Filed Pursuant to Rule 424(b)(3)
Registration No. 333-232425
RREEF PROPERTY TRUST, INC.
SUPPLEMENT NO. 2 DATED MAY 21, 2020
TO THE PROSPECTUS DATED APRIL 29, 2020
This document supplements, and should be read in conjunction with, our prospectus dated April 29, 2020, as supplemented by Supplement No. 1 dated May 5, 2020. Unless otherwise defined herein, capitalized terms shall have the same meanings as set forth in the prospectus.
The purpose of this supplement is to disclose:
•an update to the valuation of our properties;
•an update to our valuation guidelines;
•an update to the “Experts” section of our prospectus; and
•our Quarterly Report on Form 10-Q for the period ended March 31, 2020.
Valuation of Properties
The estimated value of our investments in real estate as of March 31, 2020 was $398,800,000. Altus Group U.S. Inc. serves as our independent valuation advisor. Altus Group is responsible for providing an opinion of fair value in individual appraisal reports or expressing an opinion as to the reasonableness of the value expressed in individual third-party appraisal reports based on its review of the underlying reports. Altus Group does not calculate and is not responsible for our daily NAV per share for any class of our shares.
Updates to Our Valuation Guidelines
The paragraphs under the subheading “Net Asset Value Calculation and Valuation Guidelines—Valuation of Properties—Consolidated Properties” beginning on page 146 of our prospectus are hereby deleted in their entirety and replaced with the following:
At the beginning of each calendar year, our independent valuation advisor prepares a schedule with the objective of having all of our consolidated properties valued each quarter by an appraisal. Appraisals are performed in accordance with the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation, and other appropriate standards as reasonably agreed to by our advisor and our independent appraisers. Each appraisal is reviewed, approved and signed by an individual with the professional designation of MAI (a Designated Member of the Appraisal Institute). Although our independent valuation advisor performs the majority of the appraisals, our valuation guidelines require that on a rotating basis, approximately 25% of our properties in any particular quarter must be appraised by one or more independent third-party appraisers who are not affiliated with us, our advisor or our independent valuation advisor. We believe our policy of obtaining appraisals by another independent third-party appraiser meaningfully enhances the accuracy of our NAV calculation. Our independent valuation advisor recommends independent third-party appraisal firms to our advisor and upon approval by our advisor, the independent third-party appraisal firms are engaged by our advisor. Any appraisal provided by a firm other than our independent valuation advisor is performed in accordance with our valuation guidelines and is not incorporated into the calculation of our NAV until our independent valuation advisor has reviewed and expressed an opinion as to the reasonableness of the value developed in such appraisal report. Newly acquired, consolidated properties are initially valued at cost and thereafter join the quarterly appraisal cycle during the first full quarter in which we own the property. For the first quarter in which we acquire a property, we calculate and accrue net portfolio income with respect to such property based on the performance of the property before the acquisition and the contractual arrangements in place at the
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time of the acquisition, as identified and reviewed through our due diligence and underwriting process in connection with the acquisition.
In addition to the quarterly appraisal process, prior to the beginning of each quarter, our independent valuation advisor develops a prospective quarter-end appraisal for each property. The resulting forward-looking value is based on anticipated cash flows and, if applicable, anticipated property-specific events applied to the cash flows for the property. The difference, if any, between the prospective value for quarter-end and the latest appraised value is amortized daily over the quarter, unless our independent valuation advisor, based on information provided by our advisor or based on its own information, determines that an intra-quarter appraisal is appropriate to capture any subsequent material property-specific changes or changes in the competitive or capital market conditions.
On an ongoing basis, our advisor monitors our properties for events that our advisor believes may be expected to have a material impact on the most recent estimated values provided by our independent appraisers, and notifies our independent valuation advisor of such events, if any. If, in the opinion of our independent valuation advisor, at any time during each quarter, an event identified by our advisor, or an event that becomes known to our independent valuation advisor through other means, is likely to have a material impact on previously provided estimated values of the affected properties, our independent valuation advisor prepares an intra-quarter appraisal the resulting value of which is then incorporated into our NAV. For example, an intra-quarter appraisal may be appropriate to reflect the occurrence of an unexpected property-specific event such as a termination or renewal of a material lease, a change in vacancies, an unanticipated structural or environmental event at a property or a significant capital market event that may cause the value of a wholly owned property to change materially. Intra-quarter appraisals may also be appropriate to reflect the occurrence of broader economic, social or market-driven events identified by our advisor or our independent valuation advisor which may impact more than one specific property. Any such appraisals reflect the market impact of specific events as they occur, based on assumptions and judgments that may or may not prove to be correct, and may also be based on the limited information readily available at that time. If our advisor or our independent valuation advisor believes that the value of a property has changed materially since the most recent quarterly valuation or that circumstances have arisen that were not previously contemplated in our independent appraiser’s latest appraisal for a property, our advisor or our independent valuation advisor, as applicable, promptly communicates the relevant information to the other party. If deemed appropriate by our independent valuation advisor, an intra-quarter appraisal is completed as soon as practicable. Once our independent valuation advisor has completed the intra-quarter appraisal, it updates the current value, if applicable, develops a new prospective appraisal as of the end of the current quarter and administratively prepares a revised daily amortization schedule incorporating these revised values, if any, over the remainder of the current quarter. BNY Mellon then incorporates these changes into our daily NAV calculations.
In general, we expect that any value updates will be processed as soon as practicable after a determination that a material change has occurred and the financial effects of such a change are quantifiable in an appraisal by our independent valuation advisor. However, rapidly changing market conditions or material events may not be immediately reflected in our daily NAV. The resulting potential disparity in our NAV may inure to the benefit of stockholders whose shares are redeemed or new purchasers of our common stock, depending on whether our published NAV per share for such class is overstated or understated.
Wholly owned development assets, if any, will be valued at cost plus capital expenditures, including capitalized interest, in accordance with GAAP, and will be included in the quarterly appraisal cycle upon stabilization. Acquisition costs and expenses incurred in connection with the acquisition of consolidated properties that are not directly related to any single property generally are allocated among the applicable properties pro rata based on relative values. Properties purchased as a portfolio may be valued as a single asset.
Real estate appraisals are reported on a free and clear basis (for example, without taking into consideration any mortgage on the property), irrespective of any property level financing that may be in place. We expect the primary methodology used to value properties will be the income approach, whereby value is derived by determining the present value of an asset’s stream of future cash flows (for example, through a discounted cash flow analysis). Consistent with industry practices, the income approach incorporates subjective judgments regarding comparable rental and operating expense data, capitalization or discount rate, and projections of future rent and expenses based
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on appropriate evidence as well as the residual value of the property. Other methodologies that may also be used to value properties include sales comparisons and cost approaches. Because the appraisals performed by our independent appraisers involve subjective judgments, those valuations of our consolidated properties, which are included in our NAV, may not reflect the liquidation value or net realizable value of our consolidated properties.
The paragraph under the heading “Net Asset Value Calculation and Valuation Guidelines—Valuation of Real Estate-Related Assets” beginning on page 147 of our prospectus is hereby deleted in its entirety and replaced with the following:
Real estate-related assets that we may acquire include debt and equity interests backed principally by real estate, such as common and preferred stock of REITs and real estate companies, commercial mortgage-backed securities, mortgage loans, participations in mortgage loans, mezzanine loans and preferred equity positions. In general, real estate-related assets will be valued according to the procedures specified below upon acquisition or issuance and then quarterly, or in the case of liquid securities, daily, thereafter. For real estate-related assets that are not valued daily, our board of directors will retain independent valuation firms to value such real estate-related assets no less than quarterly. Intra-quarter valuations of real estate-related assets that generally are valued quarterly may be performed if our advisor or the independent valuation firm retained to value such assets believes the value of the applicable asset has changed materially since the most recent valuation.
The paragraph under the subheading “Net Asset Value Calculation and Valuation Guidelines—Valuation of Real Estate-Related Assets—Private Real Estate-Related Assets” beginning on page 148 of our prospectus is hereby deleted in its entirety and replaced with the following:
Investments in privately placed debt instruments and securities of real estate-related operating businesses (other than joint ventures), such as real estate development or management companies, will be valued by our advisor at cost (purchase price plus all related acquisition costs and expenses, such as legal fees and closing costs) and thereafter will be revalued no less than quarterly by an independent valuation firm as approved by our board of directors. In evaluating the fair value of our interests in certain commingled investment vehicles (such as private real estate funds), values periodically assigned to such interests by the respective issuers or broker-dealers may be relied upon.
The subsection “Net Asset Value Calculation and Valuation Guidelines—Valuation of Real Estate-Related Assets—Mortgage Loans, Participations in Mortgage Loans and Mezzanine Loans” beginning on page 148 of our prospectus is hereby deleted in its entirety and replaced with the following:
Mortgage Loans, Participations in Mortgage Loans, Mezzanine Loans and Preferred Equity Positions
Individual investments in mortgages, mortgage participations, mezzanine loans and preferred equity positions will be valued initially at our acquisition cost and will be revalued on a quarterly basis by an independent valuation firm as approved by our board of directors. Revaluations of mortgages will reflect the changes in value of the underlying real estate, with anticipated sale proceeds (estimated cash flows) discounted to their present value using a discount rate based on current market rates.
The paragraph under the heading “Net Asset Value Calculation and Valuation Guidelines—Liabilities” beginning on page 148 of our prospectus is hereby deleted in its entirety and replaced with the following:
The value of our company-level liabilities will be included as part of our NAV calculation. Our independent valuation advisor will not be responsible for the valuation, quarterly or otherwise, or the review of valuations of our liabilities. We expect that these liabilities will include the fees payable to our advisor and our dealer manager, accounts payable, accrued operating expenses, property-level mortgages, any portfolio-level credit facilities and other liabilities. All liabilities will be valued using widely accepted methodologies specific to each type of liability. We anticipate having access to a line of credit, which will be held at cost. Additionally, any debt obligations originated by us will be valued at amortized cost, while any debt obligations assumed by us in connection with a transaction will be valued at the time of assumption pursuant to the purchase price allocation as required by GAAP.
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Thereafter, assumed debt will not be revalued and the discount or premium that resulted from the purchase price allocation will be amortized over the remaining term of the instrument. Liabilities allocable to a specific class of shares will only be included in the NAV calculation for that class. Estimated amounts of future trailing fees, as determined by our advisor, will be deducted from the NAV on a daily basis as and when they become payable to the dealer manager. These amounts have not yet been included in the calculation of our NAV because the timing and ultimate amount of the trailing fees to be paid are unknown and dependent on factors including how long the applicable shares remain outstanding. However, under GAAP, we have incurred a liability for estimated future trailing fees as of December 31, 2019.
The paragraphs under the heading “Net Asset Value Calculation and Valuation Guidelines—NAV and NAV Per Share Calculation” beginning on page 149 of our prospectus are hereby deleted in their entirety and replaced with the following:
Our NAV and our NAV per share are calculated by The Bank of New York Mellon, or BNY Mellon, in accordance with the valuation guidelines established by our board of directors. Our advisor is responsible for overseeing, and is ultimately responsible for, the calculation of our NAV and our NAV per share as performed by BNY Mellon. The valuation of our assets and liabilities which are utilized by BNY Mellon in the calculation of our NAV and our NAV per share are determined as described above.
We are offering to the public seven classes of shares of our common stock: Class A shares, Class I shares, Class M-I shares, Class N shares, Class S shares, Class T shares and Class T2 shares (see “Description of Capital Stock—Common Stock”). We are also offering Class D shares of our common stock via private placement, and we may issue Class Z shares of our common stock to our advisor or its affiliates in a private placement. Each such class has an undivided interest in our assets and liabilities, other than any class-specific liabilities. In accordance with the valuation guidelines, BNY Mellon calculates our NAV per share for each class after the end of each business day, using a process that reflects several components, including, but not limited to, (1) estimated values of each of our properties based upon individual appraisal reports provided periodically by our independent valuation advisor and other third-party independent valuation firms, (2) the value of our liquid assets for which third party market quotes are available, (3) estimated values of our other real estate equity securities and real estate loan investments, as provided by independent valuation agents, (4) estimated accruals and amortizations of our operating revenues and expenses, including our organization and offering expenses, and (5) accruals for stockholder distributions.
The calculation of our NAV is intended to be a calculation of fair value of our assets less our outstanding liabilities and may differ from our financial statements. As a public company, we are required to issue financial statements based on historical cost in accordance with GAAP. To calculate our NAV for the purpose of establishing a purchase and redemption price for our shares, we have adopted a model, as explained below, which adjusts the value of our assets from historical cost to fair value in accordance with the GAAP principles set forth in FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures. Our advisor will calculate the fair value of our real estate properties based on appraisals provided by our independent appraisers and in accordance with these principles. Because these appraisals involve significant professional judgment in the application of both observable and unobservable attributes, the calculated fair value of our assets may differ from their actual realizable value or future fair value. Furthermore, no rule or regulation requires that we calculate NAV in a certain way. While we believe our NAV calculation methodologies are consistent with standard industry principles, there is no established practice among public REITs, whether listed or not, for calculating NAV in order to establish a purchase or redemption price. As a result, other public REITs may use different methodologies or assumptions to determine NAV.
At the end of each business day, before taking into consideration additional issuances of shares of capital stock, redemptions or class-specific fee accruals for that day, any change in our aggregate NAV (whether an increase or decrease) is allocated among each class of shares based on each class’s relative percentage of the previous aggregate NAV. Changes in our daily NAV will include, without limitation, daily accruals and amortizations of our net portfolio income, interest expense, the advisory fee, the dealer manager fee, the distribution fee, distributions, unrealized/realized gains and losses on assets, offering costs and any expense reimbursements. Costs incurred by us under the expense support agreement for both organization and offering expenses and operating expenses will be
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allocated to all classes of shares of our common stock on a pro rata basis in connection with calculating the NAV for each class as and when such amounts are reimbursed to our advisor. In addition, all of our offering costs associated with all of our offerings (including any private placements) will be allocated to all outstanding shares of all classes, on a pro rata basis. The net portfolio income will be calculated and accrued on the basis of data extracted from (1) the quarterly budget for each property and at the company level, including organization and offering expenses and certain operating expenses, (2) material, unbudgeted non-recurring income and expense events such as capital expenditures, prepayment penalties, assumption fees, tenant buyouts, lease termination fees and tenant turnover with respect to our properties when our advisor becomes aware of such events and the relevant information is available, (3) material property acquisitions and dispositions occurring during the month and (4) reports from other vendors impacting our aggregate NAV. Acquisition costs with respect to each acquired property are amortized on a daily basis into our NAV over a five-year period following the acquisition date. On an ongoing basis, BNY Mellon will adjust the accruals to reflect actual operating results and the outstanding receivable, payable and other account balances resulting from the accumulation of daily accruals for which financial information is available.
Pursuant to the terms of our expense support agreement with our advisor described elsewhere in this prospectus, our advisor has incurred expenses related to our offerings and operations, which we refer to as expense payments. Expense payments made by our advisor in accordance with the expense support agreement will not be recognized as expenses and reflected in our daily NAV until we reimburse our advisor for these costs. Expense payments will be allocated to all classes of shares of our common stock daily on a pro rata basis in connection with calculating the daily NAV for each class. Prior to the initiation of our current follow-on offering period, and prior to initiation of future follow-on offering periods, we have incurred and will incur certain costs in preparation for such follow-on offering periods, which we refer to as prepaid offering costs. Such costs will benefit the entire follow-on offering period to which they relate and as such will be amortized on a straight-line basis over the anticipated follow-on offering period into the NAV for each class of shares beginning upon commencement of each particular follow-on offering. Organization and offering costs incurred during an active follow-on offering period will be deducted from our NAV on an accrual basis as they are incurred. In the event our advisor agrees to pay some or all of our organization and offering costs prior to the commencement of an offering period and agrees to defer reimbursement of such costs, then such costs will be amortized into the daily NAV calculation as such costs are reimbursed to our advisor. We will allocate all of our offering costs to all outstanding shares of all classes on a pro rata basis, each day that we calculate a NAV for a given class of shares. Similarly, any payments made by our dealer manager of reimbursable offering costs in connection with our offerings on our behalf will also be recognized and reflected in our daily NAV for all share classes on a pro rata basis.
Following the aggregation of the net asset values of our investments, the addition of any other assets (such as cash on hand), the deduction of any other liabilities and the allocation of income and expenses, BNY Mellon will incorporate any class-specific adjustments to our NAV, including additional issuances and redemptions of our common stock and accruals of class-specific fees such as distribution fees. Our share classes may have different fee accruals associated with the advisory fee we will pay our advisor because the performance component of our advisory fee is calculated separately with respect to each class. See “Management—The Advisory Agreement—Advisory Fee” for a discussion of the calculation of the performance component of the advisory fee. At the close of business on the date that is one business day after each record date for any declared distribution, which we refer to as the “distribution adjustment date,” our NAV for each class will be reduced to reflect the accrual of our liability to pay the distribution to our stockholders of record of each class as of the record date. NAV per share for each class is calculated by dividing such class’s NAV at the end of each trading day by the number of shares outstanding for that class on such day.
The combination of the NAV for each of our classes of common stock will equal the value of our assets, which will consist almost entirely of the value of our interest in our operating partnership, less our liabilities, which include certain class-specific liabilities. The value of our interest in our operating partnership will be equal to the excess of the value of our operating partnership over the portion thereof that would be distributed to any limited partners if our operating partnership were liquidated. The value of our operating partnership is the excess of the value of our operating partnership’s assets (including the fair value of its properties, real estate-related assets, cash and other investments) over its liabilities (including its debt, any declared and accrued unpaid distributions and the expenses attributable to its operations). BNY Mellon will calculate the value of the assets of our operating
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partnership as directed by our valuation guidelines based upon values received from various sources, as described in more detail above.
Experts
The following disclosure is added to the “Experts” section of our prospectus.
The estimated value of our investments in real estate as of March 31, 2020 presented on page 1 of this Supplement No. 2 under the section “Valuation of Properties” has been reviewed by Altus Group U.S. Inc., an independent valuation firm, and is included in this Supplement No. 2 given the authority of such firm as experts in property valuations and appraisals. Altus Group is responsible for providing an opinion of fair value in individual appraisal reports or expressing an opinion as to the reasonableness of the value expressed in individual third-party appraisal reports based on its review of the underlying reports. Altus Group does not calculate and is not responsible for our daily NAV per share for any class of our shares.
Quarterly Report on Form 10-Q
The prospectus is hereby supplemented with our Quarterly Report on Form 10-Q, excluding exhibits, for the period ended March 31, 2020 that was filed with the SEC on May 14, 2020, a copy of which is attached to this Supplement No. 2 as Appendix A.
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Appendix A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
Form 10-Q
_________________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2020
OR
| ☐ | 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 000-55598
__________________________________________
RREEF Property Trust, Inc.
(Exact name of registrant as specified in its charter)
__________________________________________
| Maryland | 45-4478978 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
| 875 Third Avenue, 26th Floor, New York, NY 10022 | (212) 454-4500 | ||||
| (Address of principal executive offices; zip code) | (Registrant’s telephone number, including area code) | ||||
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act: None.
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, 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 | o | Accelerated filer | o | ||||||||
| 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of May 5, 2020, the registrant had 3,707,421 shares of Class A common stock, $.01 par value, outstanding, 10,351,902 shares of Class I common stock, $.01 par value, outstanding, 999,934 shares of Class T common stock, $.01 par value, outstanding, 176,101 shares of Class D common stock, $.01 par value, outstanding, and no shares of Class N common stock, $.01 par value, outstanding.
