UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 11, 2022
The Necessity Retail REIT, Inc.
(Exact Name of Registrant as Specified in Charter)
| Maryland | 001-38597 | 90-0929989 | ||
|
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
| 650 Fifth Avenue, 30th Floor New York, New York 10019 |
|
(Address, including zip code, of Principal Executive Offices)
Registrant’s telephone number, including area code: (212) 415-6500 |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbols | Name of each exchange on which registered | ||
| Class A Common Stock, $0.01 par value per share | RTL | The Nasdaq Global Select Market | ||
| 7.50% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share | RTLPP | The Nasdaq Global Select Market | ||
| 7.375% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share | RTLPO | The Nasdaq Global Select Market | ||
| Preferred Stock Purchase Rights | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Explanatory Note
In its Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on February 14, 2022, February 28, 2022 and March 21, 2022 (the “Initial Reports”), The Necessity Retail REIT, Inc., a Maryland corporation (the “Company”), reported that it completed the acquisition of the First Closing Properties, the Second Closing Properties and the Third Closing Properties, as defined and described in the Initial Reports. This Current Report on Form 8-K/A amends and supplements the Initial Reports to provide the historical financial statements and unaudited pro forma information required by Item 9.01(a) and (b) of Form 8-K. This Form 8-K/A should be read in conjunction with the Initial Reports.
Item 8.01 Other Events
As previously disclosed, on December 17, 2021, the Company and its subsidiary, The Necessity Retail REIT Operating Partnership, a Delaware limited partnership (the “Operating Partnership”), entered into a definitive purchase and sale agreement (the “PSA”) to acquire, in the aggregate, 81 properties (together, the “CIM Portfolio”), from certain subsidiaries of CIM Real Estate Finance Trust, Inc. (the “Sellers”) for approximately $1.3 billion. The CIM Portfolio consists of 79 power centers and grocery-anchored multi-tenant retail centers, two single-tenant retail properties and a detention pond parcel, located across 27 states and aggregating approximately 9.5 million square feet. As previously reported on the Initial Reports, the Company has acquired 56 power centers and grocery-anchored multi-tenant retail centers and a detention pond parcel at an aggregate purchase price of $801.1 million, excluding closing costs. The Company expects to complete the acquisition of the remaining properties in the CIM Portfolio in the second quarter of 2022.
The Company is filing this Current Report on Form 8-K/A to provide the following financial information with respect to the CIM Portfolio, the partial acquisition of which has already occurred, and the remainder of which is “probable”: (1) the Combined Statements of Revenues and Certain Expenses of the CIM Portfolio for the year ended December 31, 2021 attached hereto as Exhibit 99.1, and (2) the Unaudited Pro Forma Consolidated Financial Statements of the Company as of and for the year ended December 31, 2021, giving effect to the acquired properties and the properties to be acquired of the CIM Portfolio, attached hereto as Exhibit 99.2. The Unaudited Pro Forma Consolidated Financial Statements of the Company have been prepared on the basis of certain assumptions and estimates described in the notes thereto and are subject to other uncertainties and do not purport to reflect what the actual results of operations or financial condition of the Company would have been had the CIM Portfolio been acquired on the dates assumed for purposes of such pro forma financial statements or to be indicative of the financial condition or results of operations of the Company as of or for any future date or period. Additionally, the acquisition accounting used in preparing the pro forma adjustments included in the Unaudited Pro Forma Consolidated Financial Statements are preliminary, and accordingly, the pro forma adjustments may be revised as additional information becomes available and as additional analyses are performed. Differences between these preliminary analyses and the final acquisition accounting will likely occur, and these differences could have a material impact on the Unaudited Pro Forma Consolidated Financial Statements and the Company's future results of operations and financial position giving effect to the acquisition of the CIM Portfolio. For further information, see Exhibit 99.2.
The statements contained in this Current Report on Form 8-K/A that are not historical facts may be forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause the outcome to be materially different. In addition, words such as “anticipates,” “believes,” “expects,” “estimates,” “projects,” “plans,” “intends,” “seek,” “may,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of the Company’s control, which could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include the potential adverse effects of the ongoing global COVID-19 pandemic, including actions taken to contain or treat COVID-19, on the Company, the Company’s tenants and the global economy and financial markets as well as those set forth in the Risk Factors section of the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022, and all other filings with the SEC after that date, as such risks, uncertainties and other important factors may be updated from time to time in the Company’s subsequent reports. In particular, the PSA is subject to closing conditions, including conditions that are outside of the Company’s control, and the transactions may not be completed on the contemplated terms, or at all, or may be delayed. The Company may not be able to obtain financing of the transactions on favorable terms, or at all. Further, forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise any forward-looking statement to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Acquired Properties and Properties to be Acquired.
