| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for
interim financial information and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. All intercompany transactions have
been eliminated in consolidation. The consolidated financial
statements, including the notes thereto, are unaudited and exclude
some of the disclosures required in audited financial statements.
Management believes it has made all necessary adjustments,
consisting of only normal recurring items, so that the consolidated
financial statements are presented fairly and that estimates made
in preparing its consolidated financial statements are reasonable
and prudent. The accompanying unaudited consolidated interim
financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company’s
Annual Report on Form 10-K for the fiscal year ended
December 31, 2016 filed with the SEC.
The preparation of the financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the balance sheet.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents represent cash held in banks, cash on
hand, and liquid investments with original maturities of three
months or less. The Company may have bank balances in excess of
federally insured amounts; however, the Company deposits its cash
and cash equivalents with high credit-quality institutions to
minimize credit risk.
Restricted Cash
Restricted cash primarily consists of cash received for
subscriptions prior to the date in which the subscriptions are
effective. The Company’s restricted cash is held primarily in
a bank account controlled by the Company’s transfer agent but
in the name of the Company. The amount of $103.7 million as of
March 31, 2017 represents proceeds from subscriptions received
in advance and is classified as restricted cash.
Investments in Real Estate
In accordance with the guidance for business combinations, the
Company determines whether the acquisition of a property qualifies
as a business combination, which requires that the assets acquired
and liabilities assumed constitute a business. If the property
acquired is not a business, the Company accounts for the
transaction as an asset acquisition. The Company has early adopted
Accounting Standards Update 2017-01 — Clarifying the
Definition of a Business (“ASU 2017-01”). ASU 2017-01
states that when substantially all of the fair value of the gross
assets to be acquired is concentrated in a single identifiable
asset or group of similar identifiable assets, the asset or set of
assets is not a business. All property acquisitions to date have
been accounted for as asset acquisitions.
Whether the acquisition of a property acquired is considered a
business combination or asset acquisition, the Company recognizes
the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquired entity. In addition, for
transactions that are business combinations, the Company evaluates
the existence of goodwill or a gain from a bargain purchase. The
Company expenses acquisition-related costs associated with business
combinations as they are incurred. The Company capitalizes
acquisition-related costs associated with asset acquisitions.
Upon acquisition of a property, the Company assesses the fair value
of acquired tangible and intangible assets (including land,
buildings, tenant improvements, “above-market” and
“below-market” leases, acquired in-place leases, other
identified intangible assets and assumed liabilities) and allocates
the purchase price to the acquired assets and assumed liabilities.
The Company assesses and considers fair value based on estimated
cash flow projections that utilize discount and/or capitalization
rates that it deems appropriate, as well as other available market
information. Estimates of future cash flows are based on a number
of factors including the historical operating results, known and
anticipated trends, and market and economic conditions.
The fair value of the tangible assets of an acquired property
considers the value of the property as if it were vacant. The
Company also considers an allocation of purchase price of other
acquired intangibles, including acquired in-place leases that may
have a customer relationship intangible value, including (but not
limited to) the nature and extent of the existing relationship with
the tenants, the tenants’ credit quality and expectations of
lease renewals. Based on its acquisitions to date, the
Company’s allocation to customer relationship intangible
assets has not been material.
The Company records acquired above-market and below-market leases
at their fair values (using a discount rate which reflects the
risks associated with the leases acquired) equal to the difference
between (1) the contractual amounts to be paid pursuant to
each in-place lease and (2) management’s estimate of
fair market lease rates for each corresponding in-place lease,
measured over a period equal to the remaining term of the lease for
above-market leases and the initial term plus the term of any
below-market fixed rate renewal options for below-market leases.
Other intangible assets acquired include amounts for in-place lease
values that are based on the Company’s evaluation of the
specific characteristics of each tenant’s lease. Factors to
be considered include estimates of carrying costs during
hypothetical expected lease-up periods considering current market
conditions, and costs to execute similar leases. In estimating
carrying costs, the Company includes real estate taxes, insurance
and other operating expenses and estimates of lost rentals at
market rates during the expected lease-up periods, depending on
local market conditions. In estimating costs to execute similar
leases, the Company considers leasing commissions, legal and other
related expenses.