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RREEF PROPERTY TRUST, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2020
TABLE OF CONTENTS
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RREEF PROPERTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| March 31, 2020 (unaudited) | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| Investment in real estate assets: | |||||||||||
| Land | $ | 124,860 | $ | 124,860 | |||||||
| Buildings and improvements, less accumulated depreciation of $23,160 and $21,403, respectively | 165,832 | 167,004 | |||||||||
| Furniture, fixtures and equipment, less accumulated depreciation of $391 and $369, respectively | 246 | 220 | |||||||||
| Acquired intangible lease assets, less accumulated amortization of $25,849 and $24,413, respectively | 37,842 | 39,278 | |||||||||
| Total investment in real estate assets, net | 328,780 | 331,362 | |||||||||
| Investment in marketable securities | 16,536 | 21,245 | |||||||||
| Total investment in real estate assets and marketable securities, net | 345,316 | 352,607 | |||||||||
| Cash and cash equivalents | 6,285 | 4,234 | |||||||||
| Receivables, net of allowance for doubtful accounts of $7 and $6, respectively | 4,815 | 4,812 | |||||||||
| Deferred leasing costs, net of amortization of $831 and $732, respectively | 2,045 | 2,132 | |||||||||
| Prepaid and other assets | 1,968 | 2,300 | |||||||||
| Total assets | $ | 360,429 | $ | 366,085 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Line of credit, net | $ | 74,357 | $ | 81,291 | |||||||
| Mortgage loans payable, net | 125,664 | 125,698 | |||||||||
| Accounts payable and accrued expenses | 3,983 | 2,878 | |||||||||
| Due to affiliates | 14,302 | 7,843 | |||||||||
| Note to affiliate, net of unamortized discount of $943 and $1,217, respectively | 4,440 | 7,733 | |||||||||
| Acquired below market lease intangibles, less accumulated amortization of $4,566 and $4,346, respectively | 13,999 | 14,219 | |||||||||
| Distributions payable | 473 | 441 | |||||||||
| Other liabilities | 2,418 | 2,140 | |||||||||
| Total liabilities | 239,636 | 242,243 | |||||||||
| Stockholders' Equity: | |||||||||||
| Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued | — | — | |||||||||
| Class A common stock, $0.01 par value; 200,000,000 shares authorized; 3,784,431 and 3,821,127 issued and outstanding, respectively | 38 | 38 | |||||||||
| Class I common stock, $0.01 par value; 200,000,000 shares authorized; 10,275,751 and 9,557,896 issued and outstanding, respectively | 103 | 96 | |||||||||
| Class T common stock, $0.01 par value; 250,000,000 shares authorized; 998,470 and 938,409 issued and outstanding, respectively | 10 | 9 | |||||||||
| Class D common stock, $0.01 par value; 50,000,000 shares authorized; 176,101 and 176,101 issued and outstanding, respectively | 2 | 2 | |||||||||
| Class N common stock, $0.01 par value; 300,000,000 shares authorized; none issued | — | — | |||||||||
| Additional paid-in capital | 174,206 | 169,395 | |||||||||
| Deficit | (53,566) | (45,698) | |||||||||
| Total stockholders' equity | 120,793 | 123,842 | |||||||||
| Total liabilities and stockholders' equity | $ | 360,429 | $ | 366,085 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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RREEF PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||
| Property related income | $ | 8,013 | $ | 5,765 | |||||||||||||||||||||||||
| Investment income on marketable securities | 162 | 151 | |||||||||||||||||||||||||||
| Total revenues | 8,175 | 5,916 | |||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||
| General and administrative expenses | 540 | 572 | |||||||||||||||||||||||||||
| Property operating expenses | 2,238 | 1,882 | |||||||||||||||||||||||||||
| Advisory fees | 539 | 371 | |||||||||||||||||||||||||||
| Depreciation | 1,779 | 1,310 | |||||||||||||||||||||||||||
| Amortization | 1,481 | 1,169 | |||||||||||||||||||||||||||
| Total operating expenses | 6,577 | 5,304 | |||||||||||||||||||||||||||
| Net realized (loss) gain upon sale of marketable securities | (443) | 119 | |||||||||||||||||||||||||||
| Net unrealized change in fair value of investment in marketable securities | (4,363) | 2,166 | |||||||||||||||||||||||||||
| Operating (loss) income | (3,208) | 2,897 | |||||||||||||||||||||||||||
| Interest expense | (1,952) | (1,293) | |||||||||||||||||||||||||||
| Net (loss) income | $ | (5,160) | $ | 1,604 | |||||||||||||||||||||||||
| Basic and diluted net (loss) income per share of Class A common stock | $ | (0.34) | $ | 0.15 | |||||||||||||||||||||||||
| Basic and diluted net (loss) income per share of Class I common stock | $ | (0.34) | $ | 0.15 | |||||||||||||||||||||||||
| Basic and diluted net (loss) income per share of Class T common stock | $ | (0.34) | $ | 0.15 | |||||||||||||||||||||||||
| Basic and diluted net (loss) income per share of Class D common stock | $ | (0.34) | $ | — | |||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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RREEF PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands, except share and per share data)
| Preferred Stock | Class A Common Stock | Class I Common Stock | Class T Common Stock | Class D Common Stock | Class N Common Stock | Additional Paid-in Capital | Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Par Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | — | $ | — | 3,821,127 | $ | 38 | 9,557,896 | $ | 96 | 938,409 | $ | 9 | 176,101 | $ | 2 | — | $ | — | $ | 169,395 | $ | (45,698) | $ | 123,842 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | 35,762 | — | 960,826 | 9 | 55,884 | 1 | — | — | — | — | 15,306 | — | 15,316 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock through the distribution reinvestment plan | — | — | 25,107 | — | 63,595 | 1 | 4,177 | — | — | — | — | — | 1,338 | — | 1,339 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of common stock | — | — | (97,565) | — | (308,331) | (3) | — | — | — | — | — | — | (5,794) | — | (5,797) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to investors | — | — | — | — | — | — | — | — | — | — | — | — | — | (2,708) | (2,708) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Offering costs | — | — | — | — | — | — | — | — | — | — | — | — | (5,828) | — | (5,828) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity based compensation | — | — | — | — | 1,765 | — | — | — | — | — | — | — | 25 | — | 25 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Discount on note to affiliate | — | — | — | — | — | — | — | — | — | — | — | — | (236) | — | (236) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | — | — | — | (5,160) | (5,160) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | — | $ | — | 3,784,431 | $ | 38 | 10,275,751 | $ | 103 | 998,470 | $ | 10 | 176,101 | $ | 2 | — | $ | — | $ | 174,206 | $ | (53,566) | $ | 120,793 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
11
RREEF PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands, except share and per share data)
| Preferred Stock | Class A Common Stock | Class I Common Stock | Class T Common Stock | Class D Common Stock | Class N Common Stock | Additional Paid-in Capital | Deficit | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | — | $ | — | 3,574,584 | $ | 36 | 6,132,292 | $ | 61 | 628,863 | $ | 6 | — | $ | — | — | $ | — | $ | 115,025 | $ | (37,621) | $ | 77,507 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | 131,830 | 1 | 641,503 | 7 | 55,679 | 1 | — | — | — | — | 11,913 | — | 11,922 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock through the distribution reinvestment plan | — | — | 22,405 | — | 34,329 | — | 2,250 | — | — | — | — | — | 841 | — | 841 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of common stock | — | — | (68,408) | (1) | (43,806) | — | (9,363) | — | — | — | — | — | (1,723) | — | (1,724) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to investors | — | — | — | — | — | — | — | — | — | — | — | — | — | (1,841) | (1,841) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Offering costs | — | — | — | — | — | — | — | — | — | — | — | — | (916) | — | (916) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity based compensation | — | — | — | — | 5,042 | — | — | — | — | — | — | — | 72 | — | 72 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | — | — | — | — | 1,604 | 1,604 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2019 | — | $ | — | 3,660,411 | $ | 36 | 6,769,360 | $ | 68 | 677,429 | $ | 7 | — | $ | — | — | $ | — | $ | 125,212 | $ | (37,858) | $ | 87,465 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
12
RREEF PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| Three Months Ended March 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net (loss) income | $ | (5,160) | $ | 1,604 | |||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||
| Depreciation | 1,779 | 1,310 | |||||||||||||||
| Net realized loss (gain) upon sale of marketable securities | 443 | (119) | |||||||||||||||
| Net unrealized change in fair value of marketable securities | 4,363 | (2,166) | |||||||||||||||
| Share based compensation | 25 | 72 | |||||||||||||||
| Amortization of intangible lease assets and liabilities | 1,315 | 999 | |||||||||||||||
| Amortization of deferred financing costs | 97 | 79 | |||||||||||||||
| Straight line rent | (157) | (208) | |||||||||||||||
| Amortization of discount on note to affiliate | 38 | 37 | |||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Receivables | 151 | (240) | |||||||||||||||
| Deferred leasing costs | (12) | (111) | |||||||||||||||
| Prepaid and other assets | (446) | (289) | |||||||||||||||
| Accounts payable and accrued expenses | 409 | 378 | |||||||||||||||
| Other liabilities | 169 | (46) | |||||||||||||||
| Due to affiliates | (1,065) | (511) | |||||||||||||||
| Net cash provided by operating activities | 1,949 | 789 | |||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Improvements to real estate assets | (873) | (415) | |||||||||||||||
| Investment in marketable securities | (7,087) | (5,778) | |||||||||||||||
| Proceeds from sale of marketable securities | 7,066 | 5,640 | |||||||||||||||
| Net cash used in investing activities | (894) | (553) | |||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Proceeds from line of credit | 6,500 | 900 | |||||||||||||||
| Repayment of line of credit | (13,500) | (6,100) | |||||||||||||||
| Repayment of mortgage loans payable | (65) | (63) | |||||||||||||||
| Proceeds from issuance of common stock | 15,281 | 11,909 | |||||||||||||||
| Payment of offering costs | (982) | (522) | |||||||||||||||
| Distributions to investors | (1,337) | (983) | |||||||||||||||
| Redemption of common stock | (4,901) | (1,589) | |||||||||||||||
| Net cash provided by financing activities | 996 | 3,552 | |||||||||||||||
| Net increase in cash and cash equivalents | 2,051 | 3,788 | |||||||||||||||
| Cash and cash equivalents, beginning of period | 4,234 | 2,002 | |||||||||||||||
| Cash and cash equivalents, end of period | $ | 6,285 | $ | 5,790 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
13
RREEF PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(Unaudited)
| Three Months Ended March 31, | |||||||||||||||||
| Supplemental Disclosures of Non-Cash Investing and Financing Activities: | 2020 | 2019 | |||||||||||||||
| Distributions declared and unpaid | $ | 473 | $ | 351 | |||||||||||||
| Common stock issued through the distribution reinvestment plan | 1,339 | 841 | |||||||||||||||
| Purchases of marketable securities not yet paid | 231 | 178 | |||||||||||||||
| Proceeds from sale of marketable securities not yet received | 131 | 119 | |||||||||||||||
| Proceeds from issuance of common stock not yet received | 533 | 113 | |||||||||||||||
| Extinguishment on note to affiliate | 3,567 | — | |||||||||||||||
| Discount on note to affiliate | 236 | — | |||||||||||||||
| Accrued offering costs not yet paid | 4,565 | 661 | |||||||||||||||
| Capital expenditures not yet paid | 512 | 362 | |||||||||||||||
| Redemptions of common stock not yet paid | 1,046 | 135 | |||||||||||||||
| Supplemental Cash Flow Disclosures: | |||||||||||||||||
| Interest paid | $ | 1,669 | $ | 1,053 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
14
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
(in thousands except share and per share data)
NOTE 1 — ORGANIZATION
RREEF Property Trust, Inc. (the “Company”) was formed on February 7, 2012 as a Maryland corporation and has elected to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. Substantially all of the Company's business is conducted through RREEF Property Operating Partnership, LP, the Company's operating partnership (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. RREEF Property OP Holder, LLC (the “OP Holder”), a wholly-owned subsidiary of the Company, is the limited partner of the Operating Partnership. As the Company completes the settlement for purchase orders for shares of its common stock in its continuous public offering, it will continue to transfer substantially all of the proceeds to the Operating Partnership.
The Company was organized to invest primarily in a diversified portfolio consisting primarily of high quality, income-producing commercial real estate located in the United States, including, without limitation, office, industrial, retail and apartment properties (“Real Estate Properties”). Although the Company intends to invest primarily in Real Estate Properties, it also intends to acquire common and preferred stock of REITs and other real estate companies (“Real Estate Equity Securities”) and debt investments backed principally by real estate (“Real Estate Loans” and, together with Real Estate Equity Securities, “Real Estate-Related Assets”).
On January 3, 2013, the Securities and Exchange Commission ("SEC") declared effective the Company's registration statement on Form S-11 (File No. 333-180356), filed under the Securities Act of 1933, as amended (the "Initial Registration Statement"). On May 30, 2013, RREEF America L.L.C., a Delaware limited liability company (“RREEF America”), the Company's sponsor and advisor, purchased $10,000 of the Company's Class I common stock, $0.01 par value per share ("Class I Shares"), and the Company’s board of directors authorized the release of the escrowed funds to the Company, thereby allowing the Company to commence operations.
On January 15, 2016, the Company filed articles supplementary to its articles of incorporation to add a newly-designated Class D common stock, $0.01 par value per share ("Class D Shares"). On January 20, 2016, the Company commenced a private offering of up to a maximum of $350,000 in Class D Shares (the "Private Offering," and together with the Follow-On Public Offering (defined below), the "Offerings").
On July 12, 2016, the SEC declared effective the Company's registration statement on Form S-11 (File No. 333-208751), filed under the Securities Act of 1933, as amended (the "Registration Statement"). Pursuant to the Registration Statement, the Company is offering for sale up to $2,100,000 of shares of its Class A common stock, $0.01 par value per share ("Class A Shares"), Class I Shares, and Class T common stock, $0.01 par value per share ("Class T Shares"), in its primary offering and up to $200,000 of Class A Shares, Class I Shares, Class N common stock, $0.01 par value per share ("Class N Shares") and Class T Shares pursuant to its distribution reinvestment plan, to be sold on a "best efforts" basis for the Company's follow-on public offering (the "Follow-On Public Offering"). The Company's initial public offering terminated upon the commencement of the Follow-On Public Offering.
On January 8, 2020, the SEC declared effective the Company's registration statement on Form S-11 (File No. 333-232425) (the "Second Follow-On Registration Statement"). Pursuant to the Second Follow-On Registration Statement, the Company is offering for sale up to $2,300,000 of shares of its Class A shares, Class I shares or Class T shares consisting of up to $2,100,000 in its primary offering and up to $200,000 of shares of its Class A shares, Class I shares, Class N shares or Class T shares pursuant to its distribution reinvestment plan, to be sold on a "best efforts" basis for the Company's second follow-on public offering (the "Second Follow-On Public Offering"). The Follow-On Public Offering terminated upon the commencement of the Second Follow-On Public Offering.
15
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
Together, the Initial Public Offering, the Follow-On Public Offering, the Second Follow-On Public Offering and the Private Offering are referred to as the "Offerings".
On April 22, 2020, the Company filed articles supplementary to its articles of incorporation to add newly-designated Class M-I common stock, $0.01 par value per share ("Class M-I Shares"), Class S common stock, $0.01 par value per share ("Class S Shares"), Class T2 common stock, $0.01 par value per share ("Class T2 Shares") and Class Z common stock, $0.01 par value per share ("Class Z Shares"). Class M-I Shares, Class S Shares and Class T2 Shares have been added to the shares available in the Second Follow-On Public Offering. Class Z Shares are expected to be offered only in a private offering.
Shares of the Company’s common stock are sold at the Company’s net asset value (“NAV”) per share, plus, for Class A, Class S, Class T, Class T2 and Class D Shares only, applicable selling commissions. Each class of shares have a different NAV per share because of certain class-specific fees. NAV per share is calculated by dividing the NAV at the end of each business day for each class by the number of shares outstanding for that class on such day.
The Company's NAV per share for its Class A, Class I and Class T Shares is posted to the Company's website at www.rreefpropertytrust.com after the stock market close each business day. Additionally, the Company's NAV per share for its Class A, Class I and Class T Shares is published daily via NASDAQ's Mutual Fund Quotation System under the symbols ZRPTAX, ZRPTIX and ZRPTTX for its Class A Shares, Class I Shares and Class T Shares, respectively.
16
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the authoritative reference for U.S. generally accepted accounting principles (“GAAP”). There have been no significant changes to the Company's significant accounting policies during the three months ended March 31, 2020 except for the adoption of Accounting Standards Updates (“ASU”) noted below in Note 2. The interim financial data as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 is unaudited. In the Company’s opinion, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Real Estate Investments and Lease Intangibles
Entities are required to evaluate whether transactions should be accounted for as acquisitions (and dispositions) of assets or businesses. When substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. Generally, a real estate asset and its related leases will be considered a single identifiable asset and therefore will not meet the definition of a business. If the real estate and related leases in an acquisition are determined to be an asset and not a business, then the acquisition related costs would be capitalized onto the consolidated balance sheets. Otherwise, such costs will be expensed upon completion of the transaction.
The carrying value of the real estate investments are reviewed to ascertain if there are any indicators of impairment. Factors considered include the type of asset, the economic situation in the area in which the asset is located, the economic situation in the industry in which a tenant is involved and the timeliness of the payments made by a tenant under its lease, as well as any current correspondence that may have been had with a tenant, including property inspection reports. A real estate investment is impaired if the undiscounted cash flows over the expected hold period are less than the real estate investment’s carrying amount. In this case, an impairment loss will be recorded to the extent that the estimated fair value is lower than the real estate investment’s carrying amount. The estimated fair value is determined primarily using information contained within independent appraisals obtained quarterly by the Company from its independent valuation agent or other third-party appraisers. Real estate investments that are expected to be disposed of are valued at the lower of carrying amount or estimated fair value less costs to sell. As of March 31, 2020 and December 31, 2019, none of the Company's real estate investments were impaired.
Organization and Offering Costs
Organizational expenses and other expenses which do not qualify as offering costs are expensed as incurred. Offering costs are those costs incurred by the Company, RREEF America and its affiliates on behalf of the Company which relate directly to the Company’s activities of raising capital in the Offerings, preparing for the Offerings, the qualification and registration of the Offerings and the marketing and distribution of the Company’s shares. This includes, but is not limited to, accounting and legal fees, including the legal fees of the dealer manager for the public offerings, costs for registration statement amendments and prospectus supplements, printing, mailing and distribution costs, filing fees, amounts to reimburse RREEF America as the Company’s advisor or its affiliates for the salaries of employees and other costs in connection with preparing supplemental sales literature, amounts to reimburse the dealer manager for amounts that it may pay to reimburse the bona fide due diligence expenses of any
17
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
participating broker-dealers supported by detailed and itemized invoices, telecommunication costs, fees of the transfer agent, registrars, trustees, depositories and experts, the cost of educational conferences held by the Company (including the travel, meal and lodging costs of registered representatives of any participating broker-dealers) and attendance fees and cost reimbursement for employees of affiliates to attend retail seminars conducted by broker-dealers. Offering costs will be paid from the proceeds of the Offerings. These costs will be treated as a reduction of the total proceeds. Total organization and offering costs incurred by the Company with respect to a particular Offering will not exceed 15% of the gross proceeds from such particular Offering. In addition, the Company will not reimburse RREEF America or the dealer manager for any underwriting compensation (a subset of organization and offering costs) which would cause the Company’s total underwriting compensation to exceed 10% of the gross proceeds from the primary portion of a particular offering.