The following financial statements for the CIM Portfolio are attached hereto as Exhibit 99.1 and incorporated by reference herein:
| · | Combined Statements of Revenues and Certain Expenses of the CIM Portfolio for the year ended December 31, 2021 |
(b) Pro Forma Financial Information.
The following pro forma financial information for the Company is attached as Exhibit 99.2 and is incorporated herein by reference:
| · | Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2021 |
| · | Notes to the Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2021 |
| · | Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2021 |
| · | Notes to the Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2021 |
(d) Exhibits.
|
Exhibit Number |
Description | |
| 23.1 | Consent of Deloitte & Touche LLP | |
| 99.1 | Combined Statements of Revenues and Certain Expenses of the CIM Portfolio | |
| 99.2 | Unaudited Pro Forma Consolidated Financial Statements of the Company | |
| 104 | Cover Page Interactive Data File (embedded within the XBRL document) |
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 hereunto duly authorized.
| THE NECESSITY RETAIL REIT, INC. | ||
| Date: April 8, 2022 | By: | /s/ Edward M. Weil, Jr. |
| Name: Edward M. Weil, Jr. | ||
| Title: Chief Executive Officer and President | ||
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Nos. 333-258562 and 333-210532 on Form S-3 and Registration Statement No. 333-227189 on Form S-8 of The Necessity Retail REIT, Inc. (formerly American Finance Trust, Inc.) of our report dated April 8, 2022, relating to the Combined Statement of Revenues and Certain Expenses of the portfolio of 81 properties (the “CIM Portfolio”) and related notes appearing in this Current Report on Form 8-K/A dated April 8, 2022.
/s/ Deloitte & Touche LLP
Phoenix, Arizona
April 8, 2022
EXHIBIT 99.1
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders of The Necessity Retail REIT, Inc.:
We have audited the accompanying Combined Statement of Revenues and Certain Expenses of the portfolio of 81 properties (the “CIM Portfolio”) for the year ended December 31, 2021, and the related notes (the “Combined Statement of Revenues and Certain Expenses”).
In our opinion, the accompanying Combined Statement of Revenues and Certain Expenses present fairly, in all material respects, the combined revenue and certain expenses described in Note 2 to the Combined Statement of Revenues and Certain Expenses for the year ended December 31, 2021, in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Combined Statement of Revenues and Certain Expenses section of our report. We are required to be independent of CIM Portfolio and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Basis of Accounting
We draw attention to Note 2 to the Combined Statement of Revenues and Certain Expenses, which describes that the accompanying Combined Statement of Revenues and Certain Expenses were prepared for the purpose of presenting the gross income and direct operating expenses as defined in regulation 210.3-.14(a)(1) of Regulation S-X of the Securities and Exchange Commission of CIM Portfolio and are not intended to be a complete presentation of CIM Portfolio’s revenues and expenses. As a result, the Combined Statement of Revenues and Certain Expenses may not be suitable for another purpose. Our opinion is not modified with respect to this matter.
Responsibilities of Management for the Combined Statement of Revenues and Certain Expenses
Management is responsible for the preparation and fair presentation of the Combined Statement of Revenues and Certain Expenses in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the Combined Statement of Revenues and Certain Expenses that are free from material misstatement, whether due to fraud or error.
1
Auditor’s Responsibilities for the Audit of the Combined Statement of Revenues and Certain Expenses
Our objectives are to obtain reasonable assurance about whether the Combined Statement of Revenues and Certain Expenses as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the Combined Statement of Revenues and Certain Expenses.
