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 JUNE 30, 2024
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: 000-56543
EXCHANGERIGHT INCOME FUND
(Exact name of registrant as specified in its charter)
Maryland | 36-7729360 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
|
1055 E. Colorado Blvd, Suite 310 |
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Pasadena, California | 91106 |
(Address of principal executive offices) | (Zip Code) |
(855) 317-4448
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
N/A |
| N/A |
| N/A |
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 ☒ No ☐
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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | x | Smaller reporting company | x | |
|
|
| Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 31, 2024, the issuer had the following shares of common stock outstanding: 10,248,061 Class A Common Shares, $0.01 par value per share; and 5,918,266 Class I Common Shares, $0.01 par value per share.
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Quarterly Report on Form 10-Q
Quarter ended June 30, 2024
Table of Contents
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Item 1. |
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| Condensed Consolidated Balance Sheets - June 30, 2024 and December 31, 2023 (Unaudited) |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Current Report on Form 10-Q other than historical facts may be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and, as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of ExchangeRight Income Fund (the “Company”) d/b/a the ExchangeRight Essential Income REIT (the “Company”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “may”, “will”, “should”, “estimates”, “projects”, “anticipates”, “believes”, “expects”, “intends”, “future”, and words of similar import, or the negative thereof. Forward-looking statements in this Current Report on Form 10-Q include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations, our strategic plans and objectives, occupancy, leasing rates and trends, liquidity and ability to meet future obligations, anticipated expenditures of capital and other matters. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the Securities and Exchange Commission.
Any such forward-looking statements are subject to unknown risks, uncertainties, and other factors, which in some cases are beyond our control, and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide distributions to shareholders, and maintain the value of our real estate properties, may be significantly hindered.
Factors that could cause actual results, performance or achievements to differ materially from current expectations include, but are not limited to:
The foregoing list is only a summary of the principal risks that may materially adversely affect our business, financial condition, results of operations and cash flows. The foregoing should be read in conjunction with the complete discussion of risk factors we face, which are set forth in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission on April 11, 2024.
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Condensed Consolidated Balance Sheets
(Unaudited)
|
| June 30, |
|
| December 31, |
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|
| 2024 |
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| 2023 |
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ASSETS |
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Real estate: |
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Land |
| $ | 211,307,000 |
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| $ | 209,073,000 |
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Buildings and improvements |
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| 900,890,000 |
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| 893,225,000 |
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| 1,112,197,000 |
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| 1,102,298,000 |
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Less accumulated depreciation |
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| (76,667,000 | ) |
|
| (62,243,000 | ) |
Real estate, net |
|
| 1,035,530,000 |
|
|
| 1,040,055,000 |
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Intangible lease assets, net |
|
| 63,162,000 |
|
|
| 68,616,000 |
|
RSLCA notes receivable from affiliates |
|
| 37,290,000 |
|
|
| 22,251,000 |
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Restricted cash |
|
| 11,876,000 |
|
|
| 12,275,000 |
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Cash and cash equivalents |
|
| 6,841,000 |
|
|
| 7,053,000 |
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Receivables |
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| 9,270,000 |
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|
| 8,990,000 |
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Notes receivable from affiliates |
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| 6,018,000 |
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|
| 6,017,000 |
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Right-of-use asset |
|
| 4,676,000 |
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|
| 4,652,000 |
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Other assets |
|
| 1,941,000 |
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|
| 1,095,000 |
|
Due from affiliates |
|
| 287,000 |
|
|
| 536,000 |
|
TOTAL ASSETS |
| $ | 1,176,891,000 |
|
| $ | 1,171,540,000 |
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LIABILITIES AND EQUITY |
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Mortgage loans payable, net |
| $ | 563,159,000 |
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| $ | 589,962,000 |
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Revolving credit facility |
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| 44,000,000 |
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| - |
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Intangible lease liabilities, net |
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| 23,595,000 |
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| 24,595,000 |
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Accounts payable, accrued expenses and other liabilities |
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| 9,433,000 |
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| 10,083,000 |
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Right-of-use liability |
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| 5,080,000 |
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| 4,977,000 |
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Pending trade deposits |
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| 365,000 |
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| 1,386,000 |
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Distributions payable |
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| 3,512,000 |
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| 3,452,000 |
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Due to affiliates |
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| 157,000 |
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| 43,000 |
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Total liabilities |
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| 649,301,000 |
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| 634,498,000 |
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Commitments and contingencies |
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| - |
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| - |
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Equity: |
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Class A common shares, $0.01 par value per share, 79,657,302 and 79,873,720 shares authorized, 10,281,475 and 10,017,613 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively |
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| 103,000 |
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| 100,000 |
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Class I common shares, $0.01 par value per share, 79,657,302 and 79,873,720 shares authorized, 5,993,421 and 5,768,982 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively |
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| 60,000 |
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| 58,000 |
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Class S common shares, $0.01 par value per share, 79,657,302 and 79,873,720 shares authorized, 0 and 0 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively |
|
| - |
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| - |
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Class ER common shares, $0.01 par value per share, 79,657,302 and 0 shares authorized, 0 and 0 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively |
|
| - |
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| - |
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Additional paid-in capital |
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| 421,597,000 |
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| 408,358,000 |
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Cumulative distributions in excess of net income |
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| (72,698,000 | ) |
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| (58,448,000 | ) |
Accumulated other comprehensive income (loss) |
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| 32,000 |
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| (360,000 | ) |
Total shareholders’ equity |
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| 349,094,000 |
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| 349,708,000 |
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Noncontrolling interests attributable to operating partnership |
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| 178,496,000 |
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| 187,334,000 |
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Total equity |
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| 527,590,000 |
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| 537,042,000 |
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TOTAL LIABILITIES AND EQUITY |
| $ | 1,176,891,000 |
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| $ | 1,171,540,000 |
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See accompanying notes to condensed consolidated financial statements.
1
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Condensed Consolidated Statements of Operations and Comprehensive (Loss)
(Unaudited)
|
| Three months ended June 30, |
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| Six months ended June 30, |
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| 2024 |
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| 2023 |
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| 2024 |
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| 2023 |
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Revenues |
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Rental revenue |
| $ | 20,063,000 |
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| $ | 18,960,000 |
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| $ | 40,532,000 |
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| $ | 38,487,000 |
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Interest income on notes receivable from affiliates |
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| 1,093,000 |
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| 1,280,000 |
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| 2,016,000 |
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| 2,446,000 |
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Other |
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| 23,000 |
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| 40,000 |
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| 51,000 |
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| 46,000 |
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Total revenues |
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| 21,179,000 |
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|
| 20,280,000 |
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| 42,599,000 |
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| 40,979,000 |
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Operating Expenses |
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Property operating expenses |
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| 2,636,000 |
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| 2,192,000 |
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| 5,541,000 |
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| 5,062,000 |
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Management fees to affiliates |
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| 45,000 |
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| 626,000 |
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| 369,000 |
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|
| 1,247,000 |
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General and administrative expenses |
|
| 349,000 |
|
|
| 707,000 |
|
|
| 686,000 |
|
|
| 1,135,000 |
|
Depreciation and amortization |
|
| 10,287,000 |
|
|
| 10,095,000 |
|
|
| 20,655,000 |
|
|
| 20,252,000 |
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Provision for impairment |
|
| - |
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|
| - |
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|
| 250,000 |
|
|
| - |
|
Total operating expenses |
|
| 13,317,000 |
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|
| 13,620,000 |
|
|
| 27,501,000 |
|
|
| 27,696,000 |
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Income from Operations |
|
| 7,862,000 |
|
|
| 6,660,000 |
|
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| 15,098,000 |
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|
| 13,283,000 |
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Other Income (Expense) |
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Interest expense |
|
| (7,967,000 | ) |
|
| (6,905,000 | ) |
|
| (15,805,000 | ) |
|
| (14,137,000 | ) |
Gain on land condemnation |
|
| 69,000 |
|
|
| - |
|
|
| 69,000 |
|
|
| - |
|
Interest income |
|
| 11,000 |
|
|
| 21,000 |
|
|
| 24,000 |
|
|
| 21,000 |
|
Total other income (expense) |
|
| (7,887,000 | ) |
|
| (6,884,000 | ) |
|
| (15,712,000 | ) |
|
| (14,116,000 | ) |
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Net (loss) |
|
| (25,000 | ) |
|
| (224,000 | ) |
|
| (614,000 | ) |
|
| (833,000 | ) |
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Net loss attributable to noncontrolling interests |
|
| 6,000 |
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|
| 73,000 |
|
|
| 205,000 |
|
|
| 279,000 |
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| ||||
Net (loss) attributable to common shareholders |
| $ | (19,000 | ) |
| $ | (151,000 | ) |
| $ | (409,000 | ) |
| $ | (554,000 | ) |
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Net (loss) per common share attributable to common shareholders, basic and diluted |
| $ | (0.00 | ) |
| $ | (0.01 | ) |
| $ | (0.03 | ) |
| $ | (0.04 | ) |
|
|
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|
|
|
|
|
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Weighted average number of common shares outstanding, basic and diluted |
|
| 16,112,050 |
|
|
| 15,186,606 |
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|
| 15,908,667 |
|
|
| 14,987,459 |
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Other comprehensive income (loss): |
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|
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Net (loss) |
| $ | (25,000 | ) |
| $ | (224,000 | ) |
| $ | (614,000 | ) |
| $ | (833,000 | ) |
Other comprehensive income (loss) - unrealized gain (loss) on change in fair value of cash flow hedges |
|
| 94,000 |
|
|
| 690,000 |
|
|
| 591,000 |
|
|
| (189,000 | ) |
Comprehensive income (loss) |
|
| 69,000 |
|
|
| 466,000 |
|
|
| (23,000 | ) |
|
| (1,022,000 | ) |
Comprehensive (income) loss attributable to noncontrolling interests |
|
| (25,000 | ) |
|
| (159,000 | ) |
|
| 6,000 |
|
|
| 341,000 |
|
Comprehensive income (loss) attributable to common shareholders |
| $ | 44,000 |
|
| $ | 307,000 |
|
| $ | (17,000 | ) |
| $ | (681,000 | ) |
See accompanying notes to condensed consolidated financial statements.
2
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Condensed Consolidated Statements of Equity
Six months ended June 30, 2024
(Unaudited)
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| Noncontrolling |
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| Cumulative |
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| Accumulated |
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| interest |
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| Common Shares |
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| Additional |
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| distributions |
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| other |
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| Total |
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| attributable to |
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| Class A |
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| Class I |
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| Class S |
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| Class ER |
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| paid-in |
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| in excess |
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| comprehensive |
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| shareholders' |
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| operating |
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| Total |
| ||||||||||||||||||||||||||
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| Shares |
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| Amount |
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| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
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| capital |
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| of net income |
|
| income (loss) |
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| equity |
|
| partnership |
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| equity |
| ||||||||||||||
Balance, December 31, 2023 |
|
| 10,017,613 |
|
| $ | 100,000 |
|
|
| 5,768,982 |
|
| $ | 58,000 |
|
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
| $ | 408,358,000 |
|
| $ | (58,448,000 | ) |
| $ | (360,000 | ) |
| $ | 349,708,000 |
|
| $ | 187,334,000 |
|
| $ | 537,042,000 |
|
Net (loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (390,000 | ) |
|
| - |
|
|
| (390,000 | ) |
|
| (199,000 | ) |
|
| (589,000 | ) |
Unrealized gain on change in fair value of cash flow hedges |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 329,000 |
|
|
| 329,000 |
|
|
| 168,000 |
|
|
| 497,000 |
|
Issuance of common shares |
|
| 214,923 |
|
|
| 2,000 |
|
|
| 85,569 |
|
|
| 1,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 8,479,000 |
|
|
| - |
|
|
| - |
|
|
| 8,482,000 |
|
|
| - |
|
|
| 8,482,000 |
|
Issuance of common shares under DRIP |
|
| 19,638 |
|
|
| - |
|
|
| 16,573 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 968,000 |
|
|
|
|
|
|
|
|
| 968,000 |
|
|
| - |
|
|
| 968,000 |
| ||||||
Repurchase of common shares |
|
| (52,959 | ) |
|
| - |
|
|
| (251,315 | ) |
|
| (3,000 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (8,060,000 | ) |
|
| - |
|
|
| - |
|
|
| (8,063,000 | ) |
|
| - |
|
|
| (8,063,000 | ) |
Conversion of OP Units to common shares |
|
| - |
|
|
| - |
|
|
| 24,449 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 661,000 |
|
|
| - |
|
|
| - |
|
|
| 661,000 |
|
|
| (661,000 | ) |
|
| - |
|
Offering costs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (448,000 | ) |
|
| - |
|
|
| - |
|
|
| (448,000 | ) |
|
| - |
|
|
| (448,000 | ) |
Distributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (6,826,000 | ) |
|
| - |
|
|
| (6,826,000 | ) |
|
| (3,484,000 | ) |
|
| (10,310,000 | ) |
Balance, March 31, 2024 |
|
| 10,199,215 |
|
|
| 102,000 |
|
|
| 5,644,258 |
|
|
| 56,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 409,958,000 |
|
|
| (65,664,000 | ) |
|
| (31,000 | ) |
|
| 344,421,000 |
|
|
| 183,158,000 |
|
|
| 527,579,000 |
|
Net (loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (19,000 | ) |
|
| - |
|
|
| (19,000 | ) |
|
| (6,000 | ) |
|
| (25,000 | ) |
Unrealized gain on change in fair value of cash flow hedges |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 63,000 |
|
|
| 63,000 |
|
|
| 31,000 |
|
|
| 94,000 |
|
Issuance of common shares |
|
| 111,513 |
|
|
| 1,000 |
|
|
| 380,982 |
|
|
| 4,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 13,523,000 |
|
|
| - |
|
|
| - |
|
|
| 13,528,000 |
|
|
| - |
|
|
| 13,528,000 |
|
Issuance of common shares under DRIP |
|
| 21,991 |
|
|
| - |
|
|
| 19,613 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,116,000 |
|
|
| - |
|
|
| - |
|
|
| 1,116,000 |
|
|
| - |
|
|
| 1,116,000 |
|
Repurchase of common shares |
|
| (51,244 | ) |
|
| - |
|
|
| (96,924 | ) |
|
| (1,000 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,899,000 | ) |
|
| - |
|
|
| - |
|
|
| (3,900,000 | ) |
|
| - |
|
|
| (3,900,000 | ) |
Conversion of OP Units to common shares |
|
| - |
|
|
| - |
|
|
| 45,492 |
|
|
| 1,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,223,000 |
|
|
| - |
|
|
| - |
|
|
| 1,224,000 |
|
|
| (1,224,000 | ) |
|
| - |
|
Offering costs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (324,000 | ) |
|
| - |
|
|
| - |
|
|
| (324,000 | ) |
|
| - |
|
|
| (324,000 | ) |
Distributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (7,015,000 | ) |
|
| - |
|
|
| (7,015,000 | ) |
|
| (3,463,000 | ) |
|
| (10,478,000 | ) |
Balance, June 30, 2024 |
|
| 10,281,475 |
|
| $ | 103,000 |
|
|
| 5,993,421 |
|
| $ | 60,000 |
|
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
| $ | 421,597,000 |
|
| $ | (72,698,000 | ) |
| $ | 32,000 |
|
| $ | 349,094,000 |
|
| $ | 178,496,000 |
|
| $ | 527,590,000 |
|
See accompanying notes to condensed consolidated financial statements.
3
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Condensed Consolidated Statements of Equity
Six months ended June 30, 2023
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Noncontrolling |
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cumulative |
|
| Accumulated |
|
|
|
|
| interest |
|
|
|
| ||||||||||||
|
| Common Shares |
|
| Additional |
|
| distributions |
|
| other |
|
| Total |
|
| attributable to |
|
|
|
| |||||||||||||||||||||||||||
|
| Class A |
|
| Class I |
|
| Class S |
|
| paid-in |
|
| in excess |
|
| comprehensive |
|
| shareholders' |
|
| operating |
|
| Total |
| |||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| of net income |
|
| (loss) |
|
| equity |
|
| partnership |
|
| equity |
| ||||||||||||
Balance, December 31, 2022 |
|
| 9,268,108 |
|
| $ | 93,000 |
|
|
| 5,193,941 |
|
| $ | 52,000 |
|
|
| - |
|
| $ | - |
|
| $ | 371,459,000 |
|
| $ | (30,761,000 | ) |
| $ | - |
|
| $ | 340,843,000 |
|
| $ | 188,231,000 |
|
| $ | 529,074,000 |
|
Net (loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (403,000 | ) |
|
| - |
|
|
| (403,000 | ) |
|
| (206,000 | ) |
|
| (609,000 | ) |
Unrealized (loss) on change in fair value of cash flow hedges |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (585,000 | ) |
|
| (585,000 | ) |
|
| (294,000 | ) |
|
| (879,000 | ) |
Issuance of common shares |
|
| 446,995 |
|
|
| 5,000 |
|
|
| 256,807 |
|
|
| 3,000 |
|
|
| - |
|
|
| - |
|
|
| 20,622,000 |
|
|
| - |
|
|
| - |
|
|
| 20,630,000 |
|
|
| - |
|
|
| 20,630,000 |
|
Redemption of common shares |
|
| (64,461 | ) |
|
| (1,000 | ) |
|
| (73,645 | ) |
|
| (1,000 | ) |
|
| - |
|
|
| - |
|
|
| (3,531,000 | ) |
|
| - |
|
|
| - |
|
|
| (3,533,000 | ) |
|
| - |
|
|
| (3,533,000 | ) |
Offering costs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (995,000 | ) |
|
| - |
|
|
| - |
|
|
| (995,000 | ) |
|
| - |
|
|
| (995,000 | ) |
Distributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (6,423,000 | ) |
|
| - |
|
|
| (6,423,000 | ) |
|
| (3,275,000 | ) |
|
| (9,698,000 | ) |
Balance, March 31, 2023 |
|
| 9,650,642 |
|
|
| 97,000 |
|
|
| 5,377,103 |
|
|
| 54,000 |
|
|
| - |
|
|
| - |
|
|
| 387,555,000 |
|
|
| (37,587,000 | ) |
|
| (585,000 | ) |
|
| 349,534,000 |
|
|
| 184,456,000 |
|
|
| 533,990,000 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (151,000 | ) |
|
| - |
|
|
| (151,000 | ) |
|
| (73,000 | ) |
|
| (224,000 | ) |
Unrealized gain on change in fair value of cash flow hedges |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 458,000 |
|
|
| 458,000 |
|
|
| 232,000 |
|
|
| 690,000 |
|
Issuance of common shares |
|
| 111,741 |
|
|
| - |
|
|
| 194,897 |
|
|
| 2,000 |
|
|
| - |
|
|
| - |
|
|
| 8,693,000 |
|
|
| - |
|
|
| - |
|
|
| 8,695,000 |
|
|
| - |
|
|
| 8,695,000 |
|
Redemption of common shares |
|
| (18,466 | ) |
|
| - |
|
|
| (74,451 | ) |
|
| (1,000 | ) |
|
| - |
|
|
| - |
|
|
| (2,450,000 | ) |
|
| - |
|
|
| - |
|
|
| (2,451,000 | ) |
|
| - |
|
|
| (2,451,000 | ) |
Issuance of OP Units |
|
| - |
|
|
| - |
|
|
| 37,479 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,014,000 |
|
|
| - |
|
|
| - |
|
|
| 1,014,000 |
|
|
| (1,014,000 | ) |
|
| - |
|
Offering costs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (281,000 | ) |
|
| - |
|
|
| - |
|
|
| (281,000 | ) |
|
| - |
|
|
| (281,000 | ) |
Distributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (6,600,000 | ) |
|
| - |
|
|
| (6,600,000 | ) |
|
| (3,268,000 | ) |
|
| (9,868,000 | ) |
Balance, June 30, 2023 |
|
| 9,743,917 |
|
| $ | 97,000 |
|
|
| 5,535,028 |
|
| $ | 55,000 |
|
|
| - |
|
| $ | - |
|
| $ | 394,531,000 |
|
| $ | (44,338,000 | ) |
| $ | (127,000 | ) |
| $ | 350,218,000 |
|
| $ | 180,333,000 |
|
| $ | 530,551,000 |
|
See accompanying notes to condensed consolidated financial statements.