Included in offering costs are (1) distribution fees paid on a trailing basis at the rate of (a) 0.50% per annum on the NAV of the outstanding Class A Shares, and (b) 1.00% per annum for approximately three years on the NAV of the outstanding Class T Shares, and (2) dealer manager fees paid on a trailing basis at the rate of 0.55% per annum on the NAV of the outstanding Class A and Class I Shares (collectively, the "Trailing Fees"). The Trailing Fees are computed daily based on the respective NAV of each share class as of the beginning of each day and paid monthly. However, at each reporting date, the Company accrues an estimate for the amount of Trailing Fees that ultimately may be paid on the outstanding shares. Such estimate reflects the Company's assumptions for certain variables, including future redemptions, share price appreciation and the total gross proceeds raised or to be raised during each Offering. In addition, the estimated accrual for future Trailing Fees as of a given reporting date may be reduced by the aforementioned limits on total organization and offering costs and total underwriting compensation. Changes in this estimate will be recorded prospectively as an adjustment to additional paid-in capital. As of March 31, 2020 and December 31, 2019, the Company has accrued $13,868 and $6,221, respectively, in Trailing Fees to be payable in the future, which was included in due to affiliates on the consolidated balance sheets.
Revenue Recognition
In accordance with FASB Topic 842, Leases (ASC 842), and related ASU's that amended or clarified certain provisions of ASC 842, the Company elected a practical expedient to not separate lease and non-lease components of a lease and instead accounts for them as a single component if two criteria are met: (i) the timing and pattern of transfer of the non-lease component(s) and associated lease component are the same, and (ii) the lease component, if accounted for separately, would be classified as an operating lease. The Company evaluates the lease and non-lease components within its all of its leases under the practical expedient and reports rental and other property income and common area expense reimbursement income as a single component on the Company’s consolidated statements of operations.
Contractual base rental revenue from real estate leases is recognized on a straight-line basis over the terms of the related leases. The differences between contractual base rental revenue earned from real estate leases on a straight-line basis and amounts due under the respective lease agreements are amortized or accreted, as applicable, to deferred rent receivable. Property related income will also include amortization of above- and below-market leases as well as amortization of lease incentives. Revenues relating to lease termination fees for the termination of an entire lease will be recognized at the time that a tenant’s right to occupy the leased space is terminated and collectibility is reasonably assured.
Under ASC 842, the future revenue stream from leases must be evaluated for collectibility. Pursuant to these provisions, if an entity has determined that the collectibility of substantially all future lease payments from a particular lease is not at least probable, then the entity must write off its existing receivable balances (except receivable amounts which are under dispute by the tenant), including any deferred rent amounts recognized on a straight-line basis, and instead begin recognizing revenue from such lease on cash basis. The factors used to evaluate the collectibility of future lease payments for each lease may include, but not be limited to, the tenant's payment history, current payment status, publicly available information about the financial condition of the tenant and other
18
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
information about the tenant of which the entity may be aware. The Company is closely monitoring is tenants in light of the recent and ongoing coronavirus pandemic. As of March 31, 2020, the Company has assessed substantially all of its future lease payments to be at least probable.
To the extent the Company's revenues do not qualify for treatment under ASC 842 or under other specific guidance, the Company is required to recognize revenue in its financial statements in a manner that depicts the transfer of the promised goods or services to its customers in an amount that reflects the consideration to which the Company is entitled at the time of transfer of those goods or services. Such treatment may apply to other types of real estate related contracts, such as for dispositions or development of real estate.
Investment income from marketable securities is accrued at each distribution record date.
Net Earnings or Loss Per Share
Net earnings or loss per share is calculated using the two-class method. The two-class method is utilized when an entity (1) has different classes of common stock that participate differently in net earnings or loss, or (2) has issued participating securities, which are securities that participate in distributions separately from the entity’s common stock. Pursuant to the advisory agreement between the Company and its advisor (see Note 8), the advisor may earn a performance component of the advisory fee which is calculated separately for each class of common stock which therefore may result in a different allocation of net earnings or loss to each class of common stock. In addition, in March and May 2019, the Company granted shares of its Class I common stock to its independent directors (see Note 9), which qualify as participating securities.
Concentration of Credit Risk
As of March 31, 2020 and December 31, 2019, the Company had cash on deposit at multiple financial institutions which were in excess of federally insured levels. The Company limits significant cash holdings to accounts held by financial institutions with a high credit standing. Therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits.
Cash and Cash Equivalents
For purposes of the presentation of the accompanying consolidated financial statements, all unrestricted short-term investments purchased with an initial maturity of three months or less are considered to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions. The combined cash balances at each institution periodically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes the risk is not significant.
Recent Accounting Pronouncements
In March 2019, FASB issued ASU 2019-01, Leases (Topic 842), which provides guidance for determining the fair value and its application to lease classification and measurement for lessors that are not manufacturers or dealers, referred to as qualifying lessors. For qualifying lessors, the fair value of the underlying asset at lease commencement would be its cost, including any acquisition costs, however if a significant amount of time has elapsed between the asset acquisition date and the lease commencement, the fair value would be based on the guidance in ASC 820. ASU 2019-01 is effective for fiscal years beginning after December 15, 2019, including interim periods therein. The Company has evaluated the impact of ASU 2019-01 and determined the adoption does not have a material impact.
19
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
On April 10, 2020, the FASB issued a question and answer document regarding accounting for lease concessions and other effects of COVID-19. The document clarifies that entities may elect a practical expedient to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under ASC 842. Instead, an entity that elects this practical expedient can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract vs. assume the relief was not contemplated by the contract). As of May 13, 2020, the Company had not entered into any lease-relief agreements with any of its tenants. The Company will evaluate its election of the practical expedient on a lease by lease basis if and when the Company enters into any such lease-relief agreements.
NOTE 3 — FAIR VALUE MEASUREMENTS
Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB ASC 820, Fair Value Measurement and Disclosures, establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurement. ASU 2018-13 changes the fair value measurement disclosure requirements of ASC 820 by eliminating, modifying or adding certain disclosure requirements for fair value measurements. ASU 2018-13 became effective for fiscal years beginning after December 15, 2019, including interim periods therein. ASU 2018-13 allowed an entity to early adopt the provisions regarding eliminating or modifying certain disclosures while not adopting the provisions regarding additional disclosures until the effective date of the ASU. The Company elected to early adopt the provisions regarding eliminating or modifying certain disclosures and defer adopting the provisions regarding additional disclosures until the effective date of ASU 2018-13. The Company adopted the additional disclosures under ASU 2018-13 on January 1, 2020. These additional disclosures within Topic 820 require (a) changes in unrealized gains and losses to be included in other comprehensive income, and (b) disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity's own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company's investments in marketable securities are valued using Level 1 inputs as the securities are publicly traded on major stock exchanges.
The fair value of the Company's line of credit and mortgage loans payable are determined using Level 2 and Level 3 inputs and a discounted cash flow approach with an interest rate, property valuation and other assumptions that estimate current market conditions. The carrying amount of the Company's line of credit, exclusive of deferred financing costs, approximated its fair value of $74,600 and $81,600 at March 31, 2020 and December 31, 2019, respectively. The Company estimated the fair value of the Company's mortgage loans payable at $120,240 and $126,601 as of March 31, 2020 and December 31, 2019, respectively. If the valuation of the Company's properties
20
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
as of March 31, 2020 were significantly lower, the market interest rate assumption would be higher (due to higher loan-to-value ratios) potentially resulting in a significantly lower estimated fair value for these liabilities.
The Company has estimated the fair value of its note to affiliate at approximately $4,000 and $4,500 as of March 31, 2020 and December 31, 2019, respectively. The estimated market interest rate is impacted by a number of factors. Material changes in those factors may cause a material change to the estimated market interest rate, thereby materially affecting the estimated fair value of the note to affiliate. The Company has estimated the fair value of the note to affiliate in the middle of the range of reasonably estimable values.
The following shows certain information about the estimated fair value and the unobservable inputs for the Company's debt obligations as of March 31, 2020 and December 31, 2019.
| Range | |||||||||||||||||||||||||||||||||||||||||
| Fair Value at March 31, 2020 | Primary Valuation Techniques | Significant Unobservable Inputs | Minimum | Maximum | Weighted Average | ||||||||||||||||||||||||||||||||||||
| Line of Credit | $ | 74,600 | Discounted cash flow | Loan to value | 50.0 | % | 50.0 | % | 50.0 | % | |||||||||||||||||||||||||||||||
| Market interest rate | 2.43 | % | 2.43 | % | 2.43 | % | |||||||||||||||||||||||||||||||||||
| Mortgage Loans Payable | 120,240 | Discounted cash flow | Loan to value | 38.2 | % | 59.3 | % | 50.7 | % | ||||||||||||||||||||||||||||||||
| Market interest rate | 4.00 | % | 5.50 | % | 4.56 | % | |||||||||||||||||||||||||||||||||||
| Note to Affiliate | 4,000 | Discounted cash flow | Loan to value | NA | NA | NA | |||||||||||||||||||||||||||||||||||
| Market interest rate | 5.00 | % | 5.00 | % | 5.00 | % | |||||||||||||||||||||||||||||||||||
| Range | |||||||||||||||||||||||||||||||||||||||||
| Fair Value at December 31, 2019 | Primary Valuation Techniques | Significant Unobservable Inputs | Minimum | Maximum | Weighted Average | ||||||||||||||||||||||||||||||||||||
| Line of Credit | $ | 81,600 | Discounted cash flow | Loan to value | 54.6 | % | 54.6 | % | 54.6 | % | |||||||||||||||||||||||||||||||
| Market interest rate | 3.34 | % | 3.34 | % | 3.34 | % | |||||||||||||||||||||||||||||||||||
| Mortgage Loans Payable | 126,601 | Discounted cash flow | Loan to value | 39.1 | % | 59.3 | % | 51.3 | % | ||||||||||||||||||||||||||||||||
| Market interest rate | 3.55 | % | 4.20 | % | 3.81 | % | |||||||||||||||||||||||||||||||||||
| Note to Affiliate | 4,500 | Discounted cash flow | Loan to value | NA | NA | NA | |||||||||||||||||||||||||||||||||||
| Market interest rate | 5.00 | % | 5.00 | % | 5.00 | % | |||||||||||||||||||||||||||||||||||
The Company's financial instruments, other than those referred to above, are generally short-term in nature and contain minimal credit risk. These instruments consist of cash and cash equivalents, accounts and other receivables and accounts payable. The carrying amounts of these assets and liabilities in the consolidated balance sheets approximate their fair value.
NOTE 4 — REAL ESTATE INVESTMENTS
21
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
The Company acquired no real estate property during the three months ended March 31, 2020 and 2019.
NOTE 5 — RENTALS UNDER OPERATING LEASES
As of March 31, 2020, the Company owned 14 properties with a total of 60 tenants comprised of four office properties (including one medical office property), four retail properties, five industrial properties and one student housing property with 316 beds. As of March 31, 2019, the Company owned twelve properties with a total of thirty-one tenants comprised of four office properties (including one medical office property), three retail properties and four industrial properties and one student housing property with 316 beds. All leases at the Company's properties have been classified as operating leases. The Company's property related income from its real estate investments is comprised of the following:
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||
Lease revenue 1 | $ | 7,691 | $ | 5,388 | ||||||||||||||||||||||||||||
| Straight-line revenue | 157 | 208 | ||||||||||||||||||||||||||||||
| Above- and below-market lease amortization, net | 190 | 195 | ||||||||||||||||||||||||||||||
| Lease incentive amortization | (25) | (26) | ||||||||||||||||||||||||||||||
| Property related income | $ | 8,013 | $ | 5,765 | ||||||||||||||||||||||||||||
1Lease revenue includes $1,226 and $957 of variable income from tenant reimbursements for the three months ended March 31, 2020 and 2019, respectively. | ||||||||||||||||||||||||||||||||
The Company collected nearly 100% of its lease revenue for the three months ended March 31, 2020, and collected approximately 92% of its lease revenue for the month of April 2020. The Company's retail properties are necessity-based properties, as they are grocery-anchored and contain a number of tenants that are considered essential. As of the end of April 2020, the stores of 13 of the Company's 44 retail tenants were closed. These tenants comprise approximately 10% of the Company's lease revenue for its entire property portfolio.
The future minimum rentals to be received, excluding tenant reimbursements, under the non-cancelable portions of all of the in-place leases in effect as of March 31, 2020 are as follows:
| Year | Amount | |||||||
| Remainder of 2020 | $ | 19,073 | ||||||
| 2021 | 22,630 | |||||||
| 2022 | 19,525 | |||||||
| 2023 | 15,723 | |||||||
| 2024 | 12,041 | |||||||
| Thereafter | 56,210 | |||||||
| $ | 145,202 | |||||||
Percentages of property related income by property and tenant representing more than 10% of the Company's total property related income are shown below.
22
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
| Percent of property related income | |||||||||||||||||||||||
| Property | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||||||||||||||||||
| Providence Square, Marietta, GA | 14.0 | % | — | % | |||||||||||||||||||
| Seattle East Industrial, Redmond, WA | 13.4 | — | |||||||||||||||||||||
| Flats at Carrs Hill, Athens, GA | 10.3 | 13.8 | |||||||||||||||||||||
| Elston Plaza, Chicago, IL | 10.3 | 14.2 | |||||||||||||||||||||
| Allied Drive, Dedham, MA | 9.5 | 12.8 | |||||||||||||||||||||
| Loudoun Gateway, Sterling, VA | 9.5 | 14.1 | |||||||||||||||||||||
| Terra Nova Plaza, Chula Vista, CA | 7.0 | 10.1 | |||||||||||||||||||||
| Total | 74.0 | % | 65.0 | % | |||||||||||||||||||
| Percent of property related income | |||||||||||||||||||||||
| Tenant | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||||||||||||||||||
| FedEx Ground - Seattle East Industrial | 13.4 | % | — | % | |||||||||||||||||||
| Orbital ATK Inc. - Loudoun Gateway | 9.5 | 14.1 | |||||||||||||||||||||
| New England Baptist Hospital-Allied Drive | 8.5 | 11.3 | |||||||||||||||||||||
| Total | 31.4 | % | 25.4 | % | |||||||||||||||||||
The Company's tenants representing more than 10% of in-place annualized base rental revenues were as follows:
| Percent of in-place annualized base rental revenues as of | |||||||||||||||||||||||
| Property | March 31, 2020 | March 31, 2019 | |||||||||||||||||||||
| FedEx Ground - Seattle East Industrial | 15.1 | % | — | % | |||||||||||||||||||
| Orbital ATK Inc. - Loudoun Gateway | 11.6 | 16.8 | |||||||||||||||||||||
| Total | 26.7 | % | 16.8 | % | |||||||||||||||||||
NOTE 6 — MARKETABLE SECURITIES
The following is a summary of the Company's marketable securities held as of the dates indicated, which consisted entirely of publicly-traded shares of common stock in REITs as of each date.
| March 31, 2020 | December 31, 2019 | ||||||||||
| Marketable securities—cost | $ | 17,520 | $ | 17,866 | |||||||
| Unrealized gains | 1,394 | 3,413 | |||||||||
| Unrealized losses | (2,378) | (34) | |||||||||
| Net unrealized (loss) gain | (984) | 3,379 | |||||||||
| Marketable securities—fair value | $ | 16,536 | $ | 21,245 | |||||||
23
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
Upon the sale of a particular security, the realized net gain or loss is computed assuming the shares with the highest cost are sold first. During the three months ended March 31, 2020 and 2019, marketable securities sold generated proceeds of $7,032 and $5,668, respectively, resulting in gross realized gains of $397 and $266, respectively, and gross realized losses of $840 and $147, respectively.
NOTE 7 — NOTES PAYABLE
Wells Fargo Line of Credit
On February 27, 2018, the Company, as guarantor, and certain of the wholly owned subsidiaries of the Operating Partnership, as co-borrowers, entered into an amended and restated secured revolving credit facility (the “Wells Fargo Line of Credit”) with Wells Fargo Bank, National Association, as administrative agent, and other lending institutions that may become parties to the credit agreement. The Wells Fargo Line of Credit has an initial three-year term maturing February 27, 2021. The Company has two one-year extension options following the initial term subject to satisfaction of certain conditions and payment of applicable extension fees. The Company expects to refinance or extend the Wells Fargo Line of Credit prior to its maturity date using available cash flows to meet the requirements for extension.
The interest rate under the Wells Fargo Line of Credit is based on the 1-month London Inter-bank Offered Rate ("LIBOR") with a spread of 160 to 180 basis points depending on the debt yield as defined in the agreement. The Wells Fargo Line of Credit has a maximum capacity of $100,000 and is expandable by the Company up to a maximum capacity of $200,000 upon satisfaction of specified conditions. Each requested expansion must be for at least $25,000 and may result in the Wells Fargo Line of Credit being syndicated. As of March 31, 2020, the outstanding balance under the Wells Fargo Line of Credit was $74,600 and the weighted average interest rate was 2.43%. As of December 31, 2019, the outstanding balance was $81,600 and the weighted average interest rate was 3.33%.
At any time, the borrowing capacity under the Wells Fargo Line of Credit is based on the lesser of (1) an amount equal to 65% of the aggregate value of the properties in the collateral pool as determined by lender appraisals, (2) an amount that results in a minimum debt yield of 9% based on the in-place net operating income of the collateral pool as defined, or (3) the maximum capacity of the Wells Fargo Line of Credit. Proceeds from the Wells Fargo Line of Credit can be used to fund acquisitions, redeem shares pursuant to the Company's redemption plan and for any other corporate purpose. As of March 31, 2020, the Company's maximum borrowing capacity was $89,310.
The Wells Fargo Line of Credit agreement contains customary representations, warranties, borrowing conditions and affirmative, negative and financial covenants, including that there must be at least five properties in the collateral pool at all times and that the collateral pool must also meet specified concentration provisions, unless waived by the lender. In addition, the Company, as guarantor, must meet tangible net worth hurdles. The Company was in compliance with all financial covenants as of March 31, 2020.
The following is a reconciliation of the carrying amount of the Wells Fargo Line of Credit at March 31, 2020 and December 31, 2019.
24
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
| Balance at | ||||||||||||||||||||||||||||||||||||||
| Lender | March 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Wells Fargo | $ | 74,600 | $ | 81,600 | ||||||||||||||||||||||||||||||||||
| Deduct: Deferred financing costs, less accumulated amortization | (243) | (309) | ||||||||||||||||||||||||||||||||||||
| Line of credit, net | $ | 74,357 | $ | 81,291 | ||||||||||||||||||||||||||||||||||
Mortgage Loans
Certain wholly owned subsidiaries of the Company are obligors on various mortgage loans. Such mortgage loans contain fixed interest rates, allow for one-time transfer to another borrower subject to lender discretion and payment of applicable fees, and allow for full prepayment at certain times with payment of applicable penalties, if any. The following is a reconciliation of the carrying amount of the mortgage loans payable at March 31, 2020 and December 31, 2019.
| Balance at | ||||||||||||||||||||||||||||||||||||||
| Lender | Encumbered Property | March 31, 2020 | December 31, 2019 | Interest Rate | Maturity Date | |||||||||||||||||||||||||||||||||
| Hartford Life Insurance Company | Commerce Corner | 12,682 | 12,747 | 3.41 | December 1, 2023 | |||||||||||||||||||||||||||||||||
| Nationwide Life Insurance Company | Flats at Carrs Hill | $ | 14,500 | $ | 14,500 | 3.63 | % | March 1, 2026 | ||||||||||||||||||||||||||||||
| State Farm Life Insurance Company | Elston Plaza | 17,600 | 17,600 | 3.89 | July 1, 2026 | |||||||||||||||||||||||||||||||||
| Transamerica Life Insurance Company | Wallingford Plaza | 6,950 | 6,950 | 4.56 | January 1, 2029 | |||||||||||||||||||||||||||||||||
| Nationwide Life Insurance Company | Providence Square | 29,700 | 29,700 | 3.67 | October 5, 2029 | |||||||||||||||||||||||||||||||||
| JPMorgan Chase Bank | Seattle East Industrial | 45,140 | 45,140 | 3.87 | January 1, 2030 | |||||||||||||||||||||||||||||||||
| $ | 126,572 | $ | 126,637 | |||||||||||||||||||||||||||||||||||
| Deduct: Deferred financing costs, less accumulated amortization | (908) | (939) | ||||||||||||||||||||||||||||||||||||
| Mortgage loans payable, net | 125,664 | $ | 125,698 | |||||||||||||||||||||||||||||||||||
Aggregate future principal payments due on the Wells Fargo Line of Credit and mortgage loans payable as of March 31, 2020 are as follows:
25
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
| Year | Amount | |||||||
| Remainder of 2020 | $ | 197 | ||||||
| 2021 | 75,103 | |||||||
| 2022 | 717 | |||||||
| 2023 | 12,388 | |||||||
| 2024 | 474 | |||||||
| Thereafter | 112,293 | |||||||
| Total | $ | 201,172 | ||||||
NOTE 8 — RELATED PARTY ARRANGEMENTS
Advisory Agreement
RREEF America is entitled to compensation and reimbursements in connection with the management of the Company's investments in accordance with an advisory agreement between RREEF America and the Company (the "Advisory Agreement"). The Advisory Agreement has a one-year term and is renewable annually upon the review and approval of the Company's board of directors, including the approval of a majority of the Company's independent directors. The Advisory Agreement has a current expiration date of April 21, 2021. There is no limit to the number of terms for which the Advisory Agreement can be renewed.