In performing an audit in accordance with GAAS, we:
| · | Exercise professional judgment and maintain professional skepticism throughout the audit. |
| · | Identify and assess the risks of material misstatement of the Combined Statement of Revenues and Certain Expenses, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the Combined Statement of Revenues and Certain Expenses. |
| · | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of CIM Portfolio’s internal control. Accordingly, no such opinion is expressed. |
| · | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the historical summaries. |
| · | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about CIM Portfolio’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
/s/ Deloitte & Touche LLP
Phoenix, Arizona
April 8, 2022
2
CIM PORTFOLIO
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
(In thousands)
| Year Ended December 31, 2021 | ||||||||||||
| Acquired Properties | Properties To Be Acquired | Total | ||||||||||
| Revenues: | ||||||||||||
| Revenue from tenants | $ | 97,542 | $ | 55,866 | $ | 153,408 | ||||||
| Other income | 80 | 180 | 260 | |||||||||
| Total revenues | 97,622 | 56,046 | 153,668 | |||||||||
| Certain expenses: | ||||||||||||
| Property operating expense | 33,262 | 17,853 | 51,115 | |||||||||
| Total expenses | 33,262 | 17,853 | 51,115 | |||||||||
| Revenues in excess of certain expenses | $ | 64,360 | $ | 38,193 | $ | 102,553 | ||||||
The accompanying notes are an integral part of the combined statement of revenues and certain expenses.
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CIM PORTFOLIO
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Note 1 — Organization
On December 17, 2021, American Finance Trust, Inc., a Maryland corporation (the “Company”) and its subsidiary, American Finance Operating Partnership, a Delaware limited partnership (the “Operating Partnership”), entered into a definitive purchase and sale agreement (the “PSA”) to acquire, in the aggregate, 81 properties (the “CIM Portfolio”), from certain subsidiaries of CIM Real Estate Finance Trust, Inc. (the “Sellers”) for approximately $1.3 billion (the “Purchase Price”). The acquisition of the CIM Portfolio is referred to herein as the “Transaction” or the “Transactions.” The CIM Portfolio consists of 79 power centers and grocery-anchored multi-tenant retail centers, two single-tenant retail properties and a detention pond parcel, located across 27 states and aggregating approximately 9.5 million square feet. The 79 power or grocery-anchored centers are leased primarily to “necessity-based” retail tenants. Upon the closing of the Transactions, the Operating Partnership will acquire all of the rights, titles and interests in each of the acquired CIM Portfolio properties owned by the applicable Sellers. During the three months ended March 31, 2022, the Company closed on 56 properties and the Company expects to close on the remaining properties in the second quarter of 2022.
Note 2 — Basis of Presentation
The accompanying combined statement of revenues and certain expenses for the CIM Portfolio has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and with the provisions of SEC Rule 3-14 of Regulation S-X, which require certain information with respect to real estate operations to be included with certain filings with the SEC. The accompanying combined statement of revenues and certain expenses for the CIM Portfolio include the combined historical revenues and certain expenses of the CIM Portfolio for both the properties acquired as of March 31, 2022 (the “Acquired Properties”) and the remaining properties to be acquired (the “Properties To Be Acquired”).
The accompanying combined statement of revenues and certain expenses for the CIM Portfolio is exclusive of items which may not be comparable to the proposed future operations of the CIM Portfolio subsequent to its acquisition by the Company. Material amounts that would not be directly attributable to future operating results of the CIM Portfolio are excluded, and the combined statement of revenues and certain expenses are not intended to be a complete presentation of the CIM Portfolio’s revenues and expenses. Items excluded consist primarily of interest expense and depreciation and amortization expense recorded in conjunction with the original purchase price accounting. The Company is not aware of any other material factors that would cause the financial statement not to be indicative of future operating results.
Note 3 — Summary of Significant Accounting Policies
Use of Estimates
The preparation of the combined statement of revenues and certain expenses in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of revenues and certain expenses. Actual results could differ from those estimates.
4
CIM PORTFOLIO
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES (continued)
Revenue Recognition
Revenue from tenants is recognized on a straight-line basis. As such, the rental revenue for those leases that contain rent abatements and contractual increases are recognized on a straight-line basis over the applicable terms of the related lease.
Property Operating Expense
Property operating expense represents the direct expenses of operating the properties and consist primarily of repairs and maintenance, real estate taxes, management fees, insurance, utilities and other operating expenses that are expected to continue in the proposed future operations of the properties.
Note 4 — Future Minimum Lease Payments
The future minimum lease payments to be received under non-cancelable operating leases in effect as of December 31, 2021 are as follows (in USD thousands):
| Future Minimum Base Rent Payments | |||||||||||||
| (In thousands) | Acquired Properties | Properties To Be Acquired | Total | ||||||||||
| 2022 | $ | 69,496 | $ | 40,811 | $ | 110,307 | |||||||
| 2023 | 62,227 | 36,695 | 98,922 | ||||||||||
| 2024 | 51,246 | 32,364 | 83,610 | ||||||||||
| 2025 | 42,342 | 29,008 | 71,350 | ||||||||||
| 2026 | 32,884 | 22,676 | 55,560 | ||||||||||
| Thereafter | 79,471 | 85,554 | 165,025 | ||||||||||
| Total | $ | 337,666 | $ | 247,108 | $ | 584,774 | |||||||
Note 5 — Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. There is no material litigation nor to management’s knowledge is any material litigation currently threatened against the property other than routine litigation, claims and administrative proceedings arising in the ordinary course of business.