4
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| Six months ended June 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net (loss) |
| $ | (614,000 | ) |
| $ | (833,000 | ) |
Adjustments to reconcile net (loss) to net cash provided by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 20,655,000 |
|
|
| 20,252,000 |
|
Provision for impairment |
|
| 250,000 |
|
|
| - |
|
Gain on land condemnation |
|
| (69,000 | ) |
|
| - |
|
Amortization of deferred rent receivables/liabilities, net |
|
| (417,000 | ) |
|
| (490,000 | ) |
Amortization of above/below-market lease intangibles, net |
|
| (1,325,000 | ) |
|
| (1,178,000 | ) |
Amortization of assumed below/above-market debt, net |
|
| 1,924,000 |
|
|
| 1,427,000 |
|
Amortization of lease incentives |
|
| 128,000 |
|
|
| 110,000 |
|
Amortization of deferred financing costs |
|
| 197,000 |
|
|
| 279,000 |
|
Amortization of deferred ground rent |
|
| 81,000 |
|
|
| 81,000 |
|
Changes in assets and liabilities, net of assets acquired and liabilities assumed: |
|
|
|
|
|
| ||
Receivables |
|
| 136,000 |
|
|
| (65,000 | ) |
Other assets |
|
| (265,000 | ) |
|
| 223,000 |
|
Due from affiliates |
|
| 536,000 |
|
|
| 39,000 |
|
Accounts payable, accrued expenses and other liabilities |
|
| (108,000 | ) |
|
| 1,330,000 |
|
Due to affiliates |
|
| (173,000 | ) |
|
| 470,000 |
|
Net cash provided by operating activities |
|
| 20,936,000 |
|
|
| 21,645,000 |
|
|
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
| ||
Acquisitions of real estate |
|
| (10,218,000 | ) |
|
| (2,259,000 | ) |
Proceeds from land condemnation |
|
| 122,000 |
|
|
| - |
|
Improvements of real estate |
|
| (420,000 | ) |
|
| (410,000 | ) |
Advances on notes receivable from affiliated parties |
|
| (2,000 | ) |
|
| (5,000 | ) |
Advances on RSLCA notes receivable from affiliated party |
|
| (74,508,000 | ) |
|
| (73,291,000 | ) |
Repayments on RSLCA notes receivable from affiliated party |
|
| 59,469,000 |
|
|
| 54,775,000 |
|
Net cash used in investing activities |
|
| (25,557,000 | ) |
|
| (21,190,000 | ) |
|
|
|
|
|
|
| ||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
| ||
Proceeds from issuance of common shares |
|
| 20,623,000 |
|
|
| 22,880,000 |
|
Offering costs from issuance of common shares |
|
| (772,000 | ) |
|
| (1,276,000 | ) |
Repurchases of common shares |
|
| (11,963,000 | ) |
|
| (5,984,000 | ) |
Proceeds from pending trade deposits |
|
| 364,000 |
|
|
| 2,954,000 |
|
Proceeds from mortgage loans payable |
|
| - |
|
|
| 65,430,000 |
|
Repayments of mortgage loans payable |
|
| (28,839,000 | ) |
|
| (6,528,000 | ) |
Proceeds from revolving credit facilities |
|
| 59,000,000 |
|
|
| - |
|
Repayments of revolving credit facilities |
|
| (15,000,000 | ) |
|
| (73,311,000 | ) |
Payments of financing costs |
|
| (761,000 | ) |
|
| (781,000 | ) |
Common shares distributions |
|
| (11,929,000 | ) |
|
| (12,904,000 | ) |
Noncontrolling interests distributions |
|
| (6,714,000 | ) |
|
| (6,557,000 | ) |
Net cash provided by / (used in) financing activities |
|
| 4,009,000 |
|
|
| (16,077,000 | ) |
|
|
|
|
|
|
| ||
Net (decrease) in cash, cash equivalents and restricted cash |
|
| (612,000 | ) |
|
| (15,622,000 | ) |
Cash, cash equivalents and restricted cash at beginning of year |
|
| 19,329,000 |
|
|
| 36,645,000 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 18,717,000 |
|
| $ | 21,023,000 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| Six months ended June 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Reconciliation to consolidated balance sheets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 6,841,000 |
|
| $ | 7,956,000 |
|
Restricted cash |
|
| 11,876,000 |
|
|
| 13,067,000 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 18,717,000 |
|
| $ | 21,023,000 |
|
|
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
| ||
Cash paid for interest |
| $ | 13,834,000 |
|
| $ | 12,581,000 |
|
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
| ||
Distributions payable |
| $ | 3,512,000 |
|
| $ | 3,302,000 |
|
Distributions reinvested into Class A and Class I common shares |
| $ | 2,084,000 |
|
| $ | - |
|
Conversion of OP Units to Class I common shares |
| $ | 1,885,000 |
|
| $ | 1,014,000 |
|
See accompanying notes to condensed consolidated financial statements.
6
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
Note 1. Business and Organization
ExchangeRight Income Fund, doing business as ExchangeRight Essential Income REIT, a Maryland statutory trust (the “Trust” or the “Company”), is a self-administered real estate company, formed on January 11, 2019, focusing on investing in single-tenant, primarily investment-grade net-leased real estate. The Company, through its operating partnership, ExchangeRight Income Fund Operating Partnership, LP, a Delaware limited partnership of which the Company is the sole general partner (the “Operating Partnership”) owned 353 properties in 34 states (collectively, the “Trust Properties”) as of June 30, 2024. The Trust Properties are occupied by 36 different primarily national investment-grade necessity-based retail tenants and are additionally diversified by industry, geographic region and lease term.
Unless the context requires otherwise, references to (i) the “Company” or the “General Partner” refer to ExchangeRight Income Fund, d/b/a ExchangeRight Essential Income REIT, together with its subsidiaries, including ExchangeRight Income Fund Operating Partnership, LP, a Delaware limited partnership of which the Company is the sole general partner, together with its subsidiaries, (ii) “Operating Partnership” or the “Partnership” refers to ExchangeRight Income Fund Operating Partnership, LP, together with its subsidiaries, (iii) “Trustee” refers to a related party, ExchangeRight Income Fund Trustee, LLC, a Delaware limited liability company, which is the sole trustee of the Company, (iv) “ExchangeRight” or “Sponsor” refers to ExchangeRight Real Estate, LLC, a California limited liability company, which is the Company’s sponsor and the sole member and manager of the Trustee, together with its subsidiaries, (v) “ExchangeRight Income Fund GP, LLC” refers to a wholly-owned subsidiary of ExchangeRight which owns 600,000 of the Company’s Class I common shares and holds a special limited partnership interest in the Operating Partnership, which entitles ExchangeRight Income Fund GP, LLC to receive a promote interest in the profits of the Operating Partnership in accordance with the distribution waterfall set forth in the Operating Partnership’s limited partnership agreement, (vi) “Advisor” or “Advisors” refers to any person or persons, if any, appointed, employed or contracted with by the General Partner and responsible for directing or performing the day-to-day business affairs of the General Partner, including any person to whom the Advisor hereafter subcontracts substantially all of such functions, and (vii) “Advisory Agreement” refers to the agreement among the Partnership, the General Partner and any Advisor, pursuant to which any such Advisor will direct or perform the day-to-day business affairs of the General Partner and the Partnership.
The Company has elected and is qualified to be taxed as a real estate investment trust (“REIT”) for United States of America (“U.S.”) federal income tax purposes beginning with the taxable year ended December 31, 2019. The Company is the sole general partner and a limited partner of the Operating Partnership which was formed on January 9, 2019. Substantially all of the Company’s business is conducted through the Operating Partnership. The Trust Properties are owned and controlled by the Company and are managed by ExchangeRight Net-Leased Property Management, LLC (the “Property Manager”) and ExchangeRight Net-Leased Asset Management, LLC (the “Asset Manager”), which are both wholly-owned subsidiaries of ExchangeRight, pursuant to executed property management and asset management agreements with each respective entity.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and the instructions to Form 10-Q. These unaudited interim condensed consolidated financial statements, in the opinion of management, include all adjustments of a normal recurring nature necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited annual consolidated financial statements and related notes included in Company's Form 10-K that was filed with the Securities and Exchange Commission on April 11, 2024. The consolidated results of operations for interim periods are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2024.
7
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, its subsidiaries and any single member limited liability companies or other entities which are consolidated in accordance with GAAP. Intercompany transactions and balances have been eliminated upon consolidation.
The Company consolidates variable interest entities (“VIEs”) when it is the primary beneficiary. Generally, a VIE is an entity with one or more of the following characteristics: (1) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (2) as a group, the holders of the equity investment at risk (a) lack the power through voting or similar rights to make decisions about the entity’s activities that significantly impact the entity’s performance, (b) have no obligation to absorb the expected losses of the entity, or (c) have no right to receive the expected residual returns of the entity, or (3) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately fewer voting rights.
A VIE is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE has (1) the power to direct the activities that most significantly impact the entity’s economic performance, and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. Significant judgments related to these determinations include estimates about the current values, performance of real estate held by these VIEs, and general market conditions.
Use of Estimates
The preparation of the unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant assumptions and estimates relate to the useful lives of real estate assets, real estate impairment assessments and allocation of fair value of purchase consideration. These estimates are based on historical experience and other assumptions which management believes are reasonable. The Company evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash in banks and short-term investments with original maturities when purchased of less than ninety days. The Company did not have any cash equivalents as of June 30, 2024.
The terms of mortgage loans payable may require the Company to deposit certain replacement and other reserves with its lenders. Restricted cash was $11.9 million as of June 30, 2024, and represents funds held in reserve by lenders to cover real estate taxes, insurance, repairs, tenant improvements and leasing commissions of the underlying properties collateralized by the respective loan.
Note 3. Investments in Real Estate
The Company acquires, owns, and manages primarily single-tenant, investment-grade net-leased real estate. The Company owned 353 properties in 34 states as of June 30, 2024. As of June 30, 2024, the Company’s portfolio was 98.4% leased and is occupied by 36 different primarily national investment-grade necessity-based retail tenants, and is additionally diversified by industry, geographic region, and lease term.
Real estate activity for the six months ended June 30, 2024 is composed of the following:
8
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
Cost |
|
|
| |
Balance - beginning of year |
| $ | 1,102,298,000 |
|
Acquisition |
|
| 9,782,000 |
|
Improvements |
|
| 420,000 |
|
Land condemnation |
|
| (53,000 | ) |
Provision for impairment |
|
| (250,000 | ) |
Balance - end of period |
| $ | 1,112,197,000 |
|
|
|
|
| |
Accumulated depreciation |
|
|
| |
Balance - beginning of year |
| $ | (62,243,000 | ) |
Depreciation expense |
|
| (14,424,000 | ) |
Balance - end of period |
| $ | (76,667,000 | ) |
|
|
|
| |
Net book value - end of period |
| $ | 1,035,530,000 |
|
Acquisition
On May 30, 2024, the Company acquired a property for cash from an unaffiliated entity for a total purchase price, including acquisitions costs, of $10.2 million. Per the asset management agreement, the Company paid a 1.0% acquisition fee on this property acquisition totaling $0.1 million to ExchangeRight during the three months ended June 30, 2024 (see Note 10. Related and Affiliated Party Transactions for further details).
An allocation of the purchase price, including acquisition costs, for this acquisition is as follows:
Land |
| $ | 2,288,000 |
|
Building |
|
| 6,915,000 |
|
Building and site improvements |
|
| 579,000 |
|
Lease in-place intangible assets |
|
| 993,000 |
|
|
|
| 10,775,000 |
|
Liabilities assumed: |
|
|
| |
Lease below-market intangible liabilities |
|
| (557,000 | ) |
Purchase price (including acquisition costs) |
| $ | 10,218,000 |
|
Revenues
Substantially all of the Company’s tenants are subject to net-lease agreements where the tenant is generally responsible for minimum monthly rent and actual property operating expenses incurred, including property taxes, insurance and maintenance. In addition, certain of the Company’s tenants are subject to future rent increases based on fixed amounts or, in limited cases, increases in the consumer price index. In addition, certain leases provide for additional rent calculated as a percentage of the tenants’ gross sales above a specified level. The Company recorded no percentage rent revenue for the three and six months ended June 30, 2024 and 2023. Certain of the Company’s properties are subject to leases under which it retains responsibility for specific costs and expenses of the property. The Company’s leases typically provide the tenant one or more multi-year renewal options to extend their leases, subject to generally the same terms and conditions, including rent increases.
9
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
All lease-related income is reported as a single line item, rental revenue, in the condensed consolidated statements of operations and comprehensive income. Rental revenue is comprised of the following:
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Base rents |
| $ | 17,039,000 |
|
| $ | 16,063,000 |
|
| $ | 34,060,000 |
|
| $ | 32,093,000 |
|
Tenant reimbursables |
|
| 2,124,000 |
|
|
| 1,852,000 |
|
|
| 4,730,000 |
|
|
| 4,286,000 |
|
Straight-line rent adjustments |
|
| 199,000 |
|
|
| 238,000 |
|
|
| 417,000 |
|
|
| 490,000 |
|
Above/below market lease amortization, net |
|
| 701,000 |
|
|
| 587,000 |
|
|
| 1,325,000 |
|
|
| 1,178,000 |
|
Lease termination income |
|
| - |
|
|
| 220,000 |
|
|
| - |
|
|
| 440,000 |
|
|
| $ | 20,063,000 |
|
| $ | 18,960,000 |
|
| $ | 40,532,000 |
|
| $ | 38,487,000 |
|
Concentration of Credit Risk
As of June 30, 2024, the Company’s portfolio is occupied by 36 different primarily national investment-grade necessity-based retail tenants, and is additionally diversified by industry, geographic region, and lease term. The following tenants contributed more than 10% of contractual base rents during the six months ended June 30, 2024:
Tenant |
| % of Total Base Rents |
Dollar General |
| 17.8% |
Walgreens |
| 16.0% |
Note 4. Notes Receivable
RSLCA Notes Receivable From Affiliated Party
The Company has invested in a short-term mezzanine loan to ExchangeRight (“ExchangeRight Mezz Loans”) for ExchangeRight’s Delaware Statutory Trust (“DST”) programs under a Revolving Secured Line of Credit Agreement (“RSLCA”). The loan agreement, as amended, matures on April 4, 2027, with a maximum of $250.0 million outstanding at any time, and bears interest at a rate equal to 12.0% per annum, while outstanding.
The Company’s notes receivable under the RSLCA are secured by interests in an affiliated party that indirectly owns net-leased necessity-based retail properties similar to the Company’s acquired properties, as well as a pledge agreement and subordination agreement provided by ExchangeRight. As a result, the risk profile of an investment in these notes is intended to be similar to ownership of the Company’s acquired properties while providing liquidity and an enhanced risk-adjusted return over investments with similar liquidity. The Company’s investment in the RSLCA notes receivable are held at amortized cost and totaled $37.3 million as of June 30, 2024.
Notes Receivable from Affiliated Parties
On August 25, 2022, the Company entered into a real estate note as the lender with a two-property net-leased DST managed by ExchangeRight. The real estate note matures on August 25, 2027, generates interest at a fixed-rate of 6.00% and requires monthly interest only payments from the borrower. The Company’s receivable under this real estate note totaled $3.6 million as of June 30, 2024 and is included in notes receivable from affiliates in the condensed consolidated balance sheets.
On November 18, 2022, the Company entered into a junior unsecured line of credit agreement as the lender with a four property net-leased DST managed by ExchangeRight. The junior unsecured line of credit agreement is for a maximum of $2.6 million, matures on November 18, 2027, generates interest at a fixed-rate of 7.25% and requires monthly interest only payments from the borrower. The Company’s receivable under this junior unsecured line of credit agreement totaled $2.4 million as of June 30, 2024 and is included in notes receivable from affiliates in the condensed consolidated balance sheets.
10
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
Note 5. Intangible Assets and Liabilities
Intangible assets and liabilities consisted of the following as of June 30, 2024:
|
|
|
|
|
|
|
|
|
|
| Weighted average |
| ||||
|
| Gross carrying |
|
| Accumulated |
|
| Net carrying |
|
| amortization |
| ||||
|
| amount |
|
| amortization |
|
| amount |
|
| period (years) |
| ||||
In-place leases |
| $ | 98,730,000 |
|
| $ | (37,678,000 | ) |
| $ | 61,052,000 |
|
|
| 7.1 |
|
Above-market leases |
|
| 3,489,000 |
|
|
| (1,379,000 | ) |
|
| 2,110,000 |
|
|
| 5.8 |
|
Total intangible lease assets, net |
| $ | 102,219,000 |
|
| $ | (39,057,000 | ) |
| $ | 63,162,000 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Below-market leases |
| $ | 32,741,000 |
|
| $ | (9,146,000 | ) |
| $ | 23,595,000 |
|
|
| 10.8 |
|
The Company records net amortization of above-market and below-market lease intangibles to rental revenue and records amortization of in-place lease assets to depreciation and amortization expense. Amortization of intangible assets and liabilities for the three and six months ended June 30, 2024 and 2023 were as follows:
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Net adjustment to rental revenue |
| $ | 701,000 |
|
| $ | 587,000 |
|
| $ | 1,325,000 |
|
| $ | 1,178,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amortization of in-place leases |
| $ | 3,054,000 |
|
| $ | 3,377,000 |
|
| $ | 6,216,000 |
|
| $ | 6,828,000 |
|
The estimated future amortization of lease assets to amortization expense and the amortization of above-market and below-market lease intangibles to rental revenue are as follows:
|
| Amortization |
|
| Rental revenue |
| ||||||||||
|
| In-place |
|
| Above-market |
|
| Below-market |
|
|
|
| ||||
|
| lease assets |
|
| leases |
|
| leases |
|
| Total |
| ||||
Remainder of 2024 |
| $ | 5,932,000 |
|
| $ | (223,000 | ) |
| $ | 1,462,000 |
|
| $ | 1,239,000 |
|
2025 |
|
| 11,467,000 |
|
|
| (439,000 | ) |
|
| 2,916,000 |
|
|
| 2,477,000 |
|
2026 |
|
| 10,338,000 |
|
|
| (400,000 | ) |
|
| 2,854,000 |
|
|
| 2,454,000 |
|
2027 |
|
| 8,519,000 |
|
|
| (302,000 | ) |
|
| 2,417,000 |
|
|
| 2,115,000 |
|
2028 |
|
| 6,372,000 |
|
|
| (255,000 | ) |
|
| 2,182,000 |
|
|
| 1,927,000 |
|
Thereafter |
|
| 18,424,000 |
|
|
| (491,000 | ) |
|
| 11,764,000 |
|
|
| 11,273,000 |
|
Total |
| $ | 61,052,000 |
|
| $ | (2,110,000 | ) |
| $ | 23,595,000 |
|
| $ | 21,485,000 |
|
Note 6. Fair Value Measurements
The carrying amounts of cash and cash equivalents, restricted cash, receivables, certain other assets, accounts payable, accrued expenses and other liabilities approximate their fair value due to their terms and/or short-term nature.