Fees
Under the Advisory Agreement, RREEF America can earn an advisory fee comprised of two components as described below.
1.The fixed component accrues daily in an amount equal to 1/365th of 1.0% of the NAV of the outstanding shares of each class of common stock for such day. The fixed component of the advisory fee is payable monthly in arrears.
2.The performance component is calculated for each class of common stock on the basis of the total return to stockholders and is measured by the total distributions per share declared to such class plus the change in the NAV per share for such class. For any calendar year in which the total return per share allocable to a class exceeds 6% per annum (the “Hurdle Amount”), RREEF America will receive up to 10% of the aggregate total return allocable to such class with a Catch-Up (defined below) calculated as follows: first, if the total return for the applicable period exceeds the Hurdle Amount, 25% of such total return in excess of the Hurdle Amount (the “Excess Profits”) until the total return reaches 10% (commonly referred to as a “Catch-Up”); and second, to the extent there are remaining Excess Profits, 10% of such remaining Excess Profits. The performance component earned by RREEF America for each class is subject to certain other adjustments which do not apply unless the NAV per share is below $12.00 per share. The performance component is payable annually in arrears.
The performance component is calculated daily on a year-to-date basis by reference to a proration of the per annum hurdle as of the date of calculation. Any resulting performance component as of a given date is deducted from the Company's published NAV per share for such date. At each interim balance sheet date, the Company considers the estimated performance component that is probable to be due as of the end of the current calendar year in assessing whether the calculated performance component as of the interim balance sheet date meets the threshold for recognition in accordance with GAAP in the Company's consolidated financial statements. The ultimate amount of the performance component as of the end of the current calendar year, if any, may be more or less than the amount recognized by the Company as of any interim date and will depend on a variety of factors, including but not limited to, the performance of the Company's investments, interest rates, capital raise and redemptions. No
26
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
performance component was available to be accrued as of March 31, 2020. The fixed component earned by RREEF America and the performance component recognized by the Company are shown below.
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed component | $ | 539 | $ | 371 | ||||||||||||||||||||||||||||||||||||||||||||||
| Performance component | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 539 | $ | 371 | |||||||||||||||||||||||||||||||||||||||||||||||
Expense Reimbursements
Under the Advisory Agreement, RREEF America is entitled to reimbursement of certain costs incurred by RREEF America or its affiliates that were not incurred under the Expense Support Agreement, as described below. Costs eligible for reimbursement, if they were not incurred under the Expense Support Agreement, include most third-party operating expenses, salaries and related costs of RREEF America's employees who perform services for the Company (but not those employees for which RREEF America earns a separate fee or those employees who are executive officers of the Company) and travel related costs for RREEF America's employees who incur such costs on behalf of the Company. Reimbursement payments to RREEF America are subject to the limitations described below under "Reimbursement Limitations."
For the three months ended March 31, 2020 and 2019, RREEF America incurred $64 and $73 of reimbursable operating expenses and offering costs, respectively, that were subject to reimbursement under the Advisory Agreement. As of March 31, 2020 and December 31, 2019, the Company had a payable to RREEF America of $59 and $67, respectively, of operating expenses and offering costs reimbursable under the Advisory Agreement.
Expense Support Agreement
Pursuant to the terms of the expense support agreement, as most recently amended on January 20, 2016 (the "Expense Support Agreement"), RREEF America agreed to defer reimbursement of certain expenses related to the Company's operations that RREEF America has incurred (the “Expense Payments”). The Expense Payments include organization and offering costs and operating expenses as described above under the Advisory Agreement. RREEF America incurred these expenses until the date upon which the aggregate Expense Payments by RREEF America reached $9,200. As of December 31, 2015, the Company had incurred a total of $9,200 in Expense Payments. The balance of $9,200 in Expense Payments consisted of $3,775 in organization and offering costs related to the Company's initial public offering, $196 of offering costs for the Private Offering and $5,229 in operating expenses. The Company has not received any Expense Payments since December 31, 2015.
In accordance with the Expense Support Agreement, the Company was to reimburse RREEF America $250 per quarter (the "Quarterly Reimbursement"), representing a non-interest bearing note due to RREEF America ("Note to Affiliate") which was subject to the imputation of interest. In accordance therewith, on January 1, 2016, the Company recorded a discount on the Note to Affiliate in the amount of $1,862 which was to be amortized to interest expense over the contractual reimbursement period using the effective interest method. Further, the Company made one payment of $250 to RREEF America in the first quarter of 2016, leaving a balance due of $8,950 and which was comprised of $3,567 in organization and offering costs related to the Company's initial public offering, $196 of offering costs for the Private Offering and $5,187 in operating expenses.
On April 25, 2016, the Company and RREEF America entered into a letter agreement that amended certain provisions of the Advisory Agreement and the Expense Support Agreement. On March 24, 2020, the Company and RREEF America entered into a second letter agreement which superseded the previous letter agreement (the "Letter Agreement"). The Letter Agreement provides, in part, that the Company's obligations to reimburse RREEF America for Expense Payments under the Expense Support Agreement are suspended until the first calendar month following
27
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
the month in which the Company has reached $500,000 in offering proceeds from the Offerings (the "ESA Commencement Date"). In addition, in the Letter Agreement, RREEF America agreed to permanently waive the reimbursement of $3,567 in organization and offering expenses that were previously included in the Expense Payments. Accordingly, the Company owed $5,383 to RREEF America under the expense support agreement as of March 31, 2020. Pursuant to the Letter Agreement, beginning the month following the ESA Commencement Date, reimbursements to RREEF America will be made in the amount of $250 per month for 12 months, followed by reimbursements of $198 per month for 12 months, which will fully satisfy the principal balance owed.
The aforementioned waiver of $3,567 constituted an extinguishment under GAAP of a related party loan that was determined to be a capital transaction. As a result, the remaining unamortized discount on the Note to Affiliate was written off to additional paid in capital in the amount of $1,182, and a new discount was recorded in the amount of $946 based on an estimated market interest rate of 3.75%. The resulting discount is being amortized using the effective interest method over the expected term of the Note to Affiliate. For the period of January 1, 2020 through March 23, 2020, using the previous discount rate of 1.93%, the Company amortized $34 of the discount on the Note to Affiliate into interest expense. For the period of March 24, 2020 through March 31, 2020, using the new discount rate of 3.75%, the Company amortized $4 of the discount on the Note to Affiliate into interest expense. For the three months ended March 31, 2019, the Company amortized $37 of the discount on the Note to Affiliate into interest expense.
In addition, pursuant to the Letter Agreement, if RREEF America is serving as the Company's advisor at the time that the Company or the Operating Partnership undertakes a liquidation, the Company's remaining obligations to reimburse RREEF America for the unreimbursed Expense Payments under the Expense Support Agreement shall be waived.
Dealer Manager Agreement
The Company and its Operating Partnership entered into a dealer manager agreement (the "Dealer Manager Agreement") with DWS Distributors, Inc., an affiliate of the Company's sponsor and advisor (the "Dealer Manager"), which was most recently amended and restated on April 21, 2020. The Dealer Manager Agreement governs the distribution by the Dealer Manager of the Company’s shares of common stock in the Second Follow-On Public Offering and any subsequent registered public offering. In connection with the ongoing Trailing Fees to be paid in the future, the Company and the Dealer Manager entered into an agreement whereby the Company will pay to the Dealer Manager the Trailing Fees that are attributable to the Company's shares issued in the Company's initial public offering that remain outstanding. In addition, the Company is obligated to pay to the Dealer Manager Trailing Fees that are attributable to the Company's shares issued in the Follow-On Public Offering and the Second Follow-On Public Offering. As of March 31, 2020 and December 31, 2019, the Company has accrued $123 and $118, respectively, in Trailing Fees currently payable to the Dealer Manager, and $13,868 and $6,221, respectively, in Trailing Fees estimated to become payable in the future to the Dealer Manager, both of which are included in due to affiliates on the consolidated balance sheets. The Company also pays the Dealer Manager upfront selling commissions and upfront dealer manager fees in connection with its Offerings, as applicable. For the three months ended March 31, 2020 and 2019, the Dealer Manager earned upfront selling commissions and upfront dealer manager fees totaling $59 and $90, respectively.
Under the Dealer Manager Agreement, the Company is obligated to reimburse the Dealer Manager for certain offering costs incurred by the Dealer Manager on the Company's behalf, including but not limited to broker-dealer sponsorships, attendance fees for retail seminars conducted by broker-dealers or the Dealer Manager, and travel costs for certain personnel of the Dealer Manager who are dedicated to the distribution of the Company's shares of common stock. For the three months ended March 31, 2020 and 2019, the Dealer Manager incurred $67 and $53, respectively, in such costs on behalf of the Company. As of March 31, 2020 and December 31, 2019, the Company had payable to the Dealer Manager $67 and $193, respectively, of such costs which was included in due to affiliates on the consolidated balance sheets.
28
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
Reimbursement Limitations
Organization and Offering Costs
The Company will not reimburse RREEF America under the Advisory Agreement or the Expense Support Agreement and will not reimburse the Dealer Manager under the Dealer Manager Agreement for any organization and offering costs which would cause the Company's total organization and offering costs with respect to a public offering to exceed 15% of the gross proceeds from such public offering. Further, the Company will not reimburse RREEF America or the Dealer Manager for any underwriting compensation (a subset of organization and offering costs) which would cause the Company's total underwriting compensation with respect to a public offering to exceed 10% of the gross proceeds from the primary portion of such public offering. For the Company's initial public offering that ended on June 30, 2016, the Company raised $102,831 in gross proceeds and incurred $15,424 in organization and offering costs, including, as of March 31, 2020, estimated accrued Trailing Fees payable in the future of $3,662.
For the Follow-On Public Offering that ended on January 8, 2020, the Company raised $132,994 in gross proceeds and incurred $16,861 in organization and offering costs, including, as of March 31, 2020, estimated accrued Trailing Fees payable in the future of $8,985.
For the Second Follow-On Public Offering as of March 31, 2020, the Company raised $14,905 in gross proceeds and incurred total organization and offering costs of $1,722, including estimated accrued Trailing Fees payable in the future of $1,221.
Operating Expenses
Pursuant to the Company’s charter, the Company may reimburse RREEF America, at the end of each fiscal quarter, for total operating expenses incurred by RREEF America, whether under the Expense Support Agreement or otherwise. However, the Company may not reimburse RREEF America at the end of any fiscal quarter for total operating expenses (as defined in the Company’s charter) that, in the four consecutive fiscal quarters then ended, exceed the greater of 2% of average invested assets or 25% of net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of the Company's assets for that period (the “2%/25% Guidelines”). Notwithstanding the foregoing, the Company may reimburse RREEF America for expenses in excess of the 2%/25% Guidelines if a majority of the Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended March 31, 2020, total operating expenses of the Company were $4,871, which did not exceed the amount prescribed by the 2%/25% Guidelines.
Due to Affiliates and Note to Affiliate
In accordance with all the above, the Company owed its affiliates the following amounts:
29
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
| March 31, 2020 | December 31, 2019 | ||||||||||
| Reimbursable under the Advisory Agreement | $ | 59 | $ | 67 | |||||||
| Reimbursable under the Dealer Manager Agreement | 67 | 193 | |||||||||
| Advisory fees | 185 | 1,244 | |||||||||
| Accrued Trailing Fees | 13,991 | 6,339 | |||||||||
| Due to affiliates | $ | 14,302 | $ | 7,843 | |||||||
| Note to Affiliate | $ | 5,383 | $ | 8,950 | |||||||
| Unamortized discount | (943) | (1,217) | |||||||||
| Note to Affiliate, net of unamortized discount | $ | 4,440 | $ | 7,733 | |||||||
NOTE 9 — CAPITALIZATION
Under the Company's charter, as most recently amended on April 22, 2020, the Company has the authority to issue 1,000,000,000 shares of common stock and 50,000,000 shares of preferred stock. All shares of such stock have a par value of $0.01 per share. The Company's authorized shares of common stock are allocated between classes as follows:
| Common Stock | No. of Authorized Shares | |||||||
| Class A Shares | 45,000,000 | |||||||
| Class I Shares | 200,000,000 | |||||||
| Class M-I Shares | 200,000,000 | |||||||
| Class S Shares | 200,000,000 | |||||||
| Class T Shares | 5,000,000 | |||||||
| Class T2 Shares | 150,000,000 | |||||||
| Class D Shares | 45,000,000 | |||||||
| Class N Shares | 150,000,000 | |||||||
| Class Z Shares | 5,000,000 | |||||||
| 1,000,000,000 | ||||||||
Class A Shares are subject to selling commissions of up to 3% of the purchase price, and annual dealer manager fees of 0.55% and distribution fees of 0.50% of NAV, both paid on a trailing basis. Class I Shares are subject to annual dealer manager fees of 0.55% of NAV paid in a trailing basis, but are not subject to any selling commissions or distribution fees. Class M-I Shares will not incur any up-front commissions or trailing fees. Class S Shares are subject to selling commissions of up to 3% of the purchase price, and annual distribution fees of 0.85% of the NAV paid on a trailing basis for approximately seven years. Class T Shares are subject to selling commissions of up to 3% of the purchase price, an up-front dealer manager fee of up to 2.50% of the purchase price, and annual distribution fees of 1.0% of NAV paid on a trailing basis for approximately three years. Class T2 Shares are subject to selling commissions of up to 3% of the purchase price, an up-front dealer manager fee of up to 0.50% of the purchase price, and annual distribution fees of 0.85% of the NAV paid on a trailing basis for approximately six years. Class D shares sold in the Private Offering are subject to selling commissions of up to 1.0% of the purchase price, but do not incur any dealer manager or distribution fees. Class Z shares are expected to be sold only in a private offering to RREEF America.
30
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
Class N Shares are not sold in the primary portion of the Second Follow-On Public Offering. Class N Shares will be issued upon conversion of an investor's Class T Shares once (i) the investor's Class T Share account for a given public offering has incurred a maximum of 8.5% of commissions, dealer manager fees and distribution fees; (ii) the total underwriting compensation from whatever source with respect to a public offering exceeds 10% of the gross proceeds from the primary portion of such offering; (iii) a listing of the Class N Shares; or (iv) the Company's merger or consolidation with or into another entity or the sale or other disposition of all or substantially all of the Company's assets.
Distribution Reinvestment Plan
The Company has adopted a distribution reinvestment plan that allows stockholders to have the cash distributions attributable to the class of shares that the stockholder owns automatically invested in additional shares of the same class. Shares are offered pursuant to the Company's distribution reinvestment plan at the NAV per share applicable to that class, calculated as of the distribution date and after giving effect to all distributions. Stockholders who elect to participate in the distribution reinvestment plan, and who are subject to U.S. federal income taxation laws, will incur a tax liability on an amount equal to the fair value on the relevant distribution date of the shares of the Company's common stock purchased with reinvested distributions, even though such stockholders have elected not to receive the distributions used to purchase those shares of the Company's common stock in cash.
Redemption Plan
In an effort to provide the Company's stockholders with liquidity in respect of their investment in shares of the Company's common stock, the Company has adopted a redemption plan whereby on a daily basis stockholders may request the redemption of all or any portion of their shares. The redemption price per share is equal to the Company's NAV per share of the class of shares being redeemed on the date of redemption, subject to a short-term trading discount, if applicable. The total amount of redemptions in any calendar quarter will be limited to shares whose aggregate value (based on the redemption price per share on the date of the redemption) is equal to 5% of the Company's combined NAV for all classes of shares as of the last day of the previous calendar quarter. In addition, if redemptions do not reach the 5% limit in a calendar quarter, the unused portion generally will be carried over to the next quarter and not any subsequent quarter, except that the maximum amount of redemptions during any quarter may never exceed 10% of the combined NAV for all classes of shares as of the last day of the previous calendar quarter. If the quarterly volume limitation is reached on or before the third business day of a calendar quarter, redemption requests during the next quarter will be satisfied on a stockholder by stockholder basis, which the Company refers to as a per stockholder allocation, instead of a first-come, first-served basis. Pursuant to the per stockholder allocation, each stockholder would be allowed to request redemption at any time during such quarter of a total number of shares not to exceed 5% of the shares of common stock the stockholder held as of the end of the prior quarter. The per stockholder allocation requirement will remain in effect for each succeeding quarter for which the total redemptions for the immediately preceding quarter exceeded 4% of the Company's NAV on the last business day of such preceding quarter. If total redemptions during a quarter for which the per stockholder allocation applies are equal to or less than 4% of the Company's NAV on the last business day of such preceding quarter, then redemptions will again be satisfied on a first-come, first-served basis for the next succeeding quarter and each quarter thereafter.
Each redemption request will be evaluated by the Company in consideration of rules and regulations promulgated by the Internal Revenue Service with respect to dividend equivalent redemptions. Redemptions that may be considered dividend equivalent redemptions may adversely affect the Company or its stockholders. Accordingly, the Company may reject any redemption request that it reasonably believes may be treated as a dividend equivalent redemption.
While there is no minimum holding period, shares redeemed within 365 days of the date of the investor's initial purchase of the Company's shares will be redeemed at the Company's NAV per share of the class of shares being
31
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
redeemed on the date of redemption less a short-term trading discount equal to 2% of the gross proceeds otherwise payable with respect to the redemption.
In the event that any stockholder fails to maintain a minimum balance of $500 (not in thousands) worth of shares of common stock, the Company may redeem all of the shares held by that stockholder at the redemption price per share in effect on the date it is determined that the stockholder has failed to meet the minimum balance, less the short-term trading discount of 2%, if applicable. Minimum account redemptions will apply even in the event that the failure to meet the minimum balance is caused solely by a decline in the Company's NAV.
During the three months ended March 31, 2020 and 2019, redemptions were as shown below. The Company funded these redemptions with cash flow from operations, proceeds from its Offerings or borrowings. The weighted average redemption prices are shown before allowing for any applicable 2% short-term trading discounts.
| Three Months Ended March 31, 2020 | Shares | Weighted Average Share Price | Amount | |||||||||||||||||
| Class A | 97,565 | $ | 14.28 | $ | 1,393 | |||||||||||||||
| Class I | 308,331 | 14.29 | 4,404 | |||||||||||||||||
| Class T | — | — | — | |||||||||||||||||
| Class D | — | — | — | |||||||||||||||||
| Three Months Ended March 31, 2019 | Shares | Weighted Average Share Price | Amount | |||||||||||||||||
| Class A | 68,408 | $ | 14.19 | $ | 971 | |||||||||||||||
| Class I | 43,806 | 14.16 | 620 | |||||||||||||||||
| Class T | 9,363 | 14.25 | 133 | |||||||||||||||||
| Class D | — | — | — | |||||||||||||||||
The Company's board of directors has the discretion to suspend or modify the redemption plan at any time, including in circumstances in which it (1) determines that such action is in the best interest of the Company's stockholders, (2) determines that it is necessary due to regulatory changes or changes in law or (3) becomes aware of undisclosed material information that it believes should be publicly disclosed before shares are redeemed. In addition, the Company's board of directors may suspend the Offerings and the redemption plan, if it determines that the calculation of NAV is materially incorrect or there is a condition that restricts the valuation of a material portion of the Company's assets. If the board of directors materially amends (including any reduction of the quarterly limit) or suspends the redemption plan during any quarter, other than any temporary suspension to address certain external events unrelated to the Company's business, any unused portion of that quarter’s 5% limit will not be carried forward to the next quarter or any subsequent quarter.