Note 6 — Subsequent Events
The Company has evaluated subsequent events through April 8, 2022, the date on which the statement of revenues and certain expenses has been issued and has determined that there have not been any events that have occurred that would require adjustments to, or disclosure in, this financial statement.
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Exhibit 99.2
THE NECESSITY RETAIL REIT, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On December 17, 2021, The Necessity Retail REIT, Inc., a Maryland corporation ("RTL" or the "Company”) and its subsidiary, Necessity Retail REIT Partnership, a Delaware limited partnership (the “Operating Partnership”), entered into a definitive purchase and sale agreement (the “PSA”) to acquire, in the aggregate, 81 properties (the “CIM Portfolio”), from certain subsidiaries of CIM Real Estate Finance Trust, Inc. (the “Sellers”) for approximately $1.3 billion (the “Purchase Price”). The Purchase Price is subject to adjustment if certain of the existing tenants that have rights of first refusal to purchase an underlying property exercise those rights, if the Operating Partnership exercises limited rights to exclude certain properties not exceeding $200 million in value from those being acquired or if earn out amounts associated with certain leases are satisfied. The Unaudited Pro Forma Consolidated Financial Statements included herein do not contemplate the exclusion of any properties or potential earnout amounts. The acquisition of the CIM Portfolio is referred to herein as the “Transaction” or the “Transactions.” The CIM Portfolio consists of 79 power centers and grocery-anchored multi-tenant retail centers, two single-tenant retail properties and a detention pond parcel, located across 27 states and aggregating approximately 9.5 million square feet. The 79 power and grocery-anchored centers are leased primarily to “necessity-based” retail tenants. Upon the closing of the Transactions, of which 56 properties had been acquired in three closings as of March 31, 2022 (the “Acquired Properties”) and the remaining 25 properties to be acquired (the “Properties To Be Acquired”), the Operating Partnership has acquired, or will acquire all of the right, title and interest in each of the properties acquired in the CIM Portfolio owned by the applicable Sellers, which include certain leasehold interests in land parcels. The Company has determined that the Transactions will be accounted for as asset acquisitions.
As previously announced, the Company expected to fund the Purchase Price through a combination, to be determined at each closing, of cash on the balance sheet, including net proceeds of $254.5 million from the sale of its Sanofi asset, borrowings under the Company’s credit facility, as well as debt currently encumbering certain of the properties that the Operating Partnership will seek to assume, and the issuance of $53.4 million in value of the Company’s Class A common stock, par value $0.01 (the “Class A Common Stock”) to the Sellers. The Company funded the acquisition of the Acquired Properties with borrowings under its Credit Facility of $378.0 million, cash on hand of $366.9 million, which included net proceeds from the sale of its Sanofi asset and remaining proceeds from the issuance of its Senior Notes, the issuance of 6,450,107 shares of the Company's Class A common stock with a value of $53.4 million, and the assumption of $19.5 million of fixed-rate mortgage debt. The Company expects to fund the acquisition of the Properties To Be Acquired with the assumption of $329.4 million of fixed-rate mortgage debt, borrowings under its Credit Facility of $115.0 million, the application of its $40.0 million deposit, and $33.4 million of cash on hand.
The acquisition accounting includes certain valuations which have not progressed to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments included herein are preliminary and have been made solely for the purpose of providing unaudited pro forma consolidated financial information, and may be revised as additional information becomes available and as additional analyses are performed. Differences between the preliminary estimates reflected in these unaudited pro forma consolidated financial statements and the final acquisition accounting will likely occur, and these differences could have a material impact on the accompanying unaudited pro forma consolidated financial statements and the combined company’s future results of operations and financial position.
The Unaudited Pro Forma Consolidated Balance Sheet and Statement of Operations included herein includes the impacts of the sale of the Company's Sanofi property (closed on January 6, 2022), the proceeds of which were used to fund a portion of the CIM Acquisition. The Company believes it is appropriate to make these adjustments since the completion of these transactions, and the use of the proceeds therefrom, provided the capacity needed under the Company's Credit Facility to fund a portion of the acquisition of the CIM Portfolio.