The fair value of the Company’s fixed-rate mortgage loans payable and revolving credit facilities, which were determined to be Level 3 within the valuation hierarchy, were estimated using available market information and discounted cash flow analyses based on borrowing rates the Company believes it could obtain with similar terms and maturities. As of June 30, 2024, the aggregate fair value of the Company’s fixed-rate mortgage loans payable were $526.9 million. As of June 30, 2024, the aggregate carrying value of the Company’s fixed-rate mortgage loans payable were $563.2 million. The fair value of the Company’s outstanding revolving credit facility approximated its carrying value at June 30, 2024.
Under GAAP, transactions involving related and affiliated parties cannot be presumed to be carried out on an arm’s length-basis, as the requisite conditions of competitive, free-market dealings may not exist. Therefore, in the opinion of management, the fair value of the RSLCA notes receivable from affiliated party and notes receivable from affiliates cannot be readily estimated, as the transactions are with related and affiliated parties. Other information about related and affiliated party
11
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
transactions are provided, where applicable, elsewhere in these notes to the unaudited interim condensed consolidated financial statements.
Derivative Financial Instrument
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Charges and/or credits relating to the changes in the fair value of the interest rate swaps are made to accumulated other comprehensive income (loss), noncontrolling interests or operations (included in interest expense), as applicable. Over time, the unrealized gains and losses recorded in accumulated other comprehensive income (loss) will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings. During the next twelve months, the Company estimates that an additional $0.3 million will be reclassified as a decrease to interest expense.
The Company, through the Operating Partnership, entered into a five-year swap agreement on February 8, 2023 to fix Secured Overnight Financing Rate (“SOFR”) debt, resulting in an all-in fixed rate of 5.80% relating to a $26.9 million mortgage loan, effective as of February 9, 2023. The Company designated the pay-fixed, receive-floating interest rate swap with the terms described in the table below as of the acquisition date as a cash flow hedge. The swap agreement matures on February 1, 2028. The derivative instrument qualified as a cash flow hedge for the six months ended June 30, 2024. The fair value of the interest rate swap applicable to the mortgage loan payable entered into in February 2023 is included in other assets on the condensed consolidated balance sheet as of June 30, 2024 (see Note 7. Debt, for further detail).
The following is a summary of the derivative financial instrument attributes held by the Company at June 30, 2024:
Designation/ |
|
|
|
|
|
| Notional |
|
| Fair |
|
| Maturity |
| Balance sheet | |||
Cash flow |
| Derivative |
| Count |
|
| amount |
|
| value |
|
| date |
| location | |||
Qualifying |
| Interest rate swap |
|
| 1 |
|
| $ | 26,900,000 |
|
| $ | 48,000 |
|
| Feb 2028 |
| Other assets |
The valuation of the liability for the Company’s interest rate swap, which is measured on a recurring basis, was determined to be Level 2 within the valuation hierarchy and was based on independent values provided by a financial instrument valuation specialist. Such valuation was determined using widely accepted valuation techniques, including discounted cash flow analyses on the expected cash flows of the derivative. The analysis reflects the contractual term of the swap, including the period to maturity, and user-observable market-based inputs, including interest rate curves (“significant other observable inputs”). The fair value calculation also includes an amount for risk of non-performance using “significant unobservable inputs” such as estimates of current credit spreads to evaluate the likelihood of default. The Company has concluded that, as of June 30, 2024, the fair value associated with the “significant unobservable inputs” relating to the Company’s risk of non-performance was insignificant to the overall fair value of the interest rate swap agreement and, as a result, the relevant inputs for purposes of calculating the fair value of the interest rate swap agreements, in their entirety, were based upon “significant other observable inputs”.
Note 7. Debt
Mortgage Loans Payable
Mortgage loans payable are secured by the properties on which the debt was placed and were considered nonrecourse debt with limited customary exceptions at the time of loan origination. The Company was in compliance with all of its debt covenants related to its mortgage loans payable as of June 30, 2024. Fixed-rate mortgage loans payable are composed of the following as of June 30, 2024:
12
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
|
|
|
|
|
| June 30, 2024 |
|
| |||||
|
|
|
| Maturity |
| Balance |
|
| Contractual |
|
| ||
Description |
| Amortization |
| date |
| outstanding |
|
| interest rate |
|
| ||
Fixed-rate mortgage |
| Interest-only |
| 10/1/2024 |
|
| 16,902,000 |
|
|
| 4.25 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 2/2/2025 |
|
| 21,550,000 |
|
|
| 3.97 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 5/1/2025 |
|
| 25,519,000 |
|
|
| 4.15 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 9/2/2025 |
|
| 24,420,000 |
|
|
| 4.38 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 12/1/2025 |
|
| 25,012,000 |
|
|
| 4.59 | % |
|
Fixed-rate mortgage (a) |
| Interest-only |
| 5/10/2026 |
|
| 24,850,000 |
|
|
| 4.66 | % |
|
Fixed-rate mortgage (a) |
| Interest-only |
| 9/1/2026 |
|
| 24,485,000 |
|
|
| 3.82 | % |
|
Fixed-rate mortgage (a) |
| Interest-only |
| 12/1/2026 |
|
| 28,110,000 |
|
|
| 4.06 | % |
|
Fixed-rate mortgage (a) |
| Interest-only |
| 4/1/2027 |
|
| 31,200,000 |
|
|
| 4.38 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 6/6/2027 |
|
| 32,722,000 |
|
|
| 3.98 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 9/1/2027 |
|
| 36,860,000 |
|
|
| 3.99 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 12/1/2027 |
|
| 33,441,000 |
|
|
| 4.09 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 1/11/2028 |
|
| 35,840,000 |
|
|
| 4.05 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 2/1/2028 |
|
| 38,530,000 |
|
|
| 6.12 | % |
|
Fixed-rate mortgage (b) |
| Interest-only |
| 2/1/2028 |
|
| 26,900,000 |
|
|
| 5.80 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 4/8/2028 |
|
| 37,795,000 |
|
|
| 4.27 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 7/1/2028 |
|
| 43,522,000 |
|
|
| 4.32 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 10/1/2029 |
|
| 30,231,000 |
|
|
| 3.13 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 1/1/2031 |
|
| 37,564,000 |
|
|
| 3.45 | % |
|
|
|
|
|
|
|
| 575,453,000 |
|
|
| 4.29 | % | (c) |
Unamortized issuance costs, net |
|
| (984,000 | ) |
|
|
|
| |||||
Unamortized below market debt discount, net |
|
| (11,310,000 | ) |
|
|
|
| |||||
|
|
|
|
|
| $ | 563,159,000 |
|
|
|
|
|
The Company repaid a $10.8 million mortgage loan payable by its contractual maturity date of March 1, 2024 and an $18.0 million mortgage loan payable by its contractual maturity date of June 1, 2024.
Revolving Lines of Credit
On May 30, 2024, the Operating Partnership (as the borrower) and the Company entered into a credit agreement which provides the Company with a revolving credit facility of up to a maximum amount of $75.0 million with a maturity date of May 30, 2027. The revolving credit facility may be increased to $400.0 million, upon request of the Operating Partnership, subject to, among other things, the receipt of commitments for the increased amount. On July 23, 2024, the Operating Partnership and the Company increased the revolving credit facility in the amount of $25.0 million pursuant to an incremental revolving commitment from an additional lender under the terms of the credit agreement. The additional commitment increased the Company’s borrowing capacity under the credit agreement’s revolving credit facility to $100.0 million. The Operating Partnership will have the option to select loans as either a (i) base rate loan, (ii) term SOFR loan (with a one, three or six months tenor), or (iii) daily simple SOFR loan (as in effect from time to time), each of which is subject to an applicable margin that varies based on a ratio of the total indebtedness and total asset value of the Company as defined within the agreement. Interest on base rate loans and daily simple SOFR loans shall be payable monthly in arrears on the first day of each month. Interest on term SOFR loans will be payable at the end of each interest period, and in the case of interest periods longer than three months, quarterly. The entire outstanding principal and any accrued interest thereon will be due and payable on the maturity date. The Operating Partnership is also required to pay an unused commitment fee on the difference between committed amounts under the revolving credit facility and the amounts actually used under the revolving credit facility, which is (i) 0.25% per annum when usage of the revolving credit facility is less than 50%, and (ii) 0.15% per annum when usage of the revolving credit facility is greater than or equal to 50%. The credit facility contains financial covenants including, but not limited to, maximum debt leverage, maximum secured debt, minimum fixed charge coverage, and minimum net worth. In addition, the facility contains restrictions including,
13
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
but not limited to, limits on indebtedness, certain investments and distributions. As of June 30, 2024, the Company has borrowed $44.0 million under this credit facility and is in compliance with all financial covenants.
On May 19, 2021, ExchangeRight entered into a revolving line of credit in which the Company has access to utilize available capacity under this revolving line of credit. The Company is legally responsible for the specific borrowings related to the Company, whereas ExchangeRight is the guarantor on all outstanding borrowings in relation to this revolving line of credit. The revolving line of credit agreement, as amended in December 2023, now has a maturity date of December 22, 2026, with a maximum aggregate amount being borrowed by the Company and ExchangeRight totaling $80.0 million outstanding at any time and requires monthly payments. As of June 30, 2024, ExchangeRight has no borrowings under this secured revolving line of credit resulting in $80.0 million available for borrowing by the Company and ExchangeRight as of June 30, 2024. The Company had no outstanding borrowings under this revolving line of credit as of June 30, 2024.
Additionally, in January 2021, the Company entered into a revolving line of credit. The revolving line of credit agreement, as amended in December 2023, had a maturity date of January 15, 2025, and bore interest at a rate per annum equal to the prime rate currently in effect with an interest rate floor of 6.00%, while outstanding. The revolving line of credit required monthly interest only payments, while outstanding. On January 16, 2024, the Company borrowed $15.0 million on its unsecured revolving line of credit, which was repaid in full on May 31, 2024. Upon this repayment, this revolving line of credit was terminated.
Scheduled Principal Payments
Scheduled principal payments on the Company's outstanding debt are as follows:
|
|
|
| |||||||||
|
| Mortgage loan payable |
|
|
|
|
|
|
| |||
Year |
| balloon payments |
|
| Line of credit |
|
| Total |
| |||
Remainder of 2024 |
| $ | 16,902,000 |
|
| $ | - |
|
| $ | 16,902,000 |
|
2025 |
|
| 96,501,000 |
|
|
| - |
|
|
| 96,501,000 |
|
2026 |
|
| 77,445,000 |
|
|
| - |
|
|
| 77,445,000 |
|
2027 |
|
| 134,223,000 |
|
|
| 44,000,000 |
|
|
| 178,223,000 |
|
2028 |
|
| 182,587,000 |
|
|
| - |
|
|
| 182,587,000 |
|
Thereafter |
|
| 67,795,000 |
|
|
| - |
|
|
| 67,795,000 |
|
|
| $ | 575,453,000 |
|
| $ | 44,000,000 |
|
| $ | 619,453,000 |
|
Note 8. Commitments and Contingencies
Litigation and Regulatory Matters
The Company is a party to certain legal actions arising in the normal course of business. Management does not expect there to be adverse consequences from these actions that would be material to the Company’s unaudited interim condensed consolidated financial statements.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances, or petroleum product releases, at its properties. The owner may be liable to governmental entities or to third parties for property damage, and for investigation and cleanup costs incurred by such parties in connection with any contamination. Generally, the Company’s tenants must comply with environmental laws and meet any remediation requirements. In addition, leases typically impose obligations on tenants to indemnify the Company from any compliance costs the Company may incur as a result of environmental conditions on the property caused by the tenant. However, if a lease does not require compliance, or if a tenant fails to or cannot comply, the Company could be forced to pay these costs. Management is unaware of any environmental matters that would have a material impact on the Company’s unaudited interim condensed consolidated financial statements.
14
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
Note 9. Equity and Noncontrolling Interests
Common Shares Detail
Class ER Common Shares
On May 30, 2024, the Company classified and designated a new class of common shares of beneficial interest, $0.01 par value per share of the Company designated as Class ER Common Shares. Each Class ER Common Shareholder will have the right, upon the seventh anniversary of the closing date of a shareholder’s purchase of Class ER Common Shares (subject to three one-year extensions in the Trustee’s discretion), to require the Company to redeem the Class ER Common Shares, in whole or in part, held by such shareholder, as well as the right to convert such Class ER Common Shares to Class I Common Shares on a 1:1 basis. Each Class ER Common Shareholder desiring to exercise the redemption rights must give written notice of redemption to the Company at least 15 calendar days prior to the scheduled redemption date. Subject to applicable law, the Company will effect any redemption by paying cash for each Class ER Common Share to be redeemed equal to the original purchase price per share paid by the redeeming shareholder for the Class ER Common Shares. The Class ER Common Shares have no other redemption rights and are not eligible for repurchase or redemption under the Company’s share repurchase program.
The Class ER Common Shares are subject to conversion under certain additional circumstances. First, the Class ER Common Shares are subject to mandatory conversion upon a conversion event, which is generally defined as a listing of the Common Shares on a national securities exchange or a change in control transaction involving the Operating Partnership or the Company. In this regard, each Class ER Common Share will automatically and without any action on the part of the shareholder convert into an equal number of Class I Common Shares of the Company, on a 1:1 basis, upon a conversion event, unless, at least five days before the effective date of such conversion event, the Trustee determines, in its sole and absolute discretion, that such conversion shall not occur in connection with such conversion event. Any such determination will not preclude the conversion of Class ER Common Shares into Class I Common Shares in connection with the occurrence of any successive conversion event.
The Class ER Common Shares are also subject to the optional conversion rights of the Company. In this regard, from and after the fifth anniversary of the closing date of a Class ER Common Shareholder’s purchase of Class ER Common Shares, the Trustee, on behalf of the Company, will have the right to cause each Class ER Common Shareholder, without any action on the part of the shareholder, to convert any or all of such holder’s Class ER Common Shares into an equal number of Class I Common Shares, on a 1:1 basis. The Trustee will provide written notice to the affected shareholder of its intent to exercise the conversion rights described in the preceding sentence no less than 30 calendar days prior to any such conversion date.
Except as otherwise specifically set forth above, the Class ER Common Shares have the same preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions as the Class A Common Shares, Class I Common Shares and Class S Common Shares. As of June 30, 2024, the Company had not issued any Class ER Common Shares.
Class A, Class I, and Class S Common Shares
The Company’s other common shares consist of Class A Common Shares, Class I Common Shares and Class S Common Shares. The Class A, Class I and Class S Common Shares have identical rights and privileges, including identical voting rights, but have different upfront selling commissions and related fees. Each Class A Common Share and each Class S Common Share shall automatically and without any action on the part of the shareholder thereof convert into the same number of Class I Common Shares upon a listing of any class of common shares on any securities exchange pursuant to an effective registration statement filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, or any merger, consolidation, transfer of all or substantially all of the assets or other business combination of the Company, as a result of which all outstanding common shares are canceled in exchange for the right to receive cash or securities, or a combination thereof.
Private Offering
The Company is currently conducting a private placement offering on a continuous basis of up to $2.165 billion of Class A Common Shares, Class I Common Shares, Class S Common Shares, and Class ER Common Shares (the “Private Offering”). The Trustee may increase the maximum offering amount of the Private Offering as long as it is anticipated to be accretive to the
15
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
Company’s shareholders, in the Trustee’s sole discretion. A wholly-owned subsidiary of the Sponsor, ExchangeRight Income Fund GP, LLC, owned 600,000 Class I Common Shares as of June 30, 2024 and December 31, 2023, which were purchased on the same terms as those available to the other investors at acquisition. The following table provides a summary of the Class I, Class A, Class S and Class ER common shares offering prices in effect for the six months ended June 30, 2024:
|
| Offering price |
| |||||||||||||
Effective date |
| Class I |
|
| Class A |
|
| Class S |
|
| Class ER |
| ||||
January 1, 2024 through January 23, 2024 |
| $ | 27.06 |
|
| $ | 28.77 |
|
| $ | 28.04 |
|
| n/a |
| |
January 24, 2024 through April 16, 2024 |
| $ | 26.99 |
|
| $ | 28.70 |
|
| $ | 27.97 |
|
| n/a |
| |
April 17, 2024 through June 12, 2024 |
| $ | 27.14 |
|
| $ | 28.86 |
|
| $ | 28.12 |
|
| n/a |
| |
June 13, 2024 through June 30, 2024 |
| $ | 27.14 |
|
| $ | 28.86 |
|
| $ | 28.12 |
|
| $ | 28.97 |
|
Common Share Repurchase Program
The Company has adopted a share repurchase program whereby, subject to certain limitations, holders of the Class I, Class A, and Class S Common Shares may request on a quarterly basis that the Company repurchases all or any portion of their shares. The Class ER Common Shares are not eligible for repurchase under the share repurchase program. Shareholders are eligible to have their shares repurchased by the Company pursuant to the share repurchase program and the authorization of the Trustee. Holders of shares may request that the Company repurchase shares in an amount not to exceed five percent (5.0%) per fiscal year of the Company’s issued and outstanding shares. The Company may repurchase fewer shares than have been requested in any particular quarter to be repurchased under its share repurchase program, or none at all, at the Company’s full discretion. The Company also has no obligation to repurchase shares if the redemption would violate the applicable restrictions on distributions under Maryland law, which prohibits distributions that would cause the Company to fail to meet statutory tests of solvency. The Trustee may modify, suspend or terminate the share repurchase program if it deems such action to be in the Company’s best interest and the best interest of the Company’s shareholders. The 600,000 Class I Common Shares owned by ExchangeRight Income Fund GP, LLC are restricted to redemption and therefore not subject to the share repurchase program. During the three months ended June 30, 2024, the Company repurchased 96,924 Class I Common Shares and 51,244 Class A Common Shares totaling $3.9 million under the share repurchase program. During the six months ended June 30, 2024, the Company repurchased 348,240 Class I Common Shares and 104,203 Class A Common Shares totaling $12.0 million under the share repurchase program.
Distributions
The amount of distributions payable to the Company’s shareholders is determined by the Trustee and is dependent on a number of factors, including funds available for distribution, the Company’s financial condition, capital expenditure requirements, requirements of Maryland law and annual distribution requirements needed to qualify and maintain the Company’s status as a REIT. The Trustee has authorized, and the Company has declared, distributions through June 30, 2024. The distributions are payable on or around the 15th day following each month end to shareholders of record at the close of business on the last day of the prior month.
The following table provides a summary of the monthly distributions declared per share for the six months ended June 30, 2024:
|
| Class A |
|
| Class I |
| ||
January |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
February |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
March |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
April |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
May |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
June |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
|
| $ | 0.8694 |
|
| $ | 0.8694 |
|
Cumulative distributions relating to Class A Common Shares and Class I Common Shares, and Operating Partnership units (“OP Units”) totaling $3.5 million were declared but not yet paid as of June 30, 2024 and have been included in distributions
16
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
payable in the accompanying condensed consolidated balance sheet. The unpaid distributions as of June 30, 2024 were paid in cash or reinvested in the Company’s common shares in July 2024.
Noncontrolling Interests
The Operating Partnership had 7,969,003 Units outstanding as of June 30, 2024. The holders of OP Units have the right to cause their OP Units to be redeemed by the Operating Partnership for cash, unless the Company, in its sole discretion, elects to purchase such OP Units in exchange for Class I Common Shares of the Company, issuable on a 1:1 basis, subject to adjustment under certain circumstances. The Company currently intends to elect to pay the redemption price for all OP Units tendered for redemption in the form of Class I Common Shares. 45,492 OP Units were exchanged for the same number of Class I Common Shares during the three months ended June 30, 2024. 69,941 OP Units were exchanged for the same number of Class I Common Shares during the six months ended June 30, 2024,
Note 10. Related and Affiliated Party Transactions
Acquisition Fee
The Company acquired a property from an unaffiliated entity on May 30, 2024. As outlined in the asset management agreement, the Company paid a 1% acquisition fee on this property acquisition totaling $0.1 million to ExchangeRight during the three months ended June 30, 2024. This acquisition fee was included as part of the purchase price consideration for this related acquisition.
