we may invest will involve greater risks of loss than senior loans secured by income-producing real properties, which may result in losses to us.
We may invest in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of either the entity owning the real property or the entity that owns the interest in the entity owning the real property. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.
Interest rate and related risks may cause the value of our real estate-related assets to be reduced.
Interest rate risk is the risk that fixed income securities such as preferred and debt securities, and to a lesser extent dividend paying common stocks, will decline in value because of changes in market interest rates. Generally, when market interest rates rise, the market value of such securities will decline, and vice versa. Our investment in such securities means that the NAV of our shares may tend to decline if market interest rates rise.
During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected principal payments. This may lock in a below-market interest rate, increase the security’s duration and reduce the value of the security. This is known as extension risk. During periods of declining interest rates, an issuer may be able to exercise an option to prepay principal earlier than scheduled, which is generally known as “call risk” or “prepayment risk.” If this occurs, we may be forced to reinvest in lower yielding securities. This is known as “reinvestment risk.” Preferred and debt securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem an obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. These risks may reduce the value of our real estate-related securities investments.
U.S. Federal Income and Other Tax Risks
Failure to remain qualified as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.
We believe that our prior, current and proposed organization, ownership and method of operation has enabled and will enable us to meet the requirements for qualification and taxation as a REIT. However, we cannot assure stockholders in our common stock that we have qualified or will qualify as such. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification.
If we fail to remain qualified as a REIT in any taxable year, or are determined to have lost our REIT status in a prior year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
•we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates; and
•unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if we fail to remain qualified as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to remain qualified as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock and the return on an investment in our common stock.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders’ investment.
Our ability to dispose of a property during the first few years following its acquisition is restricted to a substantial extent as a result of our REIT status. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. Properties we own, directly or through any subsidiary entity, including CIM Income NAV OP, but generally excluding our taxable REIT subsidiaries, may, depending on how we conduct our operations, be treated as inventory or property held primarily for sale to
customers in the ordinary course of a trade or business. Under applicable provisions of the Code regarding prohibited transactions by REITs, we would be subject to a 100% tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including CIM Income NAV OP, but generally excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Any taxes we pay would reduce our cash available for distribution to our stockholders. Our concern over paying the prohibited transactions tax may cause us to forgo disposition opportunities that would otherwise be advantageous if we were not a REIT. As of December 31, 2020, our dispositions were not subject to the prohibited transaction tax.
Even if we maintain our status as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we maintain our status as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. For example, to the extent we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code. Further, any taxable REIT subsidiary (“TRS”) we establish will be subject to regular corporate U.S. federal, state and local taxes. Any of these taxes would decrease cash available for distribution to stockholders.
REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.
In order to maintain our qualification as a REIT and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from operations may be insufficient to fund required distributions for numerous reasons, including as a result of differences in timing between the actual receipt of income and the recognition of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our qualification as a REIT.
If we fail to invest a sufficient amount of the net proceeds from selling our stock in real estate assets within one year from the receipt of the proceeds, we could fail to continue to qualify as a REIT.
Temporary investment of the net proceeds from sales of our stock in short-term securities and income from such investment generally will allow us to satisfy various REIT income and asset requirements, but only during the one-year period beginning on the date we receive the net proceeds. If we are unable to invest a sufficient amount of the net proceeds from sales of our stock in qualifying real estate assets within such one-year period, we could fail to satisfy one or more of the gross income or asset tests and/or we could be limited to investing all or a portion of any remaining funds in cash or cash equivalents. If we fail to satisfy any such income or asset test, unless we are entitled to relief under certain provisions of the Code, we could fail to continue to qualify as a REIT.
If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.
As of the date of this Annual Report on Form 10-K, our operating partnership is a disregarded entity for U.S. federal income tax purposes. Our operating partnership will become a partnership for U.S. federal income tax purposes if and when it issues interests to a person other than the Company or an entity disregarded from the Company for tax purposes. As a partnership, our operating partnership would not be subject to U.S. federal income tax on its income. Instead, each of its partners, including us, would be required to take into account its allocable share of the operating partnership’s income. No assurance can be provided, however, that the IRS would not challenge our operating partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as a corporation for tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, our operating partnership would become subject to U.S. federal, state and local income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.
Dividends payable by REITs generally do not qualify for reduced tax rates available for some dividends.
Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates
applicable to qualified dividend income (but under the Tax Cuts and Jobs Act, U.S. stockholders that are individuals, trusts and estates generally may deduct 20% of ordinary dividends from a REIT for taxable years beginning after December 31, 2017, and before January 1, 2026). Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities or to liquidate otherwise attractive assets.
To maintain our qualification as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forgo acquisitions we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
In addition, if we fail to comply with certain asset ownership tests at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. As a result, we may be required to liquidate otherwise attractive assets. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or to offset certain other positions, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of one or both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because a domestic TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS will generally not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
Our stockholders may have current tax liability on distributions they elect to reinvest in our common stock.
If our stockholders participate in the DRIP, for U.S. federal income tax purposes they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the reinvested distributions.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability or reduce our operating flexibility.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect our taxation and our ability to continue to qualify as a REIT, or the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a regular corporation. As a result, our charter provides our Board with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our Board has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
In addition, the Tax Cuts and Jobs Act made significant changes to the U.S. federal income tax rules for taxation of individuals and businesses, generally effective for taxable years beginning after December 31, 2017, including a number of provisions of the Code that affect the taxation of REITs and their stockholders. Among the changes made by the Tax Cuts and Jobs Act are permanently reducing the generally applicable corporate tax rate, generally reducing the tax rate applicable to individuals and other noncorporate taxpayers for tax years beginning after December 31, 2017 and before January 1, 2026,
eliminating or modifying certain previously allowed deductions (including substantially limiting interest deductibility and, for individuals, the deduction for non-business state and local taxes), and, for taxable years beginning after December 31, 2017 and before January 1, 2026, providing for preferential rates of taxation through a deduction of up to 20% (subject to certain limitations) on most ordinary REIT dividends and certain trade or business income of non-corporate taxpayers. The Tax Cuts and Jobs Act also imposes new limitations on the deduction of net operating losses and requires us to recognize income for tax purposes no later than when we take it into account on our financial statements, which may result in us having to make additional taxable distributions to our stockholders in order to comply with REIT distribution requirements or avoid taxes on retained income and gains. The Tax Cuts and Jobs Act also made numerous large and small changes to the tax rules that do not affect the REIT qualification rules directly but may otherwise affect us or our stockholders.
While the changes in the Tax Cuts and Jobs Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Code may have unanticipated effects on us or our stockholders.
We urge our stockholders to consult with their own tax advisor with respect to the status of the Tax Cuts and Jobs Act and other legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common stock.
We may be subject to adverse tax consequences if certain sale-leaseback transactions are not characterized by the IRS as “true leases.”
We may acquire real estate properties and lease them back to the sellers of such properties. In the event the IRS does not characterize such leases as “true leases,” we could be subject to certain adverse tax consequences, including an inability to deduct depreciation expense and cost recovery relating to such property, and under certain circumstances, we could fail to maintain our qualification as a REIT as a result.
Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash flows.
Even if we continue to qualify as a REIT for U.S. federal income tax purposes, we will be required to pay some state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase and if any such increase is not reimbursable under the terms of our lease, then our cash flows will be impacted, which in turn could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or maintain our level of distributions on our common stock.
Mezzanine loans may not qualify as real estate assets and could adversely affect our status as a REIT.
We may invest in mezzanine loans, for which the IRS has provided a safe harbor, but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, the IRS will treat the mezzanine loan as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. To the extent that any mezzanine loans do not meet all of the requirements for reliance on the safe harbor, such loans may not be real estate assets and could adversely affect our qualification as a REIT.
Non-U.S. stockholders may be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax upon the disposition of our shares.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a “U.S. real property interest” (“USRPI”) under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Our common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe that we are a domestically-controlled qualified investment entity. Because our shares may be purchased or will be, or redeemed on a monthly basis, no assurance can be given that we are, have been during the applicable testing period, or will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 10% or less of our common stock at any time during the five-year period ending on the date of the sale.
Distributions to tax-exempt stockholders may be classified as unrelated business taxable income.
If (1) we are a “pension-held REIT,” (2) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold shares of our common stock or (3) a holder of shares of our common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, shares by such tax-exempt stockholder may be subject to U.S. federal income tax as UBTI under the Code.
The share transfer and ownership restrictions applicable to REITs contained in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to continue to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted prospectively or retroactively by our Board, for so long as we continue to qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8% in value of or number of shares, whichever is more restrictive, of our outstanding capital stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of common stock. Our Board, in its sole discretion and upon receipt of certain representations and undertakings, may exempt a person (prospectively or retrospectively) from the ownership limits. However, our Board may not, among other limitations, grant an exemption from these ownership restrictions to any proposed transferee whose ownership, direct or indirect, in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our Board determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
If we elect to treat one or more of our subsidiaries as a TRS, it will be subject to corporate-level taxes, and our dealings with our TRSs may be subject to a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A TRS will be subject to applicable U.S. federal, state, local and foreign income tax on its taxable income, including corporate income tax on the TRS’s income, and is, as a result, less tax efficient than with respect to income we earn directly. The after-tax net income of our TRSs would be available for distribution to us. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. In addition, the rules, which are applicable to us as a REIT, also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by one of our TRSs exceeds an arm’s-length rental amount, such amount would be potentially subject to a 100% excise tax. While we intend that all transactions between us and our TRSs would be conducted on an arm’s-length basis, and therefore, any amounts paid by our TRSs to us would not be subject to the excise tax, no assurance can be given that the IRS would not disagree with such conclusion and levy an excise tax on such transactions.
For tax qualified retirement plans and accounts, if an investment in our common stock constitutes a prohibited transaction under the Employee Retirement Income Security Act (“ERISA”) or the Code, it is possible that our stockholders may be subject to the imposition of significant excise taxes and penalties with respect to the amount invested. In order to avoid triggering additional taxes and/or penalties or the implication of various fiduciary requirements under ERISA or similar applicable laws with which it would be difficult for us to comply, if our stockholders intend to invest in our shares through such plans (such as pension or profit-sharing trusts) or IRAs, they should consider additional factors.
If our stockholders are investing the assets of any of the entities identified in the prior sentence in our common stock, our stockholders should satisfy themselves that:
•their investment is consistent with their fiduciary obligations under applicable law, including common law, ERISA and the Code;
•their investment is made in accordance with the documents and instruments governing the trust, plan or IRA, including a plan’s investment policy;
•their investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404 (a)(1)(C) of ERISA, if applicable, and other applicable provisions of ERISA and the Code;
•their investment will not impair the liquidity of the trust, plan or IRA;
•their investment will not produce “unrelated business taxable income” for the plan or IRA;
•they will be able to value the assets of the plan annually (or more frequently, if required) in accordance with ERISA requirements and applicable provisions of the applicable trust, plan or IRA document;
•their investment will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code; and
•our assets will not be treated as “plan assets” of our stockholders’ plan arrangement.
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA, the Code, or other applicable statutory or common law may result in the imposition of civil penalties, and can subject the fiduciary to liability for any resulting losses as well as equitable remedies. In addition, if an investment in our shares constitutes a prohibited transaction under the Code, the “disqualified person” that engaged in the transaction may be subject to the imposition of excise taxes with respect to the amount invested.
Specific rules apply to foreign, governmental and church plans.
As a general rule, certain employee benefit plans, including foreign pension plans, governmental plans established or maintained in the United States (as defined in Section 3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA’s requirements and are not “benefit plan investors” for purposes of investing in “plan assets” subject to ERISA’s requirements. Any such plan that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code may nonetheless be subject to the prohibited transaction rules set forth in Section 503 of the Code and, under certain circumstances in the case of church plans, Section 4975 of the Code. Also, some foreign plans and governmental plans may be subject to foreign, state, or local laws which are, to a material extent, similar to the provisions of ERISA or Section 4975 of the Code. Each fiduciary of a plan subject to any such similar law should make its own determination as to the need for and the availability of any exemption relief.
If stockholders invest in our common stock through an IRA or other retirement plan, they may be limited in their ability to withdraw required minimum distributions.
If stockholders invest in our common stock with assets of a retirement plan or IRA, federal law may require them to withdraw required minimum distributions from such plan or account in the future. Our common stock will be highly illiquid, and our share redemption plan only offers limited liquidity. If stockholders require liquidity, they may generally sell their shares, but such sale may be at a price less than the price at which they initially purchased their common stock. If stockholders fail to withdraw required minimum distributions from their plan or account, they may be subject to certain taxes and tax penalties.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
ITEM 2.PROPERTIES
See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Information of this Annual Report on Form 10-K for a discussion of the properties we hold for rental operations and Part IV Item 15. Exhibits, Financial Statement Schedules — Schedule III — Real Estate and Accumulated Depreciation of this Annual Report on Form 10-K for a detailed listing of such properties.
ITEM 3.LEGAL PROCEEDINGS
In the ordinary course of business we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which our properties are the subject.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of March 22, 2021, we had approximately 30.0 million shares of common stock outstanding (15.2 million D Shares, 13.7 million T Shares, 7,500 S Shares and 1.1 million I Shares), held by a total of 10,859 stockholders of record. The number of stockholders is based on the records of DST Systems, Inc., which serves as our registrar and transfer agent.
Although we have adopted a redemption program which provides limited liquidity, there is no established trading market for our common stock, we do not expect that a public market will ever develop and our charter does not require a liquidity event at any time in the future. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Pursuant to the Offering, we are selling shares of our common stock to the public at a price that will vary from day-to-day and, on any given day, will be equal, for each class of common stock, to our NAV per share for such class. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
We have engaged an independent valuation expert which has expertise in appraising commercial real estate assets, including notes receivable secured by real estate, and related liabilities, to provide, on a rolling annual basis, valuations of each of our commercial real estate assets, and, on a rolling quarterly basis, valuations of each of our related liabilities and notes receivable secured by real estate, to be set forth in individual appraisal reports, and to adjust those valuations for events known to the independent valuation expert that it believes are likely to have a material impact on previously provided estimates of the value of the affected commercial real estate assets and notes receivable secured by real estate or related real estate liabilities. In addition, our assets will include liquid assets, which will be priced monthly by third party pricing sources, and cash and cash equivalents.
Our NAV per share for each class is calculated monthly as of the last calendar day of each month by our independent fund accountant using a process that incorporates (1) the periodic valuations of our real estate assets and related liabilities provided by our independent valuation expert, (2) ongoing assessment by the valuation expert of the estimated impact of any events that require adjustment to the most recent valuations determined by the valuation expert, (3) updates in the price of liquid assets for which third-party market quotes are available, (4) valuations of any securities or other assets for which market quotes are not available, (5) valuation of our other assets and liabilities, (6) accruals of our distributions for each share class, and accruals of our monthly distributions, and (7) estimates of monthly accruals, on a net basis, of our operating revenues, expenses including class specific expenses, debt service costs and fees, including class specific fees. NAV for each class will be adjusted for contributions, redemptions and accruals of the class’s monthly distributions and estimates of class-specific fee and expense accruals. Upfront selling commissions and dealer manager fees will have no effect on the NAV of any class. NAV is intended to reflect our estimated value on the date that NAV is determined, and NAV of any class at any given time will not reflect any obligation to pay future trail fees that may become payable after the date the NAV is determined. As a result, the estimated liability for the future stockholder servicing fees, which is accrued at the time each share is sold, will have no effect on the NAV of any class. Our independent fund accountant determines our NAV per share by dividing the NAV for each class on such day by the number of shares of such class outstanding as of the end of such day, prior to giving effect to any share purchases or redemptions to be effected on such day. Our Board is responsible for ensuring that the independent valuation expert discharges its responsibilities in accordance with our valuation policies, and will periodically receive and review such information about the valuation of our assets and liabilities as it deems necessary to exercise its oversight responsibility. Our NAV is not audited by our independent registered public accounting firm. We had previously engaged our independent valuation expert to provide on a monthly, instead of a rolling annual, basis, valuations of each of our commercial real estate assets and real estate related liabilities, until such time that we had greater visibility into the impact of COVID-19 pandemic on our properties valuations. Given the relative stability of the month-over-month valuation of our real estate assets, liabilities and rent collections, our Board has determined that it is in the best interest of our Company and its stockholders to cease incurring additional costs associated with the monthly valuations and return to valuing our real estate portfolio on a rolling annual basis in accordance with our valuation policies effective September 30, 2020.
Our goal is to provide an estimate of the market value of our shares. However, the majority of our assets will consist of commercial real estate assets and, as with any commercial real estate valuation protocol, the conclusions reached by our independent valuation expert will be based on a number of judgments, assumptions and opinions about future events that may or may not prove to be correct. The use of different judgments, assumptions or opinions would likely result in different estimates of the value of our commercial real estate assets. In addition, on any given day, our published NAV per share for each class may not fully reflect certain material events, to the extent that the financial impact of such events on our portfolio is not immediately quantifiable or known. As a result, the monthly calculation of our NAV per share for each class may not reflect the
precise amount that might be paid for a stockholder’s shares in a market transaction, and any potential disparity in our NAV per share for each class may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders.
Share Redemption Program
Prior to April 1, 2020, we had adopted a share redemption plan to provide limited liquidity whereby, on a daily basis, stockholders could request that we redeem all or any portion of their shares. The redemption price per share for each class on any business day was equal to our NAV per share for such class for that day, calculated by the independent fund accountant after the close of business on the redemption request day, without giving effect to any share purchases or redemptions to be effected on such day. Subject to limited exceptions, stockholders who redeemed their shares of our common stock within the first 365 days from the date of purchase were subject to a short-term trading fee of 5% of the aggregate NAV per share of the shares of common stock received. In each calendar quarter, net redemptions were limited under our share redemption plan to 5% of our total NAV as of the end of the immediately preceding quarter, plus any unused percentage carried over to the next quarter, but the maximum carryover percentage could never exceed 15% in the aggregate, and net redemptions in any quarter could never exceed 10% of the prior quarter’s NAV.
Effective April 1, 2020, we have adopted the Amended Share Redemption Program (as defined below) to provide limited liquidity whereby, on a monthly basis, stockholders may request that we redeem all or any portion of their shares. Our Amended Share Redemption Program provides that, no later than on the second to last business day of a given month, stockholders may request that we redeem all or any portion of their shares, subject to a minimum redemption amount and certain short-term trading fees. The redemption price per share for each class will be our NAV per share for such class for that month, calculated by the independent fund accountant in accordance with our valuation policies.
As of July 2020, the Board determined that monthly redemptions temporarily will be limited to shares whose aggregate value is no more than 0.8% of our aggregate NAV as of the last calendar day of the previous calendar month, and in any calendar quarter, redemptions will be limited to shares whose aggregate value is no more than 2.0% of our aggregate NAV as of the last calendar day of the previous calendar quarter. While no assurances can be made regarding the timing of a return to the redemption plan limits stated in our prior share redemption plan, if at all, we are targeting the return to our limits under the Amended Share Redemption Program to occur in the third quarter of 2021.
We intend to fund share redemptions with available cash, proceeds from our liquid investments and proceeds from the sale of additional shares. We may, after taking the interests of our Company as a whole and the interests of our remaining stockholders into consideration, use proceeds from any available sources at our disposal to satisfy redemption requests, including, but not limited to, proceeds from sales of additional shares, excess cash flow from operations, sales of our liquid investments, incurrence of indebtedness and, if necessary, proceeds from the disposition of real estate properties or real estate related assets. In an effort to have adequate cash available to support our share redemption plan, CIM Income NAV Management may determine to reserve borrowing capacity under our line of credit. CIM Income NAV Management could then elect to borrow against our line of credit in part to redeem shares presented for redemption during periods when we do not have sufficient proceeds from the sale of shares in the Offering to fund all redemption requests.
Our Board may modify or suspend our redemption plan in its sole discretion if it believes that such action is in the best interests of our stockholders.
We may, in our advisor’s discretion, after taking the interests of our Company as a whole and the interests of our remaining stockholders into consideration, use proceeds from any available sources at our disposal to satisfy redemption requests, including, but not limited to, available cash, proceeds from sales of additional shares, excess cash flow from operations, sales of our liquid investments, incurrence of indebtedness and, if necessary, proceeds from the disposition of real estate properties or real estate-related assets.
Our Amended Share Redemption Program includes certain redemption limits, including a quarterly limit and, in some cases, an individual stockholder limit. We received redemption requests of approximately 11.3 million shares for $188.4 million in excess of our redemption limit during the year ended December 31, 2020. During the year ended December 31, 2020, we received valid redemption requests under our Amended Share Redemption Program totaling approximately 16.8 million shares, of which we redeemed approximately 5.4 million shares as of December 31, 2020 for $93.6 million at an average redemption price of $17.31 per share and 126,000 shares subsequent to December 31, 2020 for $2.1 million at an average redemption price of $16.67. The remaining redemption requests relating to approximately 11.3 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program then in effect.
During the three-month period ended December 31, 2020, we redeemed shares as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Share Class | | Total Number
of Shares
Redeemed | | Average Price
Paid per Share | | Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs | | Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs |
| October 1, 2020 - October 31, 2020 | | | | | | | | | | |
| | D Shares | | 145,959 | | | $ | 16.86 | | | 145,959 | | | (1) |
| | T Shares | | 94,832 | | | $ | 16.44 | | | 94,832 | | | (1) |
| | S Shares | | — | | | $ | — | | | — | | | (1) |
| | I Shares | | 2,175 | | | $ | 17.13 | | | 2,175 | | | (1) |
| November 1, 2020 - November 30, 2020 | | | | | | | | | | |
| | D Shares | | 143,655 | | | $ | 16.83 | | | 143,655 | | | (1) |
| | T Shares | | 93,253 | | | $ | 16.40 | | | 93,253 | | | (1) |
| | S Shares | | — | | | $ | — | | | — | | | (1) |
| | I Shares | | 1,306 | | | $ | 17.11 | | | 1,306 | | | (1) |
| December 1, 2020 - December 31, 2020 | | | | | | | | | | |
| | D Shares | | 78,999 | | | $ | 16.84 | | | 78,999 | | | (1) |
| | T Shares | | 50,271 | | | $ | 16.41 | | | 50,271 | | | (1) |
| | S Shares | | — | | | $ | — | | | — | | | (1) |
| | I Shares | | 184 | | | $ | 17.13 | | | 184 | | | (1) |
| Total | | | | 610,634 | | | | | 610,634 | | | |
____________________________________
(1)A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table.
See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Share Redemptions in this Annual Report on Form 10-K, and Note 14 — Stockholders’ Equity to our consolidated financial statements included in this Annual Report on Form 10-K for additional share redemption information.
Distributions
We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes beginning with our taxable year ended December 31, 2012. As a REIT, we have made, and intend to continue to make, distributions each taxable year equal to at least 90% of our taxable income (excluding capital gains and computed without regard to the dividends paid deduction). One of our primary goals is to pay regular (monthly) distributions to our stockholders.
See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Distributions in this Annual Report on Form 10-K for additional distributions information.
For federal income tax purposes, distributions to common stockholders are characterized as ordinary dividends, capital gain distributions, or nondividend distributions. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, the distribution will be a nontaxable return of capital, reducing the tax basis in each U.S. stockholder’s shares. In addition, the amount of distributions in excess of a U.S. stockholder’s tax basis in such shares will be taxable as gain realized from the sale of those shares. See Note 15 — Income Taxes to our consolidated financial statements in this Annual Report on Form 10-K for the character of the distributions paid during the years ended December 31, 2020, 2019 and 2018.
The following table shows the distributions declared on a per share basis during the years ended December 31, 2020, 2019, and 2018 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | |
| Year Ending December 31, | | Share Class | | Total Distributions
Declared | | Distributions Declared
per Common Share |
| 2020 | | D Shares | | $ | 15,602 | | | $ | 0.95 | |
| | T Shares | | $ | 13,249 | | | $ | 0.95 | |
| | S Shares | | $ | 6 | | | $ | 0.95 | |
| | I Shares | | $ | 970 | | | $ | 0.95 | |
| 2019 | | D Shares | | $ | 18,476 | | | $ | 0.98 | |
| | T Shares | | $ | 13,513 | | | $ | 0.98 | |
| | S Shares | | $ | 2 | | | $ | 0.22 | |
| | I Shares | | $ | 1,121 | | | $ | 0.98 | |
| 2018 | | D Shares | | $ | 17,295 | | | $ | 0.98 | |
| | T Shares | | $ | 10,437 | | | $ | 0.98 | |
| | I Shares | | $ | 1,034 | | | $ | 0.98 | |
Use of Public Offering Proceeds
On December 6, 2011, we commenced the Initial Offering of up to $4.0 billion in shares of common stock. On August 26, 2013, we commenced the First Follow-on Offering. As part of the First Follow-on Offering, we designated the existing shares of our common stock that were sold prior to such date to be W Shares and registered two new classes of our common stock, A Shares and I Shares. On February 10, 2017, we commenced the Second Follow-on Offering. As a result of the Share Modifications, commencing November 27, 2018, we began offering and selling D Shares, T Shares, S Shares and I Shares in our continuous public offering, rather than W Shares, A Shares and I Shares. On August 7, 2020, we commenced the Third Follow-on Offering, pursuant to which we are offering to sell any combination of D Shares, T Shares, S Shares and I Shares with a dollar value up to the maximum offering amount of up to $4.0 billion, consisting of up to $3.5 billion in shares in the Primary Offering and up to $500.0 million in shares pursuant to the DRIP. Additionally, as of December 31, 2020, we were authorized to issue 10.0 million shares of preferred stock, but had none issued or outstanding.
As of December 31, 2020, we had issued approximately 48.8 million shares in the Offering, including shares issued pursuant to our DRIP, for gross proceeds of $878.2 million, out of which we recorded $26.2 million in upfront selling commissions, dealer manager fees and the current portion of stockholder servicing fees and $6.5 million in organization and offering costs. With the net offering proceeds of $845.5 million and the borrowings from our credit facility, we have acquired $1.1 billion in real estate assets, inclusive of capitalized acquisition costs, and incurred $12.7 million of acquisition-related expenses, as well as invested $49.3 million of capital in CIM UII Onshore.
As of March 22, 2021, we have sold the following common shares and raised the following proceeds in connection with the Offering (dollar amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | D Shares | | T Shares | | S Shares | | I Shares | | Total |
| Primary Offering | | | | | | | | | | |
| Shares | | 26,208,654 | | | 17,262,686 | | | 6,976 | | | 1,611,242 | | | 45,089,558 | |
| Proceeds | | $ | 464,789 | | | $ | 319,050 | | | $ | 122 | | | $ | 30,384 | | | $ | 814,345 | |
| Distribution Reinvestment Plan | | | | | | | | | | |
| Shares | | 2,303,349 | | | 1,511,312 | | | 565 | | | 139,251 | | | 3,954,477 | |
| Proceeds | | $ | 41,036 | | | $ | 26,371 | | | $ | 9 | | | $ | 2,510 | | | $ | 69,926 | |
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying consolidated financial statements and the notes thereto. See also the Cautionary Note Regarding Forward-Looking Statements section preceding Part I of this Annual Report on Form 10-K. For a comparison of the years ended December 31, 2019 and 2018, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Overview
We were formed on July 27, 2010, to acquire and operate a diversified portfolio of commercial properties in the retail, office and industrial sectors that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States, and U.S. government securities, agency securities, corporate debt and other investments for which there is reasonable liquidity. We expect to complement our portfolio of net-lease properties by investing in substantially leased core metropolitan commercial and multi-family properties with growth potential that we believe will help us meet our investment objectives, either directly or through other funds with a proven track record of performance in these investment types, including funds managed by affiliates of our advisor. We commenced our principal operations on December 7, 2011, when we issued the initial $10.0 million in shares of our common stock in the Offering and acquired our first real estate property. When we refer to our share classes in this Annual Report on Form 10-K with respect to dates prior to the Restructure Date, we are referring to our shares under our prior share structure, and when we refer to our share classes in this Annual Report on Form 10-K with respect to dates on or after the Restructure Date, we are referring to our shares under our new share structure. We have no paid employees and are externally advised and managed by CIM Income NAV Management.