Equity-Based Compensation
The Company has in place an incentive compensation plan and an independent directors compensation plan (the “Compensation Plans”). The Compensation Plans were created to attract, retain and compensate highly-qualified individuals, who are not employees of RREEF Property Trust, Inc. or any of its subsidiaries or affiliates, for service as members of the board by providing them with competitive compensation. The Compensation Plans provided for 5,000 shares of restricted stock to be issued to each of the Company's independent directors once the Company had issued 12,500,000 shares of its common stock in the aggregate from its Offerings.
32
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
On March 29, 2019, pursuant to the Company having met the issued share requirement, the Company granted 5,000 shares of restricted Class I common stock to each of the Company's independent directors for a total of 20,000 shares (the "Initial Stock Awards"). The Initial Stock Awards shall vest and become non-forfeitable in three equal annual installments on each of the first three anniversaries of the grant date with the exception of one independent director whose Initial Stock Award vested immediately upon grant. The fair value of the Initial Stock Awards was determined using the Company’s Class I Share price on the date of grant, which was $14.34. The Company has elected to account for any forfeitures of restricted stock awards as they occur.
On May 15, 2019, pursuant to the new independent director compensation plan, the Company granted $10 of shares of restricted Class I common stock to each of the Company's independent directors (the "Annual Share Grant Awards"). The fair value of the Annual Share Grant Awards is determined using the Company’s Class I Share price on the date of grant, which was $14.32, which resulted in a total of 2,094 shares granted. The Annual Share Grant Awards shall vest and become non-forfeitable at the next annual shareholder meeting (approximately one year from issue date). The Company has elected to account for any forfeitures of restricted stock awards as they occur.
Below is a summary of the activity, per share value and recognized expense for the stock awards. No stock awards were granted prior to 2019.
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
| Stock Awards | Class I Shares | Weighted Average Grant Date Fair Value | Class I Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||||||||||||||||
| Outstanding, beginning of period | 17,094 | $ | 14.34 | — | — | ||||||||||||||||||||||||||||||||||||
| Changes during the period: | |||||||||||||||||||||||||||||||||||||||||
| Granted | — | — | 22,094 | $ | 14.34 | ||||||||||||||||||||||||||||||||||||
| Vested | (5,000) | 14.34 | (5,000) | 14.34 | |||||||||||||||||||||||||||||||||||||
| Forfeited | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Outstanding, end of period | 12,094 | 14.34 | 17,094 | 14.34 | |||||||||||||||||||||||||||||||||||||
| Amount included in general and administrative expenses | $ | 25 | $ | 72 | |||||||||||||||||||||||||||||||||||||
NOTE 10 - NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share for each class of common stock with shares outstanding using the two-class method. RREEF America may earn a performance component of the advisory fee (see Note 8) which may impact the net income (loss) of each class of common stock differently. The performance component and the impact on each class of common stock, if any, are shown below.
Basic and diluted net income (loss) per share for each class of common stock is computed using the weighted-average number of common shares outstanding during the period for each class of common stock. The Initial Stock Awards and the Annual Share Grant Awards granted to the Company's independent directors (see Note 9) qualify as participating securities and therefore also require use of the two-class method for computing net income (loss) per share. However, the unvested Initial Stock Awards and the unvested Annual Share Grant Awards are anti-dilutive or immaterially dilutive, and therefore are ignored in the diluted net income (loss) per share calculation for the three months ended March 31, 2020 and 2019.
The following table sets forth the computation of basic and diluted net income (loss) per share for each class of the Company’s common stock which had shares outstanding during the relevant period.
33
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
| Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class I | Class T | Class D* | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic and diluted net loss per share: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allocation of net loss before performance fee | $ | (1,315) | $ | (3,451) | $ | (333) | $ | (61) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Allocation of performance fees | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total numerator | $ | (1,315) | $ | (3,451) | $ | (333) | $ | (61) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Denominator - weighted average number of common shares outstanding | 3,817,002 | 10,035,929 | 967,167 | 176,101 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic and diluted net loss per share: | $ | (0.34) | $ | (0.34) | $ | (0.34) | $ | (0.34) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class I | Class T | Class D* | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic and diluted net income per share: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allocation of net income before performance fee | $ | 545 | $ | 960 | $ | 99 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Allocation of performance fees | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total numerator | $ | 545 | $ | 960 | $ | 99 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Denominator - weighted average number of common shares outstanding | 3,592,146 | 6,330,885 | 649,621 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic and diluted net income per share: | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| *Class D Shares were initially issued in June 2019. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTE 11 — DISTRIBUTIONS
In order to qualify as a REIT, the Company is required, among other things, to make distributions each taxable year of at least 90% of its taxable income determined without regard to the dividends-paid deduction and excluding net capital gains, and to meet certain tests regarding the nature of the Company's income and assets. The Company expects that its board of directors will continue to declare distributions with a daily record date, payable monthly in arrears. Any distributions the Company makes will be at the discretion of its board of directors, considering factors such as its earnings, cash flow, capital needs and general financial condition and the requirements of Maryland law. The Company commenced operations on May 30, 2013 and elected taxation as a REIT for the year ended December 31, 2013. Distributions for each month are payable on or before the first business day of the following month. However, any distributions reinvested by the stockholders in accordance with the Company's dividend reinvestment plan are reinvested at the per share NAV of the same class determined at the close of business on the last business day of the month in which the distributions were accrued.
Shown below are details of the Company's distributions.
34
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2020 | March 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Declared daily distribution rate, before adjustment for class-specific fees | $ | 0.00198576 | $ | 0.00193545 | ||||||||||||||||||||||||||||||||||||||||||||||
| Distributions paid or payable in cash | $ | 1,369 | $ | 1,000 | ||||||||||||||||||||||||||||||||||||||||||||||
| Distributions reinvested | 1,339 | 841 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared | $ | 2,708 | $ | 1,841 | ||||||||||||||||||||||||||||||||||||||||||||||
| Class A Shares issued upon reinvestment | 25,107 | 22,405 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Class I Shares issued upon reinvestment | 63,595 | 34,329 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Class T Shares issued upon reinvestment | 4,177 | 2,250 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Class D Shares issued upon reinvestment* | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| * Class D Shares were initially issued in June 2019. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||||||||
| March 31, 2020 | March 31, 2019 | |||||||||||||||||||||||||||||||
| Class A | $ | 643 | $ | 588 | ||||||||||||||||||||||||||||
| Class I | 1,866 | 1,147 | ||||||||||||||||||||||||||||||
| Class T | 163 | 106 | ||||||||||||||||||||||||||||||
| Class D* | 36 | — | ||||||||||||||||||||||||||||||
| Distributions declared | $ | 2,708 | $ | 1,841 | ||||||||||||||||||||||||||||
| * Class D Shares were initially issued in June 2019. | ||||||||||||||||||||||||||||||||
NOTE 12 — INCOME TAXES
The Company believes that it has operated in such a manner to qualify to be taxed as a REIT for federal income tax purposes beginning with the taxable year ended December 31, 2013, when it first elected REIT status. In each calendar year that the Company qualifies for taxation as a REIT, the Company generally will not be subject to federal income tax to the extent it meets certain criteria and distributes its REIT taxable income to its stockholders. Distributions declared and paid by the Company may consist of ordinary income, qualifying dividends, return of capital, capital gains or a combination thereof. The characterization of the distributions into these various components will impact how the distributions are taxable to the stockholder who received them. Distributions that constitute a return of capital generally are non-taxable and will reduce the stockholder's basis in the shares. The characterization of the distributions is generally determined during the month of January following the close of the tax year.
Net worth and similar taxes paid to certain states where the Company owns real estate properties were $26 and $5 for the three months ended March 31, 2020 and 2019, respectively.
35
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
NOTE 13 — SEGMENT INFORMATION
For the three months ended March 31, 2020 and 2019, the Company had two segments with reportable information: Real Estate Properties and Real Estate Equity Securities. The Company organizes and analyzes the operations and results of each of these segments independently, due to inherently different considerations for each segment. Such considerations include, but are not limited to, the nature and characteristics of the investment and investment strategies and objectives. The following tables set forth the carrying value, revenue and the components of operating income of the Company's segments reconciled to total assets as of March 31, 2020 and December 31, 2019 and net income (loss) for the three months ended March 31, 2020 and 2019.
| Real Estate Properties | Real Estate Equity Securities | Total | ||||||||||||||||||||||||
| Carrying value as of March 31, 2020 | $ | 328,780 | $ | 16,536 | $ | 345,316 | ||||||||||||||||||||
| Reconciliation to total assets of March 31, 2020 | ||||||||||||||||||||||||||
| Carrying value per reportable segments | $ | 345,316 | ||||||||||||||||||||||||
| Corporate level assets | 15,113 | |||||||||||||||||||||||||
| Total assets | $ | 360,429 | ||||||||||||||||||||||||
| Carrying value as of December 31, 2019 | $ | 331,362 | $ | 21,245 | $ | 352,607 | ||||||||||||||||||||
| Reconciliation to total assets of December 31, 2019 | ||||||||||||||||||||||||||
| Carrying value per reportable segments | $ | 352,607 | ||||||||||||||||||||||||
| Corporate level assets | 13,478 | |||||||||||||||||||||||||
| Total assets | $ | 366,085 | ||||||||||||||||||||||||
36
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
| Three Months Ended March 31, 2020 | Real Estate Properties | Real Estate Equity Securities | Total | ||||||||||||||||||||
| Property related income | $ | 8,013 | $ | — | $ | 8,013 | |||||||||||||||||
| Investment income on marketable securities | — | 162 | 162 | ||||||||||||||||||||
| Total revenues | 8,013 | 162 | 8,175 | ||||||||||||||||||||
| Segment operating expenses | 2,238 | 14 | 2,252 | ||||||||||||||||||||
| Net realized loss upon sale of marketable securities | — | (443) | (443) | ||||||||||||||||||||
| Net unrealized change in fair value of investment in marketable securities | — | (4,363) | (4,363) | ||||||||||||||||||||
| Operating income (loss) - segments | $ | 5,775 | $ | (4,658) | $ | 1,117 | |||||||||||||||||
| Three Months Ended March 31, 2019 | |||||||||||||||||||||||
| Property related income | $ | 5,765 | $ | — | $ | 5,765 | |||||||||||||||||
| Investment income on marketable securities | — | 151 | 151 | ||||||||||||||||||||
| Total revenues | 5,765 | 151 | 5,916 | ||||||||||||||||||||
| Segment operating expenses | 1,882 | 8 | 1,890 | ||||||||||||||||||||
| Net realized gain upon sale of marketable securities | — | 119 | 119 | ||||||||||||||||||||
| Net unrealized change in fair value of investment in marketable securities | — | 2,166 | 2,166 | ||||||||||||||||||||
| Operating income - segments | $ | 3,883 | $ | 2,428 | $ | 6,311 | |||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| Reconciliation to net (loss) income | 2020 | 2019 | |||||||||||||||||||||
| Operating income - segments | $ | 1,117 | $ | 6,311 | |||||||||||||||||||
| General and administrative expenses | (526) | (564) | |||||||||||||||||||||
| Advisory expenses | (539) | (371) | |||||||||||||||||||||
| Depreciation | (1,779) | (1,310) | |||||||||||||||||||||
| Amortization | (1,481) | (1,169) | |||||||||||||||||||||
| Operating (loss) income | (3,208) | 2,897 | |||||||||||||||||||||
| Interest expense | (1,952) | (1,293) | |||||||||||||||||||||
| Net (loss) income | $ | (5,160) | $ | 1,604 | |||||||||||||||||||
NOTE 14 — ECONOMIC DEPENDENCY
The Company depends on RREEF America and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company's shares of common stock, asset acquisition and disposition decisions and other general and administrative responsibilities. In the event that RREEF America or the Dealer Manager is unable to provide such services, the Company would be required to find alternative service providers.
37
RREEF PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
March 31, 2020
(Unaudited)
(in thousands, except share and per share data)
NOTE 15 — COMMITMENTS AND CONTINGENCIES
In the normal course of business, from time to time, the Company may be involved in legal actions relating to the ownership and operations of real estate investments. In the Company's opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
The Company, as an owner of real estate, is subject to various environmental laws of federal and local governments. All of the Company's properties were subject to assessments, involving visual inspections of the properties and their neighborhoods. The Company carries environmental liability insurance on its properties that provides coverage for remediation liability and pollution liability for third-party bodily injury and property damage claims. The Company does not believe such environmental assessments will have a material adverse impact on the Company's consolidated financial position or results of operations in the future.
NOTE 16 — SUBSEQUENT EVENTS
In April 2020, in connection with the formation of the new Class M-I Shares, Class S Shares, Class T2 Shares and Class Z Shares, the Company (a) filed with the Maryland State Department of Assessment and Taxation articles supplementary to its articles of incorporation to designate the new share classes, (b) entered into a second amended and restated dealer manager agreement with its Dealer Manager to add the new share classes to the Second Follow-On Public Offering, (c) entered into a second amended and restated advisory agreement with RREEF America to include the new share classes, (d) amended its distribution reinvestment plan to include the new share classes, and (e) amended its share repurchase plan to include the new share classes.
The Company is closely monitoring the impact of the coronavirus pandemic on all aspects of its investments and operations, including how it will impact its tenants and business partners. The Company has received certain rent relief requests, most often in the form of rent deferral requests, as a result of the coronavirus. The Company is evaluating each tenant rent relief request on an individual basis, considering a number of factors, and the Company is encouraging its tenants to apply for federal aid as applicable. The Company is not forgoing its contractual rights under its lease agreements.
The Company did not incur significant disruptions during the three months ended March 31, 2020 from the coronavirus pandemic. The extent to which the coronavirus impacts the Company's investments and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. These factors include the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions taken by federal, state or local agencies and the general public to contain the coronavirus or treat its impact, among others. The Company intends to maintain sufficient liquidity at all times to satisfy its operational needs and the maximum potential quarterly redemptions under its share redemption plan. The Company's real estate securities portfolio is comprised entirely of common stock of publicly traded REITs and is viewed as part of the Company's available liquidity that could be quickly converted to cash should the Company decide to do so. In addition, the Company may consider various options, including reducing its distributions or limiting its share redemption program.
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ITEM 2. 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 unaudited consolidated financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q, or this Quarterly Report. The following discussion should also be read in conjunction with our audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2019. We further invite you to visit our website, www.rreefpropertytrust.com, where we routinely post additional information about our Company, such as, without limitation, our daily net asset value, or NAV, per share. The contents of our website are not incorporated by reference. The terms “we,” “us,” “our” and the “Company” refer to RREEF Property Trust, Inc. and its subsidiaries.
The NAV per share is published daily via NASDAQ's Mutual Fund Quotation System under the symbols ZRPTAX, ZRPTIX and ZRPTTX for our Class A shares, Class I shares and Class T shares, respectively.
All dollar amounts included in this Quarterly Report on Form 10-Q are presented in thousands, except for per share data.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, or Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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. Therefore, such statements are not intended to be a guaranty of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” “plan,” “potential,” “predict” or other similar words.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
•our ability to raise capital and effectively deploy the proceeds;
•changes in economic conditions generally and the real estate and securities markets specifically;
•legislative or regulatory changes (including changes to the laws governing the taxation of REITs);
•the effect of financial leverage, including changes in interest rates, availability of credit, loss of flexibility due to negative and affirmative covenants, refinancing risk at maturity and generally the increased risk of loss if our investments fail to perform as expected;
•our ability to access sources of liquidity when we have the need to fund redemptions of common stock in excess of the proceeds from the sales of shares of our common stock in our continuous offering and the consequential risk that we may not have the resources to satisfy redemption requests;
•the impact of the coronavirus pandemic on our tenants, portfolio and operations; and
•changes to accounting principles generally accepted in the United States of America, or GAAP.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We
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caution readers not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission, or the SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q. 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 forward-looking statements should be read in light of the risk factors identified in “Risk Factors” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019.
Overview
We are a Maryland corporation formed on February 7, 2012, our inception date, to invest in a diversified portfolio of high quality, income-producing commercial real estate properties and other real estate-related assets. We are an externally advised, perpetual-life corporation that believes that it has operated in such a manner to qualify to be taxed as a REIT for federal income tax purposes beginning with the taxable year ended December 31, 2013, when we first elected REIT status. We invest primarily in the office, industrial, retail and apartment sectors of the commercial real estate industry in the United States. We may also invest in real estate-related assets, which include common and preferred stock of publicly-traded REITs and other real estate companies, which we refer to as “real estate equity securities,” and debt investments backed by real estate, which we refer to as “real estate loans.” We hold our properties, real estate-related assets and other investments through RREEF Property Operating Partnership, LP, or our operating partnership, of which we are the sole general partner.
Our board of directors will at all times have ultimate oversight and policy-making authority over us, including responsibility for governance, financial controls, compliance and disclosure. Pursuant to our advisory agreement, our board has delegated to RREEF America L.L.C., or our advisor, authority to manage our day-to-day business in accordance with our investment objectives, strategy, guidelines, policies and limitations. Our advisory agreement is renewable annually upon approval by our board of directors, including a majority of the independent board members. The current term expires April 21, 2021.
Our initial public offering commenced on January 3, 2013, pursuant to our Registration Statement on Form S-11 (File No. 333-180356) under which we offered up to $2,500,000 of shares of our common stock in any combination of Class A and Class I shares, which we refer to as the initial offering. On May 30, 2013, upon receipt of purchase orders from our sponsor for $10,000 of Class I shares of our common stock and the release to us of funds in the escrow account, we commenced operations. Our initial offering terminated on July 1, 2016. We raised a total of $102,831 in proceeds from our initial offering.
On January 15, 2016, we filed articles supplementary to our articles of incorporation to add a newly-designated Class D common stock, $0.01 par value per share, or our Class D shares. On January 20, 2016, we commenced a private offering of up to a maximum of $350,000 in Class D shares.
On July 12, 2016, the SEC declared effective our Registration Statement on Form S-11 (File No. 333-208751) for our follow-on public offering for up to $2,300,000 of shares of our common stock in any combination of our Class A, Class I, Class T and Class N shares, which we refer to as our follow-on offering. Our follow-on offering included up to $2,100,000 in shares in our primary offering and up to $200,000 in shares in our distribution reinvestment plan. Our follow-on offering terminated on January 8, 2020. We raised a total of $132,994 in proceeds from our follow-on offering.
On January 8, 2020, the SEC declared effective our Registration Statement on Form S-11 (File No. 333-232425) for our second follow-on public offering for up to $2,300,000 of shares of our common stock in any combination of our Class A, Class I, Class N and Class T shares, which we refer to as our second follow-on offering. Our second follow-on offering includes up to $2,100,000 in shares in our primary offering and up to $200,000 in shares in our distribution reinvestment plan.
On April 22, 2020, we filed articles supplementary to our articles of incorporation to add newly-designated
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Class M-I common stock, $0.01 par value per share, Class S common stock, $0.01 par value per share, Class T2 common stock, $0.01 par value per share and Class Z common stock, $0.01 par value per share. Class M-I shares, Class S shares and Class T2 shares are available for sale in our second follow-on offering. Class Z shares are only expected to be offered to RREEF America in a private offering.