The cost of buildings and improvements includes the purchase price
of the Company’s properties and any acquisition-related
costs, along with any subsequent improvements to such properties.
The Company’s investments in real estate are stated at cost
and are generally depreciated on a straight-line basis over the
estimated useful lives of the assets as follows:
Description
Depreciable Life
Building 30 - 40 years
Building- and site-improvements 10 years
Furniture, fixtures and equipment 1 - 7 years
Lease intangibles Over lease term
Repairs and maintenance are expensed to operations as incurred and
are included in property and hotel operating expenses on the
Company’s consolidated statements of operations. Significant
improvements to properties are capitalized. When assets are sold or
retired, their costs and related accumulated depreciation are
removed from the accounts with the resulting gains or losses
reflected in net income or loss for the period.
The amortization of acquired above-market and below-market leases
is recorded as an adjustment to rental revenue on the consolidated
statements of operations. The amortization of in-place leases is
recorded as an adjustment to depreciation and amortization expense
on the consolidated statements of operations. The amortization of
below-market ground leases is recorded as an adjustment to hotel
operating expenses on the consolidated statements of
operations.
The Company has ground lease obligations in conjunction with
certain of its investments in real estate. The ground lease
obligations are generally non-cancelable and long term. The Company
recognizes the ground lease rent expense on a straight-line basis
over the term of the ground lease and records the expense as a
component of hotel operating expense on the consolidated statements
of operations.
The Company’s management reviews its real estate properties
for impairment each quarter or when there is an event or change in
circumstances that indicates an impaired value. If the carrying
amount of the real estate investment is no longer recoverable and
exceeds the fair value such investment, an impairment loss is
recognized. The impairment loss is recognized based on the excess
of the carrying amount of the asset over its fair value. The
evaluation of anticipated future cash flows is highly subjective
and is based in part on assumptions regarding future occupancy,
rental rates and capital requirements that could differ materially
from actual results. Since cash flows on real estate properties
considered to be “long-lived assets to be held and
used” are considered on an undiscounted basis to determine
whether an asset has been impaired, the Company’s strategy of
holding properties over the long term directly decreases the
likelihood of recording an impairment loss. If the Company’s
strategy changes or market conditions otherwise dictate an earlier
sale date, an impairment loss may be recognized and such loss could
be material to the Company’s results. If the Company
determines that an impairment has occurred, the affected assets
must be reduced to their fair value, less cost to sell. During the
period presented, no such impairment occurred.
Investments in Real Estate-Related Securities
The Company has elected to classify its investment in real
estate-related securities as trading securities and carry such
investments at estimated fair value. As such, the resulting gains
and losses are recorded as a component of income from real
estate-related securities on the consolidated statements of
operations.
Fair Value Measurement
Under normal market conditions, the fair value of an investment is
the amount that would be received to sell an asset or transfer a
liability in an orderly transaction between market participants at
the measurement date (i.e., the exit price). Additionally, there is
a hierarchal framework that prioritizes and ranks the level of
market price observability used in measuring investments at fair
value. Market price observability is impacted by a number of
factors, including the type of investment and the characteristics
specific to the investment and the state of the market place,
including the existence and transparency of transactions between
market participants. Investments with readily available active
quoted prices or for which fair value can be measured from actively
quoted prices generally will have a higher degree of market price
observability and a lesser degree of judgment used in measuring
fair value.
Investments measured and reported at fair value are classified and
disclosed in one of the following levels within the fair value
hierarchy:
Level 1 — quoted prices are available in active markets for
identical investments as of the measurement date. The Company does
not adjust the quoted price for these investments.
Level 2 — quoted prices are available in markets that are not
active or model inputs are based on inputs that are either directly
or indirectly observable as of the measurement date.