As we acquire additional commercial real estate, we will be subject to changes in real estate prices and changes in interest rates on any current variable rate debt, refinancings or new indebtedness used to acquire the properties. We may manage our risk of changes in real estate prices on future property acquisitions, when applicable, by entering into purchase agreements and loan commitments simultaneously, or through loan assumptions, so that our operating yield is determinable at the time we enter into a purchase agreement, by contracting with developers for future delivery of properties, or by entering into sale-leaseback transactions. We manage our interest rate risk by monitoring the interest rate environment in connection with our future property acquisitions, when applicable, or upcoming debt maturities to determine the appropriate financing or refinancing terms, which may include fixed rate loans, variable rate loans or interest rate hedges. If we are unable to acquire suitable properties or obtain suitable financing terms for future acquisitions or refinancing, our results of operations may be adversely affected.
As of December 31, 2020, we owned 123 properties located in 34 states, comprising 5.3 million rentable square feet of commercial space, which includes the rentable square feet of buildings on land subject to ground leases. Our operating results and cash flows are primarily influenced by rental income from our commercial properties and interest expense on our property indebtedness and acquisition and operating expenses. As 98.1% of our rentable square feet was under lease as of December 31, 2020, with a weighted average remaining lease term of 9.8 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors, including due to circumstances related to the COVID-19 pandemic. Our advisor regularly monitors the creditworthiness of our tenants by reviewing each tenant’s financial results, any available credit rating agency reports on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment, and other information for changes and possible trends. If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property, or identifying a possible replacement tenant should the current tenant fail to perform on the lease.
Effective April 1, 2020, we modified our Offering and certain other features of our Company from a daily to a monthly NAV REIT. We believe this change will result in greater access to capital to execute on our investment strategy, which will help us to better achieve our investment objectives by driving growth and diversification within the portfolio, creating a stronger balance sheet and enhancing liquidity for the benefit of all stockholders.
As part of the change from a daily to a monthly NAV REIT, our Board approved, among other things: (1) a change in the frequency of our NAV calculations from daily to monthly and certain other related changes to our valuation policies; and (2) adopted an amended share redemption program that provides for redemptions on a monthly basis. As a monthly NAV REIT, we
expect that investors’ subscriptions will be accepted on the first day of each month and the purchase price of each class of shares would generally equal the prior month’s NAV for that class divided by the number of shares of such class outstanding, as determined monthly, plus applicable selling commissions and dealer manager fees.
COVID-19
The COVID-19 outbreak and the associated “shelter-in-place” or “stay-at-home” orders or other quarantine mandates or public health guidance issued by local, state or federal authorities has adversely affected a number of our tenants’ businesses. The extent to which the COVID-19 pandemic continues to impact our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.
During the year ended December 31, 2020, we provided lease concessions, either in the form of rent deferrals or abatements, to certain tenants in response to the impact of the COVID-19 pandemic on those tenants. As of December 31, 2020, we granted rent deferrals with an aggregate deferral amount of $539,000. Additionally, as of December 31, 2020, we granted rent abatements to tenants with an aggregate abatement amount of $618,000, which reduced revenues during the year ended December 31, 2020.
As of March 24, 2021, we have collected approximately 99% of rental payments billed to tenants during the three months ended December 31, 2020. There have been no significant changes in rent collections subsequent to December 31, 2020.
We are actively managing our response to the COVID-19 pandemic in collaboration with our tenants and business partners and are assessing potential impacts to our financial position and operating results, as well as potential adverse developments in our business. In order to manage the financial health of the Company, our Board is making its determinations with respect to the declaration of distributions on a monthly, instead of quarterly basis and has approved and adopted an amended and restated share redemption program (the “Amended Share Redemption Program”) that, among other changes, provides that the Amended Share Redemption Program may be suspended at any time by majority vote of the Board without prior notice if the Board believes such action is in the best interest of the Company and its stockholders. Given the recent levels of investor subscriptions and increased redemption requests, which we believe has been exacerbated by the challenging economic environment caused by the COVID-19 pandemic, our stated objectives of maintaining target liquidity of 10% of the NAV up to $1 billion, and 5% of the NAV in excess of $1 billion (“Target Liquidity”) and satisfying the redemption plan limits are in conflict. As such, the Company is temporarily redeeming less than the Amended Share Redemption Program limits to maintain this Target Liquidity while the Company seeks to generate additional liquidity through investor subscriptions and execution of an in-process asset disposition program. On August 30, 2020, our Board determined that, effective immediately, monthly redemptions temporarily will be limited to shares whose aggregate value is no more than 0.8% of the aggregate NAV as of the last calendar day of the previous calendar month, and in any calendar quarter, redemptions will be limited to shares whose aggregate value is no more than 2.0% of the aggregate NAV as of the last calendar day of the previous calendar quarter. While no assurances can be made regarding the timing of a return to the redemption plan limits stated in the Company’s Amended Share Redemption Program, if at all, the Company is currently targeting the return to the limits under the Amended Share Redemption Program to occur in the third quarter of 2021. Further, in support of our efforts to achieve sustainable liquidity, our Board determined that 50% of the independent directors’ quarterly compensation payments for the third quarter of 2020 through the second quarter of 2021 will be paid in the form of D Shares based on the then current NAV per share at the time of issuance. In addition, our Advisor agreed to take 50% of the monthly advisory fee payment from August 2020 through June 30, 2021 in I Shares based on the then current NAV per share of such shares at the time of issuance. During the year ended December 31, 2020, we borrowed $52.0 million in revolving loans in order to increase liquidity during this period of economic uncertainty. See “— Liquidity and Capital Resources” for a more complete discussion of our financial resources.
We further engaged our independent valuation expert, pursuant to an agreement dated May 14, 2020, to provide valuation services on a monthly, instead of a rolling annual, basis, until such time that we had greater visibility into the impact of the COVID-19 pandemic on our properties’ valuations. Given the relative stability of the month-over-month valuation of our real estate assets, our liabilities and our rent collections our Board determined that it is in the best interests of us and our stockholders to cease incurring the additional costs associated with the monthly valuations and to return to valuing our real estate portfolio on a rolling annual basis in accordance with our valuation policies effective September 30, 2020. For further information regarding the impact of the COVID-19 pandemic on the Company, see Part I, Item 1A titled “Risk Factors.”
Operating Highlights and Key Performance Indicators
2020 Activity
•Disposed of five properties, consisting of three retail properties and two anchored shopping centers, for an aggregate gross sales price of $16.8 million.
•Increased total debt by $99.7 million to $450.7 million, with cash proceeds utilized primarily for investment and redemptions.
•Invested $50 million of limited partnership interests in CIM UII Onshore.
Portfolio Information
Real Estate Portfolio
As of December 31, 2020, we owned 123 commercial properties located in 34 states, comprising 5.3 million rentable square feet, which includes the rentable square feet of buildings on land subject to ground leases. As of December 31, 2020, these properties were 98.1% leased (including any month-to-month agreements) with a weighted average remaining lease term of 9.8 years.
The following table shows the property statistics of our real estate assets as of December 31, 2020 and 2019: | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2020 | | 2019 | | |
| Number of commercial properties | 123 | | | 128 | | | |
Rentable square feet (in thousands) (1) | 5,288 | | | 5,406 | | | |
| Percentage of rentable square feet leased | 98.1 | % | | 98.6 | % | | |
Percentage of investment-grade tenants (2) | 29.5 | % | | 32.1 | % | | |
____________________________________
(1)Includes square feet of buildings on land that are subject to ground leases.
(2)Investment-grade tenants are those with a credit rating of BBB- or higher by Standard & Poor’s or a credit rating of Baa3 or higher by Moody’s. The ratings may reflect those assigned by Standard & Poor’s or Moody’s to the lease guarantor or the parent company, as applicable. The weighted average credit rating is weighted based on annualized rental income, and is for only those tenants rated by Standard & Poor’s.
The following table summarizes our real estate acquisition activity during the years ended December 31, 2020 and 2019: | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2020 | | 2019 | | |
| Commercial properties acquired | — | | | 4 | | | |
| Purchase price of acquired properties (in thousands) | $ | — | | | $ | 78,633 | | | |
Rentable square feet of acquired properties (in thousands) (1) | — | | | 305 | | | |
| | | | | |
| | | | | |
| | | | | |
__________________________________ (1)Includes square feet of buildings on land that are subject to ground leases.
The following table shows the tenant diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Leased | | 2020 | | 2020 | | Percentage of |
| | Total | | Square | | Annualized | | Annualized | | 2020 |
| | Number | | Feet (2) | | Rental Income | | Rental Income | | Annualized |
| Tenant | | of Leases (1) | | (in thousands) | | (in thousands) | | per Square Foot (2) | | Rental Income |
| Republic Services | | 1 | | | 134 | | | $ | 3,298 | | | $ | 24.61 | | | 5 | % |
| Valvoline Oil Change | | 1 | | | 162 | | | 2,978 | | | 18.38 | | | 5 | % |
| Consumer Cellular | | 2 | | | 160 | | | 2,878 | | | 17.99 | | | 4 | % |
| AAA | | 1 | | | 120 | | | 2,785 | | | 23.21 | | | 4 | % |
| AK Steel | | 1 | | | 136 | | | 2,062 | | | 15.16 | | | 3 | % |
| Hobby Lobby | | 5 | | | 270 | | | 2,048 | | | 7.59 | | | 3 | % |
| CarMax | | 1 | | | 92 | | | 1,924 | | | 20.91 | | | 3 | % |
| Lowe's | | 2 | | | 298 | | | 1,830 | | | 6.14 | | | 3 | % |
| Valeo | | 2 | | | 178 | | | 1,722 | | | 9.67 | | | 3 | % |
| Wal-Mart | | 1 | | | 161 | | | 1,711 | | | 10.63 | | | 3 | % |
| All Other | | 125 | | | 3,475 | | | 41,010 | | | 11.80 | | | 64 | % |
| | 142 | | | 5,186 | | | $ | 64,246 | | | $ | 12.39 | | | 100 | % |
____________________________________
(1)Includes leases which are master lease agreements.
(2)Includes square feet of buildings on land that is subject to ground leases.
The following table shows the tenant industry diversification of our real estate portfolio, based on annualized rental income as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Leased | | 2020 | | 2020 | | Percentage of |
| | Total | | Square | | Annualized | | Annualized | | 2020 |
| | Number | | Feet (2) | | Rental Income | | Rental Income | | Annualized |
| Industry | | of Leases (1) | | (in thousands) | | (in thousands) | | per Square Foot (2) | | Rental Income |
| Manufacturing | | 10 | | | 1,185 | | | $ | 10,656 | | | $ | 8.99 | | | 17 | % |
| Grocery | | 8 | | | 628 | | | 6,238 | | | 9.93 | | | 10 | % |
| Discount Store | | 30 | | | 467 | | | 4,775 | | | 10.22 | | | 7 | % |
| Other Services | | 6 | | | 274 | | | 4,201 | | | 15.33 | | | 7 | % |
| Information & Communication | | 3 | | | 220 | | | 3,824 | | | 17.38 | | | 6 | % |
| Motor Vehicle | | 11 | | | 173 | | | 3,324 | | | 19.21 | | | 5 | % |
| Waste Services | | 1 | | | 134 | | | 3,298 | | | 24.61 | | | 5 | % |
| Home Furnishings | | 8 | | | 238 | | | 3,101 | | | 13.03 | | | 5 | % |
| Insurance | | 1 | | | 120 | | | 2,785 | | | 23.21 | | | 4 | % |
| Home & Garden | | 5 | | | 351 | | | 2,503 | | | 7.13 | | | 4 | % |
| Other | | 59 | | | 1,396 | | | 19,541 | | | 14.00 | | | 30 | % |
| | 142 | | | 5,186 | | | $ | 64,246 | | | $ | 12.39 | | | 100 | % |
____________________________________
(1)Includes leases which are master lease agreements.
(2)Includes square feet of buildings on land that is subject to ground leases.
The following table shows the geographic diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Rentable | | 2020 | | 2020 | | Percentage of |
| | Total | | Square | | Annualized | | Annualized | | 2020 |
| | Number of | | Feet (1) | | Rental Income | | Rental Income | | Annualized |
| Location | | Properties | | (in thousands) | | (in thousands) | | per Square Foot (1) | | Rental Income |
| Ohio | | 17 | | | 663 | | | $ | 8,392 | | | $ | 12.66 | | | 13 | % |
| Arizona | | 5 | | | 314 | | | 6,774 | | | 21.57 | | | 11 | % |
| Illinois | | 8 | | | 697 | | | 6,128 | | | 8.79 | | | 10 | % |
| New Jersey | | 2 | | | 201 | | | 3,977 | | | 19.79 | | | 6 | % |
| North Carolina | | 7 | | | 227 | | | 3,538 | | | 15.59 | | | 5 | % |
| Kentucky | | 1 | | | 162 | | | 2,978 | | | 18.38 | | | 5 | % |
| Texas | | 7 | | | 284 | | | 2,971 | | | 10.46 | | | 5 | % |
| Rhode Island | | 2 | | | 129 | | | 2,869 | | | 22.24 | | | 4 | % |
| Maryland | | 2 | | | 295 | | | 2,809 | | | 9.52 | | | 4 | % |
| Georgia | | 5 | | | 182 | | | 2,790 | | | 15.33 | | | 4 | % |
| Other | | 67 | | | 2,134 | | | 21,020 | | | 9.85 | | | 33 | % |
| | 123 | | | 5,288 | | | $ | 64,246 | | | $ | 12.15 | | | 100 | % |
____________________________________
(1)Includes square feet of buildings on land that is subject to ground leases.
The following table shows the property type diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2020 | | 2020 | | Percentage of |
| | Total | | Rentable | | Annualized | | Annualized | | 2020 |
| | Number of | | Square Feet (1) | | Rental Income | | Rental Income | | Annualized |
| Property Type | | Properties | | (in thousands) | | (in thousands) | | per Square Foot (1) | | Rental Income |
| Retail | | 97 | | | 2,404 | | | $ | 30,402 | | | $ | 12.65 | | | 47 | % |
| Office | | 11 | | | 1,106 | | | 19,682 | | | 17.80 | | | 31 | % |
| Industrial and distribution | | 11 | | | 1,363 | | | 7,723 | | | 5.90 | | | 12 | % |
| Anchored shopping centers | | 4 | | | 415 | | | 6,439 | | | 15.52 | | | 10 | % |
| Total: | | 123 | | | 5,288 | | | $ | 64,246 | | | $ | 12.15 | | | 100 | % |
____________________________________
(1)Includes square feet of buildings on land parcels subject to ground leases.
Leases
Although there are variations in the specific terms of the leases of our properties, the following is a summary of the general structure of our current leases. Generally, the leases of the properties acquired provide for initial terms of ten or more years, and provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions as the initial lease term. Certain leases also provide that in the event we wish to sell the property subject to that lease, we first must offer the lessee the right to purchase the property on the same terms and conditions as any offer which we intend to accept for the sale of the property. The properties are generally leased under net leases pursuant to which the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance, while certain of the leases require us to maintain the roof, structure and parking areas of the building. Additionally, certain leases provide for increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume.
Our leases, as of December 31, 2020, provided for annual base rental payments (payable in monthly installments) ranging from $12,000 to $3.3 million, and had an average annual base rental payment of $437,000, with a weighted average remaining lease term of 9.8 years.
The following table shows lease expirations of our real estate portfolio as of December 31, 2020, during each of the next ten years and thereafter, assuming no exercise of renewal options: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | Leased | | 2020 | | 2020 | | Percentage of |
| | Number | | Square Feet | | Annualized | | Annualized | | 2020 |
| Year of | | of Leases | | Expiring (2) | | Rental Income | | Rental Income | | Annualized |
| Lease Expiration | | Expiring (1) | | (in thousands) | | Expiring (in thousands) | | per Square Foot (2) | | Rental Income |
| 2021 | | 1 | | | 9 | | | $ | 203 | | | $ | 22.56 | | | * |
| 2022 | | 3 | | | 16 | | | 249 | | | 15.56 | | | * |
| 2023 | | 10 | | | 132 | | | 1,361 | | | 10.31 | | | 2 | % |
| 2024 | | 15 | | | 264 | | | 3,612 | | | 13.68 | | | 6 | % |
| 2025 | | 9 | | | 221 | | | 3,290 | | | 14.89 | | | 5 | % |
| 2026 | | 15 | | | 417 | | | 4,451 | | | 10.67 | | | 7 | % |
| 2027 | | 12 | | | 519 | | | 7,657 | | | 14.75 | | | 12 | % |
| 2028 | | 10 | | | 262 | | | 4,240 | | | 16.18 | | | 7 | % |
| 2029 | | 8 | | | 548 | | | 4,552 | | | 8.31 | | | 7 | % |
| 2030 | | 3 | | | 88 | | | 1,399 | | | 15.90 | | | 2 | % |
| Thereafter | | 56 | | | 2,710 | | | 33,232 | | | 12.26 | | | 52 | % |
| | 142 | | | 5,186 | | | $ | 64,246 | | | $ | 12.39 | | | 100 | % |
____________________________________
* Represents less than 1% of the total annual base rent.
(1)Includes leases which are master lease agreements.
(2)Includes square feet of buildings on land that is subject to ground leases.
The following table shows the economic metrics of our real estate assets as of and for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | |
| Economic Metrics | | | | | | |
Weighted-average lease term (in years) (1) | | 9.8 | | 10.7 | | |
Lease rollover (1),(2): | | | | | | |
| Annual average | | 2.7% | | 1.9% | | |
| Maximum for a single year | | 5.6% | | 5.9% | | |
____________________________________
(1)Based on annualized rental income of our real estate portfolio as of the respective reporting date.
(2)Through the end of the next five years as of the respective reporting date.
Results of Operations
Overview
We are not aware of any material trends or uncertainties, other than the effects of the recent outbreak of COVID-19, and national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact on our results from the acquisition, management and operations of properties other than those listed in Part I, Item 1A — Risk Factors. Currently, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows in future periods due to numerous uncertainties.
For a comparison of the years ended December 31, 2019 and 2018, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Same Store Analysis
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate assets. We review our stabilized operating results, measured by net operating income (“NOI”), from properties that we owned for the entirety of both the current and prior year reporting periods, referred to as “same store” properties, and we believe that the presentation of operating results for same store properties provides useful information to stockholders. NOI is a supplemental non-GAAP financial measure of a real estate company’s operating performance. NOI is considered by
management to be a helpful supplemental performance measure, as it enables management to evaluate the impact of occupancy, rents, leasing activity, and other controllable property operating results at our real estate properties, and it provides a consistent method for the comparison of our properties. We define NOI as operating revenues less operating expenses, which exclude (i) depreciation and amortization, (ii) interest expense and other non-property related revenue and expense items such as (a) general and administrative expenses, (b) advisory fees and expenses, (c) transaction-related expenses (d) real estate impairment (e) gain on disposition or real estate, net and (f) income from marketable securities. Our NOI may not be comparable to that of other REITs and should not be considered to be more relevant or accurate in evaluating our operating performance than the current GAAP methodology used in calculating net income. In determining the same store property pool, we include all properties that were owned for the entirety of both the current and prior reporting periods, except for properties during the current or prior year that were under development or redevelopment.
Comparison of the Years Ended December 31, 2020 and 2019
The following table reconciles net income, calculated in accordance with GAAP, to net operating income (dollar amounts in thousands): | | | | | | | | | | | | | | | | | |
| Total |
| For the Year Ended December 31, |
| 2020 | | 2019 | | Change |
| Net (loss) income | $ | (11,011) | | | $ | 14,791 | | | $ | (25,802) | |
| Interest expense and other, net | 17,127 | | | 14,337 | | | 2,790 | |
| Loss on investment in CIM UII Onshore | 2,660 | | | — | | | 2,660 | |
| Operating income | 8,776 | | | 29,128 | | | (20,352) | |
| | | | | |
| Gain on disposition of real estate, net | (627) | | | (10,213) | | | 9,586 | |
| Real estate impairment | 13,851 | | | 3,090 | | | 10,761 | |
| Depreciation and amortization | 27,647 | | | 29,182 | | | (1,535) | |
| Transaction-related expenses | 726 | | | 1,233 | | | (507) | |
| Advisory fees and expenses | 6,382 | | | 7,902 | | | (1,520) | |
| General and administrative expenses | 5,512 | | | 7,021 | | | (1,509) | |
| Interest income on marketable securities | (345) | | | (206) | | | (139) | |
| Net operating income | $ | 61,922 | | | $ | 67,137 | | | $ | (5,215) | |
A total of 119 properties were acquired before January 1, 2019 and represent our “same store” properties during the years ended December 31, 2020 and 2019. “Non-same store” properties, for purposes of the table below, includes properties acquired and disposed on or after January 1, 2019. The following table details the components of net operating income broken out between same store and non-same store properties (dollar amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Same Store | | Non-Same Store |
| For the Year Ended December 31, | | For the Year Ended December 31, | | For the Year Ended December 31, |
| 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Rental and other property income | $ | 72,596 | | | $ | 77,606 | | | $ | (5,010) | | | $ | 64,439 | | | $ | 68,486 | | | $ | (4,047) | | | $ | 8,157 | | | $ | 9,120 | | | $ | (963) | |
| | | | | | | | | | | | | | | | | |
| Property operating expenses | 4,971 | | | 5,231 | | | (260) | | | 3,586 | | | 4,361 | | | (775) | | | 1,385 | | | 870 | | | 515 | |
| Real estate tax expenses | 5,703 | | | 5,238 | | | 465 | | | 5,021 | | | 4,659 | | | 362 | | | 682 | | | 579 | | | 103 | |
| Total property operating expenses | 10,674 | | | 10,469 | | | 205 | | | 8,607 | | | 9,020 | | | (413) | | | 2,067 | | | 1,449 | | | 618 | |
| | | | | | | | | | | | | | | | | |
| Net operating income | $ | 61,922 | | | $ | 67,137 | | | $ | (5,215) | | | $ | 55,832 | | | $ | 59,466 | | | $ | (3,634) | | | $ | 6,090 | | | $ | 7,671 | | | $ | (1,581) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest Expense and Other, Net
The increase in interest expense and other, net, of $2.8 million for the year ended December 31, 2020, as compared to the same period in 2019, was primarily due to an increase of $90.6 million in our average outstanding debt balance for the year ended December 31, 2020, compared to the year ended December 31, 2019, partially offset by a decrease in the weighted average interest rate from 3.90% as of December 31, 2019 to 3.66% as of December 31, 2020.
Loss on Investment in CIM UII Onshore
The increase in loss on investment in CIM UII Onshore of $2.7 million during the year ended December 31, 2020, as compared to the same period in 2019, was due to our investment in limited partnership interests in CIM UII Onshore, for which we recognized our share of CIM UII Onshore’s loss of $2.7 million during the year ended December 31, 2020. No such investments were made during the year ended December 31, 2019.
Gain on Disposition of Real Estate, Net
The decrease in gain on disposition of real estate, net of $9.6 million during the year ended December 31, 2020, as compared to the same period in 2019 was primarily due to the disposition of five properties during the year ended December 31, 2020, as compared to the disposition of 28 properties during the year ended December 31, 2019.
Impairment
The increase in impairment of $10.8 million during the year ended December 31, 2020, as compared to the same period in 2019, was primarily due to management identifying the carrying value of one anchored shopping center and one retail property to be greater than the estimated fair value of the properties, as well as bankruptcies at one anchored shopping center and three retail properties resulting in an impairment charge of $13.9 million during the year ended December 31, 2020, as compared to an impairment charge of $3.1 million relating to one anchored shopping center and five retail properties due to the carrying value being greater than the estimated fair value of the properties during the year ended December 31, 2019.
Depreciation and Amortization
The decrease in depreciation and amortization expenses of $1.5 million during the year ended December 31, 2020, as compared to the same period in 2019, was primarily due to the disposition of five properties during the year ended December 31, 2020 and 28 properties during the year ended December 31, 2019, partially offset by recognizing a full year of depreciation and amortization expenses on four properties acquired during the year ended December 31, 2019.
Transaction-Related Expenses
We reimburse CIM Income NAV Management or its affiliates for transaction-related expenses incurred in the process of acquiring a property, disposing of a property, or the origination or acquisition of a loan, so long as the total expenses relating to the transaction do not exceed 6.0% of the contract purchase price, unless otherwise approved by a majority of our Board, including a majority of our independent directors, as commercially competitive, fair and reasonable to us. Our acquisitions qualify as asset acquisitions, and, as such, certain acquisition costs related to these asset acquisitions are capitalized.
The decrease in transaction-related expenses of $507,000 during the year ended December 31, 2020, as compared to the same period in 2019, was primarily due to a decrease in advisor reimbursement expenses related to lower acquisition and disposition activity during the year ended December 31, 2020.
Advisory Fees and Expenses
The advisory fees and expenses that we pay to our advisor are based upon our NAV. Advisory fees and expenses decreased $1.5 million during the year ended December 31, 2020, as compared to the same period in 2019, primarily due to a decrease in our average total NAV for all share classes of $69.2 million during the year ended December 31, 2020.
General and Administrative Expenses
The primary general and administrative expense items are certain expense reimbursements to our advisor, escrow and trustee fees and professional service fees.
The decrease in general and administrative expenses of $1.5 million for the year ended December 31, 2020, compared to the same period in 2019, was primarily due to a decrease in advisor reimbursements due to reduced reimbursable costs.
Net Operating Income
Same store property net operating income decreased $3.6 million during the year ended December 31, 2020, as compared to the same period in 2019. The decrease was primarily due to a reduction in rental and other property income for amounts deemed not probable of collection due to three same store tenants declaring bankruptcy.
Non-same store property net operating income decreased $1.6 million during the year ended December 31, 2020, as compared to the same period in 2019. The decrease is primarily due to the disposition of 28 properties during the year ended
December 31, 2019, partially offset by recognizing a full period of net operating income for the four properties acquired during the year ended December 31, 2019.
Distributions
Prior to April 1, 2020, on a quarterly basis, our Board authorized a daily distribution for the succeeding quarter. Our Board authorized the following daily distribution amounts per share for the periods indicated below:
| | | | | | | | | | | | | | |
| Period Commencing | | Period Ending | | Daily Distribution Amount (1) |
| December 8, 2011 | | December 31, 2011 | | $0.002260274 |
| January 1, 2012 | | September 30, 2012 | | $0.002254099 |
| October 1, 2012 | | December 31, 2012 | | $0.002383836 |
| January 1, 2013 | | September 30, 2013 | | $0.002429042 |
| October 1, 2013 | | March 31, 2014 | | $0.002563727 |
| April 1, 2014 | | March 31, 2020 | | $0.002678083 |
______________________
(1)The daily distribution amount for each class of outstanding common stock is adjusted based on the relative NAV of the various classes each day so that, from day to day, distributions constitute a uniform percentage of the NAV per share of all classes. As a result, from day to day, the per share daily distribution for each outstanding class of common stock may be higher or lower than the daily distribution amount authorized by our Board based on the relative NAV of each class of common stock on that day.