We have engaged DWS Distributors, Inc., an affiliate of our advisor, to serve as our dealer manager for our second follow-on offering pursuant to our dealer manager agreement. Our initial offering, follow-on offering and second follow-on offering are each referred to as an offering.
Coronavirus Pandemic
The coronavirus (COVID-19) pandemic has had, and is expected to continue to have, a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. We are closely monitoring the impact of the coronavirus pandemic on all aspects of our investments and operations, including how it will impact our tenants and business partners. While we did not incur significant disruptions in our operations from the coronavirus during the three months ended March 31, 2020, the extent to which the coronavirus impacts our investments and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. These developments include the duration of the outbreak, the impact of government stimulus, new information that may emerge concerning the severity of the coronavirus, and actions taken by federal, state and local agencies as well as the general public to contain the coronavirus or treat its impact, among others.
Our real estate property portfolio is diversified across the four primary sectors of commercial real estate: office, industrial, retail and apartment. Among these four sectors, retail is widely considered to be the sector that will be most impacted by the coronavirus pandemic. We collected nearly 100% of our contractual rental revenues for the three months ended March 31, 2020, and we collected approximately 92% of our contractual rental revenues for the month of April 2020. The retail properties we own are necessity-based properties, as they are grocery-anchored and contain a number of tenants that are considered essential. As of the end of April 2020, the stores of 13 of our 44 retail tenants are closed. These tenants comprise approximately 10% of our contractual rental revenue for our entire property portfolio.
We and our independent valuation advisor are closely monitoring our rent collections, market transactions and tenant situations with respect to our property investments for purposes of assessing any potential valuation change to our properties. Our independent valuation advisor and certain independent third-party appraisal firms engaged by our advisor have included additional cautionary language in their respective first quarter 2020 reports related to the uncertain impact of the coronavirus pandemic on the property values.
We have received rent relief requests from various tenants, most often in the form of requests for rent deferrals, as a result of the coronavirus. We are evaluating each rent relief request on an individual basis, considering a number of factors, and we are encouraging our tenants to apply for federal aid when available. Not all tenant requests will ultimately result in concessions, nor are we forgoing our contractual rights under our lease agreements.
Our real estate securities portfolio was significantly negatively impacted during March 2020 as the financial markets saw considerable volatility as the coronavirus pandemic expanded and worsened. While the value of our real estate securities portfolio somewhat recovered during April, there remains considerable uncertainty in the financial markets.
The Company intends to maintain sufficient liquidity at all times to satisfy its operational needs and the maximum potential quarterly redemptions under its share redemption plan. The Company's real estate securities portfolio is comprised entirely of common stock of publicly traded REITs and is viewed as part of the Company's available liquidity that could be quickly converted to cash should the Company decide to do so. In addition, the Company may consider various options, including reducing its distributions or limiting its share redemption program.
We refer readers to Part II, Item 1A, Risk Factors, in this quarterly report for specific risk factors related to the
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coronavirus pandemic.
Portfolio Information
Real Estate Property Portfolio
As of March 31, 2020, we owned 14 properties diversified across geography and sector, including one medical office property and one student housing property (a subset of apartment). Excluding The Flats at Carrs Hill, our apartment property with leases that roll over every year, as of March 31, 2020, our weighted average remaining lease term for active leases was 5.1 years. The following table sets forth certain additional information about the properties we owned as of March 31, 2020:
| Property | Location | Rentable Square Feet | Number of Leases/Units | Leased(1) | ||||||||||||||||||||||
| Office Property | ||||||||||||||||||||||||||
Heritage Parkway(2) | Woodridge, IL | 94,233 | 1 | 100.0 | % | |||||||||||||||||||||
| Anaheim Hills Office Plaza | Anaheim, CA | 73,892 | 5 | 69.2 | ||||||||||||||||||||||
| Loudoun Gateway | Sterling, VA | 102,015 | 1 | 100.0 | ||||||||||||||||||||||
| Allied Drive | Dedham, MA | 64,127 | 3 | 100.0 | ||||||||||||||||||||||
| Office Total | 334,267 | 10 | 92.8 | |||||||||||||||||||||||
| Retail Property | ||||||||||||||||||||||||||
Wallingford Plaza(3) | Seattle, WA | 30,761 | 5 | 100.0 | ||||||||||||||||||||||
| Terra Nova Plaza | Chula Vista, CA | 96,114 | 2 | 100.0 | ||||||||||||||||||||||
Elston Plaza(4) | Chicago, IL | 92,806 | 11 | 95.5 | ||||||||||||||||||||||
Providence Square(5) | Marietta, GA | 222,805 | 26 | 100.0 | ||||||||||||||||||||||
| Retail Total | 442,486 | 44 | 98.9 | |||||||||||||||||||||||
| Industrial Property | ||||||||||||||||||||||||||
| Commerce Corner | Logan Township, NJ | 259,910 | 2 | 100.0 | ||||||||||||||||||||||
| Miami Industrial | ||||||||||||||||||||||||||
| Palmetto Lakes | Miami Lakes, FL | 182,919 | 1 | 100.0 | ||||||||||||||||||||||
| Hialeah I | Miami, FL | 57,000 | 1 | 100.0 | ||||||||||||||||||||||
| Hialeah II | Miami, FL | 50,000 | 1 | 100.0 | ||||||||||||||||||||||
| Seattle East Industrial | Redmond, WA | 210,321 | 1 | 100.0 | ||||||||||||||||||||||
| Industrial Total | 760,150 | 6 | 100.0 | |||||||||||||||||||||||
| Apartment Property | ||||||||||||||||||||||||||
| The Flats at Carrs Hill | Athens, GA | 135,864 | 138 | 100.0 | ||||||||||||||||||||||
| Apartment Total | 135,864 | 138 | 100.0 | |||||||||||||||||||||||
| Grand total | 1,672,767 | 60/138 | 97.8 | % | ||||||||||||||||||||||
(1) Leased percentage is based on executed leases as of March 31, 2020, is calculated based on square footage for a single property, and is weighted by relative property value when calculated for more than one property together.
(2) Heritage Parkway is 100% occupied by Allstate. In April 2020, we executed a lease amendment with Allstate that extended the lease maturity date to May 31, 2026. Allstate has a termination option effective as of May 31, 2024 which is exercisable at their discretion upon satisfaction of certain conditions and subject to payment of the applicable early termination fee.
(3) Wallingford Plaza is ground floor retail plus two floors of office space.
(4) The total square footage for Elston Plaza includes a freestanding bank branch of 4,860 square feet that is subject to a ground lease to a single tenant.
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(5) The total square footage for Providence Square includes a freestanding restaurant of 5,779 square feet that is subject to a ground lease to a single tenant.
Real Estate Equity Securities Portfolio
As of March 31, 2020, our real estate equity securities portfolio consisted of publicly-traded common stock of 33 REITs with a value of $16,536. We believe that investing a portion of our proceeds from our offerings into a diversified portfolio of common and preferred shares of REITs and other real estate operating companies will provide the overall portfolio some flexibility with near-term liquidity as well as potentially enhance our NAV over a longer period. The portfolio is regularly reviewed and evaluated to determine whether the marketable securities held at any time continue to serve their original intended purposes.
The following chart summarizes our marketable securities by property type as of March 31, 2020:
As of March 31, 2020, our top ten holdings in our real estate equity securities portfolio were as follows:
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| Security | Sector | Percent of Securities Portfolio | ||||||||||||
| Equinix, Inc. | Data Centers | 10.8 | % | |||||||||||
| Prologis, Inc. | Industrial | 10.4 | ||||||||||||
| Digital Realty Trust, Inc. | Data Centers | 7.6 | ||||||||||||
| Alexandria Real Estate Equities, Inc. | Office | 4.7 | ||||||||||||
| Equity Residential | Apartment | 4.6 | ||||||||||||
| Extra Space Storage, Inc. | Self Storage | 4.5 | ||||||||||||
| Equity Lifestyle Properties | Apartment | 4.4 | ||||||||||||
| Mid-America Apartment Communities, Inc. | Apartment | 4.0 | ||||||||||||
| Invitation Homes, Inc. | Apartment | 3.6 | ||||||||||||
| Welltower, Inc. | Healthcare | 3.6 | ||||||||||||
| Total | 58.2 | % | ||||||||||||
Market Outlook
Shelter-in-place orders for much of the United States will, in our opinion, level a heavy blow to the economy in 2020. We believe that a sharp, “V-shaped” rebound in the second half of the year is unlikely. Even as the country slowly reopens, we believe the economy will suffer residual damage. Historically, recessions have lasted, on average, about one year, ranging from eight months in 2001 to 18 months during the global financial crisis of 2008-2009 (National Bureau of Economic Research, April 2020). While the duration of this recession may be at the shorter end of the range, it will, in our view, last through year-end.
The massive fiscal and monetary response is unprecedented in the post-war era (Congressional Budget Office; Federal Reserve; DWS, April 2020). These measures should provide a powerful backstop to asset prices, although near-term setbacks are possible. In 2021, we believe a combination of relaxed social distancing (ideally supported by the release of a vaccine), pent-up demand, and improving financial conditions should fuel an economic recovery.
We believe that in accordance with historical trends, real estate will follow the economy with a lag of one or two quarters. However, in our view, owing to the real estate industry’s underlying strength (low vacancies, moderate construction, and disciplined leverage), this cycle should be milder than the global financial crisis of 2008-2009. Moreover, as the broader U.S. economy heals, we believe that real estate’s attractive relative yields (capitalization rate spreads to Treasuries) will underpin solid investment returns.
In our view, defensive strategies will outperform through the recession and early recovery. From a sector perspective, this warrants an overweight to the industrial sector, market weights to the apartment and grocery-anchored retail sectors, and underweights to the mall and office sectors. From a geographic perspective, we believe that markets benefiting from structural drivers, including the technology industry and population growth, will outperform.
Results of Operations
Through March 31, 2020, we have acquired 14 properties and invested in real estate equity securities as described above under "Portfolio Information." We expect to continue to raise additional capital, increase our borrowings and make future investments in our targeted segments of real estate properties, real estate equity securities and real estate loans, which we believe will have a significant impact on our future results of operations.
We review our stabilized operating results, measured by contractual rental revenue, including tenant reimbursement income, less property operating expenses, which we refer to as net operating income, for properties that we owned for the entirety of both the current and prior year reporting periods, which we refer to as “same-store” properties. We believe that net operating income, a non-GAAP financial measure, in combination with net income
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(loss) and cash flows from operating activities, as defined by GAAP, is a useful supplemental performance measure that helps us evaluate our operating performance. We believe this metric is useful to our stockholders and other users of our reports because it provides additional information regarding our property acquisitions and their impact on our portfolio. Net operating income should not be considered as an alternative to net income (loss) or to cash flows from operating activities (both as defined by GAAP) as an indication of our performance and is not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. No single measure can provide users of financial information with sufficient information, and only our disclosures read as a whole can be relied upon to adequately portray our financial position, liquidity and results of operations.
Three Months Ended March 31, 2020 and 2019
The following table illustrates the changes in lease revenue, property operating expenses, and net operating income for the three months ended March 31, 2020 and 2019. "Non-same-store," as reflected in the table below, includes properties acquired after January 1, 2019, which for the three months ended March 31, 2020 and 2019 are Providence Square and Seattle East Industrial. For purposes of comparative analysis, the table below reconciles the net operating income to net income (loss) determined in accordance with GAAP for the three months ended March 31, 2020 and 2019.
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| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||||
| Lease revenue | |||||||||||||||||||||||||||||||||||||||||
| Lease revenue - same-store portfolio | $ | 5,601 | $ | 5,388 | $ | 213 | |||||||||||||||||||||||||||||||||||
| Lease revenue - non-same-store portfolio | 2,090 | — | 2,090 | ||||||||||||||||||||||||||||||||||||||
| Total lease revenue | 7,691 | 5,388 | 2,303 | ||||||||||||||||||||||||||||||||||||||
| Property operating expenses | |||||||||||||||||||||||||||||||||||||||||
| Same-store portfolio | 1,904 | 1,882 | 22 | ||||||||||||||||||||||||||||||||||||||
| Non-same-store portfolio | 334 | — | 334 | ||||||||||||||||||||||||||||||||||||||
| Total property operating expenses | 2,238 | 1,882 | 356 | ||||||||||||||||||||||||||||||||||||||
| Net operating income | |||||||||||||||||||||||||||||||||||||||||
| Same-store portfolio | 3,697 | 3,506 | 191 | ||||||||||||||||||||||||||||||||||||||
| Non-same-store portfolio | 1,756 | — | 1,756 | ||||||||||||||||||||||||||||||||||||||
| Total net operating income | 5,453 | 3,506 | 1,947 | ||||||||||||||||||||||||||||||||||||||
| Adjustments to lease revenue | |||||||||||||||||||||||||||||||||||||||||
| Straight-line revenue | 157 | 208 | (51) | ||||||||||||||||||||||||||||||||||||||
| Above- and below-market lease amortization, net | 190 | 195 | (5) | ||||||||||||||||||||||||||||||||||||||
| Lease incentive amortization | (25) | (26) | 1 | ||||||||||||||||||||||||||||||||||||||
| Depreciation | (1,779) | (1,310) | (469) | ||||||||||||||||||||||||||||||||||||||
| Amortization | (1,481) | (1,169) | (312) | ||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | (540) | (572) | 32 | ||||||||||||||||||||||||||||||||||||||
| Advisory fees | (539) | (371) | (168) | ||||||||||||||||||||||||||||||||||||||
| Interest expense | (1,952) | (1,293) | (659) | ||||||||||||||||||||||||||||||||||||||
| Marketable securities | |||||||||||||||||||||||||||||||||||||||||
| Investment income on marketable securities | 162 | 151 | 11 | ||||||||||||||||||||||||||||||||||||||
| Net realized (loss) gain on marketable securities | (443) | 119 | (562) | ||||||||||||||||||||||||||||||||||||||
| Net unrealized change in fair value of marketable securities | (4,363) | 2,166 | (6,529) | ||||||||||||||||||||||||||||||||||||||
| Net (loss) income | $ | (5,160) | $ | 1,604 | $ | (6,764) | |||||||||||||||||||||||||||||||||||
Property Operations
Our total lease revenue and total property operating expenses for the three months ended March 31, 2020 increased compared to those from the same periods in 2019 primarily due to the acquisition of Providence Square and Seattle East Industrial during the year ended December 31, 2019. Our total same-store net operating income for the three months ended March 31, 2020 and 2019 reflects 12 of the 14 properties in the portfolio. Lease
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revenue for the three months ended March 31, 2020 increased from the same period in 2019 primarily due to three leases at Anaheim Hills Office Plaza which were executed during 2019 and began paying rent, thereby increasing lease revenue by $90 compared to the three months ended March 31, 2019. Additionally contributing to the increase in lease revenue was contractually stepped up rents at several leases across the portfolio.
Same-store property operating expenses for the three months ended March 31, 2020 increased slightly from the same period in 2019 due to higher maintenance, repairs, real estate taxes and management fees, offset by lower utility and snow removal costs.
Straight-Line Revenue
The change in straight-line revenue for the three months ended March 31, 2020 compared to the 2019 period was due to the aforementioned tenant additions at Anaheim Hills Office Plaza who began paying cash rent which therefore caused a decrease in straight-line revenue, as well as increased contractual rents at Loudoun Gateway and Wallingford Plaza resulting in correspondingly less straight-line revenue. This decrease was partially offset by additional straight-line revenue from the acquisitions of Providence Square and Seattle East Industrial during the year ended December 31, 2019.
Lease Intangible Amortization
During the three months ended March 31, 2020, the net amount of above- and below-market lease amortization is nearly unchanged from the same period in 2019 as the 2019 acquisitions of Providence Square and Seattle East Industrial had minimal impact. Lease incentive amortization represents amortization of the lease incentive paid to Dick's Sporting Goods, Inc. at Terra Nova Plaza, which is being amortized over the approximate 10-year term of that lease.
Depreciation and Amortization
The depreciation and amortization on properties increased in the 2020 period as a result of the acquisitions of Providence Square and Seattle East Industrial.
General and Administrative
Our general and administrative expenses include a variety of corporate expenses, the largest of which were directors and officers insurance, audit fees, legal fees and independent director compensation. The amount for the three months ended March 31, 2020 decreased from the same period in 2019 primarily due to the March 2019 grant of Class I shares to our independent directors, a portion of which vested immediately upon grant, resulting in share-based compensation expense of $120 for the three months ended March 31, 2019. The decrease for the 2020 period was partially offset by increases in appraisal fees and state income taxes which are paid once per year.
Advisory Fees
The fixed component of the advisory fee pursuant to the advisory agreement is equal to 1% per annum of the NAV for each share class and is calculated and accrued daily and reflected in our NAV per share. For the three months ended March 31, 2020 and 2019, the advisory fee was comprised solely of the fixed component. The fixed component of the advisory fee was higher in the 2020 period compared to the 2019 period which is commensurate with the overall increase in our NAV, as we continue to raise and invest capital.
In accordance with our advisory agreement, our advisor can earn the performance component of the advisory fee when the total return to stockholders exceeds a required 6% per annum hurdle. The performance component is calculated separately for each share class and is comprised of the distributions paid to stockholders in each share class combined with the change in price of each share class. For any calendar year in which the total return per share allocable to a class exceeds 6% per annum (the “Hurdle Amount”), RREEF America will receive up to 10% of the aggregate total return allocable to such class with a Catch-Up (defined below) calculated as follows: first, if the total
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return for the applicable period exceeds the Hurdle Amount, 25% of such total return in excess of the Hurdle Amount (the “Excess Profits”) until the total return reaches 10% (commonly referred to as a “Catch-Up”); and second, to the extent there are remaining Excess Profits, 10% of such remaining Excess Profits. The performance component of the advisory fee is payable annually based on the results for the entire calendar year. The actual performance component that our advisor could earn in the current calendar year depends on several factors, including but not limited to the performance of our investments, our expenses and interest rates. For the three months ended March 31, 2020, the total return of each share class did not exceed the required 6% per annum hurdle, applied on a pro rata basis as applicable. For the three months ended March 31, 2019, the total return of each share class exceeded the required 6% per annum hurdle, applied on a pro rata basis as applicable, but no performance component was recognized as it did not meet the criteria required for recognition in accordance with GAAP.
Interest Expense
The increase in interest expense for the three months ended March 31, 2020 over the same period in 2019 was primarily due to a greater weighted average outstanding aggregate balance on our fixed rate loans. We originated a $17,600 loan on Elston Plaza with a fixed interest rate of 3.89% in June 2019, a $29,700 loan on Providence Square with a fixed interest rate of 3.67% in September 2019 and $45,140 loan on Seattle East Industrial with a fixed interest rate of 3.87% in December 2019. As a result, the weighted average outstanding aggregate balance and interest rate on all of our loan obligations was $202,418 and $117,343 for the three months ended March 31, 2020 and 2019, respectively. A general decrease in interest rates over the past year resulted in our all-in interest rate on all of our loan obligations averaging 3.5% and 4.0% for the three months ended March 31, 2020 and 2019, respectively, partially offsetting the increase in our overall interest expense for the two periods.
For the three months ended March 31, 2020 and 2019, the increase in our fixed rate loans as noted above was partially offset by a decrease in our weighted average outstanding balance on our line of credit. As a result of the aforementioned activities, our total outstanding loan balance as of March 31, 2020 consisted of 63% fixed rate loans and 37% floating rate loans.
We expect our interest expense to increase in future periods because we anticipate acquiring additional properties with borrowings, including by utilizing additional property-specific debt as a form of permanent financing along with continuing to use our line of credit.