Level 3 — pricing inputs are unobservable and include
instances where there is minimal, if any, market activity for the
investment. These inputs require significant judgment or estimation
by management or third parties when determining fair value and
generally represent anything that does not meet the criteria of
Levels 1 and 2. Due to the inherent uncertainty of these estimates,
these values may differ materially from the values that would have
been used had a ready market for these investments existed.
As of March 31, 2017, the Company’s $133.1 million of
investments in real estate-related securities were classified as
Level 2.
Valuation
The Company’s investments in real estate-related securities
are reported at estimated fair value.
As of March 31, 2017, the Company’s investments in real
estate-related securities consisted of CMBS, which are fixed income
securities. The Company generally values its CMBS by utilizing
third-party pricing service providers and broker-dealer quotations
on the basis of last available bid price.
In determining the value of a particular investment, pricing
service providers may use broker-dealer quotations, reported trades
or valuation estimates from their internal pricing models to
determine the reported price. The pricing service providers’
internal models use observable inputs such as issuer details,
interest rates, yield curves, prepayment speeds, credit
risks/spreads, default rates and quoted prices for similar
assets.
Revenue Recognition
The Company’s sources of revenue and the related revenue
recognition policies are as follows:
Rental revenue — primarily consists of base rent arising from
tenant leases at the Company’s industrial, multifamily, and
retail properties. Rental revenue is recognized on a straight-line
basis over the life of the lease, including any rent steps or
abatement provisions. The Company begins to recognize revenue upon
the acquisition of the related property or when a tenant takes
possession of leased space.
Tenant reimbursement income — consists primarily of amounts
due from tenants for costs related to common area maintenance, real
estate taxes, and other recoverable costs included in lease
agreements. The Company recognizes the reimbursement of such costs
incurred as tenant reimbursement income.
Hotel revenue — consists of income from the Company’s
hotel properties. Hotel revenue consists primarily of room revenue
and food and beverage revenue. Room revenue is recognized when the
related room is occupied and other hotel revenue is recognized when
the service is rendered.
Income Taxes
The Company intends to make an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986,
as amended, or the Internal Revenue Code, commencing with its
taxable year ending December 31, 2017. If the Company
qualifies for taxation as a REIT, the Company generally will not be
subject to federal corporate income tax to the extent it
distributes 90% of its taxable income to its stockholders. REITs
are subject to a number of other organization and operational
requirements. Even if the Company qualifies for taxation as a REIT,
it may be subject to certain state and local taxes on its income
and property, and federal income and excise taxes on its
undistributed income.
The Company leases its hotel investment to a wholly-owned taxable
REIT subsidiary (“TRS”). The TRS is subject to taxation
at the federal, state, and local levels, as applicable. Revenues
related to the hotel’s operations such as room revenue, food
and beverage revenue and other revenue are recorded in the TRS
along with corresponding expenses. The Company accounts for
applicable income taxes by utilizing the asset and liability
method. As such, the Company records deferred tax assets and
liabilities for the future tax consequences resulting from the
difference between the carrying value of existing assets and
liabilities and their respective tax basis. As of March 31,
2017, the Company recorded a deferred tax asset of $85 thousand due
to its investment in the UC Davis Hotel and recorded such amount as
a tax benefit on the consolidated statements of operations.
Organization and Offering Expenses
Organization expenses are expensed and offering costs are charged
to equity as such amounts are incurred.
The Adviser has agreed to advance certain organization and offering
expenses on behalf of the Company (including legal, accounting, and
other expenses attributable to the Company’s organization,
but excluding upfront selling commissions, dealer manager fees and
stockholder servicing fees) through December 31, 2017, the day
before the first anniversary of the date as of which escrow for the
Offering was released. The Company will reimburse the Adviser for
all such advanced expenses ratably over a 60 month period following
December 31, 2017.
As of March 31, 2017, the Adviser and its affiliates had
incurred organization and offering expenses on the Company’s
behalf of $7.7 million, consisting of offering costs of $5.9
million and organization costs of $1.8 million. These
organization and offering expenses were recorded in the
accompanying consolidated balance sheet as of March 31, 2017.