On April 20, 2020, our Board decided to make a determination as to the amount and timing of distributions on a monthly, instead of a quarterly, basis until such time that we have greater visibility into the impact that the COVID-19 pandemic will have on our tenants’ ability to continue to pay rent on their leases on a timely basis or at all, the degree to which federal, state or local governmental authorities grant rent relief or other relief or amnesty programs applicable to our tenants, our ability to access the capital markets, and on the United States and worldwide financial markets and economy. On March 25, 2021, given the relative stability of our rent collections and cash flow projections, our Board determined to declare monthly distributions for the months of March, April, May and June of 2021.
Since April of 2020, our Board has authorized the following monthly distribution amounts per share for the periods indicated below:
| | | | | | | | |
| Record Date | | Distribution Amount (1) |
| April 30, 2020 | | $0.0400 |
| May 31, 2020 | | $0.0400 |
| June 30, 2020 | | $0.0777 |
| July 30, 2020 | | $0.0777 |
| August 28, 2020 | | $0.0777 |
| September 29, 2020 | | $0.0777 |
| October 29, 2020 | | $0.0777 |
| November 27, 2020 | | $0.0777 |
| December 30, 2020 | | $0.0777 |
| January 28, 2021 | | $0.0777 |
| February 25, 2021 | | $0.0777 |
| March 29, 2021 | | $0.0777 |
| April 29 2021 | | $0.0777 |
| May 28, 2021 | | $0.0777 |
| June 29, 2021 | | $0.0777 |
| | |
________________(1)The distribution amount for each class of outstanding common stock is adjusted based on the relative NAV of the various classes so that distributions constitute a uniform percentage of the NAV per share of all classes for stockholders of record as of the last business day of the month for which the distribution rate applies.
On July 23, 2020, our Board authorized a year-end distribution (the “Year-End Distribution”) of $0.0839 per share of our D Shares, T Shares, S Shares and I Shares, which amount would be adjusted based on the relative NAV of our D Shares, T Shares, S Shares and I Shares so that distributions constitute a uniform percentage of the NAV per share of all classes. The Year-End Distribution is payable to stockholders of record as of the close of business on December 30, 2020 and was paid in January 2021 upon a determination by our chief financial officer that as of the payment date of the Year-End Distribution, we were able to pay our debts as they become due in the usual course of business and our assets were not less than the sum of our total liabilities. The Year-End Distribution was paid in cash or reinvested in shares of our common stock for stockholders participating in our distribution reinvestment plan. The Year-End Distribution was paid in addition to the distribution authorized by our Board for the month of December 2020.
As of December 31, 2020, we had distributions payable of $4.9 million, which is included in distributions and redemptions payable on the accompanying consolidated balance sheets.
The following table presents distributions and the source of distributions for the periods indicated below (dollars amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Amount | | Percent | | Amount | | Percent |
| Distributions paid in cash | $ | 14,646 | | | 53 | % | | $ | 16,816 | | | 51 | % |
| Distributions reinvested | 13,108 | | | 47 | % | | 16,201 | | | 49 | % |
| Total distributions | $ | 27,754 | | | 100 | % | | $ | 33,017 | | | 100 | % |
| | | | | | | |
| Source of distributions: | | | | | | | |
Net cash provided by operating activities (1) | $ | 27,754 | | | 100 | % | | $ | 33,017 | | (2) | 100 | % |
| | | | | | | |
| Total sources | $ | 27,754 | | | 100 | % | | $ | 33,017 | | | 100 | % |
______________________ (1)Net cash provided by operating activities for the years ended December 31, 2020 and 2019 was $32.0 million and $32.5 million, respectively.
(2)Our Distributions for the year ended December 31, 2019 were fully covered by cash flows from operating activities, including cash flows from prior periods of $471,000.
Share Redemptions
Effective April 1, 2020, we have adopted the Amended Share Redemption Program to provide limited liquidity whereby, on a monthly basis, stockholders may request that we redeem all or any portion of their shares. Our Amended Share Redemption Program provides that, no later than on the second to last business day of a given month, stockholders may request that we redeem all or any portion of their shares, subject to a minimum redemption amount and certain short-term trading fees. The redemption price per share for each class will be our NAV per share for such class for that month, calculated by the independent fund accountant in accordance with our valuation policies. Prior to April 1, 2020, our share redemption plan provided limited liquidity whereby, on a daily basis, stockholders could request that we redeem all or any portion of their shares.
Our Amended Share Redemption Program includes certain redemption limits, including a quarterly limit and, in some cases, an individual stockholder limit. During the year ended December 31, 2020, we received redemption requests of approximately 11.3 million shares of our common stock for $188.4 million in excess of our redemption limit. During the year ended December 31, 2020, we received valid redemption requests under our Amended Share Redemption Program totaling approximately 16.8 million shares, of which we redeemed approximately 5.4 million shares as of December 31, 2020 for $93.6 million at an average redemption price of $17.31 per share and 126,000 shares subsequent to December 31, 2020 for $2.1 million at an average redemption price of $16.67. The remaining redemption requests relating to approximately 11.3 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program then in effect. See Note 14 —Stockholders’ Equity to our consolidated financial statements included in this Annual Report on Form 10-K for additional terms of the share redemption program, including the share redemption plan limits.
As of July 2020, the Board determined that monthly redemptions temporarily will be limited to shares whose aggregate value is no more than 0.8% of our aggregate NAV as of the last calendar day of the previous calendar month, and in any calendar quarter, redemptions will be limited to shares whose aggregate value is no more than 2.0% of our aggregate NAV as of the last calendar day of the previous calendar quarter. While no assurances can be made regarding the timing of a return to the
redemption plan limits stated in our existing share redemption plan, if at all, we are targeting the return to our limits under the Amended Share Redemption Program to occur in the third quarter of 2021. We intend to fund share redemptions with available cash, proceeds from our liquid investments and proceeds from the sale of additional shares. We may, after taking the interests of our Company as a whole and the interests of our remaining stockholders into consideration, use proceeds from any available sources at our disposal to satisfy redemption requests, including, but not limited to, proceeds from sales of additional shares, excess cash flow from operations, sales of our liquid investments, incurrence of indebtedness and, if necessary, proceeds from the disposition of real estate properties or real estate related assets. In an effort to have adequate cash available to support our share redemption plan, CIM Income NAV Management may determine to reserve borrowing capacity under our line of credit. CIM Income NAV Management could then elect to borrow against our line of credit in part to redeem shares presented for redemption during periods when we do not have sufficient proceeds from the sale of shares in the Offering to fund all redemption requests. See the discussion of our share redemption program in Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Share Redemption Program in this Annual Report on Form 10-K.
Liquidity and Capital Resources
General
Our credit facility with JPMorgan Chase Bank, N.A. as administrative agent (“JPMorgan Chase”), provides for borrowings up to $425.0 million, which is comprised of up to $212.5 million in unsecured revolving loans (the “Revolving Loans”) and $212.5 million in unsecured term loans (the “Term Loans”), collectively, the credit facility (the “Credit Facility”). As of December 31, 2020, we had $103.5 million in unused capacity, subject to borrowing availability. We had $32.6 million of available borrowings as of December 31, 2020. As of December 31, 2020, we had cash and cash equivalents of $8.8 million and investments in marketable securities of $15.5 million.
We expect to meet our short-term liquidity requirements through available cash, cash provided by property operations, proceeds from the Offering and borrowings from the Credit Facility or other sources. During the year ended December 31, 2020, we borrowed $52.0 million on the Revolving Loans to increase cash liquidity. Additionally, given the impact of the COVID-19 pandemic, our Board has decided to make a determination as to the amount and timing of distributions on a monthly, instead of a quarterly, basis until such time that we have greater visibility into the impact that the COVID-19 pandemic will have on our tenants’ ability to continue to pay rent on their leases on a timely basis or at all, the degree to which federal, state or local governmental authorities grant rent relief or other relief or amnesty programs applicable to our tenants, our ability to access the capital markets, and on the United States and worldwide financial markets and economy. As of December 31, 2020, we believe we were in compliance with the financial covenants under our various fixed and variable rate debt agreements. During the quarter ended, September 30, 2020, the unsecured debt to unencumbered asset value ratio was 60.8%, which exceeded the 60% maximum permitted under the Second Amended Credit Agreement. Since September 30, 2020, we have taken action so that the unsecured debt to unencumbered asset value ratio was within the requirements of the Second Amended Credit Agreement. During the fourth quarter of 2020 the Company received a waiver from the administrative agent, related to the September 30, 2020, affected financial covenant.
We expect to continue to raise capital through the Offering and to utilize such funds and future proceeds from secured or unsecured financing to complete future property acquisitions, other permitted investments and for general corporate uses. The source of our operating cash flows is primarily the rental and other property income received from current and future leased properties. As of December 31, 2020, we had raised $878.2 million of gross proceeds from the Offering before organization and offering costs, upfront selling commissions, dealer manager fees and the current portion of stockholder servicing fees of $32.7 million. Refer to Item 1A - Risk Factors for risks related to our ability to raise capital in the near term.
Our investment guidelines provide that we will seek to maintain our Target Liquidity in relatively liquid investments, such as U.S. government securities, agency securities, corporate debt, publicly traded debt and equity real estate-related securities, cash, cash equivalents and other short-term investments and, in CIM Income NAV Management’s discretion, lines of credit (collectively, the “Liquid Assets”). To the extent that CIM Income NAV Management determines that we should maintain borrowing capacity under lines of credit, the amount available under the lines of credit will be included in calculating the Liquid Assets under these guidelines. These are guidelines, and our stockholders should not expect that we will, at all times, hold liquid assets at or above the target levels or that all liquid assets will be available to satisfy redemption requests as we receive them. We anticipate that both our overall allocation to liquid assets as a percentage of our NAV and our allocation to different types of liquid assets will vary. In making these determinations, our advisor will consider our receipt of proceeds from sales of additional shares, our cash flow from operations, available borrowing capacity under lines of credit, if any, or from additional mortgages on our real estate, our receipt of proceeds from sales of assets, and the anticipated use of cash to fund redemptions, as well as the availability and pricing of different investments. The amount of the Liquid Assets is determined by our advisor, in its sole discretion, but is subject to review by our independent directors on a quarterly basis.
Given the recent levels of investor subscriptions and increased redemption requests, which we believe has been exacerbated by the challenging economic environment caused by the COVID-19 pandemic, our stated objectives of maintaining Target Liquidity and satisfying the redemption plan limits are in conflict. As such, we are temporarily redeeming less than the Amended Share Redemption Program limits to maintain the Target Liquidity while we seek to generate additional liquidity through investor subscriptions and execution of an in-process asset disposition program. On August 30, 2020, our Board determined that, effective immediately, monthly redemptions temporarily will be limited to shares whose aggregate value is no more than 0.8% of the aggregate NAV as of the last calendar day of the previous calendar month, and in any calendar quarter, redemptions will be limited to shares whose aggregate value is no more than 2.0% of the aggregate NAV as of the last calendar day of the previous calendar quarter. While no assurances can be made regarding the timing of a return to the Redemption Pan Limits stated in our existing share redemption plan, if at all, we are targeting the return to our limits under the Amended Share Redemption Program to occur in the third quarter of 2021.
Further, in support of our efforts to achieve sustainable liquidity, our Board has further agreed to support our efforts towards achieving sustainable liquidity by agreeing to take 50% of their quarterly Board compensation in common stock, based on the then current NAV per share at the time of issuance, for the third quarter of 2020 through the second quarter of 2021. In addition, our Advisor has determined to take 50% of its monthly advisory fees in common stock, based on the then current NAV per share at the time of issuance, through June 30, 2021.
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for property acquisitions or other permitted investments, operating expenses, distributions and redemptions to stockholders and interest on our outstanding debt, including principal repayments of $129.4 million due within the next 12 months. Pursuant to the Credit Facility, we may elect to extend the maturity date of such loans for up to two successive six-month periods, subject to satisfying certain conditions, including providing notice of the election and paying an extension fee of 0.10% of the maximum amount of the Revolving Loans (the “Extension Fee”). We expect to extend the maturity date of the Revolving Loans through September 6, 2022, subject to payment of the Extension Fee. We expect to meet our short-term liquidity requirements through available cash, cash provided by property operations, proceeds from the Offering and borrowings from the Credit Facility or other sources, such as proceeds from dispositions.
We believe that the resources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds are for property acquisitions or other permitted investments and the payment of tenant improvements, operating expenses, including debt service payments on any outstanding indebtedness, and distributions and redemptions to our stockholders. We expect to meet our long-term liquidity requirements through proceeds from the Offering, secured or unsecured financings from banks and other lenders, any available capacity on the Credit Facility by the addition of properties to the borrowing base, proceeds from the sale of marketable securities, proceeds from dispositions and net cash flows provided by operations.
We expect that substantially all net cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we have used, and may continue to use, other sources to fund distributions, as necessary, including proceeds from the Offering, borrowings on the Credit Facility and/or future borrowings on our unencumbered assets. To the extent that cash flows from operations are lower due to fewer properties being acquired or lower than expected returns on the properties, distributions paid to our stockholders may be lower. We expect that substantially all net cash flows from the Offering or debt financings will be used to fund acquisitions, certain capital expenditures, repayments of outstanding debt or distributions and redemptions to our stockholders.
Contractual Obligations
As of December 31, 2020, we had debt outstanding with a carrying value of $450.7 million and a weighted average interest rate of 3.66%. See Note 9 — Credit Facility and Notes Payable to our consolidated financial statements in this Annual Report on Form 10-K for a description of certain terms of the debt.
Our contractual obligations as of December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by period (1) |
| | Total | | Less Than 1
Year | | 1-3 Years | | 3-5 Years | | More Than
5 Years |
Principal payments - credit facility(2) | | $ | 321,500 | | | $ | 109,000 | | | $ | 212,500 | | | $ | — | | | $ | — | |
Interest payments - credit facility(3) | | 16,797 | | | 10,661 | | | 6,136 | | | — | | | — | |
| Principal payments - fixed debt rate | | 129,219 | | | 20,442 | | | 91,827 | | | 16,950 | | | — | |
Interest payments - fixed debt rate(4) | | 8,685 | | | 4,937 | | | 2,981 | | | 767 | | | — | |
| Total | | $ | 476,201 | | | $ | 145,040 | | | $ | 313,444 | | | $ | 17,717 | | | $ | — | |
____________________________________(1)The table does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable.
(2)The table does not include the impact of any extension. We may elect to extend the maturity of the Revolving Loans to no later than September 6, 2022, subject to satisfying certain conditions contained in the second amended credit agreement, or refinance the debt or enter into the new financing arrangement.
(3)As of December 31, 2020, the Term Loans outstanding totaled $212.5 million, all of which are subject to interest rate swap agreements. The weighted average all-in interest rate for the Swapped Terms Loans was 4.25%. The remaining $109.0 million in Revolving Loans outstanding under the Credit Facility has a weighted average interest rate of 2.20% as of December 31, 2020.
(4)As of December 31, 2020, we had $69.0 million of variable rate mortgage notes effectively fixed through the use of interest rate swap agreements. We used the effective interest rates fixed under our interest rate swap agreements to calculate the debt payment obligations in future periods.
Our charter prohibits us from incurring debt that would cause our borrowings to exceed 75% of our gross assets, valued at the aggregate cost (before depreciation and other non-cash reserves), unless approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report. In addition to this limitation in our charter, our Board has adopted a policy to further limit our borrowings to 60% of the greater of cost (before depreciation or other non-cash reserves) or fair market value of our gross assets, unless excess borrowing is approved by a majority of our Board (including a majority of the independent directors) and disclosed to our stockholders in the next quarterly report along with a justification for such excess borrowing. As of December 31, 2020, our ratio of debt to total gross assets net of gross intangible lease liabilities was 49.6%, and our ratio of debt to the fair market value of our gross assets net of gross intangible lease liabilities was 50.9%. Fair market value is based on the estimated market value of our real estate assets as of December 31, 2020 used to determine our estimated per share NAV.
Our management reviews net debt as part of its management of our overall liquidity, financial flexibility, capital structure and leverage, and we therefore believe that the presentation of net debt provides useful information to stockholders. Net debt is a non-GAAP measure used to show our outstanding principal debt balance, excluding certain GAAP adjustments, such as financing and issuance costs and related accumulated amortization, less all cash and cash equivalents. As of December 31, 2020, our net debt leverage ratio, which is the ratio of net debt to total gross real estate assets net of gross intangible lease liabilities, was 48.6%.
The following table provides a reconciliation of the Credit Facility and notes payable, net balance, as reported on our consolidated balance sheet, to net debt as of December 31, 2020 (dollar amounts in thousands): | | | | | | | | |
| | | Balance as of December 31, 2020 |
| Credit facility and notes payable, net | | $ | 449,378 | |
Deferred costs, net (1) | | 1,341 | |
| Less: Cash and cash equivalents | | (8,805) | |
| Net debt | | $ | 441,914 | |
Gross real estate assets, net (2) and investment in CIM UII Onshore | | $ | 909,493 | |
| Net debt leverage ratio | | 48.6 | % |
____________________________ (1)Deferred costs relate to mortgage notes payable and the term portion of the Credit Facility.
(2)Net of gross intangible lease liabilities.
Cash Flow Analysis
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Operating Activities. Net cash provided by operating activities decreased by $573,000 for the year ended December 31, 2020, as compared to the same period in 2019. The decrease was primarily due to the timing of payments of accrued expenses and accounts payable, and amounts payable to affiliates during the year ended December 31, 2020. See “— Results of Operations” for a more complete discussion of the factors impacting our operating performance.
Investing Activities. Net cash used in investing activities increased by $32.3 million for the year ended December 31, 2020, as compared to the same period in 2019, primarily due to our investment in CIM UII Onshore for $50.0 million, partially offset by an increase in net proceeds from real estate-related activity and from investments in marketable securities.
Financing Activities. Net cash provided by financing activities was $7.3 million for the year ended December 31, 2020, compared to net cash used in financing activities of $27.8 million for the year ended December 31, 2019. The increase of net cash provided by financing activities of $35.0 million was primarily due to an increase in net proceeds from borrowing facilities of $105.8 million during the year ended December 31, 2020, as compared to the same period in 2019, as well as a decrease in distributions to stockholders of $2.2 million, partially offset by a decrease in net proceeds from the issuance of common stock of $72.8 million.
Election as a REIT
We have elected to be taxed, and currently qualify, as a REIT under the Code. To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding certain non-cash items and net capital gains).
If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying consolidated financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which, if applicable, have been provided for in our accompanying consolidated financial statements.
Inflation
We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. There are, and we expect that there will continue to be, provisions in many of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps and clauses enabling us to receive payment of additional rent calculated as a percentage of the tenant’s gross sales above pre-determined thresholds. In addition, most of our leases require the tenant to pay all or a majority of the property’s operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs. However, due to the long-term nature of leases for real property, such leases may not reset frequently enough to adequately offset the effects of inflation.
Related-Party Transactions and Agreements
We have entered into agreements with CIM Income NAV Management or its affiliates, whereby we agree to pay certain fees, or reimburse certain expenses of, CIM Income NAV Management or its affiliates, primarily advisory and performance fees and expenses, organization and offering costs, sales commissions, dealer manager fees and expenses, ongoing stockholder servicing fees, and reimbursement of certain acquisition and operating costs. In addition, the Company purchased $50.0 million of limited partnership interests of CIM UII Onshore, which is affiliated with CIM. See Note 12 — Related-Party Transactions and Agreements to our consolidated financial statements in this Annual Report on Form 10-K for a further explanation of the various related-party transactions, agreements and fees.
Conflicts of Interest
Richard S. Ressler, the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates including CIM Income NAV Management, is the chairman of the board, chief executive officer and president of CMFT and vice president of our advisor. One of our directors, Avraham Shemesh, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates including CIM Income NAV Management, serves as a director of CMFT. One of our directors, Elaine Y. Wong, who is also a principal of CIM, serves as a director of CMFT. One of our independent directors, W. Brian Kretzmer, also serves as an independent director of CMFT. Our chief financial officer and treasurer, Nathan D. DeBacker, who is also an officer of other real estate programs sponsored by CCO Group, is a vice president of CIM Income NAV Management and is an officer of certain of its affiliates. As such, there are conflicts of interest where CIM Income NAV Management or its affiliates, while serving in the capacity as sponsor, general partner, officer, director, key personnel and/or advisor for CIM or another real estate program sponsored or operated by CIM or CCO Group, including other real estate offerings in registration, may be in conflict with us in connection with providing services to other real estate-related programs related to property acquisitions, property dispositions, and property management among others. The compensation arrangements between affiliates of CIM Income NAV Management and these other real estate programs sponsored or operated by CCO Group could influence the advice provided to us. See Part I, Item 1. Business — Conflicts of Interest of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2020 and 2019, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.
Critical Accounting Policies and Significant Accounting Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K.
Recoverability of Real Estate Assets
We acquire real estate assets and subsequently monitor those assets quarterly for impairment, including the review of real estate properties subject to direct financing leases, if applicable. Additionally, we record depreciation and amortization related to our assets. The risks and uncertainties involved in applying the principles related to real estate assets include, but are not limited to, the following:
•The estimated useful lives of our depreciable assets affects the amount of depreciation and amortization recognized on our assets;
•The review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the carrying value of assets held and used to a fair value estimated by management and recognize an impairment loss. The process for evaluating real estate impairment requires management to make significant assumptions related to certain inputs, including holding periods;
•The fair value of held for sale assets is estimated by management. This estimated value could result in a reduction of the carrying value of the asset; and
•Changes in assumptions based on actual results may have a material impact on our financial results.
Allocation of Purchase Price of Real Estate Assets
In connection with our acquisition of properties, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their respective relative fair values. Tangible assets consist of land, buildings, and tenant improvements. Intangible assets consist of above- and below-market lease values and the value of in-place leases. Our purchase price allocations are developed utilizing third-party appraisal reports, industry standards and management experience. The risks and uncertainties involved in applying the principles related to purchase price allocations include, but are not limited to, the following:
•The value allocated to land, as opposed to buildings and tenant improvements, affects the amount of depreciation expense we record. If more value is attributed to land, depreciation expense is lower than if more value is attributed to buildings and tenant improvements;
•Intangible lease assets and liabilities can be significantly affected by estimates including market rent, lease term including renewal options at rental rates below estimated market rental rates, carrying costs of the property during a hypothetical expected lease-up period, and current market conditions and costs, including tenant improvement allowances and rent concessions; and
•We determine whether any financing assumed is above- or below-market based upon comparison to similar financing terms for similar types of debt financing with similar maturities.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are described in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable-rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
Interest Rate Risk
As of December 31, 2020, we had an aggregate of $109.0 million of variable rate debt, excluding any debt subject to interest rate swap agreements, and therefore, we are exposed to interest rate changes in LIBOR. As of December 31, 2020, an increase or decrease of 50 basis points in interest rates would result in an increase or decrease in interest expense of $545,000.
As of December 31, 2020, we had eight interest rate swap agreements outstanding, which mature on various dates from September 2021 to September 2022, with an aggregate notional amount of $281.5 million and an aggregate net fair value liability of $8.5 million. The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of December 31, 2020, an increase of 50 basis points in interest rates would result in a derivative liability of $6.7 million, representing a $1.8 million net change to the fair value of the net derivative liability. A decrease of 50 basis points would result in a derivative liability of $10.4 million, representing a $1.9 million net change to the fair value of the net derivative liability.
As the information presented above includes only those exposures that existed as of December 31, 2020, it does not consider exposures or positions arising after that date. The information presented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs and assume no other changes in our capital structure.
In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee which identified the SOFR as its preferred alternative
to U.S. dollar LIBOR in derivatives and other financial contracts. We are not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
We have the ability to borrow variable rate debt under our Credit Facility and interest rate swap agreements maturing on various dates from September 2021 to September 2022, as further discussed in Note 9 — Credit Facility and Notes Payable to our consolidated financial statements in this Annual Report on Form 10-K, that are indexed to LIBOR. As such, we are monitoring and evaluating the related risks, which include interest on loans, amount paid on securities, or amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans, securities, or derivative instruments tied to LIBOR could also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the respective counterparty.
If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our contracts is likely to vary by contract. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected. While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.
Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in economic conditions. We are subject to tenant, geographic and industry concentrations. Any downturn of the economic conditions in one or more of these tenants, states or industries could result in a material reduction of our cash flows or material losses to us.
The factors considered in determining the credit risk of our tenants include, but are not limited to: payment history; credit status and change in status including the impact of the COVID-19 pandemic (credit ratings for public companies are used as a primary metric); change in tenant space needs (i.e., expansion/downsize); tenant financial performance; economic conditions in a specific geographic region; and industry specific credit considerations. We believe that the credit risk of our portfolio is reduced by the high quality of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants and mitigation options.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data filed as part of this report are set forth beginning on page F-1 of this Annual Report on Form 10-K.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with our independent registered public accountants during the year ended December 31, 2020.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that no controls and procedures, no matter how well designed and operated, can provide absolute assurance of achieving the desired control objectives.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 2020 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial
officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of December 31, 2020, were effective at a reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2020.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d -15(f) of the Exchange Act) during the three months ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.OTHER INFORMATION
None.
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will be presented in our definitive proxy statement for our 2021 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2020, and is incorporated herein by reference.
ITEM 11.EXECUTIVE COMPENSATION
The information required by this Item will be presented in our definitive proxy statement for our 2021 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2020, and is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be presented in our definitive proxy statement for our 2021 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2020, and is incorporated herein by reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item will be presented in our definitive proxy statement for our 2021 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2020, and is incorporated herein by reference.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be presented in our definitive proxy statement for our 2021 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2020, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
The list of the consolidated financial statements contained herein is set forth on page F-1 hereof.
Financial Statement Schedules
Schedule III – Real Estate Assets and Accumulated Depreciation is set forth beginning on page S-1 hereof.