Organization and Offering Costs
The Sponsor incurs certain organization and offering costs in connection with the offerings of Class A Common Shares, Class I Common Shares, Class S Common Shares, Class ER Common Shares and OP Units and the organization of the Company. These costs include, but are not limited to, fees related to special purpose entity formation, legal and accounting fees, marketing expenses and other costs and expenses directly related to the offering and organization of the Company. All of these expenses are paid by the Sponsor or its affiliates. The Sponsor earns an amount equal to 1.00% of the net transaction price of sales of Class I, A, S and ER Common Shares, which is expected to offset the organizational and offering costs incurred described above.
Offering costs of $0.1 million and $0.2 million were included in total equity for the three and six months ended June 30, 2024, respectively, for which the Company was obligated to pay the Sponsor. In addition, Class A Common Shares incur broker-dealer commissions as an offering cost, a portion of which could be eligible to be earned by an affiliate of the Company. These net commissions totaled $0.2 million and $0.6 million and were included in total equity for the three and six months ended June 30, 2024, respectively.
Class I Common Share and Noncontrolling Interest Ownership Interests
ExchangeRight Income Fund GP, LLC, owned 600,000 Class I Common Shares as of June 30, 2024, which were purchased on the same terms as other investors at acquisition.
In addition, ExchangeRight has made an investment into OP Units on the same terms offered to OP Unit holders. ExchangeRight owns 77,308 OP Units as of June 30, 2024.
Performance Participation
In addition to distributions payable on the 600,000 Class I Common Shares that ExchangeRight Income Fund GP, LLC holds, ExchangeRight Income Fund GP, LLC also holds a special limited partnership interest in our Operating Partnership, which entitles it to receive an incentive fee in accordance with the following waterfall:
17
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
(1) First, 100% to the holders of OP Units (including OP Units held by the Company, with respect to common shares issued by the Company) until they have received distributions, in cash, equal to a seven percent (7.0%) cumulative, non-compounding annual return on all capital contributions made, or deemed to have been made, to the Operating Partnership;
(2) Second, 100% to the holders of OP Units, pro rata in accordance with their respective capital accounts, until all of the holders of OP Units have received cumulative distributions, in cash, equal to their respective capital contributions made, or deemed to have been made, to the Operating Partnership; and
(3) Third, (i) 80% to the holders of OP Units, pro rata in accordance with their respective capital accounts, and (ii) 20% to the special limited partner.
There was no performance participation earned or paid during the three and six months ended June 30, 2024 and 2023, respectively.
Asset Management and Property Management Fees
An annual asset management fee is payable by the Operating Partnership to the Asset Manager, pursuant to an asset management agreement between the Asset Manager and the Operating Partnership. The asset management fee is an amount equal to fifteen basis points (0.15%) of the Company’s assets under management. The asset management fee is payable quarterly (0.0375% each quarter) and in arrears. The asset management agreement has an initial term of five years and will automatically renew at the expiration of the initial or any subsequent five-year term for an additional five-year term.
An annual property management fee is payable by the Operating Partnership to the Property Manager pursuant to a property management agreement between the Operating Partnership and the Property Manager. The property management fee is equal to 1.10% of the gross revenues received by the Company from the Trust Properties and any other assets acquired by the Company, but excluding reimbursements relating to real estate taxes, insurance and common area maintenance charges and the fees earned by the Company from the RSLCA and noted receivable from affiliates. The current term of the property management agreement expires on February 28, 2025, and will automatically renew at the expiration of the term and any subsequent three-year term for an additional three-year term.
Asset management and property management fees for the three and six months ended June 30, 2024 and 2023 were as follows:
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Asset management fees |
| $ | 32,000 |
| (a) | $ | 450,000 |
|
| $ | 169,000 |
| (a) | $ | 894,000 |
|
Property management fees |
| $ | 13,000 |
| (b) | $ | 176,000 |
|
| $ | 200,000 |
| (b) | $ | 353,000 |
|
(a) Asset management fees are net of $0.5 million for the three months ended June 30, 2024 and $0.8 million for the six months ended June 30, 2024 in fees which were irrevocably waived by the asset manager.
(b) Property management fees are net of $0.2 million for the three and six months ended June 30, 2024 in fees which were irrevocably waived by the property manager.
Note 11. (Loss) Earnings Per Share
Basic (loss) earnings per share (“EPS”) is calculated by dividing net loss or earnings, as applicable, attributable to the Company’s common shareholders by the weighted average number of common shares outstanding for the period including participating securities, if applicable. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares and then shared in the earnings of the Company. OP Units are convertible into Class I Common Shares of the Company on a 1:1 basis and are allocated income on the same basis as common shares of the Company. Therefore, the result of an assumed conversion of the OP Units would have neither a dilutive nor anti-dilutive effect on earnings per share. Accordingly, basic (loss) EPS is the same as diluted (loss) EPS for the three and six months ended June 30, 2024 and 2023, respectively. The following table provides a reconciliation of the numerator and denominator of the EPS calculations for the three and six months ended June 30, 2024 and 2023, respectively:
18
ExchangeRight Income Fund
(d/b/a ExchangeRight Essential Income REIT)
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2024
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) |
| $ | (25,000 | ) |
| $ | (224,000 | ) |
| $ | (614,000 | ) |
| $ | (833,000 | ) |
Net loss attributable to noncontrolling interests |
|
| 6,000 |
|
|
| 73,000 |
|
|
| 205,000 |
|
|
| 279,000 |
|
Net (loss) attributable to common shareholders, basic and diluted |
| $ | (19,000 | ) |
| $ | (151,000 | ) |
| $ | (409,000 | ) |
| $ | (554,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares outstanding, basic and diluted |
|
| 16,112,050 |
|
|
| 15,186,606 |
|
|
| 15,908,667 |
|
|
| 14,987,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) per common share attributable to common shareholders, basic and diluted |
| $ | (0.00 | ) |
| $ | (0.01 | ) |
| $ | (0.03 | ) |
| $ | (0.04 | ) |
Note 12. Subsequent Events
Management has evaluated subsequent events through the date the unaudited interim condensed consolidated financial statements were available to be issued. Management has determined that there are no material events that would require adjustment to, or additional disclosure in, the Company’s unaudited interim condensed consolidated financial statements, other than those disclosed throughout this report and below.
Common Share Activity
The Company issued 17,969 Class A Common Shares and 70,353 Class I Common Shares (excluding the 15,134 OP Units that were exchanged for same number of Class I Common Shares discussed below) totaling $2.4 million in proceeds from July 1, 2024 through the date of issuance of this report.
The Company repurchased 51,383 Class A Common Shares totaling $1.4 million and 160,642 Class I Common Shares totaling $4.2 million from April 1, 2024 through the date of this report. Additionally, 15,134 OP Units were exchanged for the same number of Class I Common Shares from July 1, 2024 through the issuance of this report.
The Company adjusted the offering price of its common shares effective July 19, 2024 as follows:
|
| Offering price |
| |||||||||
Effective date |
| Class I |
|
| Class A |
|
| Class S |
| |||
July 19, 2024 |
| $ | 27.26 |
|
| $ | 28.98 |
|
| $ | 28.25 |
|
Amendment to Revolving Credit Facility
On July 23, 2024, the Operating Partnership and the Company increased its revolving credit facility in the amount of $25.0 million pursuant to an incremental revolving commitment from an additional lender under the terms of the credit agreement. The additional commitment increased the Company’s borrowing capacity under the credit agreement’s revolving credit facility to $100.0 million. All other terms under the revolving credit facility were not changed as a result of this amendment.
19
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited interim condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2023 and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” related thereto included in the Company's Annual Report on Form 10-K that was filed with the Securities and Exchange Commission on April 11, 2024. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategies for our business, includes forward-looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” of our Form 10-K that was filed with the Securities and Exchange Commission on April 11, 2024 and the “Cautionary Note Regarding Forward-Looking Statements” section of this Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements.
Company Overview
ExchangeRight Income Fund, doing business as ExchangeRight Essential Income REIT, a Maryland statutory trust, is a self-administered real estate company, formed on January 11, 2019, focusing on investing in single-tenant, primarily investment-grade net-leased real estate. The Company, through the Operating Partnership, owned 353 properties in 34 states as of June 30, 2024. These properties were 98.4% leased as of June 30, 2024 and are occupied by 36 different primarily national investment-grade necessity-based retail tenants and are additionally diversified by industry, geographic region and lease term.
The Company has elected and is qualified to be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2019. The Company is the sole general partner and a limited partner of the Operating Partnership, a Delaware limited partnership formed on January 9, 2019. Substantially all of the Company’s business is conducted through the Operating Partnership. The Trust Properties are owned and controlled by the Company and are managed by the Property Manager and the Asset Manager, which are both wholly-owned subsidiaries of ExchangeRight, pursuant to executed management agreements with each respective entity.
Recent Developments
During the first half of 2024, global markets continued to experience volatility, driven by concerns over geopolitical conflicts in Eastern Europe and the Middle East, persistent inflation, elevated interest rate levels, and uneven economic growth. Inflation persisted at elevated levels compared to historical norms in many major economies around the world, prompting uncertainty over whether and to what extent central banks will ease monetary policy over the remainder of 2024, if at all.
Substantially all of the Company’s tenant leases contain provisions designed to partially mitigate the negative impact of inflation in the near term. Such lease provisions include clauses that require tenants to reimburse the Company for inflation-sensitive costs such as real estate taxes or insurance and many of the operating expenses it incurs. The Company has not been materially impacted in the current period by elevated interest rate levels as all of its mortgage debt is currently effectively fixed-rate financing as of June 30, 2024. To the extent the Company utilizes its revolving credit facilities in the future, it may be impacted by fluctuating interest rates as the interest on the revolving credit facility is not fixed. Further inflation rate increases or elevated interest rates over a prolonged period of time may have a material adverse impact on the Company’s business. It remains difficult to predict the full impact of recent events and any future changes in interest rates or inflation.
Effective May 30, 2024, the Company created a new class of Common Shares, designated as the Class ER Common Shares. For a description of the preferences, rights, restrictions, qualifications, and terms and conditions of the Class ER Common Shares, see “Common Shares and Noncontrolling Interests” below. As of June 30, 2024, no Class ER Common Shares were issued and outstanding.
Highlights for the Six Months Ended June 30, 2024
Operating Results
The June 2024 distribution marked the 63rd consecutive month of providing stable distributions to our investors. We have increased the distribution we pay five times since our inception. The Company declared distributions totaling $20.8 million for the six months ended June 30, 2024. As of June 30, 2024, the Company’s cumulative inception-to-date cash flows from operating activities have funded 100% of our cumulative inception-to-date distributions. The Company’s current distributions
20
represent a 6.38% annualized return, based on the $0.1449 per share distribution rate and $27.26 NAV per share as of June 30, 2024. The following table details the annualized distribution rate based on the $0.1449 per share distribution rate in effect as of June 30, 2024 and current offering price of the Company’s common shares:
|
| Class I |
|
| Class A |
|
| Class S |
|
| Class ER |
| ||||
Offering price (effective July 19, 2024) |
| $ | 27.26 |
|
| $ | 28.98 |
|
| $ | 28.25 |
|
| $ | 28.97 |
|
Annualized distribution rate (1) |
|
| 6.41 | % |
|
| 6.02 | % |
|
| 5.30 | % |
|
| 6.00 | % |
Trailing 12 month total return (2) |
|
| 4.54 | % |
|
| -1.67 | % |
| n/a |
|
| n/a |
| ||
Three-year total annual return (2) |
|
| 8.30 | % |
|
| 5.83 | % |
| n/a |
|
| n/a |
| ||
Inception-to-date total annual return (2) |
|
| 8.76 | % |
|
| 7.09 | % |
| n/a |
|
| n/a |
|
(1) The annualized distribution rate is calculated by the June 30, 2024 distribution rate in effect of $0.1449 per share divided by the offering price per share in connection with the Company’s June 30, 2024 NAV declaration. The Company believes the annualized distribution rate is a useful measure of our overall investment performance.
(2) Total return is calculated as the change in NAV per share at the end of the respective period versus the respective share class offering price per share at the beginning of the respective period plus any distributions per share declared during the period. The Company believes total return is a useful measure of the overall investment performance of our shares.
The Company remained 100% collected on its rents across all of its tenants in the portfolio for the six months ended June 30, 2024, and through the inception of the Company to date.
Leasing
The Company’s portfolio is 98.4% leased and its weighted average lease term as of June 30, 2024 is 6.3 years. The Company executed three lease renewals during the six months ended June 30, 2024 with average lease extensions of 60 months and average new rents over rents prior to the renewal of 9.6% for the period.
Capital
On May 30, 2024, the Operating Partnership (as the borrower) and the Company entered into a credit agreement which provides the Company with a revolving credit facility of up to a maximum amount of $75.0 million with a maturity date of May 30, 2027. The revolving credit facility may be increased to $400.0 million, upon request of the Operating Partnership, subject to, among other things, the receipt of commitments for the increased amount. On July 23, 2024, the Operating Partnership and the Company increased the revolving credit facility in the amount of $25.0 million pursuant to an incremental revolving commitment from an additional lender under the terms of the credit agreement. The additional commitment increased the Company’s borrowing capacity under the credit agreement’s revolving credit facility to $100.0 million. The Operating Partnership will have the option to select loans as either a (i) base rate loan, (ii) term SOFR loan (with a one, three or six months tenor), or (iii) daily simple SOFR loan (as in effect from time to time), each of which is subject to an applicable margin that varies based on a ratio of the total indebtedness and total asset value of the Company as defined within the agreement. Interest on base rate loans and daily simple SOFR loans shall be payable monthly in arrears on the first day of each month. Interest on term SOFR loans will be payable at the end of each interest period, and in the case of interest periods longer than three months, quarterly. The entire outstanding principal and any accrued interest thereon will be due and payable on the maturity date. The Operating Partnership is also required to pay an unused commitment fee on the difference between committed amounts under the revolving credit facility and the amounts actually used under the revolving credit facility, which is (i) 0.25% per annum when usage of the revolving credit facility is less than 50%, and (ii) 0.15% per annum when usage of the revolving credit facility is greater than or equal to 50%. The credit facility contains financial covenants including, but not limited to, maximum debt leverage, maximum secured debt, minimum fixed charge coverage, and minimum net worth. In addition, the facility contains restrictions including, but not limited to, limits on indebtedness, certain investments and distributions. As of June 30, 2024, the Company has borrowed $44.0 million under this credit facility and is in compliance with all financial covenants.
The Company has experienced minimal immediate term impact from the current elevated interest rate environment as all of its outstanding mortgage loans payable are effectively fixed as of June 30, 2024. The Company has experienced regular net inflows of shareholder capital. All redemption requests, representing approximately 4.2% of inception-to-date total equity raised through June 30, 2024, have been fully satisfied.