Marketable Securities
The increase in investment income for the three months ended March 31, 2020 compared to the 2019 periods is primarily due to the larger investment basis as we made additional investments into our securities portfolio at various times during 2019. Our portfolio of investments in publicly-traded REIT securities is actively managed and thus is regularly adjusted by increasing and decreasing specific holdings primarily based upon changes in sector allocations and to a lesser degree based upon performance of specific securities. These continual portfolio refinements generate realized gains and losses by using the highest cost method whereby a sale of any particular security is first attributed to the shares of that security with the highest cost basis. In response to the COVID-19 pandemic, the financial markets significantly declined in March 2020, and our marketable securities portfolio similarly suffered. As a result, our marketable securities portfolio has experienced net realized and unrealized losses for the three months ended March 31, 2020.
Inflation
In our view, the real estate property sector has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. With the exception of leases with tenants in apartment properties, we will seek to include provisions in our tenant leases designed to protect us from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases, annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market. Leases in apartment properties generally turn over on an annual basis and do not
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typically present the same concerns regarding inflation protection due to their short-term nature.
NAV per Share
Our NAV per share is calculated in accordance with the valuation guidelines approved by our board of directors for the purposes of establishing a purchase price for our shares sold in our offerings as well as establishing a redemption price for our share repurchase plan. The following table provides a breakdown of the major components of our total NAV and NAV per share as of March 31, 2020:
| Components of NAV | Total NAV | Per Class A Share | Per Class I Share | Per Class T Share | Per Class D Share | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in real estate (1) | $ | 398,800 | $ | 26.05 | $ | 26.23 | $ | 26.12 | $ | 26.27 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in real estate equity securities (2) | 16,536 | 1.08 | 1.09 | 1.08 | 1.09 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other assets, net | 11,002 | 0.72 | 0.70 | 0.74 | 0.70 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Line of credit | (74,600) | (4.87) | (4.91) | (4.89) | (4.91) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage loans payable | (126,572) | (8.27) | (8.32) | (8.29) | (8.34) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities, net | (7,307) | (0.48) | (0.48) | (0.49) | (0.51) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value | $ | 217,859 | $ | 14.23 | $ | 14.31 | $ | 14.27 | $ | 14.30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note: No Class N shares were outstanding as of March 31, 2020. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) The value of our investments in real estate was approximately 10.0% more than their historical cost.
(2) The value of our investments in real estate securities was approximately 5.6% less than their historical cost.
As of March 31, 2020, all properties had been appraised by a third-party appraisal firm in addition to our independent valuation advisor. Set forth below are the weighted averages of the key assumptions used in the appraisals of the office, retail and industrial properties as of March 31, 2020. Once we own more than one property for the apartment property type, we will include the key assumptions for that property type.
| Discount Rate | Exit Capitalization Rate | ||||||||||
| Office properties | 7.36% | 6.67% | |||||||||
| Retail properties | 6.72% | 6.05% | |||||||||
| Industrial properties | 5.77% | 4.92% | |||||||||
These assumptions are determined by our independent valuation advisor or by separate third-party appraisers. A change in these assumptions would impact the calculation of the value of our property investments. For example, assuming all other factors remain unchanged, an increase in the weighted-average discount rate used as of March 31, 2020 of 0.25% would yield decreases in the office, retail and industrial property investment values of 1.8%, 1.8% and 1.9%, respectively. Similarly, an increase in the weighted-average exit capitalization rate used as of March 31, 2020 of 0.25% would yield decreases in the office, retail and industrial property investment values of 2.1%, 2.3% and 3.2%, respectively.
The table below sets forth a reconciliation of our stockholders' equity to our NAV, which we calculate for the purpose of establishing the purchase and redemption price for our shares, as of March 31, 2020.
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| Total NAV | Per Class A Share | Per Class I Share | Per Class T Share | Per Class D Share | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total stockholders' equity | $ | 120,793 | $ | 7.89 | $ | 7.93 | $ | 7.92 | $ | 7.91 | ||||||||||||||||||||||||||||||||||||||||||||||
| Plus: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on real estate investments | 36,309 | 2.37 | 2.39 | 2.38 | 2.39 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated depreciation | 23,551 | 1.54 | 1.55 | 1.54 | 1.55 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated amortization | 22,114 | 1.44 | 1.45 | 1.45 | 1.46 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred costs and expenses, net | 18,075 | 1.18 | 1.19 | 1.18 | 1.19 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred rent receivable | (2,983) | (0.19) | (0.20) | (0.20) | (0.20) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value | $ | 217,859 | $ | 14.23 | $ | 14.31 | $ | 14.27 | $ | 14.30 | ||||||||||||||||||||||||||||||||||||||||||||||
| Note: No Class N shares were outstanding as of March 31, 2020. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The deferred costs and expenses of $18,075 includes amounts that are initially excluded from the NAV calculation. This includes $5,188 payable to our advisor, which is less than the total amount payable to our advisor as reflected on our consolidated balance sheet as of March 31, 2020, because (1) certain amounts payable to our advisor as of March 31, 2020 were recorded as assets and as such have no impact on our NAV as of March 31, 2020, and (2) the amount payable to our advisor as reflected in due to affiliates and note to affiliate on our consolidated balance sheet includes accrued advisory fees and other amounts due under the advisory agreement. The deferred amounts will be included in the NAV calculation as such costs are reimbursed to our advisor, in accordance with the advisory agreement, the expense support agreement and the ESA letter agreement dated March 24, 2020 amending the advisory agreement and expense support agreement (defined below). The deferred costs and expenses above additionally includes $13,868 in estimated trailing fees that will be deducted from the NAV on a daily basis as and when they become payable to DWS Distributors, Inc., or the dealer manager. Lastly, the deferred cost and expenses above is net of (1) the portion of the performance component of the advisory fee that is reflected in the NAV calculation, if any, but does not yet meet the threshold for accrual under GAAP, and (2) the difference in recognition of (i) certain offering costs and (ii) compensation costs related to the shares granted to our independent board members.
Limitations and Risks
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different NAV per share. Accordingly, with respect to our NAV per share, we can provide no assurance that:
•a stockholder would be able to realize this NAV per share upon attempting to resell his or her shares;
•we would be able to achieve, for our stockholders, the NAV per share, upon a listing of our shares of common stock on a national securities exchange, selling our real estate portfolio, or merging with another company; or
•the NAV per share, or the methodologies relied upon to estimate the NAV per share, will be found by any regulatory authority to comply with any regulatory requirements.
Furthermore, the NAV per share was calculated as of a particular point in time. The NAV per share will fluctuate over time in response to, among other things, global, national or regional economic events, such as those caused by the coronavirus pandemic, changes in real estate market fundamentals, capital markets activities, and attributes specific to the properties and leases within our portfolio. The extent to which the coronavirus impacts our investments and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. These developments include the duration of the outbreak, the impact of government stimulus, new information that may emerge concerning the severity of the coronavirus, and actions taken to contain the coronavirus or treat its impact, among others.
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The coronavirus pandemic is expected to continue to have a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. Our independent valuation advisor and certain independent third-party appraisal firms engaged by our advisor have included additional cautionary language in their respective first quarter reports related to the uncertain impact of the coronavirus pandemic on the property values.
Funds from Operations and Modified Funds from Operations
We believe that funds from operations, or FFO, FFO as adjusted and modified funds from operations, or MFFO, in combination with net income or loss and cash flows from operating activities, as defined by GAAP, are useful supplemental performance measures that we use to evaluate our operating performance. However, these supplemental, non-GAAP measures should not be considered as an alternative to net income or loss or to cash flows from operating activities, both as determined by GAAP, as an indication of our performance and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. No single measure can provide users of financial information with sufficient information, and only our disclosures read as a whole can be relied upon to adequately portray our financial position, liquidity and results of operations. In addition, other REITs may define FFO and similar measures differently and thus choose to treat certain accounting line items in a manner different from us due to differences in investment and operating strategy or for other reasons.
As defined by the National Association of Real Estate Investment Trusts, or NAREIT, FFO is a non-GAAP supplemental financial performance measure that excludes certain items such as real estate-related depreciation and amortization and the impact of certain non-recurring items such as realized gains and losses on sales of real estate. We believe FFO is a meaningful supplemental financial performance measure of our operating performance that is useful to investors because depreciation and amortization in accordance with GAAP implicitly assume that the value of real estate assets diminishes predictably over time. Additionally, realized gains and losses on sales of real estate generally occur infrequently. As a result, excluding these items from FFO aids our analysis of our ongoing operations. We use FFO as an indication of our operating performance and as a guide to making decisions about future investments.
Under GAAP, the net unrealized change in the fair value of our investments in marketable securities for the period presented is recorded in earnings as part of operating income or loss. As a result, under the current NAREIT definition of FFO, the net unrealized change in the fair value of our investments in marketable securities is included in our FFO. Our investment objective with our investments in marketable securities is to generate consistent income while providing an opportunity for long term price appreciation. Additionally, we believe that investing a portion of our proceeds from our offerings into a diversified portfolio of common and preferred shares of REITs and other real estate operating companies will provide our overall investment portfolio some flexibility with near-term liquidity as well as potentially enhance our NAV over a longer period. The securities portfolio is regularly reviewed and evaluated to determine whether the marketable securities held at any time continue to serve their original intended purposes. In accordance with our objectives, it is our view that providing FFO as adjusted for the net unrealized change in the fair value of our securities portfolio, as an additional non-GAAP supplemental financial performance measure, will enhance an investor's understanding of the impact of our securities portfolio on our ongoing operations.
As defined by the Institute for Portfolio Alternatives, or IPA, MFFO is a non-GAAP supplemental financial performance measure used to assist us in evaluating our operating performance. We believe that MFFO is helpful as a measure of ongoing operating performance because it excludes costs that management considers more reflective of investing activities and other non-operating items included in FFO. Compared to FFO, MFFO additionally excludes items such as acquisition-related costs (if expensed in accordance with GAAP), non-cash amounts related to straight-line rent, amortization of above- and below-market lease intangibles and mark to market valuation adjustments on securities. In addition, there are certain other MFFO adjustments as defined by the IPA that are not applicable to us at this time and are not included in our presentation of MFFO. We believe that excluding acquisition costs from MFFO, if such costs were expensed in accordance with GAAP, provides investors with supplemental performance information that is consistent with our analysis of the operating performance of our
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portfolio over time, including periods after our acquisition stage.
We use FFO, FFO as adjusted and MFFO, among other things: (i) to evaluate and compare the potential performance of the portfolio after the acquisition phase is complete, and (ii) as metrics in evaluating our ongoing distribution policy. We believe investors are best served if the information that is made available to them allows them to align their analyses and evaluation with these same performance metrics used by us in planning and executing our business strategy. We believe that these performance metrics will assist investors in evaluating the potential performance of the portfolio after the completion of the acquisition phase. However, these supplemental, non-GAAP measures are not necessarily indicative of future performance and should not be considered as an alternative to net income or loss or to cash flows from operating activities, both as determined by GAAP, and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. Neither the SEC, NAREIT, nor any regulatory body has passed judgment on the acceptability of the adjustments used to calculate FFO as adjusted or MFFO. In the future, the SEC, NAREIT, or a regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry at which point we may adjust our calculation and characterization of FFO as adjusted or MFFO.
The following unaudited table presents a reconciliation of net income (loss) to FFO, FFO as adjusted, and MFFO.
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | $ | (5,160) | $ | 1,604 | |||||||||||||||||||||||||||||||||||||
| Real estate related depreciation | 1,779 | 1,310 | |||||||||||||||||||||||||||||||||||||||
| Real estate related amortization | 1,481 | 1,169 | |||||||||||||||||||||||||||||||||||||||
| NAREIT defined FFO | (1,900) | 4,083 | |||||||||||||||||||||||||||||||||||||||
| Net unrealized change in fair value of investments in marketable securities | 4,363 | (2,166) | |||||||||||||||||||||||||||||||||||||||
| FFO as adjusted | 2,463 | 1,917 | |||||||||||||||||||||||||||||||||||||||
| Additional adjustments: | |||||||||||||||||||||||||||||||||||||||||
| Straight line rents, net | (157) | (208) | |||||||||||||||||||||||||||||||||||||||
| Amortization of above- and below-market lease intangibles, net | (190) | (195) | |||||||||||||||||||||||||||||||||||||||
| Amortization of lease incentive | 25 | 26 | |||||||||||||||||||||||||||||||||||||||
| IPA defined MFFO | $ | 2,141 | $ | 1,540 | |||||||||||||||||||||||||||||||||||||
Liquidity and Capital Resources
Our primary needs for liquidity and capital resources are to fund our investments in accordance with our investment strategy and policies, make distributions to our stockholders, redeem shares of our common stock pursuant to our redemption plan, pay our offering and operating fees and expenses and pay interest on any outstanding indebtedness.
Over time, we generally intend to fund our cash needs for items, other than asset acquisitions and material capital improvements, from operations. Our cash needs for acquisitions and material capital improvements will be funded primarily from the sale of shares of our common stock in our offerings. The amount we may raise in such
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offerings is uncertain and dependent on a number of factors, including the impacts of the coronavirus pandemic. We intend to contribute any additional net proceeds from our offerings that are not used or retained to pay the fees and expenses attributable to our operations to our operating partnership.
The coronavirus pandemic has had, and is expected to continue to have, a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. We are closely monitoring the impact of the coronavirus pandemic on all aspects of our investments and operations, including how it will impact our tenants and business partners. We collected nearly 100% of our contractual rental revenues for the three months ended March 31, 2020, and we collected approximately 90% of our contractual rental revenues for the month for April 2020. However, the future impacts of the coronavirus cannot be predicted and it has caused, and may cause, certain of our tenants to request deferral of rental payments or not to pay rent at all. We generally intend to maintain sufficient liquidity at all times to satisfy our operational needs and the maximum potential quarterly redemptions under our share redemption plan. As of March 31, 2020, among our cash balances, our real estate securities portfolio, and the available borrowing capacity on our Wells Fargo line of credit, we had liquidity of $37,531.
We may also satisfy our cash needs for acquisitions and material capital improvements through the assumption or incurrence of debt. On February 27, 2018, we entered into an amended and restated secured revolving line of credit with Wells Fargo Bank, National Association. The Wells Fargo line of credit has a three-year term with two one-year extension options exercisable by us upon satisfaction of certain conditions and payment of applicable extension fees. The first extension option becomes exercisable in November 2020. The interest rate under the Wells Fargo line of credit is based on the 1-month LIBOR with a spread of 160 to 180 basis points depending on the debt yield as defined in the agreement. The Wells Fargo line of credit has a current maximum capacity of $100,000, and we have the option to expand the Wells Fargo line of credit up to a maximum capacity of $200,000 upon satisfaction of specified conditions. Each requested expansion must be for at least $25,000 and may result in the Wells Fargo line of credit being syndicated.
The Wells Fargo line of credit has as co-borrowers certain of the wholly-owned subsidiaries of our operating partnership, with the Company serving as the guarantor. At any time, the borrowing capacity under the Wells Fargo line of credit is based on the lesser of (1) an amount equal to 65% of the aggregate value of the properties in the collateral pool as determined by lender appraisals, (2) an amount that results in a minimum debt yield of 9% based on the in-place net operating income of the collateral pool as defined or (3) the maximum capacity of the Wells Fargo line of credit. Proceeds from the Wells Fargo line of credit can be used to fund acquisitions, redeem shares pursuant to our redemption plan and for any other corporate purpose. As of March 31, 2020, our maximum borrowing capacity was $89,310, our outstanding balance was $74,600 and our weighted average interest rate was 2.43%.
The Wells Fargo line of credit agreement contains customary representations, warranties, borrowing conditions and affirmative, negative and financial covenants, including that there must be at least five properties in the collateral pool at all times, and the collateral pool must also meet specified concentration provisions, unless waived by the lender. In addition, the guarantor must meet tangible net worth hurdles. As of March 31, 2020, we were in compliance with all covenants.
Since our inception, we have entered into property specific mortgage loans to finance the acquisition of certain properties, or refinance certain properties off of our Wells Fargo line of credit to create room under our Wells Fargo line of credit to fund future property acquisitions. The following table presents a summary of the property specific mortgage loans in place as of March 31, 2020. Each of the below mortgage loans has a fixed interest rate for the entire term of the mortgage loan. In addition, each mortgage loan contains provisions allowing for (a) a one-time transfer of the loan to an unaffiliated borrower at the sole discretion of the lender and upon payment of applicable fees, and (b) full prepayment of the mortgage loan within allowable windows subject to payment of applicable penalties, if any.
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| Lender | Encumbered Property | Outstanding Balance | Interest Rate | Maturity Date | ||||||||||||||||||||||||||||
| Nationwide Life Insurance Company | Flats at Carrs Hill | $ | 14,500 | 3.63 | % | March 1, 2026 | ||||||||||||||||||||||||||
| Hartford Life Insurance Company | Commerce Corner | 12,682 | 3.41 | December 1, 2023 | ||||||||||||||||||||||||||||
| Transamerica Life Insurance Company | Wallingford Plaza | 6,950 | 4.56 | January 1, 2029 | ||||||||||||||||||||||||||||
| State Farm Life Insurance Company | Elston Plaza | 17,600 | 3.89 | July 1, 2026 | ||||||||||||||||||||||||||||
| Nationwide Life Insurance Company | Providence Square | 29,700 | 3.67 | October 5, 2029 | ||||||||||||||||||||||||||||
| JPMorgan Chase Bank | Seattle East Industrial | 45,140 | 3.87 | January 1, 2030 | ||||||||||||||||||||||||||||
| $ | 126,572 | |||||||||||||||||||||||||||||||
In the future, as our assets increase, it may not be commercially feasible or we may not be able to secure an adequate line of credit to fund acquisitions, redemptions or other needs. Moreover, actual availability may be reduced at any given time if the values of our real estate or our marketable securities portfolio decline, such as that which may occur as a result of the coronavirus pandemic. Furthermore, the credit markets have been significantly impacted by the coronavirus pandemic which has caused certain lenders in the commercial real estate space to limit available financing options.
Expense Payments by Our Advisor
Pursuant to the advisory agreement, RREEF America is entitled to reimbursement of certain costs incurred by RREEF America or its affiliates. Costs eligible for reimbursement include most third-party operating expenses, salaries and related costs of its employees who perform services for us (but not those employees for which RREEF America earns a separate fee or those employees who are our executive officers) and travel related costs for its employees who incur such costs on our behalf. We will reimburse our advisor for all expenses paid or incurred by our advisor in connection with the services provided to us, subject to the limitations described below regarding the 2%/25% guidelines as defined in our advisory agreement. As of March 31, 2020, we owed $59 to our advisor for such costs.
On May 29, 2013, we entered into an expense support agreement with our advisor, which was amended and restated most recently on January 20, 2016, which we refer to as the expense support agreement. Pursuant to the terms of the expense support agreement, our advisor incurred expenses related to our operations which we refer to as expense payments. As of December 31, 2015, our advisor had incurred $9,200 in expense payments, which was the maximum amount of expense payments allowed under the expense support agreement.
As the expense payment limit had been reached, pursuant to the expense support agreement, in January 2016 the reimbursement provisions were triggered. During the first quarter of 2016, we reimbursed $250 to our advisor under the expense support agreement. On April 25, 2016, we and our advisor entered into a letter agreement that amended certain provisions of the advisory agreement and the expense support agreement. On March 24, 2020, we and our advisor entered into a second letter agreement which superseded the previous letter agreement, which we refer to as the ESA letter agreement. The ESA letter agreement provides, in part, that our obligations to reimburse our advisor for expense payments under the expense support agreement are suspended until the first calendar month following the month in which we have reached $500,000 in offering proceeds from our offerings, which we refer to as the ESA commencement date. Since our inception through March 31, 2020, we raised $253,251 from the sale of shares of our common stock, including proceeds from our dividend reinvestment plan. We currently owe $5,383 to our advisor under the expense support agreement. Beginning the month following the ESA commencement date, we will make monthly reimbursement payments to our advisor in the amount of $250 for the first 12 months and $198 for the second 12 months. In addition, pursuant to the ESA letter agreement, if RREEF America is serving as our advisor at the time that we or our operating partnership undertakes a liquidation, our remaining obligations to reimburse our
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advisor for the unpaid monthly reimbursements under the expense support agreement shall be waived.