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
Exhibits
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2020 (and are numbered in accordance with Item 601 of Regulation S-K). | | | | | | | | |
| Exhibit No. | | Description |
| |
| 1.1 | | |
| | |
| 1.2 | | |
| | |
| 3.1 | | |
| | |
| 3.2 | | |
| | |
| 3.3 | | |
| | |
| 3.4 | | |
| | |
| 3.5 | | |
| | |
| 3.6 | | |
| | |
| 3.7 | | |
| | |
| 4.1 | | |
| | |
| 4.2 | | Second Amended and Restated Multiple Class Plan of CIM Income NAV, Inc., (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K (File No. 000-55187), filed February 28, 2020). and Restated Multiple Class Plan of CIM Income NAV, Inc., effective November 27, 2018 (Incorporated by reference to Exhibit 4.2 to CIM Income NAV, Inc.’s Post-effective Amendment No. 9 to Form S-11 (File No. 333-213271), filed November 27, 2018). |
| | |
| 4.3 | | |
| | |
| 4.4 | | |
| | |
| | | | | | | | |
| Exhibit No. | | Description |
| 4.5 | | |
| | |
| 4.6 | | |
| 10.1 | | |
| 10.2 | | |
| 10.3 | | |
| 10.4 | | |
| 10.5 | | |
| 10.6 | | |
| 10.7 | | |
| | |
| | |
| | |
| 21.1* | | |
| 31.1* | | |
| 31.2* | | |
| 32.1** | | |
| | |
| 101.INS* | | XBRL Instance Document. |
| | |
| 101.SCH* | | XBRL Taxonomy Extension Schema Document. |
| | |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
| 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
| | |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
| 104* | | Cover Page Interactive Data File (formatted as InLine XBRL and contained in Exhibit 101) |
____________________________________ | | | | | | | | |
| * | Filed herewith. |
| ** | In accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
ITEM 16.FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 30th day of March, 2021.
| | | | | | | | |
CIM Income NAV, Inc. |
| |
| By: | | /s/ NATHAN D. DEBACKER |
| Name: | | Nathan D. DeBacker |
| Title: | | Chief Financial Officer and Treasurer
(Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Signature | | Title | | Date |
| | | | |
| |
| /s/ RICHARD S. RESSLER | | Chief Executive Officer, President and Chairman of the Board of Directors | | March 30, 2021 |
| Richard S. Ressler | | (Principal Executive Officer) | | |
|
| /s/ NATHAN D. DEBACKER | | Chief Financial Officer and Treasurer | | March 30, 2021 |
| Nathan D. DeBacker | | (Principal Financial Officer) | | |
|
| /s/ JEFFREY R. SMITH | | Vice President of Accounting | | March 30, 2021 |
| Jeffrey R. Smith | | (Principal Accounting Officer) | | |
| | | | |
| /s/ GEORGE N. FUGELSANG | | Independent Director | | March 30, 2021 |
| George N. Fugelsang | | | | |
| | | | |
| /s/ RICHARD J. LEHMANN | | Independent Director | | March 30, 2021 |
| Richard J. Lehmann | | | | |
| | | | |
| /s/ ROGER D. SNELL | | Independent Director | | March 30, 2021 |
| Roger D. Snell | | | | |
| | | | |
| /s/ W. BRIAN KRETZMER | | Independent Director | | March 30, 2021 |
| W. Brian Kretzmer | | | | |
| | | | |
| /s/ AVRAHAM SHEMESH | | Director | | March 30, 2021 |
| Avraham Shemesh | | | | |
| | | | |
| /s/ ELAINE Y. WONG | | Director | | March 30, 2021 |
| Elaine Y. Wong | | | | |
| | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of CIM Income NAV, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CIM Income NAV, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Real Estate Assets: Determination of Impairment Indicators — Refer to Notes 2 and 4 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of real estate assets for impairment involves an initial assessment of each real estate asset to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of real estate assets are no longer recoverable. Possible indications of impairment may include credit concerns of a property’s major tenants, changes in anticipated holding periods, or other circumstances. When events or changes in circumstances exist, the Company evaluates its real estate assets for impairment by comparing undiscounted future cash flows expected to be generated over the life of each asset to the respective carrying amount. If the carrying amount of an asset exceeds the undiscounted future cash flows, an analysis is performed to determine the fair value of the asset.
The Company makes significant assumptions to evaluate real estate assets for possible indications of impairment, including expected holding periods. Changes in these assumptions could result in additional impairment charges in the future.
Given the Company’s evaluation of possible indications of impairment of real estate assets requires management to make significant assumptions, performing audit procedures to evaluate whether management appropriately identified events or
changes in circumstances indicating that the carrying amounts of real estate assets may not be recoverable required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of real estate assets for possible indications of impairment included the following, among others:
•We evaluated management’s impairment indicator analysis by testing real estate assets for possible indications of impairment, including searching for adverse asset-specific and/or market conditions, such as vacancies, tenants that are late on rent or have outstanding rent balances, tenant move-outs, and tenant bankruptcies, among others.
•We tested the assumptions underlying management’s cash flow projections prepared as a completeness test to evaluate whether all impairment indicators have been appropriately identified.
•We performed corroborating inquiries with management, including property accounting, leasing and portfolio oversight to determine whether factors were identified in the current period that may be an impairment indicator, including changes in expected holding periods, or changes in market rental rates.
/s/ Deloitte & Touche LLP
Phoenix, Arizona
March 30, 2021
We have served as the Company’s auditor since 2010.
CIM INCOME NAV, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| ASSETS | | | |
| Real estate assets: | | | |
| Land | $ | 139,644 | | | $ | 145,373 | |
| Buildings and improvements | 632,190 | | | 656,208 | |
| Intangible lease assets | 106,739 | | | 112,718 | |
| Total real estate assets, at cost | 878,573 | | | 914,299 | |
| Less: accumulated depreciation and amortization | (101,991) | | | (80,938) | |
| Total real estate assets, net | 776,582 | | | 833,361 | |
| Investment in CIM UII Onshore, net | 46,680 | | | 0 | |
| Investment in marketable securities | 15,496 | | | 15,002 | |
| Total real estate assets, equity investments and marketable securities, net | 838,758 | | | 848,363 | |
| Cash and cash equivalents | 8,805 | | | 5,111 | |
| Restricted cash | 415 | | | 607 | |
| Rents and tenant receivables, net | 15,952 | | | 13,599 | |
| Prepaid expenses and other assets | 984 | | | 777 | |
| Deferred costs, net | 289 | | | 672 | |
| Due from affiliates | 7 | | | 8 | |
| Assets held for sale | 1,009 | | | 0 | |
| Total assets | $ | 866,219 | | | $ | 869,137 | |
| LIABILITIES AND EQUITY | | | |
| Credit facility and notes payable, net | $ | 449,378 | | | $ | 348,939 | |
| Accrued expenses and accounts payable | 4,518 | | | 3,444 | |
| Escrowed stockholder proceeds | 0 | | | 50 | |
| Due to affiliates | 13,826 | | | 16,567 | |
| Intangible lease liabilities, net | 12,040 | | | 13,618 | |
| Distributions and redemptions payable | 6,969 | | | 2,814 | |
| Derivative liabilities, deferred rental income and other liabilities | 11,174 | | | 7,676 | |
| Total liabilities | 497,905 | | | 393,108 | |
| Commitments and contingencies | 0 | | 0 |
| Redeemable common stock | 10,040 | | | 59,263 | |
| STOCKHOLDERS’ EQUITY: | | | |
| Preferred stock, $0.01 par value; 10,000,000 shares authorized, NaN issued and outstanding | 0 | | | 0 | |
| D Shares common stock, ,$0.01 par value per share; 122,500,000 shares authorized, 15,318,506 and 18,143,147 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | 153 | | | 181 | |
| T Shares common stock, $0.01 par value per share; 122,500,000 shares authorized, 13,778,134 and 14,499,636 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | 138 | | | 145 | |
| S Shares common stock, $0.01 par value per share; 122,500,000 shares authorized, 7,399 and 7,031 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | 0 | | | 0 | |
| I Shares common stock, $0.01 par value per share;122,500,000 shares authorized, 1,011,342 and 1,097,896 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | 10 | | | 11 | |
| Capital in excess of par value | 493,417 | | | 507,913 | |
| Accumulated distributions in excess of earnings | (128,383) | | | (87,513) | |
| Accumulated other comprehensive loss | (7,768) | | | (4,710) | |
| Total stockholders’ equity | 357,567 | | | 416,027 | |
| Non-controlling interests | 707 | | | 739 | |
| Total equity | $ | 358,274 | | | $ | 416,766 | |
| Total liabilities, redeemable common stock, and equity | $ | 866,219 | | | $ | 869,137 | |
The accompanying notes are an integral part of these consolidated financial statements.
CIM INCOME NAV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Revenues: | | | | | |
| | | | | |
| | | | | |
| Rental and other property income | $ | 72,596 | | | $ | 77,606 | | | $ | 70,778 | |
| Interest income on marketable securities | 345 | | | 206 | | | 134 | |
| Total revenues | 72,941 | | | 77,812 | | | 70,912 | |
| Operating expenses: | | | | | |
| General and administrative | 5,512 | | | 7,021 | | | 7,096 | |
| Property operating | 4,971 | | | 5,231 | | | 2,798 | |
| Real estate tax | 5,703 | | | 5,238 | | | 5,076 | |
| Advisory fees and expenses | 6,382 | | | 7,902 | | | 5,858 | |
| Transaction-related | 726 | | | 1,233 | | | 1,774 | |
| Depreciation and amortization | 27,647 | | | 29,182 | | | 27,361 | |
| Real estate impairment | 13,851 | | | 3,090 | | | 2,267 | |
| Total operating expenses | 64,792 | | | 58,897 | | | 52,230 | |
| Gain on disposition of real estate, net | 627 | | | 10,213 | | | 1,019 | |
| Operating income | 8,776 | | | 29,128 | | | 19,701 | |
| Other expense: | | | | | |
| Loss on investment in CIM UII Onshore | (2,660) | | | 0 | | | 0 | |
| Interest expense and other, net | (17,127) | | | (14,337) | | | (14,506) | |
| Net (loss) income | (11,011) | | | 14,791 | | | 5,195 | |
| Net income allocated to noncontrolling interest | 32 | | | 41 | | | 37 | |
| Net (loss) income attributable to the Company | $ | (11,043) | | | $ | 14,750 | | | $ | 5,158 | |
| | | | | |
| Class D Common Stock: | | | | | |
| Net (loss) income attributable to the Company | $ | (5,586) | | | $ | 8,304 | | | $ | 3,165 | |
| Basic and diluted weighted average number of common shares outstanding | 16,308,451 | | | 18,763,418 | | | 17,606,217 | |
| Basic and diluted net (loss) income per common share | $ | (0.34) | | | $ | 0.44 | | | $ | 0.18 | |
| | | | | |
| Class T Common Stock: | | | | | |
| Net (loss) income attributable to the Company | $ | (5,142) | | | $ | 5,933 | | | $ | 1,794 | |
| Basic and diluted weighted average number of common shares outstanding | 14,155,490 | | | 13,983,267 | | | 10,769,145 | |
| Basic and diluted net (loss) income per common share | $ | (0.36) | | | $ | 0.42 | | | $ | 0.17 | |
| | | | | |
| Class S Common Stock: | | | | | |
| Net (loss) income attributable to the Company | $ | (3) | | | $ | 1 | | | $ | 0 | |
| Basic and diluted weighted average number of common shares outstanding | 7,225 | | | 1,444 | | | 0 | |
| Basic and diluted net (loss) income per common share | $ | (0.47) | | | $ | 0.84 | | | $ | 0 | |
| | | | | |
| Class I Common Stock: | | | | | |
| Net (loss) income attributable to the Company | $ | (312) | | | $ | 512 | | | $ | 199 | |
| Basic and diluted weighted average number of common shares outstanding | 986,387 | | | 1,122,442 | | | 1,040,969 | |
| Basic and diluted net (loss) income per common share | $ | (0.32) | | | $ | 0.46 | | | $ | 0.19 | |
The accompanying notes are an integral part of these consolidated financial statements.
CIM INCOME NAV, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Net (loss) income | $ | (11,011) | | | $ | 14,791 | | | $ | 5,195 | |
| Other comprehensive loss: | | | | | |
| Unrealized holding gain (loss) on marketable securities | 537 | | | 252 | | | (88) | |
| Reclassification adjustment for realized loss included in income as other expense | 31 | | | 13 | | | 3 | |
| Unrealized loss on interest rate swaps | (8,287) | | | (5,373) | | | (750) | |
| Amount of loss (gain) reclassified from other comprehensive (loss) income into income as interest expense and other, net | 4,661 | | | (167) | | | (294) | |
| Total other comprehensive loss | (3,058) | | | (5,275) | | | (1,129) | |
| | | | | |
| Comprehensive (loss) income | (14,069) | | | 9,516 | | | 4,066 | |
| Comprehensive income allocated to noncontrolling interest | 32 | | | 41 | | | 37 | |
| Comprehensive (loss) income attributable to the Company | $ | (14,101) | | | $ | 9,475 | | | $ | 4,029 | |
The accompanying notes are an integral part of these consolidated financial statements.
CIM INCOME NAV, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Common Stock | | Capital in
Excess of
Par Value | | Accumulated
Distributions
in Excess of
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Stockholders’
Equity | | Non-
Controlling
Interests | | Total
Equity |
| | | | | | | | | | | | | | | | | | Number
of Shares | | Par
Value | | | | | | |
| Balance, January 1, 2018 | | | | | | | | | | | | | | | | | 25,695,557 | | | $ | 257 | | | $ | 378,266 | | | $ | (45,506) | | | $ | 1,657 | | | $ | 334,674 | | | $ | 772 | | | $ | 335,446 | |
| Cumulative effect of accounting changes | | | | | | | | | | | | | | | | | — | | | — | | | — | | | (37) | | | 37 | | | — | | | — | | | 0 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | 9,831,064 | | | 98 | | | 181,284 | | | — | | | — | | | 181,382 | | | — | | | 181,382 | |
| Conversion of Shares | | | | | | | | | | | | | | | | | (108) | | | — | | | — | | | — | | | — | | | — | | | — | | | 0 | |
Distributions declared on common stock — $0.98 per common share | | | | | | | | | | | | | | | | | — | | | — | | | — | | | (28,766) | | | — | | | (28,766) | | | — | | | (28,766) | |
Commissions, dealer manager and ongoing stockholder servicing fees | | | | | | | | | | | | | | | | | — | | | — | | | (561) | | | — | | | — | | | (561) | | | — | | | (561) | |
| Other offering costs | | | | | | | | | | | | | | | | | — | | | — | | | (1,339) | | | — | | | — | | | (1,339) | | | — | | | (1,339) | |
| Redemptions of common stock | | | | | | | | | | | | | | | | | (2,654,144) | | | (26) | | | (48,224) | | | — | | | — | | | (48,250) | | | — | | | (48,250) | |
| Equity-based compensation | | | | | | | | | | | | | | | | | 7,212 | | | — | | | 33 | | | — | | | — | | | 33 | | | — | | | 33 | |
| Changes in redeemable common stock | | | | | | | | | | | | | | | | | — | | | — | | | (11,878) | | | — | | | — | | | (11,878) | | | — | | | (11,878) | |
| Distributions to non-controlling interests | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (43) | | | (43) | |
| Comprehensive income (loss) | | | | | | | | | | | | | | | | | — | | | — | | | — | | | 5,158 | | | (1,129) | | | 4,029 | | | 37 | | | 4,066 | |
| Balance, December 31, 2018 | | | | | | | | | | | | | | | | | 32,879,581 | | | $ | 329 | | | $ | 497,581 | | | $ | (69,151) | | | $ | 565 | | | $ | 429,324 | | | $ | 766 | | | $ | 430,090 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock | | | | | | | | | | | | | | | | | 6,258,770 | | | 63 | | | 112,080 | | | — | | | — | | | 112,143 | | | — | | | 112,143 | |
| Conversion of shares | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 0 | |
Distributions declared on common stock — $0.98 per D Share, T Share and I Share, $0.22 per S Share | | | | | | | | | | | | | | | | | — | | | — | | | — | | | (33,112) | | | — | | | (33,112) | | | — | | | (33,112) | |
Commissions, dealer manager and ongoing stockholder servicing fees | | | | | | | | | | | | | | | | | — | | | — | | | (5,355) | | | — | | | — | | | (5,355) | | | — | | | (5,355) | |
| Other offering costs | | | | | | | | | | | | | | | | | — | | | — | | | (830) | | | — | | | — | | | (830) | | | — | | | (830) | |
| Redemptions of common stock | | | | | | | | | | | | | | | | | (5,398,065) | | | (55) | | | (95,333) | | | — | | | — | | | (95,388) | | | — | | | (95,388) | |
| Equity-based compensation | | | | | | | | | | | | | | | | | 7,424 | | | — | | | 131 | | | — | | | — | | | 131 | | | | | 131 | |
| Changes in redeemable common stock | | | | | | | | | | | | | | | | | — | | | — | | | (361) | | | — | | | — | | | (361) | | | — | | | (361) | |
| Distributions to non-controlling interests | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (68) | | | (68) | |
| Comprehensive income (loss) | | | | | | | | | | | | | | | | | — | | | — | | | — | | | 14,750 | | | (5,275) | | | 9,475 | | | 41 | | | 9,516 | |
| Balance, December 31, 2019 | | | | | | | | | | | | | | | | | 33,747,710 | | | $ | 337 | | | $ | 507,913 | | | $ | (87,513) | | | $ | (4,710) | | | $ | 416,027 | | | $ | 739 | | | $ | 416,766 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | 1,951,610 | | | 19 | | | 34,065 | | | — | | | — | | | 34,084 | | | — | | | 34,084 | |
| Conversion of Shares | | | | | | | | | | | | | | | | | (400) | | | — | | | — | | | — | | | — | | | — | | | — | | | 0 | |
Distributions declared on common stock — $0.95 per common share | | | | | | | | | | | | | | | | | — | | | — | | | — | | | (29,827) | | | — | | | (29,827) | | | — | | | (29,827) | |
Commissions, dealer manager and ongoing stockholder servicing fees | | | | | | | | | | | | | | | | | — | | | — | | | (1,009) | | | — | | | — | | | (1,009) | | | — | | | (1,009) | |
| Other offering costs | | | | | | | | | | | | | | | | | — | | | — | | | (253) | | | — | | | — | | | (253) | | | — | | | (253) | |
| Redemptions of common stock | | | | | | | | | | | | | | | | | (5,635,111) | | | (55) | | | (97,402) | | | — | | | — | | | (97,457) | | | — | | | (97,457) | |
| Equity-based compensation | | | | | | | | | | | | | | | | | 10,691 | | | — | | | 180 | | | — | | | — | | | 180 | | | — | | | 180 | |
| Equity-based payments to Advisor | | | | | | | | | | | | | | | | | 40,881 | | | — | | | 700 | | | — | | | — | | | 700 | | | — | | | 700 | |
| Changes in redeemable common stock | | | | | | | | | | | | | | | | | — | | | — | | | 49,223 | | | — | | | — | | | 49,223 | | | — | | | 49,223 | |
| Distributions to non-controlling interests | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (64) | | | (64) | |
| Comprehensive (loss) income | | | | | | | | | | | | | | | | | — | | | — | | | — | | | (11,043) | | | (3,058) | | | (14,101) | | | 32 | | | (14,069) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2020 | | | | | | | | | | | | | | | | | 30,115,381 | | | $ | 301 | | | $ | 493,417 | | | $ | (128,383) | | | $ | (7,768) | | | $ | 357,567 | | | $ | 707 | | | $ | 358,274 | |
The accompanying notes are an integral part of these consolidated financial statements.
CIM INCOME NAV, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | |
| Net (loss) income | $ | (11,011) | | | $ | 14,791 | | | $ | 5,195 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization, net | 27,402 | | | 28,801 | | | 26,855 | |
| Straight-line rental income | (2,736) | | | (3,615) | | | (3,070) | |
| Write-off of uncollectible lease-related receivables | 1,406 | | | 2 | | | 0 | |
| Amortization of deferred financing costs | 1,073 | | | 1,084 | | | 1,086 | |
| Amortization on marketable securities | 70 | | | 17 | | | 9 | |
| Equity-based compensation | 180 | | | 131 | | | 33 | |
| Equity-based payments to Advisor | 700 | | | 0 | | | 0 | |
| Loss on sale of marketable securities | 31 | | | 13 | | | 3 | |
| Loss on investment in CIM UII Onshore | 2,660 | | | 0 | | | 0 | |
| Gain on disposition of real estate assets, net | (627) | | | (10,213) | | | (1,019) | |
| Impairment of real estate assets | 13,851 | | | 3,090 | | | 2,267 | |
| Write-off of deferred financing costs | 0 | | | 0 | | | 130 | |
| | | | | |
| Changes in assets and liabilities: | | | | | |
| Rents and tenant receivables | (890) | | | (860) | | | 312 | |
| Prepaid expenses and other assets | (445) | | | (693) | | | (35) | |
| Accrued expenses and accounts payable | 1,073 | | | (359) | | | 592 | |
| Deferred rental income and other liabilities | (94) | | | (31) | | | 877 | |
| Due from affiliates | 1 | | | 104 | | | (12) | |
| Due to affiliates | (671) | | | 284 | | | (387) | |
| Net cash provided by operating activities | 31,973 | | | 32,546 | | | 32,836 | |
| Cash flows from investing activities: | | | | | |
| Investment in real estate assets and capital expenditures | (2,476) | | | (82,746) | | | (254,949) | |
| Investment in marketable securities | (3,946) | | | (10,112) | | | (1,269) | |
| Proceeds from sale and maturities of marketable securities | 3,919 | | | 811 | | | 1,202 | |
| Investment in CIM UII Onshore | (50,000) | | | 0 | | | 0 | |
| Distributions of capital from investment in CIM UII Onshore | 660 | | | 0 | | | 0 | |
| Net proceeds from disposition of real estate assets | 15,909 | | | 88,080 | | | 47,660 | |
| Payment of property escrow deposits | 0 | | | (1,700) | | | (5,240) | |
| Refund of property escrow deposits | 0 | | | 1,700 | | | 5,740 | |
| Proceeds from the settlement of insurance claims | 204 | | | 498 | | | 0 | |
| Net cash used in investing activities | (35,730) | | | (3,469) | | | (206,856) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of common stock | 20,976 | | | 95,942 | | | 167,608 | |
| Offering costs on issuance of common stock | (3,332) | | | (5,487) | | | (7,908) | |
| Redemptions of common stock | (95,375) | | | (95,388) | | | (48,250) | |
| Distributions to stockholders | (14,646) | | | (16,816) | | | (14,399) | |
| Proceeds from credit facility and notes payable | 127,000 | | | 63,000 | | | 206,000 | |
| Repayments of credit facility and notes payable | (27,240) | | | (69,000) | | | (127,275) | |
| | | | | |
| | | | | |
| Deferred financing costs paid | (10) | | | (42) | | | (187) | |
| | | | | |
| Distributions to noncontrolling interests | (64) | | | (68) | | | (43) | |
| Change in escrowed stockholder proceeds liability | (50) | | | 50 | | | 0 | |
| Net cash provided by (used in) financing activities | 7,259 | | | (27,809) | | | 175,546 | |
| Net increase in cash and cash equivalents and restricted cash | 3,502 | | | 1,268 | | | 1,526 | |
| Cash and cash equivalents and restricted cash, beginning of period | 5,718 | | | 4,450 | | | 2,924 | |
| Cash and cash equivalents and restricted cash, end of period | $ | 9,220 | | | $ | 5,718 | | | $ | 4,450 | |
| Reconciliation of cash and cash equivalents and restricted cash to the consolidated balance sheets: | | | | | |
| Cash and cash equivalents | $ | 8,805 | | | $ | 5,111 | | | $ | 3,644 | |
| Restricted cash | 415 | | | 607 | | | 806 | |
| Total cash and cash equivalents and restricted cash | $ | 9,220 | | | $ | 5,718 | | | $ | 4,450 | |
The accompanying notes are an integral part of these consolidated financial statements.
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BUSINESS
CIM Income NAV, Inc. (the “Company”) is a monthly priced perpetual life non-exchange traded real estate investment trust (“REIT”) formed as a Maryland corporation on July 27, 2010 that qualified as a REIT for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2012. Substantially all of the Company’s business is conducted through CIM Income NAV Operating Partnership, LP, a Delaware limited partnership (“CIM Income NAV OP”), of which the Company is the sole general partner, and owns, directly or indirectly, 100% of the partnership interests. The Company is externally managed by CIM Income NAV Management, LLC, a Delaware limited liability company (“CIM Income NAV Management”), which is an affiliate of CIM Group, LLC (“CIM”). CIM is a community-focused real estate and infrastructure owner, operator, lender and developer. Headquartered in Los Angeles, California, CIM has offices across the United States and in Tokyo, Japan.
CCO Group, LLC owns and controls CIM Income NAV Management, the Company’s advisor, and is the indirect owner of CCO Capital, LLC (“CCO Capital”), the Company’s dealer manager, and CREI Advisors, LLC (“CREI Advisors”), the Company’s property manager. CCO Group, LLC and its subsidiaries (collectively, “CCO Group”) serve as the Company’s sponsor and as a sponsor to CIM Real Estate Finance Trust, Inc. (“CMFT”).
On December 6, 2011, the Company commenced its initial public offering (the “Initial Offering”) on a “best efforts” basis of $4.0 billion in shares of common stock, consisting of $3.5 billion in shares in the primary offering (the “Primary Offering”) and $500.0 million in shares pursuant to a distribution reinvestment plan (the “DRIP”). On August 26, 2013, the Company commenced its first follow-on offering (the “First Follow-on Offering”), pursuant to which the Company offered up to $4.0 billion in shares of common stock, consisting of $3.5 billion in shares in the Primary Offering and $500.0 million in shares pursuant to the DRIP. As part of the First Follow-on Offering, the Company designated the existing shares of the Company’s common stock that were sold prior to such date to be Wrap Class shares (“W Shares”) of common stock and registered 2 new classes of the Company’s common stock, Advisor Class shares (“A Shares”) and Institutional Class shares (“I Shares”). On February 10, 2017, the Company commenced its second follow-on offering (the “Second Follow-on Offering”), pursuant to which the Company offered up to $4.0 billion in shares of common stock, consisting of $3.5 billion in shares in the Primary Offering and $500.0 million in shares pursuant to the DRIP. On August 7, 2020, the Company commenced its third follow-on offering, pursuant to which the Company is offering up to $4.0 billion in shares of common stock (the “Third Follow-on Offering” and collectively with the Initial Offering, the First Follow-on Offering and the Second Follow-on offering, the “Offering”), consisting of $3.5 billion in shares in the Primary Offering and $500.0 million in shares pursuant to the DRIP.
On November 27, 2018, the Company amended its charter to, among other things, change the name and designation of its W Shares to Class D Common Stock (the “D Shares”), and its A Shares to Class T Common Stock (the “T Shares”), respectively, and reclassified a portion of its common stock as Class S Common Stock (the “S Shares”), to be offered alongside its D Shares, T Shares and I Shares in its continuous public offering (the “Share Modifications”). The Company is offering to sell any combination of D Shares, T Shares, S Shares and I Shares with a dollar value up to the maximum offering amount. In connection with the Share Modifications, when the Company refers to its share classes in this Annual Report on Form 10-K with respect to dates prior to November 27, 2018 (the “Restructure Date”), the Company is referring to its shares under its prior share structure, and when the Company refers to its share classes in this Annual Report on Form 10-K with respect to dates on or after November 27, 2018, the Company is referring to its shares under its new share structure. See Note 12 — Related-Party Transactions and Agreements to the Company’s consolidated financial statements for detailed information regarding the advisory and dealer manager amendments related to its Share Modifications. As of December 31, 2020, the Company had issued approximately 48.8 million shares of common stock in the Offering, including 3.7 million in shares issued in the DRIP, for gross offering proceeds of $878.2 million before $26.2 million in upfront selling commissions, dealer manager fees and the current portion of stockholder servicing fees and $6.5 million in organization and offering costs. Effective April 1, 2020, the Company modified its Offering and certain other features of the Company from a daily to a monthly NAV REIT. As part of the change from a daily to a monthly NAV REIT, the Board approved, among other things: (1) a change in the frequency of the NAV calculations from daily to monthly and certain other related changes to the Company’s valuation policies; and (2) adopted an amended share redemption program that provides for redemptions on a monthly basis.
The per share purchase price for each class of common stock varies from month-to-month and, each month, is generally equal to, for each class of common stock, the Company’s net asset value (“NAV”) for such class, divided by the number of shares of that class outstanding, as of the prior month, plus, for T Shares and S Shares sold in the Primary Offering, applicable upfront selling commissions and dealer manager fees. The Company’s NAV per share is calculated monthly as of the last calendar day of each month by an independent fund accountant using a process that incorporates (1) the periodic valuations of each of the Company’s real estate assets and related liabilities by the Company’s independent valuation expert, (2) ongoing assessment by the valuation expert of the estimated impact of any events that require adjustment to the most recent valuations determined by the valuation expert, (3) updates in the price of liquid assets for which third-party market quotes are available,
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(4) valuations of any securities or other assets for which market quotes are not available, (5) valuation of the Company’s other assets and liabilities, (6) accruals of the Company’s distributions for each share class, and (7) estimates of monthly accruals, on
a net basis, of operating revenues, expenses, debt service costs and fees. As of December 31, 2020, the NAV per share for D Shares, T Shares, S Shares and I Shares was $16.75, $16.32, $16.30 and $17.04, respectively. The Company’s NAV is not audited or reviewed by its independent registered public accounting firm.