Real Estate Investments
The following table details information about our tenants as of June 30, 2024:
21
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| Weighted |
| ||||||||
|
| Number of leases |
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| Annualized base rents |
|
| average lease |
| ||||||||||||||||||||
Tenant |
| NN (a) |
|
| NNN (b) |
|
| Total |
|
| GLA (c) |
|
| Total |
|
| % of total |
|
| Per sq. ft (d) |
|
| term (yrs) (e) |
| ||||||||
Dollar General |
|
| 25 |
|
|
| 92 |
|
|
| 117 |
|
|
| 1,109,300 |
|
| $ | 12,160,600 |
|
|
| 17.7 | % |
| $ | 10.96 |
|
|
| 5.1 |
|
Walgreens |
|
| 19 |
|
|
| 14 |
|
|
| 33 |
|
|
| 476,800 |
|
| $ | 10,869,600 |
|
|
| 15.8 | % |
| $ | 22.80 |
|
|
| 5.0 |
|
Tractor Supply |
|
| 14 |
|
|
| 5 |
|
|
| 19 |
|
|
| 390,500 |
|
| $ | 5,429,800 |
|
|
| 7.9 | % |
| $ | 13.90 |
|
|
| 6.6 |
|
Family Dollar |
|
| 26 |
|
|
| 12 |
|
|
| 38 |
|
|
| 328,700 |
|
| $ | 4,183,100 |
|
|
| 6.1 | % |
| $ | 12.73 |
|
|
| 3.8 |
|
Hobby Lobby |
|
| 8 |
|
|
| 1 |
|
|
| 9 |
|
|
| 513,400 |
|
| $ | 4,075,200 |
|
|
| 5.9 | % |
| $ | 7.94 |
|
|
| 5.5 |
|
Advance Auto Parts |
|
| 27 |
|
|
| 5 |
|
|
| 32 |
|
|
| 233,900 |
|
| $ | 3,554,900 |
|
|
| 5.2 | % |
| $ | 15.20 |
|
|
| 4.0 |
|
Stop & Shop |
|
| - |
|
|
| 1 |
|
|
| 1 |
|
|
| 102,100 |
|
| $ | 2,940,000 |
|
|
| 4.3 | % |
| $ | 28.80 |
|
|
| 12.4 |
|
Fresenius Medical Care |
|
| 9 |
|
|
| 2 |
|
|
| 11 |
|
|
| 94,300 |
|
| $ | 2,916,200 |
|
|
| 4.2 | % |
| $ | 30.92 |
|
|
| 6.3 |
|
CVS Pharmacy |
|
| 8 |
|
|
| 1 |
|
|
| 9 |
|
|
| 111,200 |
|
| $ | 2,675,500 |
|
|
| 3.9 | % |
| $ | 24.06 |
|
|
| 5.2 |
|
Pick ’n Save |
|
| 1 |
|
|
| 1 |
|
|
| 2 |
|
|
| 123,500 |
|
| $ | 1,988,100 |
|
|
| 2.9 | % |
| $ | 16.10 |
|
|
| 5.3 |
|
Napa Auto Parts |
|
| - |
|
|
| 18 |
|
|
| 18 |
|
|
| 155,000 |
|
| $ | 1,850,300 |
|
|
| 2.7 | % |
| $ | 11.94 |
|
|
| 11.8 |
|
Kroger |
|
| 3 |
|
|
| - |
|
|
| 3 |
|
|
| 200,100 |
|
| $ | 1,624,500 |
|
|
| 2.4 | % |
| $ | 8.12 |
|
|
| 7.0 |
|
Publix |
|
| 2 |
|
|
| - |
|
|
| 2 |
|
|
| 96,800 |
|
| $ | 1,548,400 |
|
|
| 2.3 | % |
| $ | 16.00 |
|
|
| 15.9 |
|
Hy-Vee |
|
| - |
|
|
| 1 |
|
|
| 1 |
|
|
| 101,200 |
|
| $ | 1,415,800 |
|
|
| 2.1 | % |
| $ | 13.99 |
|
|
| 14.6 |
|
BioLife Plasma Services L.P. |
|
| - |
|
|
| 3 |
|
|
| 3 |
|
|
| 45,600 |
|
| $ | 2,028,500 |
|
|
| 3.0 | % |
| $ | 44.48 |
|
|
| 11.5 |
|
First Midwest Bank |
|
| - |
|
|
| 3 |
|
|
| 3 |
|
|
| 41,600 |
|
| $ | 1,333,500 |
|
|
| 1.9 | % |
| $ | 32.06 |
|
|
| 5.5 |
|
AutoZone |
|
| 7 |
|
|
| 2 |
|
|
| 9 |
|
|
| 65,900 |
|
| $ | 1,003,700 |
|
|
| 1.5 | % |
| $ | 15.23 |
|
|
| 2.6 |
|
Dollar Tree |
|
| 9 |
|
|
| - |
|
|
| 9 |
|
|
| 84,200 |
|
| $ | 921,400 |
|
|
| 1.3 | % |
| $ | 10.94 |
|
|
| 3.8 |
|
Giant Eagle |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 81,800 |
|
| $ | 850,700 |
|
|
| 1.2 | % |
| $ | 10.40 |
|
|
| 6.8 |
|
Walmart Neighborhood Market |
|
| - |
|
|
| 1 |
|
|
| 1 |
|
|
| 41,800 |
|
| $ | 738,600 |
|
|
| 1.1 | % |
| $ | 17.67 |
|
|
| 7.3 |
|
Goodwill |
|
| 2 |
|
|
| - |
|
|
| 2 |
|
|
| 42,800 |
|
| $ | 653,200 |
|
|
| 1.0 | % |
| $ | 15.26 |
|
|
| 5.9 |
|
Sherwin Williams |
|
| 7 |
|
|
| - |
|
|
| 7 |
|
|
| 45,400 |
|
| $ | 577,200 |
|
|
| 0.8 | % |
| $ | 12.71 |
|
|
| 2.4 |
|
Verizon Wireless |
|
| 2 |
|
|
| - |
|
|
| 2 |
|
|
| 11,300 |
|
| $ | 569,800 |
|
|
| 0.8 | % |
| $ | 50.42 |
|
|
| 3.0 |
|
O'Reilly |
|
| 5 |
|
|
| 1 |
|
|
| 6 |
|
|
| 41,400 |
|
| $ | 557,900 |
|
|
| 0.8 | % |
| $ | 13.48 |
|
|
| 4.9 |
|
Ross Stores |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 25,800 |
|
| $ | 354,800 |
|
|
| 0.5 | % |
| $ | 13.75 |
|
|
| 4.6 |
|
Food Lion |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 41,300 |
|
| $ | 351,400 |
|
|
| 0.5 | % |
| $ | 8.51 |
|
|
| 9.3 |
|
PNC Bank, N.A. |
|
| - |
|
|
| 1 |
|
|
| 1 |
|
|
| 6,100 |
|
| $ | 266,800 |
|
|
| 0.4 | % |
| $ | 43.74 |
|
|
| 4.3 |
|
Home Goods |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 22,200 |
|
| $ | 255,800 |
|
|
| 0.4 | % |
| $ | 11.52 |
|
|
| 6.8 |
|
MedSpring |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 4,600 |
|
| $ | 193,100 |
|
|
| 0.3 | % |
| $ | 41.98 |
|
|
| 2.7 |
|
The Christ Hospital |
|
| - |
|
|
| 1 |
|
|
| 1 |
|
|
| 9,300 |
|
| $ | 181,300 |
|
|
| 0.3 | % |
| $ | 19.49 |
|
|
| 3.5 |
|
Five Below |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 8,500 |
|
| $ | 135,700 |
|
|
| 0.2 | % |
| $ | 15.96 |
|
|
| 6.6 |
|
TCF National Bank |
|
| - |
|
|
| 1 |
|
|
| 1 |
|
|
| 4,500 |
|
| $ | 116,700 |
|
|
| 0.2 | % |
| $ | 25.93 |
|
|
| 2.5 |
|
BB&T Bank |
|
| - |
|
|
| 1 |
|
|
| 1 |
|
|
| 2,700 |
|
| $ | 105,500 |
|
|
| 0.2 | % |
| $ | 39.07 |
|
|
| 4.5 |
|
Aaron's |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 7,200 |
|
| $ | 101,900 |
|
|
| 0.1 | % |
| $ | 14.15 |
|
|
| 1.7 |
|
Athletico Physical Therapy |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 3,400 |
|
| $ | 77,000 |
|
|
| 0.1 | % |
| $ | 22.65 |
|
|
| 2.3 |
|
Archana Grocery |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| 9,300 |
|
| $ | 74,600 |
|
|
| 0.1 | % |
| $ | 8.02 |
|
|
| 9.0 |
|
Total |
|
| 183 |
|
|
| 167 |
|
|
| 350 |
|
|
| 4,683,500 |
|
| $ | 68,681,100 |
|
|
| 100.0 | % |
| $ | 14.66 |
|
|
| 6.3 |
|
Vacant |
|
|
|
|
|
|
|
|
|
|
| 74,400 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
| 4,757,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the industries in which our tenants operate as of June 30, 2024:
22
|
| Number |
|
| GLA |
|
| Annualized base rents |
| |||||||||||
Industry |
| of leases |
|
| Square feet |
|
| % of total |
|
| Dollars (a) |
|
| % of total |
| |||||
Discount Necessity Retail |
|
| 164 |
|
|
| 1,522,200 |
|
|
| 32.0 | % |
| $ | 17,265,100 |
|
|
| 25.1 | % |
Pharmaceutical Retailers |
|
| 42 |
|
|
| 588,000 |
|
|
| 12.4 | % |
|
| 13,545,100 |
|
|
| 19.7 | % |
Grocery |
|
| 13 |
|
|
| 797,900 |
|
|
| 16.8 | % |
|
| 11,532,100 |
|
|
| 16.8 | % |
Discount Automotive |
|
| 65 |
|
|
| 496,200 |
|
|
| 10.4 | % |
|
| 6,966,800 |
|
|
| 10.1 | % |
Farm and Rural Supply |
|
| 19 |
|
|
| 390,500 |
|
|
| 8.2 | % |
|
| 5,429,800 |
|
|
| 7.9 | % |
Discount Specialty Retail |
|
| 13 |
|
|
| 586,900 |
|
|
| 12.3 | % |
|
| 5,119,900 |
|
|
| 7.5 | % |
Medical Care |
|
| 12 |
|
|
| 98,900 |
|
|
| 2.1 | % |
|
| 3,109,300 |
|
|
| 4.5 | % |
Banking Services |
|
| 6 |
|
|
| 54,900 |
|
|
| 1.2 | % |
|
| 1,822,500 |
|
|
| 2.7 | % |
Healthcare Providers |
|
| 5 |
|
|
| 58,300 |
|
|
| 1.2 | % |
|
| 2,286,800 |
|
|
| 3.3 | % |
Paint and Supplies |
|
| 7 |
|
|
| 45,400 |
|
|
| 1.0 | % |
|
| 577,200 |
|
|
| 0.8 | % |
Necessity Retail |
|
| 2 |
|
|
| 11,300 |
|
|
| 0.2 | % |
|
| 569,800 |
|
|
| 0.8 | % |
Discount Apparel |
|
| 1 |
|
|
| 25,800 |
|
|
| 0.5 | % |
|
| 354,800 |
|
|
| 0.5 | % |
Rental & Leasing Services |
|
| 1 |
|
|
| 7,200 |
|
|
| 0.1 | % |
|
| 101,900 |
|
|
| 0.1 | % |
Total |
|
| 350 |
|
|
| 4,683,500 |
|
|
| 98.4 | % |
| $ | 68,681,100 |
|
|
| 100.0 | % |
Vacant |
|
|
|
|
| 74,400 |
|
|
| 1.6 | % |
|
|
|
|
|
| |||
Total Portfolio |
|
|
|
|
| 4,757,900 |
|
|
| 100.0 | % |
|
|
|
|
|
|
The following table details our contractual lease expirations as of June 30, 2024 (assuming no exercise of contractual extension options):
|
| Number |
|
| GLA |
|
| Annualized base rents |
| |||||||||||||||
Year |
| of leases |
|
| Square feet |
|
| % of total |
|
| Dollars |
|
| % of total |
|
| Per sq. ft. (a) |
| ||||||
2024 |
|
| 4 |
|
|
| 31,300 |
|
|
| 0.7 | % |
| $ | 372,400 |
|
|
| 0.5 | % |
| $ | 11.90 |
|
2025 |
|
| 20 |
|
|
| 163,200 |
|
|
| 3.5 | % |
|
| 1,956,300 |
|
|
| 2.8 | % |
| $ | 11.99 |
|
2026 |
|
| 42 |
|
|
| 487,200 |
|
|
| 10.4 | % |
|
| 5,786,600 |
|
|
| 8.4 | % |
| $ | 11.88 |
|
2027 |
|
| 40 |
|
|
| 561,200 |
|
|
| 12.0 | % |
|
| 8,293,800 |
|
|
| 12.1 | % |
| $ | 14.78 |
|
2028 |
|
| 59 |
|
|
| 612,300 |
|
|
| 13.1 | % |
|
| 10,049,800 |
|
|
| 14.6 | % |
| $ | 16.41 |
|
2029 |
|
| 40 |
|
|
| 464,400 |
|
|
| 9.9 | % |
|
| 6,473,100 |
|
|
| 9.4 | % |
| $ | 13.94 |
|
2030 |
|
| 33 |
|
|
| 474,300 |
|
|
| 10.1 | % |
|
| 7,404,400 |
|
|
| 10.8 | % |
| $ | 15.61 |
|
2031 |
|
| 43 |
|
|
| 673,500 |
|
|
| 14.4 | % |
|
| 9,305,700 |
|
|
| 13.5 | % |
| $ | 13.82 |
|
2032 |
|
| 29 |
|
|
| 456,100 |
|
|
| 9.7 | % |
|
| 6,199,100 |
|
|
| 9.0 | % |
| $ | 13.59 |
|
2033 |
|
| 10 |
|
|
| 131,500 |
|
|
| 2.8 | % |
|
| 2,116,800 |
|
|
| 3.1 | % |
| $ | 16.10 |
|
2034 |
|
| 5 |
|
|
| 135,400 |
|
|
| 2.9 | % |
|
| 1,439,000 |
|
|
| 2.1 | % |
| $ | 10.63 |
|
2035 |
|
| 8 |
|
|
| 71,400 |
|
|
| 1.5 | % |
|
| 1,324,300 |
|
|
| 1.9 | % |
| $ | 18.55 |
|
2036 |
|
| 6 |
|
|
| 140,500 |
|
|
| 3.0 | % |
|
| 3,521,400 |
|
|
| 5.1 | % |
| $ | 25.06 |
|
2037 |
|
| 5 |
|
|
| 54,200 |
|
|
| 1.2 | % |
|
| 641,900 |
|
|
| 0.9 | % |
| $ | 11.84 |
|
2038 |
|
| 2 |
|
|
| 14,200 |
|
|
| 0.3 | % |
|
| 200,300 |
|
|
| 0.3 | % |
| $ | 14.11 |
|
2039 |
|
| 3 |
|
|
| 164,400 |
|
|
| 3.5 | % |
|
| 2,846,100 |
|
|
| 4.1 | % |
| $ | 17.31 |
|
2040 |
|
| 1 |
|
|
| 48,400 |
|
|
| 1.0 | % |
|
| 750,100 |
|
|
| 1.1 | % |
| $ | 15.50 |
|
Total |
|
| 350 |
|
|
| 4,683,500 |
|
|
| 100.0 | % |
| $ | 68,681,100 |
|
|
| 100.0 | % |
| $ | 14.66 |
|
23
The following table details annualized base rents by state for our portfolio as of June 30, 2024:
|
| Number |
|
| GLA |
|
| Annualized base rents |
| |||||||||||
State |
| of leases |
|
| Square feet |
|
| % of total |
|
| Dollars (a) |
|
| % of total |
| |||||
Illinois |
|
| 38 |
|
|
| 382,400 |
|
|
| 8.0 | % |
| $ | 7,278,700 |
|
|
| 10.6 | % |
Ohio |
|
| 44 |
|
|
| 579,400 |
|
|
| 12.2 | % |
|
| 6,820,800 |
|
|
| 9.9 | % |
Texas |
|
| 37 |
|
|
| 403,500 |
|
|
| 8.5 | % |
|
| 5,964,500 |
|
|
| 8.7 | % |
Louisiana |
|
| 41 |
|
|
| 420,400 |
|
|
| 8.8 | % |
|
| 5,080,700 |
|
|
| 7.4 | % |
Wisconsin |
|
| 20 |
|
|
| 342,800 |
|
|
| 7.2 | % |
|
| 5,025,100 |
|
|
| 7.3 | % |
Florida |
|
| 22 |
|
|
| 240,400 |
|
|
| 5.1 | % |
|
| 3,808,100 |
|
|
| 5.5 | % |
Alabama |
|
| 14 |
|
|
| 268,800 |
|
|
| 5.6 | % |
|
| 3,491,900 |
|
|
| 5.1 | % |
Georgia |
|
| 14 |
|
|
| 264,300 |
|
|
| 5.6 | % |
|
| 3,039,400 |
|
|
| 4.4 | % |
Tennessee |
|
| 16 |
|
|
| 207,400 |
|
|
| 4.4 | % |
|
| 2,955,500 |
|
|
| 4.3 | % |
Massachusetts |
|
| 1 |
|
|
| 102,100 |
|
|
| 2.1 | % |
|
| 2,940,000 |
|
|
| 4.3 | % |
Indiana |
|
| 11 |
|
|
| 245,000 |
|
|
| 5.1 | % |
|
| 2,682,400 |
|
|
| 3.9 | % |
North Carolina |
|
| 14 |
|
|
| 210,000 |
|
|
| 4.4 | % |
|
| 2,536,600 |
|
|
| 3.7 | % |
South Carolina |
|
| 15 |
|
|
| 186,100 |
|
|
| 3.9 | % |
|
| 2,512,800 |
|
|
| 3.7 | % |
Pennsylvania |
|
| 13 |
|
|
| 129,200 |
|
|
| 2.7 | % |
|
| 2,114,500 |
|
|
| 3.1 | % |
Michigan |
|
| 5 |
|
|
| 102,100 |
|
|
| 2.1 | % |
|
| 1,636,800 |
|
|
| 2.4 | % |
Minnesota |
|
| 1 |
|
|
| 101,200 |
|
|
| 2.1 | % |
|
| 1,415,800 |
|
|
| 2.1 | % |
Virginia |
|
| 6 |
|
|
| 91,800 |
|
|
| 1.9 | % |
|
| 1,367,000 |
|
|
| 2.0 | % |
Missouri |
|
| 7 |
|
|
| 72,700 |
|
|
| 1.5 | % |
|
| 1,366,800 |
|
|
| 2.0 | % |
Nevada |
|
| 2 |
|
|
| 31,100 |
|
|
| 0.7 | % |
|
| 1,082,800 |
|
|
| 1.6 | % |
Arizona |
|
| 2 |
|
|
| 32,100 |
|
|
| 0.7 | % |
|
| 880,500 |
|
|
| 1.3 | % |
New Jersey |
|
| 3 |
|
|
| 33,000 |
|
|
| 0.7 | % |
|
| 702,000 |
|
|
| 1.0 | % |
Utah |
|
| 2 |
|
|
| 44,700 |
|
|
| 0.9 | % |
|
| 618,200 |
|
|
| 0.9 | % |
Oklahoma |
|
| 4 |
|
|
| 53,800 |
|
|
| 1.1 | % |
|
| 571,300 |
|
|
| 0.8 | % |
Connecticut |
|
| 3 |
|
|
| 38,000 |
|
|
| 0.8 | % |
|
| 550,500 |
|
|
| 0.8 | % |
California |
|
| 2 |
|
|
| 35,000 |
|
|
| 0.7 | % |
|
| 499,000 |
|
|
| 0.7 | % |
Maryland |
|
| 1 |
|
|
| 20,000 |
|
|
| 0.4 | % |
|
| 321,900 |
|
|
| 0.5 | % |
Iowa |
|
| 3 |
|
|
| 29,300 |
|
|
| 0.6 | % |
|
| 309,300 |
|
|
| 0.5 | % |
Arkansas |
|
| 3 |
|
|
| 29,400 |
|
|
| 0.6 | % |
|
| 261,900 |
|
|
| 0.4 | % |
Idaho |
|
| 1 |
|
|
| 22,000 |
|
|
| 0.5 | % |
|
| 255,000 |
|
|
| 0.4 | % |
Wyoming |
|
| 1 |
|
|
| 7,000 |
|
|
| 0.1 | % |
|
| 132,200 |
|
|
| 0.2 | % |
Rhode Island |
|
| 1 |
|
|
| 8,400 |
|
|
| 0.2 | % |
|
| 131,400 |
|
|
| 0.2 | % |
Colorado |
|
| 1 |
|
|
| 8,000 |
|
|
| 0.2 | % |
|
| 119,400 |
|
|
| 0.2 | % |
Mississippi |
|
| 1 |
|
|
| 9,300 |
|
|
| 0.2 | % |
|
| 106,400 |
|
|
| 0.2 | % |
Kansas |
|
| 1 |
|
|
| 7,200 |
|
|
| 0.2 | % |
|
| 101,900 |
|
|
| 0.1 | % |
Total Portfolio |
|
| 350 |
|
|
| 4,757,900 |
|
|
| 100.0 | % |
| $ | 68,681,100 |
|
|
| 100.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Activity for the Six Months Ended June 30, 2024
Acquisition
On May 30, 2024, the Company acquired a property for cash from an unaffiliated entity for a total purchase price, including acquisitions costs, of $10.2 million. Per the asset management agreement, the Company paid a 1.0% acquisition fee on this property acquisition totaling $0.1 million to ExchangeRight during the three months ended June 30, 2024. This acquisition was accounted for as an asset acquisition and the related purchase price was allocated to the acquired tangible and identifiable intangible assets or assumed liabilities based on its relative fair value.
RSLCA Notes Receivable from Related Party
The Company has invested in the ExchangeRight Mezz Loans for the DST programs under the RSLCA. The loan agreement, as amended, matures on April 4, 2027 and bears interest at a rate equal to 12.0% per annum, while outstanding. ExchangeRight structured the RSLCA, including the 12.0% interest rate, as a way to provide an enhanced risk-adjusted return to the Company. The current capacity under the RSLCA is a maximum of $250.0 million outstanding at any time. ExchangeRight had net borrowings of $15.0 million during the six months ended June 30, 2024 increasing the balance of the RSLCA notes receivable to $37.3 million at June 30, 2024.
Mortgage Loans Payable
The Company repaid a $10.8 million mortgage loan payable by its contractual maturity date of March 1, 2024 and an $18.0 million mortgage loan payable by its contractual maturity date of June 1, 2024.
Revolving Lines of Credit
On May 30, 2024, the Operating Partnership (as the borrower) and the Company entered into a credit agreement which currently provides the Company with a revolving credit facility of up to a maximum amount of $100.0 million with a maturity date of May 30, 2027. For a description of the material terms of the credit agreement and revolving credit facility thereunder, see “Capital” above.
On May 19, 2021, ExchangeRight entered into a revolving line of credit in which the Company has access to utilize available capacity under this revolving line of credit. The Company is legally responsible for the specific borrowings related to the Company, whereas ExchangeRight is the guarantor on all outstanding borrowings in relation to this secured revolving line of credit. The revolving line of credit agreement, as amended in December 2023, now has a maturity date of December 22, 2026, with a maximum aggregate amount being borrowed by the Company and ExchangeRight totaling $80.0 million outstanding at any time and requires monthly payments. As of June 30, 2024, the Company and ExchangeRight had no borrowings outstanding under this revolving line of credit resulting in $80.0 million available for borrowing by the Company and ExchangeRight as of June 30, 2024.
Additionally, in January 2021, the Company entered into a revolving line of credit. The revolving line of credit agreement, as amended in December 2023, had a maturity date of January 15, 2025, and bore interest at a rate per annum equal to the prime rate currently in effect with an interest rate floor of 6.00%, while outstanding. The revolving line of credit required monthly interest only payments, while outstanding. On January 16, 2024, the Company borrowed $15.0 million on its unsecured revolving line of credit, which was repaid in full on May 31, 2024. Upon this repayment, this unsecured revolving line of credit was terminated.