Limits on Expense Reimbursement
In all cases, reimbursement payments to our advisor will be subject to reduction as necessary in order to ensure that such reimbursement payment will not cause the aggregate organization and offering costs paid by us for an offering to exceed 15% of the gross proceeds from the sale of shares in such offering as of the date of the reimbursement payment, and such reimbursement payment will not adversely affect our ability to maintain our status as a REIT for federal tax purposes.
In addition to the reimbursement limitations for organization and offering costs, we are also limited in the amount of operating expenses that we may reimburse our advisor. Pursuant to our charter, we may reimburse our advisor, at the end of each fiscal quarter, for total operating expenses incurred by our advisor; provided, however, that we may not reimburse our advisor at the end of any fiscal quarter for total operating expenses (as defined in our charter) that, in the four consecutive fiscal quarters then ended, exceed the greater of 2% of our average invested assets or 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period (which we refer to as the 2%/25% guidelines) for such four-quarter period. Notwithstanding the foregoing, we may reimburse our advisor for expenses in excess of the 2%/25% guidelines if a majority of our independent directors determine that such excess expenses, which we refer to as an excess amount, are justified based on unusual and non-recurring factors. For the four fiscal quarters ended March 31, 2020, our total operating expenses (as defined in our charter) were $4,871, which did not exceed the amount prescribed by the 2%/25% guidelines.
Pursuant to the expense support agreement, the amount of the reimbursement payment paid in any calendar quarter will not be aggregated with our cumulative operating expenses for any four consecutive calendar quarters that includes the calendar quarter in which such reimbursement payment is paid, and instead the amount of the unreimbursed expense payments comprising such reimbursement payment will have previously been aggregated with our total operating expenses for the four calendar quarter periods ending with the calendar quarter in which such expense payment was originally incurred, which we refer to as prior 2%/25% periods. If an unreimbursed expense payment incurred during a prior 2%/25% period exceeded the 2%/25% guidelines for such prior 2%/25% period, the amount of such excess will only be reimbursed pursuant to the expense support agreement to the extent that our independent directors previously approved such excess with respect to the applicable prior 2%/25% period. Our independent directors approved the excess amount for every period of four consecutive quarters since we were first subject to this limitation for the four consecutive quarters ended June 30, 2014 through September 30, 2016. During the fiscal quarter ended March 31, 2017, our advisor reimbursed us for the excess amount related to the four fiscal quarters ended December 31, 2016. Our total operating expenses have not exceeded the 2%/25% guidelines for any four-quarter period ending after December 31, 2016.
We anticipate our offering and operating fees and expenses will include, among other things, the advisory fee that we pay to our advisor, the selling commissions, dealer manager and distribution fees we pay to the dealer manager, legal and audit expenses, federal and state filing fees, printing expenses, transfer agent fees, marketing and distribution expenses and fees related to appraising and managing our properties. We will not have any office or personnel expenses as we do not have any employees. Our advisor will incur certain of these expenses and fees, for which we may reimburse our advisor, subject to certain limitations. Additionally, our advisor may allocate to us out-of-pocket expenses in connection with providing services to us, including our allocable share of our advisor’s overhead, such as rent, utilities and personnel costs for personnel who are directly involved in the performance of services to us and are not our executive officers. Ultimately, total organization and offering costs incurred in a given offering will not exceed 15% of the gross proceeds from such offering. During our initial offering, our advisor paid on our behalf or reimbursed us for $3,975 in organization and offering costs and $5,229 in operating expenses. Pursuant to the ESA letter agreement dated March 24, 2020, our advisor waived reimbursement of $3,567 of expense payments related to organization and offering costs from our initial offering. The total organization and offering costs paid by our advisor did not cause us to exceed the 15% limitation as of March 31, 2020 with respect to the initial offering. If, in future periods, the total organization and offering costs paid by our advisor and the dealer manager cause us to exceed the 15% limitation with respect to the initial offering, the excess would not be reflected
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on our consolidated balance sheet as of the end of such period. A similar limitation will apply to the total organization and offering costs incurred with respect to each follow-on offering. In such event, we may become obligated to reimburse all or a portion of this excess as we raise additional proceeds from such follow-on offering. As of March 31, 2020, our total organization and offering costs incurred with respect to the follow-on offering and the second follow-on offering did not exceed the 15% limitation for the follow-on offering.
Other potential future sources of capital include secured or unsecured financings from banks or other lenders and proceeds from the sale of assets. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.
Cash Flow Analysis
Cash flow provided by operating activities during the three months ended March 31, 2020 and 2019 was $1,949 and $789, respectively. The increase in cash flow from operating activities for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 is due to additional operating cash flows from our 2019 acquisitions as well as additional cash paying leases at Anaheim Hills Office Plaza. These increases were partially offset by higher debt service costs in the 2020 period as a result of our higher average outstanding debt balances.
Cash flow used in investing activities during the three months ended March 31, 2020 and 2019 was $894 and $553, respectively. In 2020 we paid approximately $873 on improvements to our real estate investments, primarily for tenant improvements at Anaheim Hills Office Plaza related to new leases and building improvements at our Miami Industrial properties. This compares to paid real estate improvements of only $415 in the 2019 period.
Cash flow provided by financing activities was $996 for the three months ended March 31, 2020. We received proceeds of $15,281 in our offerings and paid $982 in offering costs. Cash distributions to stockholders paid during the three months ended March 31, 2020 were $1,337. Of the total distributions declared for the three months ended March 31, 2020, $1,339 was reinvested via our distribution reinvestment plan. Additionally, we processed redemptions during the three months ended March 31, 2020 that resulted in payments by us of $4,901, after deductions for any applicable 2% short-term trading discounts. We used the proceeds from our offerings to repay $13,500 against our outstanding balance on the Wells Fargo line of credit. We borrowed $6,500 from our Wells Fargo line of credit during 2020. Additionally, we made principal payments on the Hartford Loan of $65 which required monthly principal payments beginning in January 2019.
Cash flow provided by financing activities was $3,552 for the three months ended March 31, 2019. We received proceeds of $11,909 in our offerings and paid $522 in offering costs. Cash distributions to stockholders paid during the three months ended March 31, 2019 were $983. Of the total distributions declared for the three months ended March 31, 2019, $841 was reinvested via our distribution reinvestment plan. Additionally, we processed redemptions during the three months ended March 31, 2019 that resulted in payments by us of $1,589, after deductions for any applicable 2% short-term trading discounts. We also borrowed $900 from our Wells Fargo line of credit and made repayments of $6,100 against our outstanding balance on the Wells Fargo line of credit with excess capital raised. Additionally, we made principal payments on the Hartford Loan of $63 which required monthly principal payments beginning in January 2019.
Distributions
Our board of directors authorized and declared daily cash distributions for each quarter which were payable monthly for each share of Class A, Class I, Class T and Class D common stock outstanding. Shown below are details of the distributions:
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| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
| Distributions: | ||||||||||||||||||||||||||||||||||||||||||||
| Declared daily distribution rate, before adjustment for class-specific fees | $ | 0.00198576 | $ | 0.00193545 | ||||||||||||||||||||||||||||||||||||||||
| Distributions paid or payable in cash | $ | 1,369 | $ | 1,000 | ||||||||||||||||||||||||||||||||||||||||
| Distributions reinvested | 1,339 | 841 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions declared | $ | 2,708 | $ | 1,841 | ||||||||||||||||||||||||||||||||||||||||
| Net Cash Provided by Operating Activities: | $ | 1,949 | $ | 789 | ||||||||||||||||||||||||||||||||||||||||
| Funds From Operations: | $ | (1,900) | $ | 4,083 | ||||||||||||||||||||||||||||||||||||||||
For the three months ended March 31, 2020, our distributions were covered 72.0% by cash flow from operations and 28.0% by borrowings. We expect that we will continue to pay distributions monthly in arrears. Any distributions not reinvested will be payable in cash, and there can be no assurances regarding the portion of the distributions that will be reinvested. We intend to fund distributions from cash generated by operations. However, we may fund distributions from borrowings under our line of credit, from the proceeds of our offering or any other source.
As discussed above under “Funds from Operations and Modified Funds from Operations,” FFO, as defined by NAREIT, includes the net unrealized change in fair value of our investments in marketable securities. For the three months ended March 31, 2020 and 2019, the net unrealized change in fair value of our investments in marketable securities was a loss of $4,363 and a gain $2,166, respectively. Without this net unrealized change in fair value, our FFO for the three months ended March 31, 2020 and 2019 would have been $2,463 and $1,917, respectively, which we refer to as FFO as adjusted, and which is presented above under "Funds from Operations and Modified Funds from Operations" for the three months ended March 31, 2020 and 2019.
The coronavirus pandemic has caused a world-wide economic slowdown, and resulted in numerous temporary retail store closings as well as temporary closings of many other businesses due to government imposed or elected shelter-in-place orders. The duration and ultimate impact of these measures cannot be predicted and may cause reduced operating cash flows from our investments. The payment of distributions from sources other than cash flow from operations or FFO may be dilutive to our NAV per share because it may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
Redemptions
For details on our redemptions, please see Note 9 (“Capitalization”) to our consolidated financial statements included in this quarterly report on Form 10-Q. As of March 31, 2020, we had no unfulfilled redemption requests.
Critical Accounting Policies
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and
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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 the comparability of our results of operations to those of companies in similar businesses. We consider our critical accounting policies to be the policies that relate to the following concepts:
•Real Estate Investments and Lease Intangibles
•Revenue Recognition
•Organization and Offering Expenses
A complete description of such policies and our considerations is contained in Note 2 ("Summary of Significant Accounting Policies") to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by the most recent quarterly report on Form 10-Q.
Certain Accounting Pronouncements Effective in the Future
We refer you to Note 2 (“Summary of Significant Accounting Policies”) to our consolidated financial statements included in this quarterly report on Form 10-Q for a discussion of the potential impact on us from certain accounting pronouncements that become effective in the future.
REIT Compliance and Income Taxes
We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code beginning with the year ended December 31, 2013, and we believe that we have operated in such a manner to continue to be taxed as a REIT for federal income tax purposes. In order to maintain our qualification as a REIT, we are required to, among other things, distribute as dividends at least 90% of our REIT taxable income, determined without regard to the dividends-paid deduction and excluding net capital gains, to our stockholders and meet certain tests regarding the nature of our income and assets. If we qualify for taxation as a REIT, we generally will not be subject to federal income tax to the extent our income meets certain criteria and we distribute our REIT taxable income to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to (1) certain state and local taxes on our income, property or net worth and (2) federal income and excise taxes on undistributed income, if any income remains undistributed. Many of these requirements are highly technical and complex. We will monitor the business and transactions that may potentially impact our REIT status. If we were to fail to meet these requirements, we could be subject to federal income tax on our taxable income at regular corporate rates. We would not be able to deduct distributions paid to stockholders in any year in which we fail to qualify as a REIT. We will also 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.
Off Balance Sheet Arrangements
As of March 31, 2020, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In connection with our line of credit, which has a variable interest rate, we are subject to market risk associated with changes in LIBOR. As of March 31, 2020, we had $74,600 outstanding under our Wells Fargo line of credit bearing interest at approximately 2.4%, representing approximately a 54.7% loan-to-cost ratio. At this balance, a change in the interest rate of 0.50% would result in a change in our interest expense of $373 per annum. In the future, we may be exposed to additional market risk associated with interest rate changes as a result of additional short-term debt, such as additional borrowings under our line of credit, and long-term debt, which, in either case, may be used to maintain liquidity, fund capital expenditures and expand our investment portfolio. Market fluctuations in real estate financing may affect the availability and cost of funds needed to expand our investment portfolio. In addition, restrictions upon the availability of real estate financing or high interest rates for
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real estate loans could adversely affect our ability to dispose of real estate in the future. We will seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. We intend to manage market risk associated with our variable-rate financing by assessing our interest rate cash flow risk through continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets.
We may be exposed to credit risk, which is the risk that the counterparty will fail to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We will seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties. We are not currently a party to any such derivative contracts.
We will be exposed to financial market risk with respect to our marketable securities portfolio. Financial market risk is the risk that we will incur economic losses due to adverse changes in equity security prices. Our exposure to changes in equity security prices is a result of our investment in these types of securities. Market prices are subject to fluctuation and, therefore, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market prices of a security may result from any number of factors, including perceived changes in the underlying fundamental characteristics of the issuer, the relative price of alternative investments, interest rates, default rates and general market conditions. In addition, the coronavirus pandemic has caused significant disruption in the financial markets due uncertainties around the actual and perceived impacts on global, national and local economies. Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the security being sold. We do not currently engage in derivative or other hedging transactions to manage our security price risk. As of March 31, 2020, we owned marketable securities with a value of $16,536. While it is difficult to project what factors may affect the prices of equity securities and how much the effect might be, a 10% change in the value of the marketable securities we owned as of March 31, 2020 would result in a change of $1,654 to the unrealized gain on marketable securities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of March 31, 2020, were effective to ensure that information required to be disclosed by us in this Quarterly Report is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act and is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.
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 March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of March 31, 2020, there were no material pending legal proceedings.
ITEM 1A. RISK FACTORS
We refer you to the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 5, 2020. In addition, the following risk factors should be considered.
The continuing spread of a new strain of coronavirus, which causes the viral disease known as COVID-19, may adversely affect our investments and operations.
Since its discovery in December 2019, a new strain of coronavirus, which causes the viral disease known as COVID-19, has spread from China to many other countries, including the United States. The World Health Organization has declared the outbreak a pandemic, the Health and Human Services Secretary has declared a public health emergency in the United States in response to the outbreak and the President of the United States has declared the coronavirus outbreak a national emergency. Considerable uncertainty still surrounds the coronavirus and its potential effects, and the extent of and effectiveness of any responses taken on a national and local level. The impact of the coronavirus on the U.S. and world economies is uncertain and is expected to result in a world-wide economic downturn that will lead to corporate bankruptcies in the most affected industries and has already led to a substantial increase in unemployment.
As a result of our property investments being located in the United States, the coronavirus will impact our properties and operating results to the extent that its continued spread within the United States reduces occupancy, increases the cost of operation, results in limited hours or necessitates the closure of such properties. In addition, quarantines, states of emergencies and other measures taken to curb the spread of the coronavirus may negatively impact the ability of such properties to continue to obtain necessary goods and services or provide adequate staffing, which may also adversely affect our properties and operating results. With respect to our retail properties, individual stores and shopping plazas have been, and may continue to be, closed for an extended period of time or only open certain hours of the day. Our office and industrial properties may be negatively impacted by tenant bankruptcies and defaults. Our apartment property may be impacted by colleges suspending in-person classroom education or declining household incomes and wealth, resulting in delinquencies or vacancies.
The economic downturn resulting from the coronavirus could negatively impact our investments and operations, as well as our ability to make distributions to stockholders. The extent to which the coronavirus impacts our investments and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions taken to contain the coronavirus or treat its impact, among others.
Our NAV and the price paid by new investors for shares of our common stock in our offering may not reflect the adverse impact on the value of our properties resulting from the coronavirus pandemic.
The recent coronavirus pandemic is expected to continue to have a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. The fallout from the ongoing pandemic on our investments is uncertain; however it is expected to have a negative impact on the overall real estate market. The NAV per share of each class of our common stock as published on any given day may not reflect the changes in values of our properties resulting from the coronavirus pandemic, as this impact is occurring rapidly and is not immediately quantifiable. Our independent valuation advisor and certain independent third-party appraisal firms engaged by our advisor have included additional cautionary language in their respective reports related to the uncertain impact of the coronavirus pandemic on the property values. In certain cases this cautionary language asks
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that we not rely on conclusions made prior to the most recent developments related to the coronavirus pandemic, encourages us to exercise diligence in reviewing those conclusions as the situation evolves and reminds us to consider that the report expresses an opinion of value as of the date of value. As a result, the property appraisals we use in our NAV calculation may not take into account changes to the value of our properties resulting from the effects of the coronavirus and as such the price per share paid by new investors may be higher than the actual value of our shares of common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
No unregistered sales of our common stock occurred during the three months ended March 31, 2020.
Share Redemption Plan
On November 27, 2012 we adopted a share redemption plan whereby on a daily basis stockholders may request that we repurchase all or a portion of their shares of common stock. The redemption price per share is equal to our NAV per share of the class of shares being redeemed on the date of redemption. The total amount of redemptions in any calendar quarter will be limited to shares whose aggregate value (based on the redemption price per share on the date of the redemption) is equal to 5% of our combined NAV for all classes of shares as of the last day of the previous calendar quarter. In addition, if redemptions do not reach the 5% limit in a calendar quarter, the unused portion generally will be carried over to the next quarter and not any subsequent quarter, except that the maximum amount of redemptions during any quarter may never exceed 10% of the combined NAV for all classes of shares as of the last day of the previous calendar quarter. While there is no minimum holding period, shares redeemed within 365 days of an investor's initial date of purchase will be redeemed at our NAV per share of the class of shares being redeemed on the date of redemption, less a short-term trading discount equal to 2% of the gross proceeds otherwise payable with respect to the redemption. Our board of directors has the discretion to suspend or modify the share redemption plan at any time.
The following tables set forth information regarding our redemption of shares of our common stock by share class. The weighted average redemption prices are shown before allowing for any applicable 2% short-term trading discounts.
| Three Months Ended March 31, 2020 | Shares | Weighted Average Share Price | ||||||||||||
| Class A | 97,565 | $ | 14.28 | |||||||||||
| Class I | 308,331 | 14.29 | ||||||||||||
| Class T | — | — | ||||||||||||
| Class D | — | — | ||||||||||||
We funded these redemptions with cash flow from operations, proceeds from our offerings or borrowings on our line of credit.
The following table sets forth information regarding redemptions of shares of our common stock by month. As of March 31, 2020, we had no unfulfilled redemption requests.
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| Period | 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 Pursuant to the Program (1) | ||||||||||||||||||||||||||||||||||||||||
| January 1 - January 31, 2020 | 24,402 | $14.52 | 24,402 | (1) | ||||||||||||||||||||||||||||||||||||||||
| February 1 - February 29, 2020 | 83,271 | $14.53 | 83,271 | (1) | ||||||||||||||||||||||||||||||||||||||||
| March 1 - March 31, 2020 | 298,223 | $14.20 | 298,223 | (1) | ||||||||||||||||||||||||||||||||||||||||
| (1) Redemptions are limited as described above. | ||||||||||||||||||||||||||||||||||||||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| Exhibit No. | Description | |||||||
| 3.1 | Second Articles of Restatement of RREEF Property Trust, Inc., incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on February 17, 2017. | |||||||
| 3.2 | Articles Supplementary to the Second Articles of Restatement of RREEF Property Trust, Inc., incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on April 24, 2020. | |||||||
| 3.3 | Bylaws of RREEF Property Trust, Inc., incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 3 to the Company’s initial Registration Statement on Form S-11, Commission File No. 333-180356, filed on November 29, 2012. | |||||||
| 4.1 | Third Amended and Restated Distribution Reinvestment Plan of RREEF Property Trust, Inc., incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on April 24, 2020. | |||||||
| 31.1* | Certification of the Principal Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||||
| 31.2* | Certification of the Principal Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||||
| 32.1* | Certification of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||||
| 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 | |||||||
| * | Filed herewith | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RREEF Property Trust, Inc. | ||||||||
| By: | /s/ W. Todd Henderson | |||||||
| Name: | W. Todd Henderson | |||||||
| Title: | Chief Executive Officer (Principal Executive Officer) | |||||||
| By: | /s/ Eric M. Russell | ||||
| Name: | Eric M. Russell | ||||
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | ||||
Date: May 14, 2020
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