The Company has used substantially all of the net proceeds from the Offering to acquire and operate a diversified portfolio primarily consisting of retail, office and industrial properties that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States. As of December 31, 2020, the Company owned 123 commercial properties, including 2 properties owned through a consolidated joint venture arrangement (the “Consolidated Joint Venture”), comprised of 5.3 million rentable square feet of commercial space located in 34 states, and which was 98.1% leased, including month-to-month agreements, if any. As of December 31, 2020, the Company also owned limited partnership interests with CIM UII Onshore, L.P. (“CIM UII Onshore”), the sole purpose of which is to invest all of its assets in CIM Urban Income Investments, L.P. (“CIM Urban Income”), which is a private institutional fund that acquires, owns and operates substantially stabilized, diversified real estate and real estate-related assets in urban markets primarily located throughout North America.
As a perpetual-life, non-exchange traded REIT, the Company will be selling shares of common stock on a continuous basis and for an indefinite period of time, subject to ongoing regulatory approval of the Company’s filings for additional offerings. The Company will endeavor to take all reasonable actions to avoid interruptions in the continuous offering of shares of common stock. The Company reserves the right to terminate the Offering at any time.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the Consolidated Joint Venture in which the Company has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.
The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE’s operations.
For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a VIE.
A VIE must be consolidated by its primary beneficiary, which is generally defined as the party who has a controlling financial interest in the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE, and the difference between consolidating the VIE and accounting for it using the equity method could be material to the Company’s consolidated financial statements. The Company continually evaluates the need to consolidate any VIEs based on standards set forth in GAAP as described above. As of December 31, 2020 and 2019,
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the Company determined that it had a controlling interest in the Consolidated Joint Venture and therefore met the requirements for consolidation.
Reclassifications
The Company is separately presenting the write-off of uncollectable lease-related receivables of $2,000 for the year ended December 31, 2019, which was previously included in straight-line rental income, net in the consolidated statements of cash flows. This reclassification had no effect on previously reported totals or subtotals.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. The Company considers the period of future benefit of each respective asset to determine the appropriate useful life. The estimated useful lives of the Company’s real estate assets by class are generally as follows: | | | | | | | | |
| Buildings | | 40 years |
| Site improvements | | 15 years |
| Tenant improvements | | Lesser of useful life or lease term |
| Intangible lease assets | | Lease term |
Recoverability of Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to: bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, lease concessions and other factors; a significant decrease in a property’s revenues due to lease terminations; vacancies; co-tenancy clauses; reduced lease rates; changes in anticipated holding periods; or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value is determined using a discounted cash flow analysis and recent comparable sales transactions. During the year ended December 31, 2020, the Company recorded impairment charges of $13.9 million, related to 1 anchored shopping center and 1 retail property due to the carrying value being greater than the estimated fair value of the property, net of selling costs, and 1 anchored shopping center and 3 retail properties, due to tenant bankruptcy. The Company’s impairment assessment as of December 31, 2020 was based on the most current information available to the Company, including expected holding periods. If the Company’s expected holding periods for assets change, subsequent tests for impairment could result in additional impairment charges in the future. The Company cannot provide any assurance that additional material impairment charges with respect to the Company’s real estate assets will not occur during 2021 or in future periods. During the year ended December 31, 2019, the Company recorded impairment charges of $3.1 million, related to 1 anchored shopping center and 5 retail properties, due to the carrying value being greater than the estimated fair value of the property. During the year ended December 31, 2018, the Company recorded impairment charges of $2.3 million, related to 1 anchored shopping center, due to the carrying value being greater than the estimated fair value of the property.
Assets Held for Sale
When a real estate asset is identified by the Company as held for sale, the Company will cease recording depreciation and amortization of the assets related to the property and estimate its fair value, net of selling costs. If, in management’s opinion, the fair value, net of selling costs, of the asset is less than the carrying amount of the asset, an adjustment to the carrying amount is then recorded to reflect the estimated fair value of the property, net of selling costs. As of December 31, 2020, the Company identified 1 property with a fair value of $1.0 million as held for sale. There were 0 assets identified as held for sale as of December 31, 2019.
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Disposition of Real Estate Assets
Gains and losses from dispositions are recognized once the various criteria relating to the terms of sale and any subsequent involvement by the Company with the asset sold are met. A discontinued operation includes only the disposal of a component of an entity and represents a strategic shift that has (or will have) a major effect on an entity’s financial results. The Company’s property dispositions during the years ended December 31, 2020 and 2019 did not qualify for discontinued operations presentation, and thus, the results of the properties that have been sold remain in operating income, and any associated gains or losses from the disposition are included in gain on disposition of real estate, net.
Allocation of Purchase Price of Real Estate Assets
Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings and improvements, and to identified intangible assets and liabilities, consisting of the value of above- and below-market leases and the value of in-place leases and other intangibles, based in each case on their respective fair values. The Company utilizes independent appraisals to assist in the determination of the fair values of the tangible assets of an acquired property (which includes land and buildings). The information in the appraisal, along with any additional information available to the Company’s management, is used in estimating the amount of the purchase price that is allocated to land. Other information in the appraisal, such as building value and market rents, may be used by the Company’s management in estimating the allocation of purchase price to the building and to intangible lease assets and liabilities. The appraisal firm has no involvement in management’s allocation decisions other than providing this market information.
The fair values of above- and below-market lease intangibles are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) an estimate of fair market lease rates for the corresponding in-place leases, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease including, for below-market leases, any bargain renewal periods. The above- and below-market lease intangibles are capitalized as intangible lease assets or liabilities, respectively. Above-market leases are amortized as a reduction to rental income over the remaining terms of the respective leases. Below-market leases are amortized as an increase to rental income over the remaining terms of the respective leases, including any bargain renewal periods. In considering whether or not the Company expects a tenant to execute a bargain renewal option, the Company evaluates economic factors and certain qualitative factors at the time of acquisition, such as the financial strength of the tenant, the remaining lease term, the tenant mix of the leased property, the Company’s relationship with the tenant and the availability of competing tenant space. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above- or below-market lease intangibles relating to that lease would be recorded as an adjustment to rental income.
The fair values of in-place leases include estimates of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rental and other property income which are avoided by acquiring a property with an in-place lease. Direct costs associated with obtaining a new tenant include leasing commissions, legal and other related expenses and are estimated in part by utilizing information obtained from independent appraisals and management’s consideration of current market costs to execute a similar lease. The intangible values of opportunity costs, which are calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease, are capitalized as intangible lease assets and are amortized to expense over the remaining term of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
The Company may acquire certain properties subject to contingent consideration arrangements that may obligate the Company to pay additional consideration to the seller based on the outcome of future events. Additionally, the Company may acquire certain properties for which it funds certain contingent consideration amounts into an escrow account pending the outcome of certain future events. The outcome may result in the release of all or a portion of the escrow funds to the Company or the seller or a combination thereof. The determination of the amount of contingent consideration arrangements is based on the probability of several possible outcomes as identified by management.
The Company estimates the fair value of assumed mortgage notes payable based upon indications of current market pricing for similar types of debt financing with similar maturities. Assumed mortgage notes payable will initially be recorded at their estimated fair value as of the assumption date, and any difference between such estimated fair value and the mortgage note’s outstanding principal balance will be amortized or accreted to interest expense over the term of the respective mortgage note payable.
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The determination of the fair values of the real estate assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables. The use of alternative estimates may result in a different allocation of the Company’s purchase price, which could materially impact the Company’s results of operations.
During the years ended December 31, 2020, 2019 and 2018, all real estate acquisitions qualified as asset acquisitions and, as such, acquisition-related fees and certain acquisition-related expenses related to these asset acquisitions are capitalized and allocated to tangible and intangible assets and liabilities, as described above.
Investment in Marketable Securities
Investment in marketable securities consists primarily of the Company’s investment in corporate and government debt securities. The Company determines the appropriate classification for debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. As of December 31, 2020, the Company classified its investments as available-for-sale as the Company is not actively trading the securities; however, the Company may sell them prior to their maturity. These investments are carried at their estimated fair value with unrealized gains and losses reported in other comprehensive (loss) income.
The Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), as further described in “Recent Accounting Pronouncements,” on January 1, 2020. The Company monitors its available-for-sale securities for impairments. A loss is recognized when the Company determines that a decline in the estimated fair value of a security below its amortized cost has resulted from a credit loss or other factors. The Company records impairments related to credit losses through an allowance for credit losses. However, the allowance is limited by the amount that the fair value is less than the amortized cost basis. The Company considers many factors in determining whether a credit loss exists, including, but not limited to, the extent to which the fair value is less than the amortized cost basis, recent events specific to the security, industry or geographic area, the payment structure of the security, the failure of the issuer of the security to make scheduled interest or principal payments, and external credit ratings and recent changes in such ratings. The analysis of determining whether a credit loss exists requires significant judgments and assumptions. The use of alternative judgments and assumptions could result in a different conclusion.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method and is recorded in the accompanying consolidated statements of operations in interest and other expense, net. Upon the sale of a security, the realized net gain or loss is computed on the specific identification method.
Investment in CIM UII Onshore
As of December 31, 2020, the Company had invested capital of $49.3 million in CIM UII Onshore with a carrying value of $46.7 million, which represents less than 5% ownership of CIM UII Onshore. The Company accounts for its investment under the equity method. The equity method of accounting requires the investment to be initially recorded at cost, including transaction costs incurred to finalize the investment, and subsequently adjusted for the Company’s share of equity in CIM UII Onshore’s earnings and distributions. The Company records its share of CIM UII Onshore’s profits or losses on a quarterly basis as an adjustment to the carrying value of the investment on the Company’s consolidated balance sheet and is recognized as a profit or loss on the consolidated statements of operations. The Company recorded its share of loss of $2.7 million during the year ended December 31, 2020, in the consolidated statements of operations During the year ended December 31, 2020, the Company received $660,000 in dividends, which reduced the invested capital and the carrying amount of the Company’s investment as the dividends are not recognized as dividend income.
Noncontrolling Interest in Consolidated Joint Venture
The Company has a controlling interest in a Consolidated Joint Venture and, therefore, meets the requirements for consolidation. The Company recorded net income of $32,000 and paid distributions of $64,000 to the noncontrolling interest during the year ended December 31, 2020. The Company recorded the noncontrolling interest of $707,000 and $739,000 as of December 31, 2020 and 2019, respectively, on the consolidated balance sheets.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash in bank accounts, as well as investments in highly-liquid money market funds. The Company deposits cash with several high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company (“FDIC”) up to an insurance limit of $250,000. At times, the Company’s cash and cash equivalents may
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
exceed federally insured levels. Although the Company bears risk on amounts in excess of those insured by the FDIC, it has not experienced and does not anticipate any losses due to the high quality of the institutions where the deposits are held.
The Company had $415,000 and $607,000 in restricted cash as of December 31, 2020 and 2019, respectively. Included in restricted cash was $134,000 and $136,000 held by lenders in lockbox accounts as of December 31, 2020 and 2019, respectively. As part of certain debt agreements, rent from certain of the Company’s tenants is deposited directly into a lockbox account, from which funds in excess of the required minimum balance are disbursed on a weekly basis to the Company. Restricted cash as of December 31, 2020 and 2019 also included $281,000 and $421,000, respectively, held in escrow for tenant improvements at a certain property in accordance with the associated lease agreement. In addition, restricted cash included $50,000 of escrowed investor proceeds for which shares of common stock had not been issued as of December 31, 2019. There were 0 such proceeds as of December 31, 2020.
Deferred Financing Costs
Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These costs are amortized to interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. Unamortized deferred financing costs are written off when the associated debt is extinguished or repaid prior to maturity. The presentation of all deferred financing costs, other than those associated with the revolving loan portion of the credit facility, are classified such that the debt issuance costs related to a recognized debt liability are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability rather than as an asset. Debt issuance costs related to securing a revolving line of credit are presented as an asset and amortized ratably over the term of the line of credit arrangement. As such, the Company’s current and corresponding prior period total deferred financing costs, net in the accompanying consolidated balance sheets relate only to the revolving loan portion of the credit facility and the historical presentation, amortization and treatment of unamortized costs are still applicable. As of December 31, 2020 and 2019, the Company had $289,000 and $672,000, respectively, of deferred financing costs, net of accumulated amortization, related to the revolving loan portion of the credit facility. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined the financing will not close.
Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments at fair value. Accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the designation of the derivative instrument. The change in fair value of the derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive loss. The changes in fair value for derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria are recorded as a gain or loss to operations.
Due to Affiliates
CIM Income NAV Management and certain of its affiliates received, and will continue to receive, fees, reimbursements and compensation in connection with services provided relating to the Offering and the acquisition, management and performance of the Company’s assets. As of December 31, 2020 and 2019, $13.8 million and $16.6 million, respectively, was due to CIM Income NAV Management and its affiliates for such services, as discussed in Note 12 — Related-Party Transactions and Arrangements to these consolidated financial statements.
Redeemable Common Stock
The Company has adopted a share redemption program that permits its stockholders to redeem their shares, subject to certain limitations discussed in Note 14 — Stockholders’ Equity to these consolidated financial statements. The Company records the maximum amount that is redeemable under the share redemption program as redeemable common stock outside of permanent equity on its consolidated balance sheets. Redeemable common stock is recorded at the greater of the carrying amount or redemption value each reporting period. Changes in the value from period to period are recorded as an adjustment to capital in excess of par value.
As of July 2020, the Company’s board of directors (the “Board”) determined that monthly redemptions temporarily would be limited to shares whose aggregate value is no more than 0.8% of our aggregate NAV as of the last calendar day of the previous calendar month, and in any calendar quarter, redemptions will be limited to shares whose aggregate value is no more than 2.0% of our aggregate NAV as of the last calendar day of the previous calendar quarter. While no assurances can be made regarding the timing of a return to the redemption plan limits stated in our existing share redemption plan, if at all, the Company is targeting to return to the limits under its amended and restated share redemption program (the “Amended Share Redemption
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Program”) to occur in the third quarter of 2021. As of December 31, 2020 and 2019, the redeemable common stock recorded on the consolidated balance sheets was $10.0 million and $59.3 million, respectively.
Stockholder Servicing Fees
The Company pays CCO Capital stockholder servicing fees, which are calculated on a daily basis in the amount of 1/365th of 0.25%, 0.85% and 0.85% of the NAV per share, respectively, for each class of common stock outstanding for D Shares, T Shares and S Shares, respectively. The Company does not pay a stockholder servicing fee with respect to I Shares.
The stockholder servicing fees are paid monthly in arrears. An estimated liability for future stockholder servicing fees payable to CCO Capital is recognized at the time each share is sold and included in due to affiliates in the consolidated balance sheets with a corresponding decrease to capital in excess of par value. The Company recognized a liability for future fees payable to CCO Capital of $11.9 million and $13.9 million as of December 31, 2020 and 2019, respectively.
Leases
The Company has lease agreements with lease and non-lease components. The Company has elected to not separate non-lease components from lease components for all classes of underlying assets (primarily real estate assets) and will account for the combined components as rental and other property income. Non-lease components included in rental and other property income include certain tenant reimbursements for maintenance services (including common-area maintenance services or “CAM”), real estate taxes, insurance and utilities paid for by the lessor but consumed by the lessee. As a lessor, the Company has further determined that this policy will be effective only on a lease that has been classified as an operating lease and the revenue recognition pattern and timing is the same for both types of components. The Company is not party to any material leases where it is the lessee.
Significant judgments and assumptions are inherent in not only determining if a contract contains a lease, but also the lease classification, terms, payments, and, if needed, discount rates. Judgments include the nature of any options, including if they will be exercised, evaluation of implicit discount rates and the assessment and consideration of “fixed” payments for straight-line rent revenue calculations.
Lease costs represent the initial direct costs incurred in the origination, negotiation and processing of a lease agreement. Such costs include outside broker commissions and other independent third-party costs and are amortized over the life of the lease on a straight-line basis. Costs related to salaries and benefits, supervision, administration, unsuccessful origination efforts and other activities not directly related to completed lease agreements are expensed as incurred. Upon successful lease execution, leasing commissions are capitalized.
Revenue Recognition
Rental and other property income is primarily derived from fixed contractual payments from operating leases and, therefore, is generally recognized on a straight-line basis over the term of the lease, which typically begins the date the tenant takes control of the space. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purpose of this calculation. Variable rental and other property income consists primarily of tenant reimbursements for recoverable real estate taxes and operating expenses, which are included in rental and other property income in the period when such costs are incurred, with offsetting expenses in real estate taxes and property operating expenses, respectively, within the consolidated statements of operations. The Company defers the recognition of variable rental and other property income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
The Company continually reviews whether collection of lease-related receivables, including any straight-line rent, and current and future operating expense reimbursements from tenants are probable. The determination of whether collectability is probable takes into consideration the tenant’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. Upon the determination that the collectability of a receivable is not probable, the Company will record a reduction to rental and other property income for amounts previously recorded and a decrease in the outstanding receivable. Revenue from leases where collection is deemed to be not probable is recorded on a cash basis until collectability becomes probable. Management’s estimate of the collectability of lease-related receivables is based on the best information available at the time of estimate. The Company does not use a general reserve approach and lease-related receivables are adjusted and taken against rental and other property income only when collectability becomes not probable.
During the year ended December 31, 2020, the Company identified certain tenants where collection was no longer considered probable. For these tenants, the Company made the determination to record revenue on a cash basis and wrote off
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
total outstanding receivables of $1.4 million for the year ended December 31, 2020, which included $158,000 of straight-line rental income and $235,000 related to certain tenant reimbursements. These write offs reduced rental and other property income during the year ended December 31, 2020.
Income Taxes
The Company elected to be taxed, and currently qualifies, as a REIT for federal income tax purposes beginning with our taxable year ended December 31, 2012. The Company generally is not subject to federal corporate income tax to the extent it distributes its taxable income to its stockholders, and so long as it, among other things, distributes at least 90% of its annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the Company maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.
(Loss) Earnings and Distributions Per Share
The Company has 4 classes of common stock with nonforfeitable dividend rights that are determined based on a different NAV for each class. Accordingly, the Company utilizes the two-class method to determine its earnings per share, which can result in different earnings per share for each of the classes. Under the two-class method, earnings per share of each class of common stock are computed by dividing the sum of the distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of shares for each class of common stock for the respective period. Diluted income per share, when applicable, considers the effect of any potentially dilutive share equivalents, of which the Company had 0ne for each of the years ended December 31, 2020, 2019 or 2018. Distributions per share are calculated based on the authorized monthly distribution rate. Prior to April 1, 2020, distributions were calculated based on the authorized daily distribution rate.
Offering and Related Costs
CIM Income NAV Management funds all of the organization and offering costs associated with the sale of the Company’s common stock (excluding upfront selling commissions, dealer manager fees and ongoing stockholder servicing fees) and is reimbursed for such costs up to 0.75% of gross proceeds from the Offering, excluding upfront selling commissions and dealer manager fees, as applicable, charged on D Shares, T Shares and S Shares sold in the Primary Offering. As of December 31, 2020, CIM Income NAV Management, or its affiliates, had paid organization and offering costs in excess of the 0.75% in connection with the Offering. These excess costs were not included in the financial statements of the Company because such costs were not a liability of the Company as they exceeded 0.75% of gross proceeds from the Offering. As the Company raises additional proceeds from the Offering, these excess costs may become payable to CIM Income NAV Management.
Reportable Segments
The Company’s commercial real estate assets primarily consist of single-tenant, necessity commercial properties, which are leased to creditworthy tenants under long-term net leases and provide current operating cash flow. The commercial properties are geographically diversified throughout the United States and have similar economic characteristics. The Company’s management evaluates operating performance on an overall portfolio level; therefore the Company’s properties are 1 reportable segment.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on the Company’s accounting and reporting. Except as otherwise stated below, the Company is currently evaluating the effect that certain new accounting requirements may have on the Company’s accounting and related reporting and disclosures in the Company’s consolidated financial statements.
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, which was subsequently amended by ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (“ASU 2018-19”), in November 2018. Subsequently, the FASB issued ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10, ASU No. 2019-11 and ASU No. 2020-02 to provide additional guidance on the credit losses standard. ASU 2016-13 and the related updates are intended to improve financial reporting requiring more timely recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held-for-investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology under current GAAP. ASU 2018-19 clarified that receivables arising from operating leases are not within the scope of Topic 326. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASU No. 2016-02, Leases (Topic 842) (“ASC 842”). ASU 2016-13 and ASU 2018-19 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted ASU 2016-13 during the first quarter of fiscal year 2020, and has concluded that there is no material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This ASU amends and removes several disclosure requirements including the valuation processes for Level 3 fair value measurements. ASU 2018-13 also modifies some disclosure requirements and requires additional disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and requires the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The provisions of ASU 2018-13 are effective January 1, 2020 using a prospective transition method for amendments effecting changes in unrealized gains and losses, significant unobservable inputs used to develop Level 3 fair value measurements and narrative description on uncertainty of measurements. The remaining provisions of ASU 2018-13 are to be applied retrospectively, and early adoption is permitted. The Company adopted ASU 2018-13 during the first quarter of fiscal year 2020, and has concluded that there is no material impact on its consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”). The guidance changes the guidance for determining whether a decision-making fee is a variable interest. Under the new ASU, indirect interests held through related parties under common control will now be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. Such indirect interests were previously treated the same as direct interests. ASU 2018-17 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted ASU 2018-17 during the first quarter of fiscal year 2020, and has concluded that there is no material impact on its consolidated financial statements.
In April 2020, the FASB issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Due to the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, many lessors may be required to provide rent deferrals and other lease concessions to lessees. While the lease modification guidance in ASC 842 addresses routine changes to lease terms resulting from negotiations between the lessee and the lessor, this guidance did not contemplate concessions being so rapidly executed to address the sudden liquidity constraints of some lessees arising from COVID-19 related impacts. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows the Company, if certain criteria have been met, to bypass the lease by lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances.
The Company has elected to apply this guidance to avoid performing a lease by lease analysis for the lease concessions that (1) were granted as relief due to COVID-19 related impacts and (2) result in the cash flows remaining substantially the same or less than the original contract and will account for these lease concessions as if no changes were made to the leases. During the year ended December 31, 2020, the Company provided lease concessions, in the form of rent deferrals or rent abatements, to certain tenants in response to the impact of the COVID-19 pandemic on those tenants. As of December 31, 2020, the Company had granted rent deferrals with an aggregate deferral amount of $539,000. The deferral of rental payments affects the timing, but not the amount, of the lease payments and resulted in an increase of $539,000 to the Company’s lease related receivables balance as of December 31, 2020. Additionally, as of December 31, 2020, the Company had granted rental abatements of $218,000.
In addition, the Company entered into lease amendments during the year ended December 31, 2020 that provided for lease concessions, through rent abatements or rent deferrals, that represented substantive changes to the consideration in the original lease. These lease amendments extended the lease periods to 36 months. For these leases, the Company applied the lease modification accounting framework pursuant to ASC 842. As of December 31, 2020, these lease amendments resulted in rent abatements of $400,000.
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of March 24, 2021, the Company has collected approximately 99% of rental payments billed to tenants during the three months ended December 31, 2020.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848) (“ASU 2021-01”). The amendments in ASU 2021-01 clarify that certain optional expedients and exceptions for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of the discontinuation of the use of LIBOR as a benchmark interest rate due to reference rate reform. ASU 2021-01 is effective immediately for all entities with the option to apply retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, and can be applied prospectively to any new contract modifications made on or after January 7, 2021. The Company currently uses LIBOR as its benchmark interest rate for its derivative instruments, and has not entered into any new contracts on or after the effective date of ASU 2021-01. The Company is evaluating the impact of this ASU’s adoption, and does not believe this ASU will have a material impact on its consolidated financial statements.
NOTE 3 — FAIR VALUE MEASUREMENTS
GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 — Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:
Credit facility and notes payable — The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of the measurement date. Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs. These financial instruments are valued using Level 2 inputs. As of December 31, 2020, the estimated fair value of the Company’s debt was $451.0 million, compared to a carrying value of $450.7 million. As of December 31, 2019, the estimated fair value of the Company’s debt was $351.2 million, compared to a carrying value of $351.0 million.
Marketable securities — The Company’s marketable securities are carried at fair value and are valued using Level 1 inputs. The estimated fair value of the Company’s marketable securities are based on quoted market prices that are readily and regularly available in an active market.
Derivative instruments — The Company’s derivative instruments are comprised of interest rate swaps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the respective counterparties.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. However, as of December 31, 2020 and 2019, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Other financial instruments — The Company considers the carrying values of its cash and cash equivalents, restricted cash, tenant receivables, accrued expenses and accounts payable, other liabilities, due to affiliates and distributions payable to approximate their fair values because of the short period of time between their origination and their expected realization as well as their highly-liquid nature. Due to the short-term maturities of these instruments, Level 1 inputs are utilized to estimate the fair value of these financial instruments.
Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, upon disposition of the financial assets and liabilities. As of December 31, 2020 and 2019, there have been no transfers of financial assets or liabilities between fair value hierarchy levels.
Items Measured at Fair Value on a Recurring Basis
In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2020 and 2019 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant
Unobservable Inputs |
| | December 31, 2020 | | (Level 1) | | (Level 2) | | (Level 3) |
| Financial asset: | | | | | | | | |
| | | | | | | | |
| Marketable securities | | $ | 15,496 | | | $ | 15,496 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | |
| Financial liabilities: | | | | | | | | |
| Interest rate swaps | | $ | (8,509) | | | $ | 0 | | | $ | (8,509) | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant
Unobservable Inputs |
| | December 31, 2019 | | (Level 1) | | (Level 2) | | (Level 3) |
| Financial asset: | | | | | | | | |
| Interest rate swaps | | $ | 34 | | | $ | 0 | | | $ | 34 | | | $ | 0 | |
| Marketable securities | | 15,002 | | | 15,002 | | | 0 | | | 0 | |
| Total financial assets | | $ | 15,036 | | | $ | 15,002 | | | $ | 34 | | | $ | 0 | |
| Financial liabilities: | | | | | | | | |
| Interest rate swaps | | $ | (4,917) | | | $ | 0 | | | $ | (4,917) | | | $ | 0 | |
Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)
Certain financial and nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The Company’s process for identifying and recording impairment related to real estate assets and intangible assets is discussed in Note 2 — Summary of Significant Accounting Policies.
As discussed in Note 4 — Real Estate Assets, during the year ended December 31, 2020, real estate assets related to 1 anchored shopping center and 3 retail properties were impaired due to tenant bankruptcy. Additionally, real estate assets related to 1 anchored shopping center and 1 retail property were deemed to be impaired, due to the carrying values being greater than the estimated fair values of the properties, net of selling costs. The carrying value was reduced to an estimated fair value of 40.1 million, resulting in impairment charges of 13.9 million. During the year ended December 31, 2019, real estate assets related to 1 anchored shopping center and 5 retail properties were deemed to be impaired due to the carrying values being greater than the estimated fair values of the properties. The carrying value was reduced to an estimated fair value of $15.5 million, resulting in impairment charges of $3.1 million. The Company estimates fair values using Level 3 inputs and using a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and to make certain key assumptions, including, but not limited to, the following: (1) terminal capitalization rates; (2) discount rates; (3) the number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions, including the number of months to re-lease, market rental income and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and the future performance
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
and sustainability of the Company’s tenants. The Company determined that the selling prices used to determine the fair values were Level 2 inputs.