Common Shares and Noncontrolling Interests
On May 30, 2024, the Company classified and designated a new class of common shares of beneficial interest, $0.01 par value per share of the Company designated as Class ER Common Shares. Each Class ER Common Shareholder will have the right, upon the seventh anniversary of the closing date of a shareholder’s purchase of Class ER Common Shares (subject to three one-year extensions in the Trustee’s discretion), to require the Company to redeem the Class ER Common Shares, in whole or in part, held by such shareholder, as well as the right to convert such Class ER Commons Share to Class I Common Shares on a 1:1 basis. Each Class ER Common Shareholder desiring to exercise the redemption rights must give written notice of redemption to the Company at least 15 calendar days prior to the scheduled redemption date. Subject to applicable law, the Company will effect any redemption by paying cash for each Class ER Common Share to be redeemed equal to the original purchase price per
25
share paid by the redeeming shareholder for the Class ER Common Shares. The Class ER Common Shares have no other redemption rights and are not eligible for repurchase or redemption under the Company’s share repurchase program.
The Class ER Common Shares are subject to conversion under certain circumstances. First, the Class ER Common Shares are subject to mandatory conversion upon a conversion event, which is generally defined as a listing of the Common Shares on a national securities exchange or a change in control transaction involving the Operating Partnership or the Company. In this regard, each Class ER Common Share will automatically and without any action on the part of the shareholder convert into an equal number of Class I Common Shares of the Company, on a 1:1 basis, upon a conversion event, unless, at least five days before the effective date of such conversion event, the Trustee determines, in its sole and absolute discretion, that such conversion shall not occur in connection with such conversion event. Any such determination will not preclude the conversion of Class ER Common Shares into Class I Common Shares in connection with the occurrence of any successive conversion event.
The Class ER Common Shares are also subject to the optional conversion rights of the Company. In this regard, from and after the fifth anniversary of the closing date of a Class ER Common Shareholder’s purchase of Class ER Common Shares, the Trustee, on behalf of the Company, will have the right to cause each Class ER Common Shareholder, without any action on the part of the shareholder, to convert any or all of such holder’s Class ER Common Shares into an equal number of Class I Common Shares, on a 1:1 basis. The Trustee will provide written notice to the affected shareholder of its intent to exercise the conversion rights described in the preceding sentence no less than 30 calendar days prior to any such conversion date.
Except as otherwise specifically set forth above, the Class ER Common Shares have the same preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions as the Class A Common Shares, Class I Common Shares and Class S Common Shares. As of June 30, 2024, the Company has not issued any Class ER Common Shares.
The following table provides a summary of certain Class I, Class A, Class S and Class ER Common Shares attributes during the six months ended June 30, 2024:
|
| Offering price |
| |||||||||||||
Effective date |
| Class I |
|
| Class A |
|
| Class S |
|
| Class ER |
| ||||
January 1, 2024 through January 23, 2024 |
| $ | 27.06 |
|
| $ | 28.77 |
|
| $ | 28.04 |
|
| n/a |
| |
January 24, 2024 through April 16, 2024 |
| $ | 26.99 |
|
| $ | 28.70 |
|
| $ | 27.97 |
|
| n/a |
| |
April 17, 2024 through June 12, 2024 |
| $ | 27.14 |
|
| $ | 28.86 |
|
| $ | 28.12 |
|
| n/a |
| |
June 13, 2024 through June 30, 2024 |
| $ | 27.14 |
|
| $ | 28.86 |
|
| $ | 28.12 |
|
| $ | 28.97 |
|
The Company issued 400,595 Class I Common Shares and 133,504 Class A Common Shares resulting in an aggregate of $14.6 million in proceeds to the Company during the three months ended June 30, 2024. No Class S Common Shares or Class ER Common Shares were issued during the three months ended June 30, 2024. The Company issued 502,738 Class I Common Shares and 368,065 Class A Common Shares resulting in an aggregate of $24.1 million in proceeds to the Company during the six months ended June 30, 2024. No Class ER or Class S Common Shares were issued during the six months ended June 30, 2024.
The Company redeemed 96,924 Class I Common Shares and 51,244 Class A Common Shares totaling $3.9 million during the three months ended June 30, 2024. The Company redeemed 348,240 Class I Common Shares and 104,203 Class A Common Shares totaling $12.0 million during the six months ended June 30, 2024.
There were no OP Units issued by the Operating Partnership during the three and six months ended June 30, 2024.
Results of Operations
Comparison of the Three Months Ended June 30, 2024 and 2023
As of June 30, 2024, the Company owned 353 properties that were 98.4% leased. As of June 30, 2023, the Company owned 337 properties that were 99.7% leased. The following table details the Company’s results of operations for the three months ended June 30, 2024 and 2023, respectively:
26
|
| Three Months Ended June 30, |
|
|
|
| ||||||
|
| 2024 |
|
| 2023 |
|
| Change |
| |||
Rental revenue |
| $ | 20,063,000 |
|
| $ | 18,960,000 |
|
| $ | 1,103,000 |
|
Interest income on notes receivable from affiliates |
|
| 1,093,000 |
|
|
| 1,280,000 |
|
|
| (187,000 | ) |
Other |
|
| 23,000 |
|
|
| 40,000 |
|
|
| (17,000 | ) |
Property operating expenses |
|
| (2,636,000 | ) |
|
| (2,192,000 | ) |
|
| (444,000 | ) |
Management fees to affiliates |
|
| (45,000 | ) |
|
| (626,000 | ) |
|
| 581,000 |
|
General and administrative expenses |
|
| (349,000 | ) |
|
| (707,000 | ) |
|
| 358,000 |
|
Depreciation and amortization |
|
| (10,287,000 | ) |
|
| (10,095,000 | ) |
|
| (192,000 | ) |
Interest expense |
|
| (7,967,000 | ) |
|
| (6,905,000 | ) |
|
| (1,062,000 | ) |
Gain on land condemnation |
|
| 69,000 |
|
|
| - |
|
|
| 69,000 |
|
Interest income |
|
| 11,000 |
|
|
| 21,000 |
|
|
| (10,000 | ) |
Net (loss) |
| $ | (25,000 | ) |
| $ | (224,000 | ) |
| $ | 199,000 |
|
Rental revenues consist of base rents, tenant reimbursables, straight-line rent adjustments, above and below market lease amortization, net and lease termination income. Rental revenues increased $1.1 million, or 5.6%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily due to the acquisition of one property on May 30, 2024 and 15 properties on August 31, 2023. The rental revenues associated with these properties were $1.4 million and $0 for the three months ended June 30, 2024 and 2023, respectively. This increase was offset by a decrease in lease termination income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.
Interest income on notes receivable from affiliates includes interest earned from (1) outstanding advances under the RSLCA which bears interest at a rate equal to 12.0% per annum, (2) a $3.6 million real estate note receivable from an affiliated party and (3) a $2.4 million note receivable from an affiliated party. Interest income from the RSLCA was $0.2 million lower during the three months ended June 30, 2024 as a result of an approximate $6.4 million decrease in the average daily outstanding balance of the RSLCA during the three months ended June 30, 2024 versus the three months ended June 30, 2023.
Property operating expenses increased $0.4 million, or 20.3% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase in property operating expenses for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was primarily due to the acquisition of one property on May 30, 2024 and 15 properties on August 31, 2023 as well as increase in property tax expense in certain jurisdictions. These increases were offset by decreases in general repairs and maintenance costs.
Management fees to affiliates decreased $0.6 million, or 93.0%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Asset management fees decreased $0.4 million and property management fees decreased $0.2 million during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, respectively. Asset management fees for the three months ended June 30, 2024 consisted of $0.5 million of earned fees per the management agreement, net of $0.5 million of fees which were irrevocably waived by the asset manager. Property management fees consisted of $0.2 million of earned fees per the management agreement, net of $0.2 million of fees which were irrevocably waived by the property manager.
General and administrative expenses decreased $0.4 million, or 50.6%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The decrease in general and administrative expenses was primarily due to a decrease in audit, tax and legal fees. During the three months ended June 30, 2023, the Company incurred additional audit and legal fees in connection with its Form 10 registration statement.
Depreciation and amortization increased $0.2 million, or 1.9%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase is mainly attributable to the acquisition of one property on May 30, 2024 and 15 properties on August 31, 2023. The depreciation and amortization associated with these properties totaled $0.8 million and $0 for the three months ended June 30, 2024 and 2023, respectively. This increase was offset by a decrease in depreciation and amortization expense as a result of certain intangible assets being fully depreciated.
Interest expense increased $1.1 million, or 15.4%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 as a result of (1) an increase in interest expense of $0.5 million related to the Company’s borrowings under its revolving lines of credit, (2) the assumption of a $43.5 million mortgage loan payable in connection with the acquisition of 15 properties via a merger agreement with one former 1031-exchangeable portfolio on August 31, 2023, and (3) an increase of $0.3 million in amortization of below market debt associated with the assumption of mortgage loans payable. These increases
27
were offset by a minor decrease in interest expense on the Company’s mortgage debt as certain mortgage debt was paid off upon maturity.
Gain on land condemnation during the three months ended June 30, 2024 related to the receipt of funds in connection with an easement at one of the Company’s properties.
Comparison of the Six Months Ended June 30, 2024 and 2023
As of June 30, 2024, the Company owned 353 properties that were 98.4% leased. As of June 30, 2023, the Company owned 337 properties that were 99.7% leased. The following table details the Company’s results of operations for the six months ended June 30, 2024 and 2023, respectively:
|
| Six Months Ended June 30, |
|
|
|
| ||||||
|
| 2024 |
|
| 2023 |
|
| Change |
| |||
Rental revenue |
| $ | 40,532,000 |
|
| $ | 38,487,000 |
|
| $ | 2,045,000 |
|
Interest income on notes receivable from affiliates |
|
| 2,016,000 |
|
|
| 2,446,000 |
|
|
| (430,000 | ) |
Other |
|
| 51,000 |
|
|
| 46,000 |
|
|
| 5,000 |
|
Property operating expenses |
|
| (5,541,000 | ) |
|
| (5,062,000 | ) |
|
| (479,000 | ) |
Management fees to affiliates |
|
| (369,000 | ) |
|
| (1,247,000 | ) |
|
| 878,000 |
|
General and administrative expenses |
|
| (686,000 | ) |
|
| (1,135,000 | ) |
|
| 449,000 |
|
Depreciation and amortization |
|
| (20,655,000 | ) |
|
| (20,252,000 | ) |
|
| (403,000 | ) |
Provision for impairment |
|
| (250,000 | ) |
|
| - |
|
|
| (250,000 | ) |
Interest expense |
|
| (15,805,000 | ) |
|
| (14,137,000 | ) |
|
| (1,668,000 | ) |
Gain on land condemnation |
|
| 69,000 |
|
|
| - |
|
|
| 69,000 |
|
Interest income |
|
| 24,000 |
|
|
| 21,000 |
|
|
| 3,000 |
|
Net (loss) |
| $ | (614,000 | ) |
| $ | (833,000 | ) |
| $ | 219,000 |
|
Rental revenues consist of base rents, tenant reimbursables, straight-line rent adjustments, above and below market lease amortization, net and lease termination income. Rental revenues increased $2.0 million, or 5.2%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily due to the acquisition of one property on May 30, 2024 and 15 properties on August 31, 2023. The rental revenues associated with these properties were $2.8 million and $0 for the six months ended June 30, 2024 and 2023, respectively. This increase was offset by a decrease in lease termination income for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Interest income on notes receivable from affiliates includes interest earned from (1) outstanding advances under the RSLCA which bears interest at a rate equal to 12.0% per annum, (2) a $3.6 million real estate note receivable from an affiliated party and (3) a $2.4 million note receivable from an affiliated party. Interest income from the RSLCA was $0.4 million lower during the six months ended June 30, 2024 as a result of an approximate $7.3 million decrease in the average daily outstanding balance of the RSLCA during the six months ended June 30, 2024 versus the six months ended June 30, 2023.
Property operating expenses increased $0.5 million, or 9.5%, during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase in property operating expenses for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to the acquisition of one property on May 30, 2024 and 15 properties on August 31, 2023. These increases were offset by decreases in general repairs and maintenance.
Management fees to affiliates decreased $0.9 million, or 70.4%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Asset management fees decreased $0.7 million and property management fees decreased $0.2 million during the six months ended June 30, 2024 compared to the six months ended June 30, 2023, respectively. Asset management fees for the six months ended June 30, 2024 consisted of $0.9 million of earned fees per the management agreement, net of $0.8 million of fees which were irrevocably waived by the asset manager. Property management fees consisted of $0.4 million of earned fees per the management agreement, net of $0.2 million of fees which were irrevocably waived by the property manager.
General and administrative expenses decreased $0.4 million, or 39.0%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease in general and administrative expenses was primarily due to a decrease in audit, tax and legal fees. During the six months ended June 30, 2023, the Company incurred additional audit and legal fees in connection with its Form 10 registration statement.
28
Depreciation and amortization increased $0.4 million, or 2.0%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase is mainly attributable to the acquisition of one property on May 30, 2024 and 15 properties on August 31, 2023. The depreciation and amortization associated with these properties totaled $1.6 million and $0 for the six months ended June 30, 2024 and 2023, respectively. This increase was offset by a decrease in depreciation and amortization expense as a result of certain intangible assets being fully depreciated.
Provision for impairment during the six months ended June 30, 2024 related to the impairment of one property. The estimation and evaluation of this impairment charge relies on judgments and assumptions made by management in determining the impairment charge to record. It is possible that such judgments and/or estimates will change; if this occurs, we may recognize additional impairment charges for this property or other properties owned by the Company.
Interest expense increased $1.7 million, or 11.8%, during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 as a result of (1) the assumption of a $43.5 million mortgage loan payable from the acquisition of 15 properties via merger agreements with one former 1031-exchangeable portfolios on August 31, 2023, (2) an increase in interest expense of $0.8 million related to the Company's borrowings under its revolving lines of credit, (3) an increase of $0.5 million in amortization of below market debt associated with the assumption of mortgage loans payable. These increases were offset by a slight decrease in interest expense on the Company’s mortgage debt as certain mortgage debt was paid off upon maturity.
Gain on land condemnation during the six months ended June 30, 2024 related to the receipt of funds related to an easement at one of the Company’s properties.
Liquidity and Capital Resources
The Company has historically funded, and expects to continue to fund, short-term liquidity requirements, including debt service and distributions to our shareholders and distributions to holders of noncontrolling interests, from its operations. The Company funds acquisitions and certain capital expenditures primarily from the sale of shares of its Class A and Class I Common Shares, the issuance of additional OP Units, and through the assumption or incurrence of debt. The Company believes that its current liquidity position is sufficient to meet its expected acquisition activity. We expect to fund our current liquidity requirements from a combination of cash on hand, cash flow generated from operations, secured financings or a line of credit.
The Company received payment of 100% of contractual base rents during the six months ended June 30, 2024. The Company’s strategy targets properties with net leases to insulate our shareholders from rising costs and surprise repair costs that affect other types of real estate investments. Longer lease terms primarily with investment-grade national tenants successfully operating in historically recession-resilient sectors are also intended to provide stable income that can help bridge economic cycles.
The Company has invested in the ExchangeRight Mezz Loans for the DST programs under the RSLCA. The loan agreement, as amended, matures on April 4, 2027 and bears interest at a rate equal to 12.0% per annum, while outstanding. ExchangeRight structured the RSLCA, including the 12.0% interest rate, as a way to provide an enhanced risk-adjusted return to the Company. The current capacity under the RSLCA is a maximum of $250.0 million outstanding at any time. ExchangeRight had net borrowings of $15.0 million during the six months ended June 30, 2024 increasing the balance of the RSLCA notes receivable to $37.3 million at June 30, 2024.
The Company’s notes receivable under the RSLCA are secured by interests in an entity that indirectly owns net-leased necessity-based retail properties similar to the Company’s acquired properties, as well as a pledge agreement and subordination agreement provided by ExchangeRight. As a result, the risk profile of an investment in this program is intended to be similar to ownership of the Company’s acquired properties while providing liquidity and an enhanced risk-adjusted return over investments with similar liquidity.
In order to continue qualifying as a REIT, the Company is required to distribute at least 90% of its “REIT taxable income”, as defined in the Code. The Company paid monthly distributions relating to its common shares during the six months ended June 30, 2024. While the Company intends to continue paying regular monthly distributions, future distribution declarations will continue to be at the discretion of the Trustee, and will depend on the cash flow and financial condition of the Company, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as the Trustee may deem relevant.
On May 30, 2024, the Operating Partnership (as the borrower) and the Company entered into a credit agreement which currently provides the Company with a revolving credit facility of up to a maximum amount of $100.0 million with a maturity
29
date of May 30, 2027. For a description of the material terms of the credit agreement and revolving credit facility thereunder, see “Capital” above.
In January 2021, the Company entered into a revolving line of credit. The revolving line of credit agreement, as amended in December 2023, had a maturity date of January 15, 2025, and bore interest at a rate per annum equal to the prime rate currently in effect with an interest rate floor of 6.00%, while outstanding. The unsecured revolving line of credit required monthly interest only payments, while outstanding. On January 16, 2024, the Company borrowed $15.0 million on its unsecured revolving line of credit, which was repaid in full on May 31, 2024. Upon this repayment, this unsecured revolving line of credit was terminated.
On May 19, 2021, ExchangeRight entered into a revolving line of credit in which the Company has access to utilize available capacity under this revolving line of credit. The Company is legally responsible for the specific borrowings related to the Company, whereas ExchangeRight is the guarantor on all outstanding borrowings in relation to this revolving line of credit. The revolving line of credit agreement, as amended in December 2023, now has a maturity date of December 22, 2026, with a maximum aggregate amount being borrowed by the Company and ExchangeRight totaling $80.0 million outstanding at any time and requires monthly payments. As of June 30, 2024, ExchangeRight has no borrowings under this secured revolving line of credit resulting in $80.0 million available for borrowing by the Company and ExchangeRight as of June 30, 2024. The Company had no outstanding borrowings under this revolving line of credit as of June 30, 2024.
Repayment terms for each borrowing note within the secured line of credit were as follows:
Loan to cost % |
| Repayment terms |
80% |
| Three months interest only followed by a 25-year amortization |
75% |
| Six months interest only followed by a 30-year amortization |
70% or less |
| 12 months interest only followed by a 30-year amortization |
The interest only period bore interest at a rate equal to the prime rate. The amortization principal period required payments at the current interest rate.