Such costs became the Company’s liability on January 1,
2017, the date as of which the proceeds from the Offering were
released from escrow.
Blackstone Advisory Partners L.P. (the “Dealer
Manager”), a registered broker-dealer affiliated with the
Adviser, serves as the dealer manager for the Offering. The Dealer
Manager is entitled to receive selling commissions and dealer
manager fees based on the transaction price of each applicable
class of shares sold in the Offering. The Dealer Manager is also
entitled to receive a stockholder servicing fee of 0.85%, 0.85% and
0.25% per annum of the aggregate net asset value
(“NAV”) of the Company’s outstanding Class T
shares, Class S shares and Class D shares, respectively.
The following table details the selling commissions, dealer manager
fees, and stockholder servicing fees for each applicable share
class:
Class T Class S Class D Class I
Selling commissions and dealer manager fees (% of transaction
price)
up to 3.5 %
up to 3.5 % — —
Stockholder servicing fee (% of NAV) 0.85 % 0.85 % 0.25 % —
There is no stockholder servicing fee with respect to Class I
shares. The Dealer Manager has entered into agreements with the
selected dealers distributing the Company’s shares in the
Offering, which provide, among other things, for the re-allowance
of the full amount of the selling commissions and dealer manager
fees received and all or a portion of the stockholder servicing
fees to such selected dealers. The Company will cease paying the
stockholder servicing fee with respect to any Class T share,
Class S share or Class D share sold in the primary
Offering at the end of the month in which the total selling
commissions, dealer manager fees and stockholder servicing fees
paid with respect to such share would exceed 8.75% (or, in the case
of Class T shares sold through certain participating
broker-dealers, a lower limit as set forth in any applicable
agreement between the Dealer Manager and a participating
broker-dealer) of the gross proceeds from the sale of such share
(including the gross proceeds of any shares issued under the
Company’s distribution reinvestment plan with respect
thereto). The Company will accrue the full cost of the stockholder
servicing fee as an offering cost at the time each Class T,
Class S and Class D share is sold during the primary
Offering. As of March 31, 2017, the Company had accrued
$29.6 million of stockholder servicing fees related to Class S
shares sold and recorded such amount as a component of due to
affiliate on the Company’s consolidated balance sheets.
Earnings Per Share
Basic net loss per share of common stock is determined by dividing
net loss attributable to common stockholders by the weighted
average number of common shares outstanding during the
period. All classes of common stock are allocated net
income/(loss) at the same rate per share.
The restricted stock grants of Class I shares held by our directors
and issued on January 1, 2017 are considered to be participating
securities because they contain non-forfeitable rights to
distributions. The impact of these restricted stock grants on basic
and diluted earnings per common share (“EPS”) has been
calculated using the two-class method whereby earnings are
allocated to the restricted stock grants based on dividends
declared and the restricted stocks’ participation rights in
undistributed earnings. As of March 31, 2017, the effects of
the two-class method on basic and diluted EPS were not material to
the consolidated financial statements.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued ASU 2014-09 “Revenue from
Contracts with Customers (Topic 606).” Beginning
January 1, 2018, companies will be required to recognize
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services and also includes additional disclosure requirements. The
new standard can be adopted either retrospectively to prior
reporting periods presented or as a cumulative effect adjustment as
of the date of adoption. The Company is currently evaluating the
overall impact and adoption method that will be used for the
implementation.
In February 2016, the FASB issued ASU 2016-02,
“Leases,” which will require organizations that lease
assets to recognize the assets and liabilities for the rights and
obligations created by those leases on their balance sheet.
Additional disclosure regarding a company’s leasing
activities will also be expanded under the new guidance. For public
entities, ASU 2016-02 is effective for fiscal years beginning after
December 15, 2018, including interim periods within those
fiscal years, and requires a modified retrospective transition. The
Company is currently evaluating the potential impact of this
pronouncement on its consolidated financial statements from both a
lessor and lessee standpoint. |