The following summarizes the ranges of discount rates and terminal capitalization rates used for the Company’s impairment test for the real estate assets during the year ended December 31, 2020:
| | | | | | | | | | | |
| Year Ended December 31, 2020 | |
| Discount Rate | | Terminal Capitalization Rate | |
| 7.87% - 9.69% | | 7.37% - 9.19% | |
The following table presents the impairment charges by asset class recorded during the years ended December 31, 2020, 2019 and 2018(in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Asset class impaired: | | | | | | |
| Land | | $ | 2,607 | | | $ | 329 | | | $ | 454 | |
| Buildings and improvements | | 8,889 | | | 2,227 | | | 1,000 | |
| Intangible lease assets | | 2,358 | | | 570 | | | 1,176 | |
| Intangible lease liabilities | | (3) | | | (36) | | | (363) | |
| Total impairment loss | | $ | 13,851 | | | $ | 3,090 | | | $ | 2,267 | |
NOTE 4 — REAL ESTATE ASSETS
2020 Property Acquisitions
During the year ended December 31, 2020, the Company did 0t acquire any properties.
2020 Property Dispositions
During the year ended December 31, 2020, the Company disposed of 2 anchored shopping centers and 3 retail properties for an aggregate gross sales price of $16.8 million, resulting in net proceeds of $15.9 million after closing costs and a net gain of $627,000. The Company has no continuing involvement with these properties. The gain on sale of real estate is included in gain on disposition of real estate, net in the consolidated statements of operations.
2020 Impairment
The Company performs quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate that the carrying value of certain of its real estate assets may not be recoverable. See Note 2 — Summary of Significant Accounting Policies for a discussion on the Company’s accounting policies regarding impairment of real estate assets. During the year ended December 31, 2020, 2 anchored shopping center and 4 retail properties totaling approximately 329,000 square feet with a combined carrying value of $54.0 million were deemed to be impaired and their carrying values were reduced to an estimated combined fair value of $40.1 million, resulting in impairment charges of $13.9 million, which were recorded in the consolidated statements of operations. See Note 3 — Fair Value Measurements for a further discussion on these impairment charges.
Consolidated Joint Venture
As of December 31, 2020, the Company had an interest in a Consolidated Joint Venture that owns and manages 2 properties, with total assets of $7.0 million, which included $7.2 million of land, building and improvements, and $641,000 of intangible assets, net of accumulated depreciation and amortization of $924,000, and total liabilities of $106,000. The Consolidated Joint Venture did 0t have any debt outstanding as of December 31, 2020. The Company has the ability to control operating and financial policies of the Consolidated Joint Venture. There are restrictions on the use of these assets as the Company would generally be required to obtain the approval of the partner (the “Consolidated Joint Venture Partner”) in accordance with the joint venture agreement for any major transactions. The Company and the Consolidated Joint Venture Partner are subject to the provisions of the joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2019 Property Acquisitions
During the year ended December 31, 2019, the Company acquired a 100% interest in 4 commercial properties for an aggregate purchase price of $78.6 million (the “2019 Asset Acquisitions”), which included $287,000 of external acquisition-related expenses that were capitalized. The Company funded the 2019 Asset Acquisitions with net proceeds from the Offering, real estate dispositions and available borrowings.
The following table summarizes the purchase price allocation for the 2019 Asset Acquisitions purchased during the year ended December 31, 2019 (in thousands): | | | | | |
| 2019 Asset Acquisitions |
| Land | $ | 17,998 | |
| Buildings and improvements | 54,373 | |
Acquired in-place leases and other intangibles (1) | 6,575 | |
| |
Intangible lease liabilities (2) | (313) | |
| Total purchase price | $ | 78,633 | |
______________________ (1)The weighted average amortization period for acquired in-place leases and other intangibles was 14.1 years.
(2)The weighted average amortization period for acquired intangible lease liabilities was 15.0 years.
2019 Property Dispositions
During the year ended December 31, 2019, the Company disposed of 25 retail properties and 3 industrial properties for an aggregate gross sales price of $91.1 million, resulting in net proceeds of $88.1 million after closing costs and a net gain of $10.2 million. The Company has no continuing involvement with these properties. The gain on sale of real estate is included in gain on disposition of real estate, net in the consolidated statements of operations.
2019 Impairment
During the year ended December 31, 2019, 1 anchored shopping center and 5 retail properties totaling approximately 129,000 square feet with a combined carrying value of $18.6 million were deemed to be impaired and their carrying values were reduced to an estimated fair value of $15.5 million, resulting in impairment charges of $3.1 million, which were recorded in the consolidated statements of operations. See Note 3 — Fair Value Measurements for a further discussion on these impairment charges.
2018 Property Acquisitions
During the year ended December 31, 2018, the Company acquired a 100% interest in 19 commercial properties for an aggregate purchase price of $254.2 million (the “2018 Acquisitions”), which included $1.4 million of external acquisition-related expenses that were capitalized. The Company funded the 2018 Acquisitions with net proceeds from the Offering and available borrowings.
The following table summarizes the purchase price allocation for the 2018 Acquisitions (in thousands): | | | | | |
| 2018 Asset Acquisitions |
| Land | 28,293 | |
| Building and improvements | 193,658 | |
Acquired in-place leases and other intangibles(1) | 31,279 | |
Acquired above-market leases(2) | 5,707 | |
Intangible lease liabilities(3) | (4,721) | |
| Total purchase price | $ | 254,216 | |
______________________
(1)The weighted average amortization period for acquired in-place leases and other intangibles was 13.7 years.
(2)The weighted average amortization period for acquired above-market leases was 14.0 years.
(3)The weighted average amortization period for acquired intangible lease liabilities was 17.5 years.
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2018 Property Dispositions
During the year ended December 31, 2018, the Company disposed of 2 anchored shopping centers and 4 retail properties for an aggregate gross sales price of $49.1 million, resulting in net proceeds of $36.4 million after closing costs and the repayment of the $11.3 million fixed rate debt secured by 1 of the disposed properties and a net gain of $1.0 million. The Company has no continuing involvement with these properties. The gain on sale of real estate is included in gain on disposition of real estate, net in the consolidated statements of operations.
2018 Impairment
During the year ended December 31, 2018, 1 anchored shopping center totaling approximately 149,000 square feet with a carrying value of $19.1 million was deemed to be impaired and its carrying value was reduced to an estimated fair value of $16.8 million, resulting in impairment charges of $2.3 million, which were recorded in the consolidated statements of operations. See Note 3 — Fair Value Measurements for a further discussion on these impairment charges.
NOTE 5 — INTANGIBLE LEASE ASSETS AND LIABILITIES
Intangible lease assets and liabilities consisted of the following as of December 31, 2020 and 2019 (in thousands, except weighted average life remaining): | | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| Intangible lease assets: | | | |
| In-place leases and other intangibles, net of accumulated amortization of $27,966 and $23,026, respectively | | | |
| (with a weighted average life remaining of 9.8 years and 14.6 years, respectively) | $ | 65,157 | | | $ | 75,754 | |
| Acquired above-market leases, net of accumulated amortization of $3,938 and $3,118, respectively | | | |
| (with a weighted average life remaining of 11.4 years and 12.7 years, respectively) | 9,678 | | | 10,820 | |
| Total intangible lease assets, net | $ | 74,835 | | | $ | 86,574 | |
| Intangible lease liabilities: | | | |
| Acquired below-market leases, net of accumulated amortization of $4,734 and $4,111, respectively | | | |
| (with a weighted average life remaining of 10.2 years and 20.9 years, respectively) | $ | 12,040 | | | $ | 13,618 | |
| | | |
Amortization of the above-market leases is recorded as a reduction to rental and other property income, and amortization expense for the in-place leases and other intangibles is included in depreciation and amortization in the accompanying consolidated statements of operations. Amortization of below-market leases is recorded as an increase to rental and other property income in the accompanying consolidated statements of operations.
The following table summarizes the amortization related to the intangible lease assets and liabilities for the years ended December 31, 2020, 2019 and 2018 (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| In-place lease and other intangible amortization | | $ | 7,776 | | | $ | 9,029 | | | $ | 8,971 | |
| Above-market lease amortization | | $ | 1,020 | | | $ | 1,104 | | | $ | 959 | |
| Below-market lease amortization | | $ | 1,393 | | | $ | 1,569 | | | $ | 1,501 | |
As of December 31, 2020, the estimated amortization relating to the intangible lease assets and liabilities is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Amortization |
| Year Ending December 31, | | In-Place Leases and Other Intangibles | | Above-Market Leases | | Below-Market Leases |
| 2021 | | $ | 7,397 | | | $ | 1,005 | | | $ | 1,237 | |
| 2022 | | 7,352 | | | 1,005 | | | 1,213 | |
| 2023 | | 7,197 | | | 1,004 | | | 1,203 | |
| 2024 | | 6,835 | | | 943 | | | 1,140 | |
| 2025 | | 6,197 | | | 883 | | | 1,109 | |
| Thereafter | | 30,179 | | | 4,838 | | | 6,138 | |
| Total | | $ | 65,157 | | | $ | 9,678 | | | $ | 12,040 | |
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 6 — INVESTMENT IN CIM UII ONSHORE
On September 27, 2019, the Company executed a subscription agreement (the “Subscription Agreement”) to purchase $50.0 million of limited partnership interests in CIM UII Onshore. CIM UII Onshore’s sole purpose is to invest all of its assets in CIM Urban Income, which is a private institutional fund that acquires, owns and operates substantially stabilized, diversified real estate and real estate-related assets in urban markets primarily located throughout North America. The investment was made by the Company to gain exposure to the urban real assets invested in by CIM Urban Income. The Company’s Subscription Agreement was accepted by the general partner of CIM UII Onshore on September 30, 2019, and the entire $50.0 million of capital was called and funded on March 31, 2020. The Company accounts for its investment using the equity method.
During the year ended December 31, 2020, the Company recognized an equity method net loss of $2.7 million related to its investment. The Company received dividends totaling $660,000 related to its investment during the year ended December 31, 2020, which was recognized as a return of capital. As of December 31, 2020, the carrying value of the Company’s investment was $46.7 million, which represents less than 5% ownership of CIM UII Onshore, and approximates fair value.
NOTE 7 — MARKETABLE SECURITIES
The Company owned marketable securities with an estimated fair value of $15.5 million and $15.0 million as of December 31, 2020 and 2019, respectively. The following is a summary of the Company’s available-for-sale securities as of December 31, 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Available-for-sale securities |
| | Amortized Cost Basis | | Unrealized Gain | | Fair Value |
| U.S. Treasury Bonds | | $ | 6,415 | | | $ | 274 | | | $ | 6,689 | |
| U.S. Agency Bonds | | 1,721 | | | 35 | | | 1,756 | |
| Corporate Bonds | | 6,619 | | | 432 | | | 7,051 | |
| | | | | | |
| | | | | | |
| Total available-for-sale securities | | $ | 14,755 | | | $ | 741 | | | $ | 15,496 | |
The following table provides the activity for the marketable securities during the year ended December 31, 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis | | Unrealized Gain (Loss) | | Fair Value |
| Marketable securities as of January 1, 2020 | | $ | 14,829 | | | $ | 173 | | | $ | 15,002 | |
| Face value of marketable securities acquired | | 3,699 | | | — | | | 3,699 | |
| Premiums and discounts on purchase of marketable securities, net of acquisition costs | | 247 | | | — | | | 247 | |
| Amortization on marketable securities | | (70) | | | — | | | (70) | |
| Sales and maturities of securities | | (3,950) | | | 31 | | | (3,919) | |
| Unrealized gain on marketable securities | | — | | | 537 | | | 537 | |
| Marketable securities as of December 31, 2020 | | $ | 14,755 | | | $ | 741 | | | $ | 15,496 | |
During the year ended December 31, 2020, the Company sold 26 marketable securities for aggregate proceeds of $3.9 million resulting in a loss of $31,000. In addition, the Company recorded an unrealized gain of $537,000 on its investments, which is included in accumulated other comprehensive income (loss) attributable to the Company in the accompanying consolidated statements of changes in equity for the year ended December 31, 2020 and the consolidated balance sheet as of December 31, 2020. The total unrealized holding gain on marketable securities of $741,000 and $173,000 as of December 31, 2020 and 2019, respectively, is included in accumulated other comprehensive income (loss) attributable to the Company in the accompanying consolidated statement of changes in equity.
The scheduled maturities of the Company’s marketable securities as of December 31, 2020 are as follows (in thousands): | | | | | | | | | | | | | | |
| | Available-for-sale securities |
| | Amortized Cost | | Estimated Fair Value |
| Due within one year | | $ | 2,061 | | | $ | 2,074 | |
| Due after one year through five years | | 5,970 | | | 6,327 | |
| Due after five years through ten years | | 5,039 | | | 5,377 | |
| Due after ten years | | 1,685 | | | 1,718 | |
| Total | | $ | 14,755 | | | $ | 15,496 | |
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Actual maturities of marketable securities can differ from contractual maturities because borrowers on certain debt securities may have the right to prepay their respective debt obligations at any time. In addition, factors such as prepayments and interest rates may affect the yields on such securities.
In estimating credit losses, management considers a variety of factors, including (1) whether the Company will be required to sell the impaired security before the recovery of its amortized cost basis, (2) whether the Company expects to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value, and (3) whether the Company expects to recover the entire amortized cost basis of the security. The Company believes that none of the unrealized losses on investment securities are credit losses as management expects the Company will fully recover the entire amortized cost basis of all securities. As of December 31, 2020, the Company had 0 credit losses.
NOTE 8 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risk. During the year ended December 31, 2020, one of the Company’s interest rate swaps matured. As of December 31, 2020, the Company had 8 interest rate swap agreements. The following table summarizes the terms of the Company’s executed interest rate swap agreements designated as hedging instruments as of December 31, 2020 and 2019 (dollar amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Outstanding Notional Amount as of December 31, 2020 | | | | | | | | Fair Value of Liabilities |
| Balance Sheet Location | | | Interest Rates(1) | | Effective Dates | | Maturity Dates | | December 31, 2020 | | December 31, 2019 |
| | | | | | | | | | | | | |
Interest Rate Swaps(2) | Derivative liabilities, deferred rental income and other liabilities | | $ | 281,465 | | | 3.46% to 4.99% | | 12/16/2016 to 9/30/2019 | | 9/13/2021 to 9/6/2022 | | $ | (8,509) | | | $ | (4,917) | |
____________________________________
(1)The interest rates consist of the underlying index swapped to a fixed rate and the applicable interest rate spread as of December 31, 2020.
(2)As of December 31, 2019, interest rate swaps with an aggregate outstanding notional amount of $49.2 million were in an asset position with an aggregate fair value balance of $34,000 and were included in prepaid expenses and other assets in the accompanying consolidated balance sheets.
Additional disclosures related to the fair value of the Company’s derivative instruments are included in Note 3 — Fair Value Measurements. The notional amount under the interest rate swap agreements is an indication of the extent of the Company’s involvement in each instrument, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges in order to hedge the variability of the anticipated cash flows on its variable rate debt. The change in fair value of the derivative instruments that are designated as hedges is recorded in other comprehensive loss, with a portion of the amount subsequently reclassified to interest expense as interest payments are made on the Company’s variable rate debt. For the year ended December 31, 2020, the amounts of losses reclassified from other comprehensive (loss) income as an increase to interest expense was $4.7 million. For the years ended December 31, 2019 and 2018, the amount of gains reclassified from other comprehensive (loss) income as a decrease to interest expense was $167,000 and $294,000, respectively. The total unrealized holding loss on interest rate swaps of $8.5 million and $4.9 million as of December 31, 2020 and 2019, respectively, is included in accumulated other comprehensive income (loss) attributable to the Company in the accompanying consolidated statement of changes in equity. During the next 12 months, the Company estimates that an additional $5.7 million will be reclassified from total other comprehensive loss as an increase to interest expense. The Company includes cash flows from interest rate swap agreements in cash flows provided by operating activities on the consolidated statements of cash flows, as the Company’s accounting policy is to present cash flows from hedging instruments in the same category in the consolidated statements of cash flows as the category for cash flows from the hedged items.
The Company has agreements with each of its derivative counterparties that contain provisions whereby, if the Company defaults on certain of its unsecured indebtedness, the Company could also be declared in default on its derivative obligations resulting in an acceleration of payment. If the Company had breached any of these provisions, it could have been required to settle its obligations, under the agreements at an aggregate termination value, inclusive of interest payments of $8.7 million, which includes accrued interest, at December 31, 2020. In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
credit quality of the Company and the respective counterparty. There were no termination events or events of default related to the interest rate swaps as of December 31, 2020.
NOTE 9 — CREDIT FACILITY AND NOTES PAYABLE
As of December 31, 2020, the Company had $449.4 million of debt outstanding, including net deferred financing costs, with a weighted average years to maturity of 1.4 years and a weighted average interest rate of 3.66%. The weighted average years to maturity is computed using the scheduled repayment date as specified in each loan agreement where applicable. The weighted average interest rate is computed using the interest rate in effect until the scheduled repayment date. Should a loan not be repaid by its scheduled repayment date, the applicable interest rate will increase as specified in the respective loan agreement until the extended maturity date. The following table summarizes the debt balances as of December 31, 2020 and 2019, and the debt activity for the year ended December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | During the Year Ended December 31, 2020 | | |
| | | Balance as of
December 31, 2019 | | Debt Issuances, Net (1) | | Repayments | | Amortization | | Balance as of
December 31, 2020 |
| Credit facility | | $ | 212,500 | | | $ | 127,000 | | | $ | (18,000) | | | $ | — | | | $ | 321,500 | |
| Fixed rate debt | | 138,459 | | | 0 | | | (9,240) | | | — | | | 129,219 | |
| | | | | | | | | | |
| Total debt | | 350,959 | | | 127,000 | | | (27,240) | | | — | | | 450,719 | |
Deferred costs - credit facility(2) | | (1,023) | | | 0 | | | — | | | 378 | | | (645) | |
| Deferred costs - fixed rate debt | | (997) | | | 0 | | | — | | | 301 | | | (696) | |
| Total debt, net | | $ | 348,939 | | | $ | 127,000 | | | $ | (27,240) | | | $ | 679 | | | $ | 449,378 | |
____________________________________(1)Includes deferred financing costs incurred during the period.
(2)Deferred costs related to the term portion of the credit facility, as discussed in Note 2 — Summary of Significant Accounting Policies.
Notes Payable
As of December 31, 2020, the Company had fixed rate debt outstanding of $129.2 million, including $69.0 million of variable rate debt that is fixed through interest rate swap agreements, which has the effect of fixing the variable interest rate per annum through the maturity date of the variable rate debt. The fixed rate debt has interest rates ranging from 3.56% to 4.17% per annum and as of December 31, 2020, the fixed rate debt had a weighted average interest rate of 3.93%. The fixed rate debt outstanding matures on various dates from October 2021 to February 2025. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the fixed rate debt outstanding was $228.8 million as of December 31, 2020. Each of the mortgage notes payable comprising the fixed rate debt is secured by the respective properties on which the debt was placed.
Credit Facility
The Company is party to a second amended and restated credit agreement (the “Second Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent (“JPMorgan Chase”), that provides for borrowings up to $425.0 million, which is comprised of up to $212.5 million in unsecured revolving loans (the “Revolving Loans”) and up to $212.5 million in unsecured term loans (the “Term Loans”) (collectively, with the Revolving Loans, the “Credit Facility”). The Term Loans mature on September 6, 2022 and the Revolving Loans mature on September 6, 2021; however, the Company may elect to extend the maturity date for the Revolving Loans for up to 2 six-month periods, but no later than September 6, 2022, subject to satisfying certain conditions contained in the Second Amended Credit Agreement.
Depending upon the type of loan specified and overall leverage ratio, the Credit Facility bears interest at (i) the one-month, two-month, three-month or six-month LIBOR multiplied by the statutory reserve rate (the “Eurodollar Rate”) plus an interest rate spread ranging from 1.70% to 2.20% for Revolving Loans and 1.60% to 2.10% for Term Loans; or (ii) a base rate ranging from 0.70% to 1.20% for Revolving Loans and 0.60% to 1.10% for Term Loans, plus the greater of: (a) JPMorgan Chase’s Prime Rate (as defined in the Second Amended Credit Agreement); (b) the Federal Funds Effective Rate (as defined in the Second Amended Credit Agreement) plus 0.50%; or (c) the one-month LIBOR multiplied by the statutory reserve rate plus 1.0%. As of December 31, 2020, the Revolving Loans outstanding totaled $109.0 million at an interest rate of 2.20%. As of December 31, 2020, the Term Loans outstanding totaled $212.5 million, all of which are subject to interest rate swap agreements (the “Swapped Term Loans”). The interest rate swap agreements have the effect of fixing the Eurodollar Rate per annum of the Swapped Term Loan at an all-in rate of 4.25%. As of December 31, 2020, the Company had $321.5 million
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
outstanding under the Credit Facility at a weighted average interest rate of 3.56% and $103.5 million in unused capacity, subject to borrowing availability. The Company had $32.6 million available borrowings as of December 31, 2020.
The Second Amended Credit Agreement contains provisions with respect to covenants, events of default and remedies customary for facilities of this nature. In particular, the Second Amended Credit Agreement requires the Company to maintain a minimum consolidated net worth greater than or equal to the sum of (i) $367.1 million plus (ii) 75% of the equity issued (iii) minus the aggregate amount of any redemptions or similar transaction from the date of the Second Amended Credit Agreement, a leverage ratio less than or equal to 60%, a fixed charge coverage ratio equal to or greater than 1.50, an unsecured debt to unencumbered asset value ratio equal to or less than 60%, an unsecured debt service coverage ratio greater than 1.75, a secured debt ratio equal to or less than 40%, and the amount of secured debt that is recourse debt at no greater than 15% of total asset value. As of December 31, 2020, the Company believes it was in compliance with the financial covenants of the Second Amended Credit Agreement, as well as the financial covenants under the Company’s various fixed and variable rate debt agreements.
Maturities
As of December 31, 2020, the Company had $109.0 million of debt outstanding under the Credit Facility maturing on September 6, 2021 and $20.4 million of fixed rate debt maturing on October 1, 2021. For the debt outstanding under the Credit Facility, the Company expects to extend the maturity date for the Revolving Loans for up to two six-month periods, subject to satisfying certain conditions contained in the Second Amended Credit Agreement. For the fixed rate debt, the Company expects to use cash on hand or entering into new financing arrangements in order to meet its debt obligations, which management believes is probable based on the current loan-to-value ratios, the occupancy of the Company’s properties and assessment of the lending environment. The Company believes cash on hand, net cash provided by operations and the entry into new financing arrangements will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.
The following table summarizes the scheduled aggregate principal repayments for the Company’s outstanding debt subsequent to December 31, 2020 (in thousands): | | | | | | | | |
| Year Ending December 31, | | Principal Repayments |
| 2021 | | $ | 129,442 | |
| 2022 | | 304,327 | |
| 2023 | | 0 | |
| 2024 | | 0 | |
| 2025 | | 16,950 | |
| Thereafter | | 0 | |
| Total | | $ | 450,719 | |
NOTE 10 — SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Supplemental Disclosures of Non-Cash Investing and Financing Activities: | | | | | |
| Change in accrued dealer manager fees, ongoing stockholder servicing fees, and other offering costs | $ | 613 | | | $ | 3,867 | | | $ | (2,236) | |
| Distributions to stockholders declared and unpaid | $ | 4,887 | | | $ | 2,814 | | | $ | 2,719 | |
| Common stock issued through distribution reinvestment plan | $ | 13,108 | | | $ | 16,201 | | | $ | 13,774 | |
| Redemptions to stockholders declared and unpaid | $ | 2,082 | | | $ | 0 | | | $ | 0 | |
| Change in fair value of marketable securities | $ | 568 | | | $ | 265 | | | $ | 85 | |
| Change in fair value of interest rate swaps | $ | (3,626) | | | $ | (5,540) | | | $ | (1,044) | |
| Accrued deferred financing costs | $ | 1 | | | $ | 0 | | | $ | 9 | |
| | | | | |
| Supplemental Cash Flow Disclosures: | | | | | |
| Interest paid | $ | 16,115 | | | $ | 14,115 | | | $ | 13,273 | |
| Cash paid for taxes | $ | 197 | | | $ | 179 | | | $ | 184 | |
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation and claims. The Company is not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which the Company’s properties are the subject.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. In addition, the Company may own or acquire certain properties that are subject to environmental remediation. Generally, the seller of the property, the tenant of the property and/or another third party is responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify the Company against future remediation costs. The Company also carries environmental liability insurance on its properties that provides limited coverage for any remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which the Company may be liable. The Company is not aware of any environmental matters which it believes are reasonably likely to have a material effect on its results of operations, financial condition or liquidity.
NOTE 12 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred, and will continue to incur, commissions, fees and expenses payable to CIM Income NAV Management and certain of its affiliates in connection with the Offering, and the acquisition, management and performance of the Company’s assets.
Upfront selling commissions, dealer manager and ongoing stockholder servicing fees
In connection with the Offering, CCO Capital, the Company’s dealer manager, will receive upfront selling commissions and dealer manager fees, and/or an asset-based stockholder servicing fees, as summarized in the table below for each class of common stock: | | | | | | | | | | | | | | | | | | | | |
| | Upfront Selling Commissions | | Dealer Manager Fees | | Ongoing Stockholder Servicing Fees(2) |
D Shares (1) | | 0 | % | | 0 | % | | 0.25 | % |
T Shares (1) | | 3.00 | % | | 0.50 | % | | 0.85 | % |
S Shares (1) | | 3.50 | % | | 0 | % | | 0.85 | % |
| I Shares | | 0 | % | | 0 | % | | 0 | % |
____________________________________ (1)The upfront selling commissions are based on a percentage of the transaction price, which is exclusive of the upfront selling commission, for T Shares and S Shares. Prior to February 28, 2020, there was a 1.50% upfront selling commission payable on D Shares. Effective February 28, 2020, there are 0 upfront selling commissions or dealer manager fees payable on D Shares. The dealer manager fee is based on a percentage of the transaction price for T Shares. Upfront selling commissions and dealer manager fees are deducted directly from the offering price for T Shares and S Shares and paid to CCO Capital. The Company has been advised that CCO Capital intends to reallow 100% of the upfront selling commissions on T Shares and S Shares to participating broker-dealers and may reallow a portion of the dealer manager fee.
(2)The stockholder servicing fees are calculated as a percentage of the NAV per D Share, T Share or S Share, as applicable, and are paid monthly in arrears. CCO Capital, in its sole discretion, may reallow a portion of the stockholder servicing fees to participating broker-dealers. The Company will cease paying the stockholder servicing fees with respect to any D Shares, T Shares or S Shares held in a stockholder’s account when the total upfront selling commissions, dealer manager fees and stockholder servicing fees would exceed, in the aggregate, 8.75% (or, in the case of shares sold through certain participating broker-dealers, a lower limit as set forth in any applicable agreement between the Company’s dealer manager and a participating broker-dealer) of the gross proceeds from the sale of such shares.
Other organization and offering expenses
All other organization and offering expenses associated with the sale of the Company’s common stock (excluding upfront selling commissions, dealer manager fees and the ongoing stockholder servicing fees) are paid for by CIM Income NAV Management or its affiliates and can be reimbursed by the Company up to 0.75% of the aggregate gross offering proceeds, excluding upfront selling commissions and dealer manager fees charged on T Shares and S Shares sold in the Primary Offering. Prior to February 28, 2020, there was a 1.50% upfront selling commission on D Shares. Effective February 28, 2020, there are
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
0 upfront selling commissions on D Shares. As of December 31, 2020, CIM Income NAV Management or its affiliates had paid organization and offering expenses in excess of 0.75% of the gross proceeds from the Offering. These excess amounts were not included in the financial statements of the Company because such amounts were not a liability of the Company as they exceeded 0.75% of gross proceeds from the Offering. As the Company raises additional proceeds from the Offering, these excess amounts may become payable to CIM Income NAV Management or its affiliates.