Fixed-rate mortgage loans payable were composed of the following as of June 30, 2024:
|
|
|
|
|
| June 30, 2024 |
|
| |||||
|
|
|
| Maturity |
| Balance |
|
| Contractual |
|
| ||
Description |
| Amortization |
| date |
| outstanding |
|
| interest rate |
|
| ||
Fixed-rate mortgage |
| Interest-only |
| 10/1/2024 |
|
| 16,902,000 |
|
|
| 4.25 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 2/2/2025 |
|
| 21,550,000 |
|
|
| 3.97 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 5/1/2025 |
|
| 25,519,000 |
|
|
| 4.15 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 9/2/2025 |
|
| 24,420,000 |
|
|
| 4.38 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 12/1/2025 |
|
| 25,012,000 |
|
|
| 4.59 | % |
|
Fixed-rate mortgage (a) |
| Interest-only |
| 5/10/2026 |
|
| 24,850,000 |
|
|
| 4.66 | % |
|
Fixed-rate mortgage (a) |
| Interest-only |
| 9/1/2026 |
|
| 24,485,000 |
|
|
| 3.82 | % |
|
Fixed-rate mortgage (a) |
| Interest-only |
| 12/1/2026 |
|
| 28,110,000 |
|
|
| 4.06 | % |
|
Fixed-rate mortgage (a) |
| Interest-only |
| 4/1/2027 |
|
| 31,200,000 |
|
|
| 4.38 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 6/6/2027 |
|
| 32,722,000 |
|
|
| 3.98 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 9/1/2027 |
|
| 36,860,000 |
|
|
| 3.99 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 12/1/2027 |
|
| 33,441,000 |
|
|
| 4.09 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 1/11/2028 |
|
| 35,840,000 |
|
|
| 4.05 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 2/1/2028 |
|
| 38,530,000 |
|
|
| 6.12 | % |
|
Fixed-rate mortgage (b) |
| Interest-only |
| 2/1/2028 |
|
| 26,900,000 |
|
|
| 5.80 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 4/8/2028 |
|
| 37,795,000 |
|
|
| 4.27 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 7/1/2028 |
|
| 43,522,000 |
|
|
| 4.32 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 10/1/2029 |
|
| 30,231,000 |
|
|
| 3.13 | % |
|
Fixed-rate mortgage |
| Interest-only |
| 1/1/2031 |
|
| 37,564,000 |
|
|
| 3.45 | % |
|
|
|
|
|
|
|
| 575,453,000 |
|
|
| 4.29 | % | (c) |
Unamortized issuance costs, net |
|
| (984,000 | ) |
|
|
|
| |||||
Unamortized below market debt discount, net |
|
| (11,310,000 | ) |
|
|
|
| |||||
|
|
|
|
|
| $ | 563,159,000 |
|
|
|
|
|
30
The following table details the Company’s scheduled debt maturities as of June 30, 2024:
|
|
|
| |||||||||
|
| Mortgage loan payable |
|
|
|
|
|
|
| |||
Year |
| balloon payments |
|
| Line of credit |
|
| Total |
| |||
Remainder of 2024 |
| $ | 16,902,000 |
|
| $ | - |
|
| $ | 16,902,000 |
|
2025 |
|
| 96,501,000 |
|
|
| - |
|
|
| 96,501,000 |
|
2026 |
|
| 77,445,000 |
|
|
| - |
|
|
| 77,445,000 |
|
2027 |
|
| 134,223,000 |
|
|
| 44,000,000 |
|
|
| 178,223,000 |
|
2028 |
|
| 182,587,000 |
|
|
| - |
|
|
| 182,587,000 |
|
Thereafter |
|
| 67,795,000 |
|
|
| - |
|
|
| 67,795,000 |
|
|
| $ | 575,453,000 |
|
| $ | 44,000,000 |
|
| $ | 619,453,000 |
|
The mortgage loans payable mature at various dates from October 2024 through January 2031. The Company intends to repay the mortgage debt maturing in 2024 with either available cash, proceeds from repayments under the RSLCA, secured debt financing, unsecured debt financing, or a combination of these options. Mortgage loans payable may require the Company to deposit certain replacement and other reserves with its lenders. Such “restricted cash” is generally available only for property-level requirements for which the reserves have been established and is not available to fund other property-level or Company-level obligations. The Company had $11.9 million in restricted cash as of June 30, 2024.
Cash Flows
The sources and uses of cash reflected in the Company's consolidated statements of cash flows for the six months ended June 30, 2024 and 2023 are summarized below:
|
| Six months ended June 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Cash flows provided by (used in): |
|
|
|
|
|
| ||
Operating activities |
| $ | 20,936,000 |
|
| $ | 21,645,000 |
|
Investing activities |
| $ | (25,557,000 | ) |
| $ | (21,190,000 | ) |
Financing activities |
| $ | 4,009,000 |
|
| $ | (16,077,000 | ) |
Operating Activities
Net cash from operating activities was $20.9 million and $21.6 million for the six months ended June 30, 2024 and 2023, respectively. Cash flows from operations decreased $0.7 million, or 3.3%, during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily due an increase in cash paid for interest of $1.3 million and a decrease in interest income of $0.4 million from the RSLCA and notes receivable from affiliated parties, which was partially offset by an increase in the results for the acquisition of one property on May 30, 2024 and 15 properties on August 31, 2023.
Investing Activities
Net cash flows used in investing activities were primarily the result of the net advances/repayments on the RLSCA, a property acquisition, and leasehold improvements. During the six months ended June 30, 2024, the Company had $15.0 million in net advances under the RSLCA, acquired a property for a total cash outlay of $10.2 million, and incurred expenditures of $0.4 million for improvements of real estate. These cash outflows were offset by $0.1 million in proceeds received from the sale of real estate as a result of a condemnation settlement at one property. During the six months ended June 30, 2023, the Company had $18.5 million in net advances under the RSLCA, acquired a property for a total cash outlay of $2.3 million and incurred expenditures of $0.4 million for improvements of real estate.
Financing Activities
During the six months ended June 30, 2024, the Company had balloon mortgage loan repayments of $28.8 million, redemptions of $12.0 million of Class A and Class I Common Shares, distributions of $11.9 million to the holders of Class A and Class I Common Shares, distributions of $6.7 million to the holders of OP Units, and financing costs of $0.8 million relating to
31
revolving line of credit entered into in Mary 2024, which was offset by net borrowings of $44.0 million from its revolving credit facilities, net proceeds of $19.9 million from the issuance of Class A and Class I Common Shares and pending trade deposits of $0.4 million.
During the six months ended June 30, 2023, the Company had net repayments of $73.3 million from its revolving credit facilities, distributions of $12.9 million to the holders of Class A and Class I Common Shares, distributions of $6.6 million to the holders of OP Units, mortgage loans payable repayments of $6.5 million, redemptions of $6.0 million of Class A and Class I Common Shares and financing costs of $0.8 million relating to the two mortgage loans payable entered into in February 2023, which was offset by proceeds of $65.4 million relating to two mortgage loans payable entered into in February 2023, proceeds, net of offering costs, of $21.6 million from the issuance of Class A and Class I Common Shares and pending trade deposits of $3.0 million.
Distributions
The amount of distributions payable to the Company’s shareholders is determined by the Trustee and is dependent on a number of factors, including funds available for distribution, the Company’s financial condition, capital expenditure requirements, requirements of Maryland law and annual distribution requirements needed to qualify and maintain its status as a REIT. Our distribution policy is for our inception-to-date cash flow from operations to always exceed our distributions that have been declared or paid, rather than making distributions out of investor equity or financing, subject only to REIT qualification requirements or to avoid incurring federal income tax. The Trustee has authorized, and the Company has declared, distributions through June 30, 2024. The distributions are payable on approximately the 15th day following each month end to shareholders of record at the close of business on the last day of the prior month. Distributions in the aggregate amount of $3.5 million were declared but not yet paid as of June 30, 2024. The unpaid distributions as of June 30, 2024 were paid in cash or settled in common shares under the Company's Dividend Reinvestment and Direct Share Purchase Plan (“DRIP”) during July 2024.
The following table provides a summary of the monthly distributions declared and paid per Class A Common Share and Class I Common Share for the six months ended June 30, 2024 and 2023, respectively:
|
| Six months ended |
| |||||||||||||
|
| June 30, 2024 |
|
| June 30, 2023 |
| ||||||||||
|
| Class A |
|
| Class I |
|
| Class A |
|
| Class I |
| ||||
January |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
February |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
March |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
April |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
May |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
June |
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
| $ | 0.1449 |
|
|
| $ | 0.8694 |
|
| $ | 0.8694 |
|
| $ | 0.8694 |
|
| $ | 0.8694 |
|
On October 19, 2023, the Trustee approved the DRIP. The following table lists the Common Shares issued and total distributions reinvested under the DRIP during the six months ended June 30, 2024:
|
| Common Shares |
|
| Total |
|
| ||
Share Class |
| Issued |
|
| Reinvestment |
|
| ||
Class I |
|
| 27,132 |
| (a) | $ | 727,000 |
| (a) |
Class A |
|
| 41,629 |
|
|
| 1,115,000 |
|
|
Class S |
|
| - |
|
|
| - |
|
|
Class ER |
|
| - |
|
|
| - |
|
|
Total |
|
| 68,761 |
|
| $ | 1,842,000 |
|
|
(a) Includes the issuance of 9,054 Class I Common Shares totaling $243,000 in connection with OP Unitholder distributions being reinvested back into the Company's Class I Common Shares based on OP Unitholders’ election.
The following table details the sources of our distributions during the six months ended June 30, 2024 and 2023:
32
|
| Six months ended June 30, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Cash Distributions |
|
|
|
|
|
| ||
Class A and Class I Common Shares |
| $ | 11,929,000 |
|
| $ | 12,904,000 |
|
Noncontrolling interests |
|
| 6,714,000 |
|
|
| 6,557,000 |
|
Total cash distributions |
| $ | 18,643,000 |
|
| $ | 19,461,000 |
|
|
|
|
|
|
|
| ||
Sources of Distributions |
|
|
|
|
|
| ||
Cash flows from operating activities (a) |
| $ | 18,643,000 |
|
| $ | 19,461,000 |
|
|
|
|
|
|
|
| ||
Cash flows from operating activities |
| $ | 20,936,000 |
|
| $ | 21,645,000 |
|
Funds from Operations (“FFO”) (b) |
| $ | 20,290,000 |
|
| $ | 19,469,000 |
|
Adjusted FFO (b) |
| $ | 20,809,000 |
|
| $ | 19,647,000 |
|
Contractual Obligations
The following table sets forth the Company’s significant debt repayments, interest payments and operating lease obligations at June 30, 2024:
|
| Mortgage loans |
|
| Line of |
|
| Interest |
|
| Operating ground |
|
|
|
| |||||
Year |
| payable |
|
| credit |
|
| payments (a) |
|
| lease obligation |
|
| Total |
| |||||
2024 |
| $ | 16,902,000 |
|
| $ | - |
|
| $ | 13,845,000 |
|
| $ | 143,000 |
|
| $ | 30,890,000 |
|
2025 |
|
| 96,501,000 |
|
|
| - |
|
|
| 25,315,000 |
|
|
| 285,000 |
|
|
| 122,101,000 |
|
2026 |
|
| 77,445,000 |
|
|
| - |
|
|
| 21,948,000 |
|
|
| 285,000 |
|
|
| 99,678,000 |
|
2027 |
|
| 134,223,000 |
|
|
| 44,000,000 |
|
|
| 15,600,000 |
|
|
| 285,000 |
|
|
| 194,108,000 |
|
2028 |
|
| 182,587,000 |
|
|
| - |
|
|
| 3,912,000 |
|
|
| 285,000 |
|
|
| 186,784,000 |
|
Thereafter |
|
| 67,795,000 |
|
|
| - |
|
|
| 3,302,000 |
|
|
| 28,745,000 |
|
|
| 99,842,000 |
|
Total |
| $ | 575,453,000 |
|
| $ | 44,000,000 |
|
| $ | 83,922,000 |
|
| $ | 30,028,000 |
|
| $ | 733,403,000 |
|
Related and Affiliated Party Transactions and Agreements
The Company has entered into agreements with ExchangeRight and its affiliates whereby we have paid, and may continue to pay, certain fees to, or reimburse certain expenses of, ExchangeRight or its affiliates for acquisition fees and actual incurred out-of-pocket expenses, but specifically excluding reimbursement related to employee compensation. The Company is also subject to a fee arrangement with ExchangeRight and its affiliates for organization and offering costs and asset and property management fees.
ExchangeRight incurs certain organization and offering costs in connection with the Company’s current private securities offering of its common shares and the organization of the Company. These costs include, but are not limited to, fees related to special purpose entity formation, legal and accounting fees, valuation fees related to any expansion of the offering, marketing expenses and other costs and expenses directly related to the offering and organization of the Company. All of these expenses are paid by ExchangeRight or its affiliates. ExchangeRight earns a percentage of the gross proceeds from the offering which is expected to offset the organizational and offering costs incurred described above. This amount is equal to 1.00% of the net transaction price of sales of common shares. Offering costs of $0.1 million and $0.2 million were included in total equity for the three and six months ended June 30, 2024, for which the Company was obligated to reimburse ExchangeRight.
Off-Balance Sheet Arrangements
Other than the items disclosed in the Contractual Obligations section above, the Company had no off-balance sheet arrangements as of June 30, 2024 that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
33
Critical Accounting Policies
The Company’s most critical accounting policies are summarized below. Other accounting policies are summarized in Note 2, “Summary of Significant Accounting Policies,” to the Company’s condensed consolidated financial statements as of and for the year ended December 31, 2023 included in the Company's Annual Report on Form 10-K that was filed with the Securities and Exchange Commission on April 11, 2024. There have been no material changes in such critical accounting policies during the six months ended June 30, 2024.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, its subsidiaries and any single member limited liability companies or other entities which are consolidated in accordance with GAAP. The Company consolidates variable interest entities (“VIEs”) when it is the primary beneficiary. Generally, a VIE is an entity with one or more of the following characteristics: (1) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (2) as a group, the holders of the equity investment at risk (a) lack the power through voting or similar rights to make decisions about the entity’s activities that significantly impact the entity’s performance, (b) have no obligation to absorb the expected losses of the entity, or (c) have no right to receive the expected residual returns of the entity, or (3) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately fewer voting rights. A VIE is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE has (1) the power to direct the activities that most significantly impact the entity’s economic performance, and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. Significant judgments related to these determinations include estimates about the current values, performance of real estate held by these VIEs, and general market conditions.
Use of Estimates
The preparation of the unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant assumptions and estimates relate to the useful lives of real estate assets, lease accounting, real estate impairment assessments and allocation of fair value of purchase consideration. These estimates are based on historical experience and other assumptions which management believes are reasonable. The Company evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates.
Investment in Real Estate
Real estate assets are stated at cost, less accumulated depreciation and amortization. Assets are recognized at fair value at acquisition date.
The Company evaluates each acquisition transaction to determine whether the acquired asset meets the definition of a business and therefore accounted for as a business combination or if the acquisition transaction should be accounted for as an asset acquisition. Under Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), an acquisition does not qualify as a business when substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that qualify as asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred.
The Company allocates the purchase price of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, buildings, site improvements and tenant improvements. Intangible assets include the value of in-place leases and above-market leases and intangible liabilities include below-market leases. The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the relative fair value of the tangible assets. The fair value of in-place leases is determined by considering
34
estimates of carrying costs during the expected lease-up periods, current market conditions as well as costs to execute similar leases based on the specific characteristics of each tenant’s lease. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including tenant improvements, leasing commissions, legal and other related expenses.
The values of acquired above-market and below-market leases are recorded based on the present values (using discount rates which reflect the risks associated with the leases acquired) of the differences between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of the acquisitions. Such valuations include consideration of the noncancelable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions. The values of the above-market and below-market leases are amortized over the term of the respective leases, including certain renewal options (as applicable), as an adjustment to rental revenue on the Company’s consolidated statements of operations and comprehensive income. The value of other intangible assets (including leasing commissions, tenant improvements, etc.) is amortized to expense over the applicable terms of the respective leases. If a lease were to be terminated prior to its stated expiration or not renewed, all unamortized amounts relating to that lease would be recognized in operations at that time. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources and also considers information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate; e.g., location, size, demographics, value and comparative rental rates; tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business. Additionally, the Company considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets and liabilities acquired. The Company’s methodology for measuring and allocating the fair value of real estate acquisitions includes both observable market data (categorized as level 2 on the three-level valuation hierarchy of Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement), and unobservable inputs that reflect the Company’s own internal assumptions (categorized as level 3 under ASC Topic 820). Given the significance of the unobservable inputs the Company believes the allocations of fair value of real estate acquisitions should be categorized as level 3 under ASC Topic 820.
Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability of real estate investments held for use is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, capital expenditures, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value.
Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The Company considers the period of future benefit of each respective asset to determine its appropriate useful life. The estimated useful lives of the Company’s real estate assets by class are generally as follows:
Description |
| Depreciable life |
Buildings |
| 39 years |
Building and site improvements |
| Ranging from 5 to 20 years |
Tenant improvements |
| Shorter of the term of the related lease or useful life |
Intangible lease assets and liabilities |
| Term of the related lease |
Expenditures for improvements that substantially extend the useful lives of the assets are capitalized. Expenditures for maintenance, repairs and betterments that do not substantially prolong the normal useful life of an asset are expensed as incurred.
Revenue Recognition and Receivables
Management has determined that predominantly all of the Company’s leases with its various tenants are operating leases. The Company recognizes minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases on a straight-line basis over the term of the related leases when collectability is reasonably assured and records amounts expected to be received in later years as deferred rent receivable. Deferred rent receivable represents rent earned in excess of rent received as a result of straight-lining rents over the terms of the leases, in accordance with the guidance and is included in receivables on the accompanying consolidated balance sheets. Deferred rent liability represents rent received in excess of rent earned as a result of straight-lining rents over the terms of the leases. The Company records property operating expense
35
reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period the related expenses are incurred.
A limited number of operating leases contain contingent rent provisions under which tenants are required to pay, as additional rent, a percentage of their sales in excess of a specified amount. The Company defers recognition of contingent rental income until those specified sales targets are met. Revenues also may include items such as lease termination fees, which tend to fluctuate more than rents from year to year. Termination fees are fees that the Company has agreed to accept in consideration for permitting certain tenants to terminate their lease prior to the contractual expiration. The Company recognizes lease termination income when the following conditions are met: (1) the lease termination agreement has been executed, (2) the lease termination fee is determinable, (3) all the Company’s landlord services pursuant to the terminated lease have been rendered, and (4) collectability of the lease termination fee is assured.
If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by the Company. When the Company is the owner of the tenant improvements, the tenant is typically not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed.
When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
Noncontrolling Interests
The Company presents noncontrolling interests, which represents OP Units, and classifies such interests as a component of equity, separate from the Company’s shareholders’ equity. Noncontrolling interests were created as part of contribution and merger agreements with former 1031-exchangeable portfolios that were previously managed by ExchangeRight on behalf of investors and recognized at fair value as of the date of the transaction. The holders of OP Units have the right to exchange their OP Units for the same number of the Company’s Class I Common Shares.
Income Taxes
The Company has elected and is qualified to be taxed as a REIT, as it complies with the related provisions under the Internal Revenue Code of 1986, as amended. Accordingly, the Company generally is not and will not be subject to U.S. federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and share ownership tests are met. To qualify as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its shareholders and meet certain other requirements. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. The Company may also be subject to certain state, local and franchise taxes. If the Company fails to meet these requirements, it will be subject to U.S. federal income tax, which could have a material adverse impact on its results of operations and amounts available for distributions to its shareholders. Application of tax laws and regulations to various types of transactions is susceptible to varying interpretations. Therefore, amounts reported in the consolidated financial statements could be changed at a later date upon examination and final determination by the taxing authorities. No such examinations by taxing authorities are presently in process.
The Company provides for uncertain tax positions based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because assumptions are used in determining whether a tax benefit is more likely than not to be sustained upon examination by tax authorities, actual results may differ from the Company’s estimates under different assumptions or conditions.
36
Inflation
During the first half of 2024, global markets continued to experience volatility, driven by concerns over geopolitical conflicts in Eastern Europe and the Middle East, persistent inflation, elevated interest rate levels, and uneven economic growth. Inflation persisted at elevated levels compared to historical norms in many major economies around the world, prompting uncertainty over whether and to what extent central banks will ease monetary policy over the next several quarters of 2024, if at all.
Substantially all of the Company’s tenant leases contain provisions designed to partially mitigate the negative impact of inflation in the near term. Such lease provisions include clauses that require tenants to reimburse the Company for inflation-sensitive costs such as real estate taxes or insurance and many of the operating expenses it incurs. The Company has not been materially impacted in the current period by elevated interest rate levels as all of its mortgage debt is currently effectively fixed-rate financing as of June 30, 2024. Further inflation rate increases or elevated interest rates over a prolonged period of time may have a material adverse impact on the Company’s business. It remains difficult to predict the full impact of recent events and any future changes in interest rates or inflation.