Advisory fees and expenses
The Company pays CIM Income NAV Management an asset-based advisory fee that is payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 1.10% of the Company’s NAV for each class of common stock. At the request of the Board, CIM Income NAV Management agreed to take 50% of the monthly advisory fee payment from August 2020 through June 30, 2021 in I Shares based on the then current NAV per share of such shares at the time of issuance. During the year ended December 31, 2020, approximately 41,000 Class I Shares were issued for payment of advisory fees, which vested upon issuance, totaling $700,000 for the year ended December 31, 2020 in equity-based payments included in advisory fees and expenses in the consolidated statements of operations.
Operating expenses
The Company reimburses CIM Income NAV Management for the operating expenses it paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse for any amount by which its operating expenses (including the advisory fee) at the end of the four preceding fiscal quarters exceeds the greater of (1) 2% of average invested assets, or (2) 25% of net income other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period.
Acquisition expenses
In addition, the Company reimburses CIM Income NAV Management for all out-of-pocket expenses incurred in connection with the acquisition of the Company’s investments. While most of the acquisition expenses are expected to be paid to third parties, a portion of the out-of-pocket acquisition expenses may be reimbursed to CIM Income NAV Management or its affiliates. Acquisition expenses, together with any acquisition fees paid to third parties for a particular real estate-related asset, will in no event exceed 6% of the gross purchase price of such asset. Other acquisition-related expenses, such as advisor reimbursements, are expensed as incurred and are included in transaction-related expenses in the accompanying consolidated statements of operations.
Performance Fee
As compensation for services provided pursuant to the second amended and restated advisory agreement with CIM Income NAV Management, the Company will also pay CIM Income NAV Management a performance-based fee calculated based on the Company’s annual total return to stockholders for each class of common stock (defined below), payable annually in arrears. The total return to stockholders is defined, for each class of the Company’s common stock, as the change in NAV per share plus distributions per share for such class. For each respective class, the NAV per share is calculated on the last trading day of a calendar year shall be the amount against which changes in NAV per share for such class are measured during the subsequent calendar year. Under the terms of the advisory agreement, in the event that performance fees are earned for any particular period, CIM Income NAV Management will not be obligated to return any portion of such fees previously paid based on the Company’s subsequent performance. Through December 31, 2018, the performance fee was calculated such that for any calendar year in which the total return per share for a particular class exceeded 6% (the “6% Return”), CIM Income NAV Management would receive 25% of the excess total return on such class above the 6% Return allocable to that class, but in no event would the Company pay CIM Income NAV Management more than 10% of the aggregate total return, for that class, for such year. However, in the event the NAV per share of the Company’s D Shares, T Shares and I Shares decreased below the base NAV for the respective share class ($15.00, $16.72 and $16.82 for the D Shares, T Shares and I Shares, respectively) (the “Base NAV”), the performance fee for a respective class was not calculated on any increase in NAV up to the Base NAV for the respective share class. In addition, the performance fee was not payable with respect to any calendar year in which the NAV per share as of the last business day of the calendar year (the “Ending NAV”) for the respective share class was less than the Base NAV of that class. The Base NAV of any share class was subject to downward adjustment in the event that the Company’s Board, including a majority of the independent directors, determined that such an adjustment was necessary to provide an appropriate incentive to CIM Income NAV Management to perform in a manner that sought to maximize stockholder value and was in the best interests of the Company’s stockholders. In the event of any stock dividend, stock split, recapitalization or similar change in the Company’s capital structure, the Base NAV for the respective share class was to be ratably adjusted to reflect the effect of any such event. The Company did not reach the 6% Return during the year ended December 31, 2018 and, therefore, no performance fee was paid during the year.
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Starting with the period beginning on January 1, 2019, the performance-based fee is equal to 12.5% of the Total Return for each class of common stock, subject to a 5% Hurdle Amount, a High Water Mark and a Catch-Up (each term as defined in the advisory agreement), payable annually in arrears. The Company did not reach the 5% Hurdle Amount during the years ended December 31, 2020 and 2019.
The Company incurred commissions, fees and expense reimbursements as shown in the table below for services provided by CIM Income NAV Management and its affiliates related to the services described above during the periods indicated (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Upfront selling commissions | $ | 396 | | | $ | 1,488 | | | $ | 2,797 | |
Stockholder servicing fees (1) | $ | 2,574 | | | $ | 2,910 | | | $ | 1,126 | |
Dealer manager fees (1) | $ | 69 | | | $ | 267 | | | $ | 2,609 | |
| Organization and offering expense reimbursement | $ | 253 | | | $ | 830 | | | $ | 1,339 | |
| Acquisition expense reimbursement | $ | 714 | | | $ | 1,217 | | | $ | 1,722 | |
| Advisory fee | $ | 6,382 | | | $ | 7,902 | | | $ | 5,858 | |
| Operating expense reimbursement | $ | 861 | | | $ | 2,388 | | | $ | 2,652 | |
| | | | | |
______________________ (1)Amounts are calculated for the respective period in accordance with the dealer manager agreement and exclude the estimated liability for the future fees payable to CCO Capital of $11.9 million and $13.9 million as of December 31, 2020 and 2019, respectively, which are included in due to affiliates in the consolidated balance sheets, with a corresponding decrease to capital in excess of par value, as described in Note 2 — Summary of Significant Accounting Policies.
Due to/from Affiliates
As of December 31, 2020 and 2019, $13.8 million and $16.6 million, respectively, was due to CIM Income NAV Management or its affiliates primarily related to the estimated liability for current and future stockholder servicing fees, the reimbursement of organization and offering expenses, and advisory fees, which were included in amounts due to affiliates on the consolidated balance sheets.
As of December 31, 2020 and 2019, $7,000 and $8,000 was due from CIM Income NAV Management or its affiliates related to amounts received by affiliates of the advisor which were due to the Company.
CIM UII Onshore Investment
On September 27, 2019, the Company executed a Subscription Agreement to purchase $50.0 million of limited partnership interests of CIM UII Onshore, which was accepted by the general partner of CIM UII Onshore on September 30, 2019. As of December 31, 2020, the limited partnership interest in CIM UII Onshore had a carrying value of $46.7 million. Both CIM UII Onshore and CIM Urban Income were formed by CIM, and CIM controls the general partner of both CIM UII Onshore and CIM Urban Income.
NOTE 13 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged and may in the future engage CIM Income NAV Management or its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issuance, as well as other administrative responsibilities for the Company including accounting services and stockholder relations. As a result of these relationships, the Company is dependent upon CIM Income NAV Management or its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.
NOTE 14 — STOCKHOLDERS’ EQUITY
As of December 31, 2020, the Company was authorized to issue up to 500,000,000 shares of capital stock. Of the total number of shares of capital stock authorized (a) 490,000,000 shares are designated as common stock, 122,500,000 of which are classified as D Shares, 122,500,000 of which are classified as T Shares, 122,500,000 of which are classified as S Shares, and 122,500,000 of which are classified as I Shares, and (b) 10,000,000 shares are designated as preferred stock. All shares of such stock have a par value of $0.01 per share. The Company’s Board may amend the charter from time to time to increase or decrease the aggregate number of authorized shares of capital stock or the number of authorized shares of capital stock of any
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
class or series without stockholder approval. During the year ended December 31, 2020, the Company issued a total of 2.0 million shares, including 766,000 shares issued under the DRIP, for gross proceeds of $34.1 million. As of December 31, 2020, the Company had issued 48.8 million shares of common stock for cumulative gross proceeds of $878.2 million.
The table below provides information regarding the issuances and redemptions of each class of the Company’s common stock during the years ended December 31, 2020, 2019 and 2018 (dollar amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| D Shares | | T Shares | | S Shares(1) | | I Shares | | Total |
| Shares | | Par Value | | Shares | | Par Value | | Shares | | Par Value | | Shares | | Par Value | | Shares | | Par Value |
| Balance as of January 1, 2018 | 15,837,102 | | | $ | 158 | | | 8,793,223 | | | $ | 88 | | | 0 | | | $ | 0 | | | 1,065,232 | | | $ | 11 | | | 25,695,557 | | | $ | 257 | |
| Issuance of common stock | 4,853,772 | | | 48 | | | 4,719,621 | | | 47 | | | 0 | | | 0 | | | 257,671 | | | 3 | | | 9,831,064 | | | 98 | |
| Conversion of shares | (8,997) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 8,889 | | | 0 | | | (108) | | | 0 | |
| Redemptions of common stock | (1,746,560) | | | (17) | | | (735,522) | | | (7) | | | 0 | | | 0 | | | (172,062) | | | (2) | | | (2,654,144) | | | (26) | |
| Equity-based compensation | 7,212 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 7,212 | | | 0 | |
| Balance as of December 31, 2018 | 18,942,529 | | | $ | 189 | | | 12,777,322 | | | $ | 128 | | | 0 | | | $ | 0 | | | 1,159,730 | | | $ | 12 | | | 32,879,581 | | | $ | 329 | |
| Issuance of common stock | 2,670,861 | | | 27 | | | 3,471,200 | | | 35 | | | 7,031 | | | 0 | | | 109,678 | | | 1 | | | 6,258,770 | | | 63 | |
| | | | | | | | | | | | | | | | | | | |
| Redemptions of common stock | (3,477,667) | | | (35) | | | (1,748,886) | | | (18) | | | 0 | | | 0 | | | (171,512) | | | (2) | | | (5,398,065) | | | (55) | |
| Equity-based compensation | 7,424 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 7,424 | | | 0 | |
| Balance as of December 31, 2019 | 18,143,147 | | | $ | 181 | | | 14,499,636 | | | $ | 145 | | | 7,031 | | | $ | 0 | | | 1,097,896 | | | $ | 11 | | | 33,747,710 | | | $ | 337 | |
| Issuance of common stock | 751,336 | | | 8 | | | 1,164,339 | | | 11 | | | 368 | | | 0 | | | 35,567 | | | 0 | | | 1,951,610 | | | $ | 19 | |
| Conversion of shares | (25,087) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 24,687 | | | 0 | | | (400) | | | 0 | |
| Redemptions of common stock | (3,561,581) | | | (36) | | | (1,885,841) | | | (18) | | | 0 | | | 0 | | | (187,689) | | | (1) | | | (5,635,111) | | | (55) | |
| Equity-based compensation | 10,691 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 10,691 | | | 0 | |
| Equity-based payments to advisor | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 40,881 | | | 0 | | | 40,881 | | | 0 | |
| Balance as of December 31, 2020 | 15,318,506 | | | $ | 153 | | | 13,778,134 | | | $ | 138 | | | 7,399 | | | $ | 0 | | | 1,011,342 | | | $ | 10 | | | 30,115,381 | | | $ | 301 | |
______________________ (1)The Company did not issue any Class S Shares prior to October 10, 2019.
NAV per Share Calculation
The purchase and redemption price for shares of our common stock is based on our NAV per share for each class as determined each month. The Company has engaged an independent valuation expert which has expertise in appraising commercial real estate assets and related liabilities, to provide, on a rolling annual basis, valuations of each of the Company’s commercial real estate assets and related liabilities to be set forth in individual appraisal reports, and to adjust those valuations for events known to the independent valuation expert that it believes are likely to have a material impact on previously provided estimates of the value of the affected commercial real estate assets or related real estate liabilities. In addition, the calculation of NAV for each class includes liquid assets, which are priced monthly using third party pricing services, and cash and cash equivalents.
The Company’s NAV per share is calculated monthly as of the last calendar day of each month by an independent fund accountant using a process that incorporates (1) the periodic valuations of each of the Company’s real estate assets and related liabilities by the Company’s independent valuation expert, (2) ongoing assessment by the valuation expert of the estimated impact of any events that require adjustment to the most recent valuations determined by the valuation expert, (3) updates in the price of liquid assets for which third-party market quotes are available, (4) valuations of any securities or other assets for which market quotes are not available, (5) valuation of the Company’s other assets and liabilities, (6) accruals of the Company’s distributions for each share class, and (7) estimates of monthly accruals, on a net basis, of operating revenues, expenses, debt service costs and fees. The NAV for each class will be adjusted for subscriptions, redemptions and accruals of such class’s distributions and estimates of class-specific fee and expense accruals. Distributions reflect the monthly distribution rate set by the Company’s Board, which may vary for each class. Upfront selling commissions and dealer manager fees will have no effect on the NAV of any share class. The NAV is intended to reflect our estimated value as of the last calendar day of the month prior to the date that the NAV is determined.
The NAV per share for each class is determined by dividing such class’s NAV at the end of each month by the number of shares outstanding for that class as of the end each month, prior to giving effect to any share purchases or redemptions to be effected each month. At regularly scheduled board of directors meetings, the Company’s Board reviews the process by which the Company’s advisor estimated the monthly accruals and the independent fund accountant calculated the NAV per share, and the operation and results of the process to determine NAV per share generally. The Company’s NAV is not calculated in accordance with GAAP and is not audited by the independent registered public accounting firm.
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Distribution Reinvestment Plan
Pursuant to the DRIP, the Company allows stockholders to elect to have their distributions reinvested in additional shares of the Company’s common stock. The purchase price for shares under the DRIP is equal to the NAV per share on the date that the distribution is payable, after giving effect to the distribution. During the years ended December 31, 2020, 2019 and 2018, 766,000, 917,000 and 758,000 shares were purchased under the DRIP for $13.1 million, $16.2 million and $13.8 million, respectively.
Share Redemption Program
Effective April 1, 2020, the Company has adopted the Amended Share Redemption Program to provide limited liquidity whereby, on a monthly basis, stockholders may request that the Company redeems all or any portion of their shares. The Amended Share Redemption Program provides that, no later than on the second to last business day of a given month, stockholders may request that the Company redeems all or any portion of their shares, subject to a minimum redemption amount and certain short-term trading fees. The redemption price per share for each class will be our NAV per share for such class for that month, calculated by the independent fund accountant in accordance with our valuation policies. Prior to April 1, 2020, the share redemption plan provided limited liquidity whereby, on a daily basis, stockholders could request that the Company redeems all or any portion of their shares.
As of July 2020, the Board determined that monthly redemptions temporarily would be limited to shares whose aggregate value is no more than 0.8% of our aggregate NAV as of the last calendar day of the previous calendar month, and in any calendar quarter, redemptions will be limited to shares whose aggregate value is no more than 2.0% of our aggregate NAV as of the last calendar day of the previous calendar quarter. While no assurances can be made regarding the timing of a return to the redemption plan limits stated in the existing share redemption plan, if at all, the Company is targeting to return to the limits under the Amended Share Redemption Program to occur in the third quarter of 2021.
In addition, as of December 31, 2020, CIM Income NAV Management owned 13,333 D Shares. Pursuant to the Company’s charter, CIM Income NAV Management is prohibited from selling these shares, which represents the initial investment in the Company, for so long as the CCO Group remains the Company’s sponsor; provided, however, that CIM Income NAV Management could transfer ownership of all or a portion of such shares to other affiliates of the Company’s sponsor.
The Company intends to fund share redemptions with available cash, proceeds from our liquid investments and proceeds from the sale of additional shares. The Company may, after taking interests as a whole and the interests of its remaining stockholders into consideration, use proceeds from any available sources at the Company’s disposal to satisfy redemption requests, including, but not limited to, proceeds from sales of additional shares, excess cash flow from operations, sales of liquid investments, incurrence of indebtedness and, if necessary, proceeds from the disposition of real estate properties or real estate related assets. In an effort to have adequate cash available to support our share redemption plan, CIM Income NAV Management may determine to reserve borrowing capacity under our line of credit. CIM Income NAV Management could then elect to borrow against the line of credit in part to redeem shares presented for redemption during periods when the Company does not have sufficient proceeds from the sale of shares in the Offering to fund all redemption requests.
As of December 31, 2020, the quarterly redemption capacity was equal to 2% of the Company’s NAV and this amount was recorded as redeemable common stock on the consolidated balance sheet for a total of $10.0 million.
During the year ended December 31, 2020, the Company received redemption requests of approximately 11.3 million shares of our common stock for $188.4 million in excess of our redemption limit. During the year ended December 31, 2020, the Company received valid redemption requests under our Amended Share Redemption Program totaling approximately 16.8 million shares, of which we redeemed approximately 5.4 million shares as of December 31, 2020 for $93.6 million at an average redemption price of $17.31 per share and 126,000 shares subsequent to December 31, 2020 for $2.1 million at an average redemption price of $16.67. The remaining redemption requests relating to approximately 11.3 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program then in effect.
Distributions Payable and Distribution Policy
On July 23, 2020, the Board authorized a year-end distribution (the “Year-End Distribution”) of $0.0839 per share of our D Shares, T Shares, S Shares and I Shares, which amount will be adjusted based on the relative NAV of our D Shares, T Shares, S Shares and I Shares so that distributions constitute a uniform percentage of the NAV per share of all classes. The Year-End Distribution is payable to stockholders of record as of the close of business on December 30, 2020 and was paid in January
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2021 upon a determination by the Company’s chief financial officer that as of the payment date of the Year-End Distribution, the Company was able to pay its debts as they become due in the usual course of business and its assets were not less than the sum of its total liabilities. The Year-End Distribution was paid in cash or reinvested in shares of the Company’s common stock for stockholders participating in the distribution reinvestment plan. The Year-End Distribution was paid in addition to the distribution authorized by the Board for the month of December 2020.
Equity-Based Compensation
On August 9, 2018, the Board approved the adoption of the Company’s 2018 Equity Incentive Plan (the “Plan”), under which 400,000 of the Company’s common shares were reserved for issuance and share awards of 378,000 are available for future grant as of December 31, 2020.
As of December 31, 2020, the Company has granted awards of approximately 5,600 restricted D Shares to each of the independent members of the Board (approximately 22,400 restricted shares in aggregate) under the Plan. As of December 31, 2020, 14,600 of the restricted D Shares had vested based on one year of continuous service. The remaining 7,800 shares issued had not been forfeited as of December 31, 2020. The fair value of the Company’s share awards is determined using the Company’s NAV per share on the date of grant. Compensation expense related to these restricted D Shares is recognized over the vesting period. The Company recorded compensation expense of $131,000 for both the years ended December 31, 2020 and 2019 related to these restricted D Shares, which is included in general and administrative expenses in the accompanying consolidated statements of operations.
As of December 31, 2020, there was $99,000 of total unrecognized compensation expense related to the restricted D Shares issued in 2020, which will be recognized ratably over the remaining period of service prior to October 1, 2021.
The Board determined 50% of the Company’s independent directors’ quarterly compensation payments for the third quarter of 2020 through the first quarter of 2021 will be paid in D Shares based on the then current NAV per share at the time of issuance. As of December 31, 2020, the Company has granted awards of approximately 725 unrestricted D Shares to each of the independent members of the Board (approximately 2,900 unrestricted shares in aggregate). The Company recorded compensation expense of $49,000 for the year ended December 31, 2020 related to these unrestricted D Shares, which is included in general and administrative expenses in the accompanying consolidated statements of operations.
NOTE 15 — INCOME TAXES
For federal income tax purposes, distributions to stockholders are characterized as ordinary dividends, capital gain distributions, or nondividend distributions. Nondividend distributions will reduce U.S stockholders’ basis (but not below zero) in their shares. The following table shows the character of the distributions the Company paid on a percentage basis for the years ended December 31, 2020, 2019, and 2018: | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| Character of Distributions: | | | 2020 | | 2019 | | 2018 |
| Ordinary dividends | | | 26.9 | % | | 38.9 | % | | 52.4 | % |
| Nondividend distributions | | | 71.3 | % | | 43.1 | % | | 47.6 | % |
| Capital gain distributions | | | 1.8 | % | | 18.0 | % | | 0 | % |
| Total | | | 100 | % | | 100 | % | | 100 | % |
During the years ended December 31, 2020, 2019 and 2018, the Company incurred state and local income and franchise taxes of $152,000, $214,000 and $182,000, respectively, which were recorded in general and administrative expenses on the consolidated statements of operations.
The Company had 0 unrecognized tax benefits as of or during the years ended December 31, 2020, 2019 and 2018. Any interest and penalties related to unrecognized tax benefits would be recognized within the provision for income taxes in the accompanying consolidated statements of operations. The Company files income tax returns in the U.S. federal jurisdiction, as well as various state jurisdictions, and is subject to routine examinations by the respective tax authorities.
NOTE 16 — LEASES
The Company’s real estate assets are leased to tenants under operating leases for which the terms, expirations and extension options vary. The Company’s operating leases do not convey to the lessee the right to purchase the underlying asset upon expiration of the lease period. To determine whether a contract contains a lease, the Company reviews contracts to determine if the agreement conveys the right to control the use of an asset. The Company accounts for lease and non-lease
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
components as a single, combined operating lease component. Non-lease components primarily consist of maintenance services, including CAM, real estate taxes, insurance and utilities paid for by the lessor but consumed by the lessee. Non-lease components are considered to be variable rental and other property income and are recognized in the period incurred.
As of December 31, 2020, the Company’s leases had a weighted-average remaining term of 9.8 years. Certain leases include provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other negotiated terms and conditions. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As of December 31, 2020, the future minimum rental income from the Company’s real estate assets under non-cancelable operating leases, assuming no exercise of renewal options for the succeeding five fiscal years and thereafter, was as follows (in thousands): | | | | | | | | |
| Year Ending December 31, | | Future Minimum Rental Income |
| 2021 | | $ | 62,374 | |
| 2022 | | 62,697 | |
| 2023 | | 62,710 | |
| 2024 | | 61,318 | |
| 2025 | | 57,480 | |
| Thereafter | | 335,208 | |
| Total | | $ | 641,787 | |
A certain amount of the Company’s rental and other property income is from tenants with leases which are subject to contingent rent provisions. These contingent rents are subject to the tenant achieving periodic revenues in excess of specified levels. For the years ended December 31, 2020 and 2019, the amount of the contingent rent earned by the Company was not significant. Rental and other property income during the years ended December 31, 2020, 2019 and 2018 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Fixed rental and other property income (1) | $ | 63,782 | | | $ | 68,815 | | | $ | 63,669 | |
Variable rental and other property income (2) | 8,814 | | | 8,791 | | | 7,109 | |
| Total rental and other property income | $ | 72,596 | | | $ | 77,606 | | | $ | 70,778 | |
______________________
(1)Consists primarily of fixed contractual payments from operating leases with tenants recognized on a straight-line basis over the lease term, including amortization of acquired above- and below-market leases, and is net of uncollectible lease related receivables.
(2)Consists primarily of tenant reimbursements for recoverable real estate taxes and property operating expenses, and percentage rent.
CIM INCOME NAV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 17 — QUARTERLY RESULTS (UNAUDITED)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2020 and 2019 (in thousands, except for per share amounts). In the opinion of management, the information for the interim periods presented includes all adjustments, which are of a normal and recurring nature, necessary to present a fair presentation of the results for each period. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenues | | $ | 18,678 | | | $ | 17,236 | | | $ | 18,875 | | | $ | 18,152 | |
| Net (loss) income | | $ | (3,510) | | | $ | (11,292) | | | $ | 1,729 | | | $ | 2,062 | |
| Net (loss) income attributable to the Company | | $ | (3,514) | | | $ | (11,301) | | | $ | 1,721 | | | $ | 2,051 | |
Basic and diluted net (loss) income per share - Class D common stock (1) | | $ | (0.10) | | | $ | (0.36) | | | $ | 0.06 | | | $ | 0.07 | |
Basic and diluted net (loss) income per share - Class T common stock (1) | | $ | (0.11) | | | $ | (0.36) | | | $ | 0.05 | | | $ | 0.06 | |
Basic and diluted net (loss) income per share - Class S common stock (1) | | $ | (0.07) | | | $ | (0.51) | | | $ | 0.10 | | | $ | 0.02 | |
Basic and diluted net (loss) income per share - Class I common stock (1) | | $ | (0.10) | | | $ | (0.35) | | | $ | 0.06 | | | $ | 0.08 | |
____________________________________
(1)The Company calculates net (loss) income per share based on the weighted-average number of outstanding shares of common stock during the reporting period. The average number of shares fluctuates throughout the year and can therefore produce a full year result that does not agree to the sum of the individual quarters.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenues | | $ | 19,541 | | | $ | 19,288 | | | $ | 19,350 | | | $ | 19,633 | |
| Net income | | $ | 1,636 | | | $ | 5,453 | | | $ | 7,678 | | | $ | 24 | |
| Net income attributable to the Company | | $ | 1,627 | | | $ | 5,445 | | | $ | 7,669 | | | $ | 9 | |
Basic and diluted net income per share - Class D common stock (1) | | $ | 0.05 | | | $ | 0.16 | | | $ | 0.23 | | | $ | 0 | |
Basic and diluted net income per share - Class T common stock (1) | | $ | 0.05 | | | $ | 0.16 | | | $ | 0.22 | | | $ | 0 | |
Basic and diluted net income per share - Class S common stock (1), (2) | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0.10 | |
Basic and diluted net income per share - Class I common stock (1) | | $ | 0.05 | | | $ | 0.17 | | | $ | 0.23 | | | $ | 0.01 | |
____________________________________
(1)The Company calculates net income per share based on the weighted-average number of outstanding shares of common stock during the reporting period. The average number of shares fluctuates throughout the year and can therefore produce a full year result that does not agree to the sum of the individual quarters.
(2)The Company did not issue any Class S Shares prior to October 10, 2019.
NOTE 18 — SUBSEQUENT EVENTS
Disposition of Real Estate Assets
Subsequent to December 31, 2020, the Company disposed of 1 property for an aggregate gross sales price of $1.1 million, resulting in net proceeds of $1.0 million after closing costs, and a gain of $10,000. NaN disposition fees were paid to CIM Income NAV Management or its affiliates in connection with the sale of this property and the Company has no continuing involvement with this property.