Non-GAAP Financial Measures
FFO and Adjusted FFO
FFO is a widely recognized supplemental non-GAAP measure utilized to evaluate the financial performance of a REIT. The Company presents FFO in accordance with the definition adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT generally defines FFO as net income (determined in accordance with GAAP), excluding gains (losses) from sales of real estate properties, impairment write-downs on real estate properties directly attributable to decreases in the value of depreciable real estate, plus real estate related depreciation and amortization, and adjustments for partnerships and joint ventures to reflect FFO on the same basis. The Company considers FFO to be an appropriate measure of its financial performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than other depreciable assets.
The Company also considers Adjusted Funds From Operations (“Adjusted FFO”) to be an additional meaningful financial measure of financial performance as it provides supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. The Company believes Adjusted FFO further assists in comparing the Company’s performance across reporting periods on a consistent basis by excluding such items.
FFO and Adjusted FFO should be reviewed with net (loss) attributable to common shareholders, the most directly comparable GAAP financial measure, when trying to understand the Company’s operating performance. FFO and Adjusted FFO do not represent cash generated from operating activities and should not be considered as an alternative to net (loss) income attributable to common shareholders or to cash flow from operating activities. The Company’s computations of FFO and Adjusted FFO may differ from the computations utilized by other REITs and, accordingly, may not be comparable to such REITs.
37
A reconciliation of net (loss) attributable to common shareholders to FFO and Adjusted FFO for the three and six months ended June 30, 2024 and 2023, is as follows:
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
|
| 2024 |
|
| 2023 |
|
| 2024 |
|
| 2023 |
| ||||
Net (loss) attributable to common shareholders |
| $ | (19,000 | ) |
| $ | (151,000 | ) |
| $ | (409,000 | ) |
| $ | (554,000 | ) |
Depreciation and amortization |
|
| 10,321,000 |
|
|
| 10,121,000 |
|
|
| 20,723,000 |
|
|
| 20,302,000 |
|
Gain on land condemnation |
|
| (69,000 | ) |
|
| - |
|
|
| (69,000 | ) |
| . |
| |
Provision for impairment |
|
| - |
|
|
| - |
|
|
| 250,000 |
|
|
| - |
|
Net (loss) attributable to noncontrolling interests |
|
| (6,000 | ) |
|
| (73,000 | ) |
|
| (205,000 | ) |
|
| (279,000 | ) |
FFO applicable to diluted common shares |
|
| 10,227,000 |
|
|
| 9,897,000 |
|
|
| 20,290,000 |
|
|
| 19,469,000 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Straight-line rent adjustments |
|
| (199,000 | ) |
|
| (238,000 | ) |
|
| (417,000 | ) |
|
| (490,000 | ) |
Above/below market lease amortization, net |
|
| (701,000 | ) |
|
| (587,000 | ) |
|
| (1,325,000 | ) |
|
| (1,178,000 | ) |
Amortization of deferred financing costs |
|
| 124,000 |
|
|
| 74,000 |
|
|
| 197,000 |
|
|
| 279,000 |
|
Above/below market debt amortization, net |
|
| 968,000 |
|
|
| 714,000 |
|
|
| 1,924,000 |
|
|
| 1,427,000 |
|
Straight-line ground rent adjustments |
|
| 41,000 |
|
|
| 40,000 |
|
|
| 81,000 |
|
|
| 81,000 |
|
Amortization of tax incentive financing arrangement |
|
| 29,000 |
|
|
| 29,000 |
|
|
| 59,000 |
|
|
| 59,000 |
|
Adjusted FFO applicable to diluted common shares |
| $ | 10,489,000 |
|
| $ | 9,929,000 |
|
| $ | 20,809,000 |
|
| $ | 19,647,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FFO per diluted common shares |
| $ | 0.42 |
|
| $ | 0.44 |
|
| $ | 0.85 |
|
| $ | 0.86 |
|
Adjusted FFO per diluted common shares |
| $ | 0.44 |
|
| $ | 0.44 |
|
| $ | 0.87 |
|
| $ | 0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of diluted common shares (a): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common shares |
|
| 16,112,050 |
|
|
| 15,186,606 |
|
|
| 15,908,667 |
|
|
| 14,987,459 |
|
OP Units |
|
| 7,969,003 |
|
|
| 7,520,973 |
|
|
| 7,991,884 |
|
|
| 7,537,824 |
|
|
|
| 24,081,053 |
|
|
| 22,707,579 |
|
|
| 23,900,551 |
|
|
| 22,525,283 |
|
(a) The weighted average number of diluted common shares used to compute FFO and Adjusted FFO applicable to diluted common shares includes OP Units that are excluded from the computation of diluted EPS as the result of an assumed conversion of the OP Units would have neither a dilutive nor anti-dilutive effect on earnings per share.
Net Asset Value
The Company calculates NAV per share in accordance with the valuation guidelines that have been approved by our Trustee. Our Trustee has adopted valuation procedures, as amended from time to time, that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV. To calculate our NAV for the purpose of establishing a purchase and redemption price for our shares, our Trustee has adopted a model which adjusts the value of certain of our investments in real estate assets from historical cost to fair value. Our Trustee oversees the process of determining our estimated NAV per share, which includes considering estimated values of our commercial real estate assets and investments, including related liabilities, based upon, in certain instances, reports of the discounted cash flows generated by the underlying real estate provided by an independent valuation firm. The Trustee, upon its receipt and review of such valuation report, will determine a reasonable range for our estimated NAV per share and an estimated NAV per share. The independent valuation firm is not responsible for, and does not prepare, our NAV per share. The final determination of our NAV per share is made by our Trustee. The estimated NAV per share will represent approximately the mid-point of the range of values reflecting the effect of using different discount rates and terminal capitalization rates in the sensitivity analysis. Such NAV may be declared prior to the finalization, and ultimate issuance, of our quarterly or annual financial statements which may result in an immaterial variance in the declared NAV per share to the final reconciliation of NAV per share after the review and issuance of such financial statements is completed. If any such variance was ever determined to be material, our Trustee would declare a revised NAV per share for the quarter. Our Trustee has used the mid-point of the independent valuation firm’s real estate value range in setting the NAV per share since our formation.
We will cause our real property portfolio to be valued quarterly by an independent valuation firm, which will apply the fair value methodologies detailed within the Financial Accounting Standards Board ASC Topic 820, Fair Value Measurements and Disclosures. An independent valuation firm will review information provided by our Trustee regarding the properties we own as of the end of the quarter including location, building size, tenancy, lease rates, lease term and various other relevant metrics. The independent valuation firm will also research and analyze market data and valuation benchmarks in connection with
38
each quarterly valuation. The independent valuation firm will utilize the income approach (i.e., discounted cash flow) to value and may perform the following actions in connection with its quarterly valuations:
In performing each quarterly valuation, our Trustee will provide the independent valuation firm with certain data, including but not limited to the following:
The Company’s total NAV presented in the following tables includes the NAV of our Class A, Class I, and Class S Common Shares, as well as the OP Units as of June 30, 2024 and per share/unit is identical for Class A, Class I and Class S Common Shares and OP Units. The following table provides a breakdown of the major components of the Company’s NAV as of June 30, 2024 and December 31, 2023:
Components |
| June 30, 2024 |
|
| December 31, 2023 |
| ||
Investments in real estate |
| $ | 1,211,450,000 |
|
| $ | 1,192,250,000 |
|
RSLCA notes receivable from affiliates |
|
| 37,290,000 |
|
|
| 22,251,000 |
|
Restricted cash |
|
| 11,876,000 |
|
|
| 12,275,000 |
|
Cash and cash equivalents |
|
| 6,841,000 |
|
|
| 7,053,000 |
|
Receivables |
|
| 6,475,000 |
|
|
| 6,612,000 |
|
Notes receivable from affiliates |
|
| 6,018,000 |
|
|
| 6,017,000 |
|
Other assets |
|
| 1,284,000 |
|
|
| 496,000 |
|
Due from affiliates, net |
|
| 130,000 |
|
|
| 493,000 |
|
Mortgage loans payable |
|
| (563,159,000 | ) |
|
| (589,962,000 | ) |
Revolving credit facility |
|
| (44,000,000 | ) |
|
| - |
|
Accounts payable, accrued expenses and other liabilities |
|
| (9,427,000 | ) |
|
| (9,533,000 | ) |
Distributions payable |
|
| (3,512,000 | ) |
|
| (3,452,000 | ) |
Pending trade deposits |
|
| (365,000 | ) |
|
| (1,386,000 | ) |
NAV |
| $ | 660,901,000 |
|
| $ | 643,114,000 |
|
|
|
|
|
|
|
| ||
Class A Common Shares |
|
| 10,281,475 |
|
|
| 10,017,613 |
|
Class I Common Shares |
|
| 5,993,421 |
|
|
| 5,768,982 |
|
Class S Common Shares |
|
| - |
|
|
| - |
|
Class ER Common Shares |
|
| - |
|
|
| - |
|
OP Units |
|
| 7,969,003 |
|
|
| 8,038,944 |
|
Total outstanding Common Shares/OP Units |
|
| 24,243,899 |
|
|
| 23,825,539 |
|
|
|
|
|
|
|
| ||
NAV per share/unit |
| $ | 27.26 |
|
| $ | 26.99 |
|
39
The following table reconciles shareholders’ equity per the Company’s condensed consolidated balance sheet to the Company’s NAV as of June 30, 2024 and December 31, 2023:
Reconciliation of Shareholders’ Equity to NAV |
| June 30, 2024 |
|
| December 31, 2023 |
| ||
Total shareholders’ equity |
| $ | 349,094,000 |
|
| $ | 349,708,000 |
|
Noncontrolling interests attributable to operating partnership |
|
| 178,496,000 |
|
|
| 187,334,000 |
|
Total equity per GAAP |
|
| 527,590,000 |
|
|
| 537,042,000 |
|
Adjustment: |
|
|
|
|
|
| ||
Fair value adjustment of real estate investments |
|
| 133,311,000 |
|
|
| 106,072,000 |
|
NAV |
| $ | 660,901,000 |
|
| $ | 643,114,000 |
|
The Company’s investments in real estate are presented under historical cost in our consolidated financial statements. As such, any increases or decreases in the fair market value of the Company’s investments in real estate are not recorded in the Company’s GAAP results other than in the event of an impairment or upon a sale. The Company’s mortgage loans payable and revolving credit facilities are valued at GAAP carrying value in the Company’s NAV calculation for any financings that are anticipated to be held to maturity. In addition, because the Company plans to utilize interest rate hedges to stabilize interest payments (i.e. to fix all-in interest rates through interest rate swaps or to limit interest rate exposure through interest rate caps) on individual loans and intends to hold each interest rate hedge until maturity, each interest rate hedge will be valued at par and thus its market value in accordance with GAAP will be excluded from the calculation of NAV. The Company entered into an interest rate swap agreement concurrent with the closing of the $26.9 million mortgage entered into in February 2023. At June 30, 2024, $48,000 is included in other assets relating to the fair value of this interest rate swap agreement, which was not included for the calculation of NAV.
While the Company believes that the independent valuation firm’s assumptions and inputs are reasonable, a change in these assumptions and inputs may significantly impact the fair value of the real estate properties and the Company’s estimated NAV per share. For purposes of determining the Company’s NAV, the Company’s investments in real estate as of (1) June 30, 2024 are recorded at fair value using a weighted average discount rate of 6.50% with a range of 6.40% to 6.60% and weighted average exit capitalization rate of 5.80% with a range of 5.70% to 5.90% and (2) December 31, 2023 are recorded at fair value using a weighted average discount rate of 6.60% with a range of 6.50% to 6.70% and weighted average exit capitalization rate of 5.75% with a range of 5.65% to 5.85%. Assuming all other factors remain unchanged, the tables below present the estimated increase or decrease to the Company’s June 30, 2024 and December 31, 2023 NAV for the changes in the weighted average discount and exit capitalization rate.
|
|
|
| NAV per share/unit |
| |||||
Input |
| Hypothetical change |
| June 30, 2024 |
|
| December 31, 2023 |
| ||
Discount rate (weighted average) |
| 25 bps decrease |
| $ | 28.19 |
|
| $ | 27.92 |
|
Discount rate (weighted average) |
| 25 bps increase |
| $ | 26.33 |
|
| $ | 26.06 |
|
Exit capitalization rate (weighted average) |
| 25 bps decrease |
| $ | 28.56 |
|
| $ | 28.31 |
|
Exit capitalization rate (weighted average) |
| 25 bps increase |
| $ | 26.04 |
|
| $ | 25.76 |
|
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules, forms and regulations and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
Our management carries out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer regarding the effectiveness of our disclosure controls and procedures as of the end of each
40
fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2024.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
We and our Trustee may from time to time be a party to legal proceedings which arise in the ordinary course of our business. The Company’s management is not aware of any current or pending legal proceedings to which we or any of our subsidiaries, or the Trustee, are a party or to which any of our property is subject, the outcome of which would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition, nor is management aware of any such legal proceedings contemplated by governmental authorities.
ITEM 1A. Risk Factors
The risk factors affecting the Company are described in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 11, 2024. There have been no material changes from these previously disclosed risk factors for the three months ended June 30, 2024.
ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Unregistered Sales of Equity Securities
Private Offering of Class I, Class A, Class S and Class ER Common Shares
On February 28, 2019, we commenced private placement offerings of our Class I and Class A Common Shares, the terms of which have been updated from time to time, including the addition of Class S and Class ER Common Shares to the offering (as so updated, the “Private Offering”). Upon the receipt of investment proceeds from the offering of our common shares, we transfer the net investment proceeds to our Operating Partnership in exchange for OP Units to be held by the Company. The offerings had an initial aggregate offering amount of $100,000,000, which has since been increased by the Trustee to the current aggregate offering amount of $2.165 billion. The common shares are being sold only for cash. The offering does not have a defined expiration date and will be left open to investors until the Trustee determines to terminate the offering. We also have offered the common shares at various offering prices, as determined by the Trustee, effective at various intervals. From the inception of the Private Offering until July 5, 2023, we offered the common shares in the Private Offering in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder. Commencing on July 6, 2023, we began conducting the Private Offering under Rule 506(c) of Regulation D and began accepting subscriptions for investments under those terms for purchases closing on or after August 1, 2023. As of that date, subscriptions will be accepted solely from “accredited investors,” as defined in Rule 501(a) of Regulation D, whose accredited investor status has been verified by us. Under Rule 506(c), general solicitation and advertisement of offerings is permitted, however all purchasers in the offering must be accredited investors and the Company must take reasonable steps to verify the accredited investor status of each purchaser, among other requirements.
During the three months ended June 30, 2024, we sold common shares in the Private Offering, as set forth in the following table:
Class |
| Shares Sold |
|
| Average Price Per Share |
|
| Aggregate Offering Price |
| |||
Class I Common Shares |
|
| 380,982 |
|
| $ | 27.09 |
|
| $ | 10,320,000 |
|
Class A Common Shares |
|
| 111,513 |
|
| $ | 28.77 |
|
|
| 3,208,000 |
|
Class S Common Shares |
|
| - |
|
| $ | - |
|
|
| - |
|
Class ER Common Shares |
|
| - |
|
| $ | - |
|
|
| - |
|
Total |
|
| 492,495 |
|
|
|
|
| $ | 13,528,000 |
|
41
We have engaged broker-dealers who are registered with the SEC and members of the FINRA to act as our exclusive placement agents in connection with the Private Offering. During the three months ended June 30, 2024, we paid aggregate selling commissions to these placement agents in connection with the Private Offering of $196,000, allocable among the various classes of our common shares as follows: $5,000 with respect to the Class I Common Shares; and $191,000 with respect to the Class A Common Shares.
Issuance of Common Shares to OP Unitholders
The holders of the Operating Partnership’s Class I, Class ER and Class A 721 Common Units have the right to cause their units to be redeemed by the Operating Partnership for cash, unless the Company, in its sole discretion, elects to purchase such units in exchange for Class I, Class ER, or Class A Common Shares of the Company, as applicable and corresponding to the class of OP units being redeemed, issuable on a 1:1 basis, subject to adjustment under certain circumstances. The Company currently intends to elect to pay the redemption price for all OP units tendered for redemption in the form of Common Shares of the Company corresponding to the class of OP units being redeemed.
During the three months ended June 30, 2024, holders of 45,492 Class I Common Units elected to cause the Operating Partnership to redeem their Class I Common Units, and the Company elected to purchase those units in exchange for the issuance of 45,492 Class I Common Shares. The Company did not pay any selling commissions in connection with the issuance of those common shares during the three months ended June 30, 2024.
Share Repurchases
The Company has a share repurchase program to provide eligible shareholders with limited, interim liquidity by enabling them to sell shares back to the Company, subject to restrictions and applicable law, if such repurchases do not impair the capital or operations of the Company. The Company is structured to provide partial liquidity to investors through redemptions on a quarterly basis of up to 5% of the Company’s issued and outstanding shares per fiscal year pursuant to the share repurchase program. Affiliates may seek to have their shares repurchased on the same terms and limitations as the common shareholders. However, notwithstanding the foregoing, ExchangeRight’s $15.0 million investment in Class I Common Shares is not eligible for redemption pursuant to the share repurchase program. All shareholder requests to the Company for repurchases have been honored since the inception of the Company. The Class ER Common Shares are not eligible for repurchase under the share repurchase program.
During the three months ended June 30, 2024, the Company repurchased common shares in the following amounts:
|
| Total Number of Shares Repurchased |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs(1) |
|
| Maximum Number of Shares That May Yet Be Repurchased Under the Plans or Programs(2) | |||||||||||||
Period |
| Class I |
| Class A |
|
| Class I |
| Class A |
|
| Class I |
| Class A |
|
| Class I | Class A | ||||||
April 2024 |
|
| 96,924 |
|
| 51,244 |
|
| $ | 26.44 |
| $ | 26.10 |
|
|
| 96,924 |
|
| 51,244 |
|
| N/A | N/A |
May 2024 |
|
| - |
|
| - |
|
| $ | - |
| $ | - |
|
|
| - |
|
| - |
|
| N/A | N/A |
June 2024 |
|
| - |
|
| - |
|
| $ | - |
| $ | - |
|
|
| - |
|
| - |
|
| N/A | N/A |
Total |
|
| 96,924 |
|
| 51,244 |
|
|
|
|
|
|
|
| 96,924 |
|
| 51,244 |
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
43
Item 6. Exhibits
44
Exhibit |
| Exhibit Description |
|
|
|
3.1 |
| |
|
|
|
10.1 |
| |
|
|
|
10.2 |
| |
|
|
|
10.3 |
| |
|
|
|
10.4 |
| |
|
|
|
10.5 |
| |
|
|
|
10.6 |
| |
|
|
|
10.7 |
| |
|
|
|
31.1* |
| |
|
| |
31.2* |
| |
|
|
|
32.1* |
| |
|
|
|
32.2* |
| |
|
|
|
101.INS |
| Inline XBRL Instance Document |
|
|
|
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
|
| |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
45
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
| |
* |
| Filed herewith. |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| EXCHANGERIGHT INCOME FUND |
|
|
|
August 2, 2024 |
| /s/ David Fisher |
Date |
| David Fisher |
|
| Executive Managing Principal |
|
| (Principal Executive Officer) |
|
|
|
August 2, 2024 |
| /s/ David Van Steenis |
Date |
| David Van Steenis |
|
| Chief Financial Officer and Chief Investment Officer |
|
| (Principal Financial Officer) |
|
|
|
47