CIM INCOME NAV, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Gross Amount | | | | | | |
| | | | | | | | | | at Which | | | | | | |
| | | Initial Costs to Company | | Total | | Carried At | | Accumulated | | | | |
| | | | | Buildings & | | Adjustment | | December 31, 2020 | | Depreciation | | Date | | Date |
| Description (a) | | Encumbrances | | Land | | Improvements | | to Basis (b) | | (c) (d) (e) | | (f) (g) | | Acquired | | Constructed |
| Real Estate Held for Investment: |
| 24 Hour Fitness | | | | | | | | | | | | | | | | |
| Orlando, FL | | (f) | | $ | 2,528 | | | $ | 7,272 | | | $ | (5,725) | | | $ | 4,075 | | | $ | 42 | | | 2/5/2019 | | 2018 |
| AAA Office Park | | | | | | | | | | | | | | | | |
| Hamilton, NJ | | (f) | | 3,254 | | | 25,221 | | | 0 | | | 28,475 | | | 2,468 | | | 3/22/2018 | | 2007 |
| Advance Auto | | | | | | | | | | | | | | | | |
| Macomb Township, MI | | (f) | | 718 | | | 1,146 | | | 0 | | | 1,864 | | | 280 | | | 12/20/2011 | | 2009 |
| Ravenswood, WV | | (f) | | 150 | | | 645 | | | (137) | | | 658 | | | 14 | | | 6/17/2015 | | 1996 |
| Sedalia, MO | | (f) | | 374 | | | 1,187 | | | 0 | | | 1,561 | | | 236 | | | 9/23/2013 | | 2013 |
| AK Steel | | | | | | | | | | | | | | | | |
| West Chester, OH | | (f) | | 1,028 | | | 19,914 | | | 0 | | | 20,942 | | | 1,925 | | | 4/30/2018 | | 2007 |
| Amcor Rigid Plastics | | | | | | | | | | | | | | | | |
| Ames, IA | | $8,300 | | 775 | | | 12,179 | | | 0 | | | 12,954 | | | 1,916 | | | 9/19/2014 | | 1996 |
| Apex Technologies | | | | | | | | | | | | | | | | |
| Mason, OH | | (f) | | 997 | | | 11,657 | | | 0 | | | 12,654 | | | 1,111 | | | 12/19/2017 | | 1999 |
| AutoZone | | | | | | | | | | | | | | | | |
| Vandalia, OH | | 532 | | 778 | | | 0 | | | 0 | | | 778 | | | 0 | | | 10/10/2014 | | 2014 |
| Bank of America | | | | | | | | | | | | | | | | |
| Fairview Park, OH | | (f) | | 646 | | | 830 | | | 0 | | | 1,476 | | | 155 | | | 10/10/2014 | | 2014 |
| BioLife Plasma Services | | | | | | | | | | | | | | | | |
| Fort Wayne, IN | | | | 691 | | | 2,662 | | | 0 | | | 3,353 | | | 324 | | | 12/16/2016 | | 2007 |
| Moorhead, MN | | | | 727 | | | 3,109 | | | 0 | | | 3,836 | | | 365 | | | 12/16/2016 | | 2008 |
| Bob Evans | | | | | | | | | | | | | | | | |
| Defiance, OH | | (f) | | 391 | | | 1,674 | | | 0 | | | 2,065 | | | 217 | | | 4/28/2017 | | 2011 |
| Dover, OH | | (f) | | 362 | | | 1,495 | | | 0 | | | 1,857 | | | 189 | | | 4/28/2017 | | 2008 |
| Dundee, MI | | (f) | | 403 | | | 1,438 | | | 0 | | | 1,841 | | | 172 | | | 4/28/2017 | | 2000 |
| Hamilton, OH | | (f) | | 393 | | | 1,305 | | | 0 | | | 1,698 | | | 168 | | | 4/28/2017 | | 1997 |
| Hummelstown, PA | | (f) | | 1,184 | | | 1,165 | | | 0 | | | 2,349 | | | 133 | | | 4/28/2017 | | 1994 |
| Mayfield Heights, OH | | (f) | | 721 | | | 919 | | | 0 | | | 1,640 | | | 119 | | | 4/28/2017 | | 2003 |
| Burger King | | | | | | | | | | | | | | | | |
| Midwest City, OK | | 765 | | 576 | | | 413 | | | 0 | | | 989 | | | 66 | | | 9/30/2014 | | 2015 |
| Caliber Collision | | | | | | | | | | | | | | | | |
| Houston, TX | | (f) | | 466 | | | 4,929 | | | 0 | | | 5,395 | | | 603 | | | 8/11/2016 | | 2016 |
| San Antonio, TX | | (f) | | 196 | | | 2,918 | | | 0 | | | 3,114 | | | 330 | | | 1/19/2017 | | 1963 |
| Venice, FL | | (f) | | 857 | | | 2,662 | | | 0 | | | 3,519 | | | 330 | | | 8/12/2016 | | 2015 |
| CarMax | | | | | | | | | | | | | | | | |
| Tinley Park, IL | | 15,800 | | 3,282 | | | 21,974 | | | 0 | | | 25,256 | | | 2,261 | | | 6/27/2017 | | 1998 |
| Carrier Rental Systems | | | | | | | | | | | | | | | | |
| Houston, TX | | 2,800 | | 749 | | | 3,832 | | | 0 | | | 4,581 | | | 619 | | | 9/4/2014 | | 2006 |
| Cottage Plaza | | | | | | | | | | | | | | | | |
| Pawtucket, RI | | (f) | | 5,431 | | | 15,582 | | | 8 | | | 21,021 | | | 1,707 | | | 6/29/2017 | | 2004 |
| CVS | | | | | | | | | | | | | | | | |
| Austin, TX | | 1,830 | | 1,417 | | | 1,579 | | | 81 | | | 3,077 | | | 377 | | | 12/8/2011 | | 1997 |
| Erie, PA | | (f) | | 1,007 | | | 1,157 | | | 63 | | | 2,227 | | | 271 | | | 12/9/2011 | | 1999 |
| Mansfield, OH | | (f) | | 270 | | | 1,691 | | | 81 | | | 2,042 | | | 396 | | | 12/9/2011 | | 1998 |
| Wisconsin Rapids, WA | | 1,790 | | 517 | | | 2,148 | | | 0 | | | 2,665 | | | 391 | | | 12/13/2013 | | 2013 |
| DaVita Dialysis | | | | | | | | | | | | | | | | |
| Austell, GA | | (f) | | 581 | | | 2,359 | | | 0 | | | 2,940 | | | 403 | | | 5/6/2014 | | 2009 |
CIM INCOME NAV, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
(in thousands) – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Gross Amount | | | | | | |
| | | | | | | | | | at Which | | | | | | |
| | | Initial Costs to Company | | Total | | Carried At | | Accumulated | | | | |
| | | | | Buildings & | | Adjustment | | December 31, 2020 | | Depreciation | | Date | | Date |
| Description (a) | | Encumbrances | | Land | | Improvements | | to Basis (b) | | (c) (d) (e) | | (f) (g) | | Acquired | | Constructed |
| Dollar General | | | | | | | | | | | | | | | | |
| Erie, IL | | (f) | | $ | 67 | | | $ | 974 | | | $ | 0 | | | $ | 1,041 | | | $ | 119 | | | 6/30/2016 | | 2016 |
| Gladwin, MI | | $780 | | 121 | | | 1,119 | | | 0 | | | 1,240 | | | 209 | | | 1/24/2014 | | 2013 |
| Glasford, IL | | (f) | | 167 | | | 904 | | | 0 | | | 1,071 | | | 111 | | | 6/24/2016 | | 2016 |
| Independence, MO | | 837 | | 276 | | | 1,017 | | | 0 | | | 1,293 | | | 213 | | | 3/15/2013 | | 2012 |
| Lexington, MI | | 707 | | 89 | | | 1,033 | | | 0 | | | 1,122 | | | 194 | | | 1/24/2014 | | 2013 |
| New Richland, MN | | (f) | | 173 | | | 900 | | | 0 | | | 1,073 | | | 111 | | | 6/24/2016 | | 2016 |
| Ocala, FL | | (f) | | 205 | | | 1,308 | | | 0 | | | 1,513 | | | 225 | | | 5/7/2014 | | 2013 |
| Pine River, MN | | (f) | | 230 | | | 872 | | | 0 | | | 1,102 | | | 111 | | | 4/8/2016 | | 2016 |
| Redfield, SD | | (f) | | 43 | | | 839 | | | 0 | | | 882 | | | 145 | | | 9/5/2014 | | 2014 |
| Stacy, MN | | 658 | | 84 | | | 810 | | | 0 | | | 894 | | | 127 | | | 11/6/2014 | | 2014 |
| Starbuck, MN | | (f) | | 76 | | | 946 | | | 0 | | | 1,022 | | | 120 | | | 4/15/2016 | | 2016 |
| St. Joseph, MO | | (f) | | 197 | | | 972 | | | 0 | | | 1,169 | | | 202 | | | 4/2/2013 | | 2013 |
| Topeka, KS | | 794 | | 176 | | | 882 | | | 0 | | | 1,058 | | | 150 | | | 10/22/2014 | | 2014 |
| Trimble, MO | | (f) | | 212 | | | 802 | | | 0 | | | 1,014 | | | 96 | | | 6/30/2016 | | 2016 |
| Wheaton, MN | | (f) | | 134 | | | 874 | | | 0 | | | 1,008 | | | 111 | | | 4/22/2016 | | 2016 |
| Winthrop, MN | | (f) | | 130 | | | 876 | | | 0 | | | 1,006 | | | 112 | | | 4/8/2016 | | 2016 |
| Duluth Trading | | | | | | | | | | | | | | | | |
| Arlington, TX | | (f) | | 1,123 | | | 3,859 | | | 0 | | | 4,982 | | | 291 | | | 8/16/2018 | | 2018 |
| Wichita, KS | | | | 1,252 | | | 3,405 | | | 0 | | | 4,657 | | | 163 | | | 5/17/2019 | | 2019 |
| Enid Crossing | | | | | | | | | | | | | | | | |
| Enid, OK | | 3,407 | | 685 | | | 4,426 | | | 515 | | | 5,626 | | | 938 | | | 6/30/2014 | | 2013 |
| Family Dollar | | | | | | | | | | | | | | | | |
| Centreville, AL | | (f) | | 50 | | | 1,122 | | | 0 | | | 1,172 | | | 196 | | | 4/29/2014 | | 2013 |
| Danville, VA | | (f) | | 228 | | | 774 | | | 0 | | | 1,002 | | | 166 | | | 6/17/2014 | | 2013 |
| Darby, MT | | 881 | | 244 | | | 889 | | | 0 | | | 1,133 | | | 159 | | | 9/30/2014 | | 2014 |
| Denton, NC | | (f) | | 334 | | | 545 | | | 0 | | | 879 | | | 109 | | | 6/17/2014 | | 2012 |
| Deridder, LA | | (f) | | 183 | | | 746 | | | 0 | | | 929 | | | 157 | | | 9/3/2014 | | 2014 |
| Hampton, AR | | 651 | | 131 | | | 741 | | | 0 | | | 872 | | | 163 | | | 9/15/2014 | | 2014 |
| Londonderry, OH | | (f) | | 65 | | | 1,078 | | | 0 | | | 1,143 | | | 214 | | | 9/3/2014 | | 2014 |
| Tatum, NM | | 700 | | 130 | | | 805 | | | 0 | | | 935 | | | 158 | | | 3/31/2014 | | 2014 |
| West Portsmouth, OH | | (f) | | 214 | | | 768 | | | 0 | | | 982 | | | 130 | | | 9/23/2014 | | 2004 |
| FedEx | | | | | | | | | | | | | | | | |
| Elko, NV | | (f) | | 186 | | | 2,024 | | | 0 | | | 2,210 | | | 402 | | | 5/28/2013 | | 2012 |
| Spirit Lake, IA | | (f) | | 115 | | | 2,501 | | | 0 | | | 2,616 | | | 467 | | | 12/12/2013 | | 2013 |
| Fresh Thyme | | | | | | | | | | | | | | | | |
| Indianapolis, IN | | 4,470 | | 1,074 | | | 7,452 | | | 0 | | | 8,526 | | | 798 | | | 9/26/2017 | | 2016 |
| Worthington, OH | | (f) | | 2,648 | | | 6,498 | | | 0 | | | 9,146 | | | 763 | | | 8/9/2016 | | 2015 |
| H&E Equipment Services | | | | | | | | | | | | | | | | |
| Albuquerque, NM | | (f) | | 1,211 | | | 4,278 | | | 0 | | | 5,489 | | | 521 | | | 6/19/2018 | | 2016 |
| Fort Myers, FL | | (f) | | 735 | | | 3,963 | | | 0 | | | 4,698 | | | 368 | | | 6/19/2018 | | 2016 |
| Suwanee, GA | | (f) | | 1,020 | | | 3,505 | | | 0 | | | 4,525 | | | 288 | | | 6/19/2018 | | 2016 |
| Hobby Lobby | | | | | | | | | | | | | | | | |
| Cadillac, MI | | (f) | | 480 | | | 4,382 | | | 0 | | | 4,862 | | | 363 | | | 6/22/2018 | | 2017 |
| Sedalia, MO | | (f) | | 478 | | | 3,976 | | | 0 | | | 4,454 | | | 319 | | | 3/15/2018 | | 2016 |
| Watertown, SD | | (f) | | 565 | | | 4,252 | | | 0 | | | 4,817 | | | 370 | | | 2/22/2018 | | 2016 |
| Willmar, MN | | (f) | | 1,289 | | | 3,721 | | | 0 | | | 5,010 | | | 346 | | | 2/22/2018 | | 2017 |
| Jewel-Osco | | | | | | | | | | | | | | | | |
| Spring Grove, IL | | (f) | | 739 | | | 9,530 | | | 0 | | | 10,269 | | | 584 | | | 11/14/2018 | | 2007 |
| Wood Dale, IL | | (f) | | 3,368 | | | 6,146 | | | 0 | | | 9,514 | | | 375 | | | 11/14/2018 | | 1995 |
| Jo-Ann's | | | | | | | | | | | | | | | | |
| Roseville, MI | | (f) | | 506 | | | 2,747 | | | 200 | | | 3,453 | | | 630 | | | 9/30/2013 | | 2013 |
| Kloeckner | | | | | | | | | | | | | | | | |
| University Park, IL | | (f) | | 816 | | | 11,887 | | | 0 | | | 12,703 | | | 748 | | | 11/7/2018 | | 2016 |
CIM INCOME NAV, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
(in thousands) – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Gross Amount | | | | | | |
| | | | | | | | | | at Which | | | | | | |
| | | Initial Costs to Company | | Total | | Carried At | | Accumulated | | | | |
| | | | | Buildings & | | Adjustment | | December 31, 2020 | | Depreciation | | Date | | Date |
| Description (a) | | Encumbrances | | Land | | Improvements | | to Basis (b) | | (c) (d) (e) | | (f) (g) | | Acquired | | Constructed |
| Kum & Go | | | | | | | | | | | | | | | | |
| Cedar Rapids, IA | | $1,501 | | $ | 630 | | | $ | 1,679 | | | $ | 0 | | | $ | 2,309 | | | $ | 342 | | | 5/3/2013 | | 2011 |
| LA Fitness | | | | | | | | | | | | | | | | |
| Pawtucket, RI | | (f) | | 5,556 | | | 7,071 | | | 0 | | | 12,627 | | | 1,220 | | | 10/11/2016 | | 2015 |
| Rock Hill, SC | | (f) | | 630 | | | 7,858 | | | 0 | | | 8,488 | | | 917 | | | 4/6/2017 | | 2015 |
| Levin Furniture | | | | | | | | | | | | | | | | |
| Monroeville, PA | | (f) | | 1,023 | | | 9,607 | | | 0 | | | 10,630 | | | 841 | | | 11/22/2017 | | |
| Lowe's | | | | | | | | | | | | | | | | |
| Fremont, OH | | 5,312 | | 1,287 | | | 7,125 | | | 278 | | | 8,690 | | | 1,576 | | | 12/11/2013 | | 1996 |
| North Dartmouth, MA | | (f) | | 7,334 | | | 11,976 | | | 0 | | | 19,310 | | | 1,682 | | | 1/4/2017 | | 2004 |
| Marshalls | | | | | | | | | | | | | | | | |
| Wilkesboro, NC | | (f) | | 968 | | | 1,775 | | | 155 | | | 2,898 | | | 231 | | | 10/20/2016 | | 1999 |
| Mattress Firm | | | | | | | | | | | | | | | | |
| Gadsden, AL | | (f) | | 393 | | | 1,413 | | | 0 | | | 1,806 | | | 282 | | | 6/10/2013 | | 2012 |
| Mattress Firm & Panera Bread | | | | | | | | | | | | | | | | |
| Elyria, OH | | (f) | | 1,100 | | | 2,836 | | | 0 | | | 3,936 | | | 416 | | | 4/7/2016 | | 2015 |
| Mister Carwash | | | | | | | | | | | | | | | | |
| Hudson, FL | | (f) | | 1,014 | | | 843 | | | 0 | | | 1,857 | | | 91 | | | 10/19/2016 | | 2007 |
| Spring Hill, FL | | (f) | | 961 | | | 1,156 | | | 0 | | | 2,117 | | | 124 | | | 10/19/2016 | | 2008 |
| National Tire & Battery | | | | | | | | | | | | | | | | |
| Conyers, GA | | 1,657 | | 522 | | | 1,845 | | | 0 | | | 2,367 | | | 307 | | | 9/26/2014 | | 1995 |
| Natural Grocers | | | | | | | | | | | | | | | | |
| Prescott, AZ | | 2,367 | | 795 | | | 2,802 | | | 0 | | | 3,597 | | | 626 | | | 5/6/2013 | | 2012 |
| North Lake Square | | | | | | | | | | | | | | | | |
| Gainesville, GA | | 13,365 | | 1,318 | | | 22,598 | | | 0 | | | 23,916 | | | 2,277 | | | 7/26/2017 | | 2015 |
| Northern Tool | | | | | | | | | | | | | | | | |
| Hoover, AK | | (f) | | 691 | | | 2,150 | | | 0 | | | 2,841 | | | 375 | | | 8/15/2014 | | 2014 |
| O'Reilly Auto Parts | | | | | | | | | | | | | | | | |
| Decatur, GA | | (f) | | 491 | | | 985 | | | 0 | | | 1,476 | | | 111 | | | 9/12/2016 | | 2007 |
| Fayetteville, NC | (f) | | 132 | | | 1,246 | | | 0 | | | 1,378 | | | 213 | | | 3/18/2014 | | 2012 |
| PetSmart | | | | | | | | | | | | | | | | |
| Lexington, NC | | (f) | | 605 | | | 3,162 | | | 0 | | | 3,767 | | | 406 | | | 1/27/2017 | | 2016 |
| McAllen, TX | | 2,924 | | 1,961 | | | 1,994 | | | 0 | | | 3,955 | | | 516 | | | 9/30/2014 | | 1995 |
| Procter & Gamble | | | | | | | | | | | | | | | | |
| Fayetteville, AR | | (f) | | 1,757 | | | 8,663 | | | 485 | | | 10,905 | | | 757 | | | 4/2/2018 | | 2006 |
| Raising Canes | | | | | | | | | | | | | | | | |
| Avondale, AZ | | (f) | | 1,435 | | | 1,857 | | | 0 | | | 3,292 | | | 308 | | | 5/23/2014 | | 2013 |
| Republic Services | | | | | | | | | | | | | | | | |
| Scottsdale, AZ | | | | 10,961 | | | 32,089 | | | 3,644 | | | 46,694 | | | 1,726 | | | 8/16/2019 | | 1999 |
| Sam's Club | | | | | | | | | | | | | | | | |
| Timonium, MD | | 9,150 | | 6,194 | | | 11,042 | | | 0 | | | 17,236 | | | 1,732 | | | 11/28/2016 | | 2000 |
| Sherwin-Williams | | | | | | | | | | | | | | | | |
| Pigeon Forge, TN | | (f) | | 392 | | | 661 | | | 0 | | | 1,053 | | | 75 | | | 11/1/2016 | | 2015 |
| Sleepy's | | | | | | | | | | | | | | | | |
| Roanoke Rapids, NC | | (f) | | 238 | | | 1,267 | | | 0 | | | 1,505 | | | 180 | | | 8/17/2015 | | 2015 |
| Steinhafels | | | | | | | | | | | | | | | | |
| Madison, WI | | | | 3,257 | | | 11,607 | | | 0 | | | 14,864 | | | 531 | | | 5/1/2019 | | 1994 |
| SuperValu | | | | | | | | | | | | | | | | |
| Oglesby, IL | | (f) | | 1,190 | | | 14,098 | | | 0 | | | 15,288 | | | 897 | | | 7/23/2018 | | 1996 |
| Tailwinds | | | | | | | | | | | | | | | | |
| Denton, TX | | (f) | | 884 | | | 7,747 | | | 0 | | | 8,631 | | | 1,232 | | | 9/30/2014 | | 2013 |
| Tellico Greens | | | | | | | | | | | | | | | | |
| Loudon, TN | | 3,000 | | 823 | | | 3,959 | | | 0 | | | 4,782 | | | 727 | | | 12/20/2013 | | 2008 |
CIM INCOME NAV, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
(in thousands) – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Gross Amount | | | | | | |
| | | | | | | | | | at Which | | | | | | |
| | | Initial Costs to Company | | Total | | Carried At | | Accumulated | | | | |
| | | | | Buildings & | | Adjustment | | December 31, 2020 | | Depreciation | | Date | | Date |
| Description (a) | | Encumbrances | | Land | | Improvements | | to Basis (b) | | (c) (d) (e) | | (f) (g) | | Acquired | | Constructed |
| Tempe Commerce | | | | | | | | | | | | | | | | |
| Tempe, AZ | | (f) | | $ | 1,975 | | | $ | 12,512 | | | $ | 383 | | | $ | 14,870 | | | $ | 1,292 | | | 12/22/2017 | | 1998 |
| Tempe, AZ | | (f) | | 1,872 | | | 10,758 | | | 0 | | | 12,630 | | | 823 | | | 9/17/2018 | | 1998 |
| Teradata | | | | | | | | | | | | | | | | |
| Miami Township, OH | | (f) | | 1,161 | | | 9,181 | | | 0 | | | 10,342 | | | 1,223 | | | 12/12/2016 | | 2010 |
| The Toro Company | | | | | | | | | | | | | | | | |
| Windom, MN | | (f) | | 73 | | | 8,708 | | | 0 | | | 8,781 | | | 1,030 | | | 5/19/2016 | | 2016 |
| Time Warner | | | | | | | | | | | | | | | | |
| Streetsboro, OH | | $3,543 | | 811 | | | 3,849 | | | 0 | | | 4,660 | | | 639 | | | 9/30/2014 | | 2003 |
| Tire Centers | | | | | | | | | | | | | | | | |
| Decatur, AL | | 1,311 | | 208 | | | 1,329 | | | 0 | | | 1,537 | | | 233 | | | 10/3/2014 | | 1998 |
| Title Resource Group | | | | | | | | | | | | | | | | |
| Mt. Laurel, NJ | | (f) | | 2,188 | | | 12,380 | | | 0 | | | 14,568 | | | 2,526 | | | 11/24/2015 | | 2004 |
| TJ Maxx | | | | | | | | | | | | | | | | |
| Danville, IL | | (f) | | 271 | | | 2,528 | | | 0 | | | 2,799 | | | 579 | | | 9/23/2013 | | 2013 |
| Triangle Town Place | | | | | | | | | | | | | | | | |
| Raleigh, NC | | 16,400 | | 4,694 | | | 23,044 | | | (2,953) | | | 24,785 | | | 266 | | | 12/15/2016 | | 2004 |
| Valeo North American HQ | | | | | | | | | | | | | | | | |
| Troy, MI | | (f) | | 1,564 | | | 11,662 | | | 0 | | | 13,226 | | | 1,286 | | | 2/9/2018 | | 2000 |
| Valeo Production Facility | | | | | | | | | | | | | | | | |
| East Liberty, OH | | (f) | | 268 | | | 5,564 | | | 0 | | | 5,832 | | | 557 | | | 6/2/2017 | | 2016 |
| Valvoline HQ | | | | | | | | | | | | | | | | |
| Lexington, KY | | (f) | | 5,204 | | | 31,112 | | | 0 | | | 36,316 | | | 2,932 | | | 3/1/2018 | | 2017 |
| Vacant | | | | | | | | | | | | | | | | |
| Nephi, UT | | (f) | | 180 | | | 2,872 | | | (3,052) | | | 0 | | | 0 | | | 3/4/2016 | | 2015 |
| Richmond, VA | | (f) | | 785 | | | 688 | | | 0 | | | 1,473 | | | 80 | | | 4/28/2017 | | 1990 |
| York, PA | | (f) | | 1,720 | | | 6,628 | | | (4,857) | | | 3,491 | | | 61 | | | 11/22/2017 | | 1978 |
| Walgreens | | | | | | | | | | | | | | | | |
| Coweta, OK | | 2,600 | | 725 | | | 3,246 | | | 0 | | | 3,971 | | | 533 | | | 6/30/2014 | | 2009 |
| Reidsville, NC | | 3,603 | | 610 | | | 3,801 | | | 0 | | | 4,411 | | | 887 | | | 12/8/2011 | | 2008 |
| St. Louis, MO | | 2,534 | | 307 | | | 3,205 | | | 0 | | | 3,512 | | | 514 | | | 8/8/2014 | | 2007 |
| Walmart | | | | | | | | | | | | | | | | |
| Randallstown, MD | | 14,250 | | 7,748 | | | 22,021 | | | 0 | | | 29,769 | | | 2,479 | | | 5/17/2017 | | 2012 |
| Weasler Engineering | | | | | | | | | | | | | | | | |
| West Bend, WI | | (f) | | 600 | | | 12,732 | | | 0 | | | 13,332 | | | 833 | | | 6/22/2018 | | 1957 |
| West Marine | | | | | | | | | | | | | | | | |
| Mystic, CT | | (f) | | 1,168 | | | 3,132 | | | 0 | | | 4,300 | | | 466 | | | 9/11/2015 | | 2014 |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $129,219 | | $ | 142,392 | | | $ | 640,273 | | | $ | (10,831) | | | $ | 771,834 | | | $ | 70,087 | | | | | |
____________________________________
(a)As of December 31, 2020, the Company owned 97 retail, 4 anchored shopping centers, 11 industrial and distribution and 11 office properties.
(b)Consists of capital expenditures and real estate development costs, and impairment charges.
(c)Gross intangible lease assets of $106.7 million and the associated accumulated amortization of $31.9 million are not reflected in the table above.
(d)The aggregate cost for federal income tax purposes was approximately $790.9 million.
CIM INCOME NAV, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
(in thousands) – (Continued)
(e)The following is a reconciliation of total real estate carrying value for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | 2018 |
| Balance, beginning of period | $ | 801,581 | | | $ | 798,969 | | | $ | 618,085 | |
| Additions | | | | | |
| | Acquisitions | 0 | | | 72,371 | | | 221,951 | |
| | Improvements | 2,388 | | | 2,751 | | | 472 | |
| Total additions | $ | 2,388 | | | $ | 75,122 | | | $ | 222,423 | |
| Deductions | | | | | |
| | Dispositions | (16,635) | | | (68,722) | | | (39,272) | |
| | Impairments | (14,486) | | | (3,788) | | | (2,267) | |
| | Reclassified to assets held for sale | (1,014) | | | 0 | | | 0 | |
| Total deductions | $ | (32,135) | | | $ | (72,510) | | | $ | (41,539) | |
| Balance, end of period | $ | 771,834 | | | $ | 801,581 | | | $ | 798,969 | |
(f)The following is a reconciliation of accumulated depreciation for the years ended December 31: | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | 2018 |
| Balance, beginning of period | $ | 54,794 | | | $ | 41,645 | | | $ | 26,073 | |
| Additions | | | | | |
| | Acquisitions - depreciation expense | 18,219 | | | 18,468 | | | 17,099 | |
| | Improvements - depreciation expense | 1,780 | | | 1,769 | | | 1,327 | |
| Total additions | $ | 19,999 | | | $ | 20,237 | | | $ | 18,426 | |
| Deductions | | | | | |
| | Impairments | (2,983) | | | (1,230) | | | 0 | |
| | Dispositions | (1,718) | | | (5,858) | | | (2,854) | |
| | Reclassified to assets held for sale | (5) | | | 0 | | | 0 | |
| Total deductions | $ | (4,706) | | | $ | (7,088) | | | $ | (2,854) | |
| Balance, end of period | $ | 70,087 | | | $ | 54,794 | | | $ | 41,645 | |
(g)The Company’s assets are depreciated or amortized using the straight-line method over the useful lives of the assets by class. Generally, buildings are depreciated over 40 years, site improvements are amortized over 15 years, and tenant improvements are amortized over the remaining life of the lease or the useful life, whichever is shorter.
(h)Part of the Credit Facility’s Borrowing Base. As of December 31, 2020, the Company had $321.5 million outstanding under the Credit Facility.