The unaudited pro forma consolidated balance sheet as of December 31, 2021 is presented as if the acquisition of the CIM Portfolio and other significant capital transactions were completed on December 31, 2021.
The unaudited pro forma consolidated statements of operations for the year ended December 31, 2021, are presented as if the acquisition of the CIM Portfolio and other significant capital transactions were completed on January 1, 2021.
The unaudited pro forma consolidated financial statements (including notes thereto) of the Company are qualified in their entirety and should be read in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2021, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “ SEC”) on February 24, 2022. The unaudited pro forma consolidated financial statements (including the notes thereto) of the Company are qualified in their entirety and should be read in conjunction with the combined financial statements of the CIM Portfolio for the fiscal year ended December 31, 2021, and the related notes thereto, included as part of this Form 8-K in Exhibit 99.1. The unaudited pro forma consolidated balance sheet and statements of operations are not necessarily indicative of what the actual financial position and operating results would have been had the acquisition of the CIM Portfolio and the other significant capital transactions occurred on December 31, 2021 and January 1, 2021, respectively, nor are they indicative of future operating results of the Company.
THE NECESSITY RETAIL REIT, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2021
(In thousands)
Notes to Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2021:
| (A) | Reflects the historical Consolidated Balance Sheet of the Company as of December 31, 2021 as presented in the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2022. |
| (B) | Reflects the preliminary purchase accounting allocation for the acquisition of the CIM Portfolio as if the transaction was completed on December 31, 2021. For purposes of these pro forma financial statements, the Company has assumed (i) that the transaction will be accounted for as an asset acquisition, (ii) that the purchase price will be paid with a combination of assumed debt from the CIM Portfolio, cash (from cash on hand and additional draw on the Company's credit facility), and the issuance of the Company's common stock and (iii) no properties will be excluded and there are no earnout amounts included that would result in contingent consideration which may be earned by the Sellers (related to qualified leases negotiated by the Sellers on behalf of RTL signed within 180 days of closing of the respective property). |
| (In thousands) | ||||||||||||
| Preliminary allocation of assets acquired and liabilities assumed: | Acquired Properties | Properties To Be Acquired | Total | |||||||||
| Real estate investments, at cost: | ||||||||||||
| Land | $ | 142,229 | $ | 103,960 | $ | 246,189 | ||||||
| Buildings, fixtures and improvements | 558,628 | 348,731 | 907,359 | |||||||||
| Total tangible assets | 700,857 | 452,691 | 1,153,548 | |||||||||
| Acquired intangible assets: | ||||||||||||
| In-place leases | 137,365 | 65,080 | 202,445 | |||||||||
| Above market lease assets | 12,747 | — | 12,747 | |||||||||
| Total intangible assets | 150,112 | 65,080 | 202,445 | |||||||||
| Liabilities assumed: | ||||||||||||
| Mortgage notes payable | 19,526 | 329,448 | 348,974 | |||||||||
| Below market lease liabilities | 38,223 | — | 38,223 | |||||||||
| Net assets and liabilities assumed | $ | 793,220 | $ | 188,323 | $ | 968,796 | ||||||
| Consideration to be transferred to acquire the CIM Portfolio: | ||||||||||||
| Cash | $ | 744,934 | $ | 148,323 | $ | 893,257 | ||||||
| Deposits for real estate investments | — | 40,000 | 40,000 | |||||||||
| Application of deferred liability | (1,700 | ) | — | (1,700 | ) | |||||||
| Redeemable securities (1) | 49,986 | — | 49,986 | |||||||||
| Total consideration transferred | $ | 793,220 | $ | 188,323 | $ | 981,543 | ||||||
| (1) | Represents the fair value of the stock issued to the Sellers at date of issue. This amount differs from the defined maximum dollar value of equity consideration that was transferred, pursuant to the purchase and sale agreement (see Note G). |
| (C) | Assumes a draw on the Company's Credit Facility to partially fund the acquisition of the CIM Portfolio upon closings of the Acquired Properties during the first quarter of 2022 and the expected closing of the Properties To Be Acquired in the second quarter of 2022, as if these closings had occurred on December 31, 2021. The Credit Facility requires the Company to maintain a minimum of cash on hand or availability of at least $60.0 million. |
| (In thousands) | Acquired Properties | Properties To Be Acquired | Total | |||||||||
| Borrowings on the Credit Facility | $ | 378,000 | $ | 115,000 | $ | 493,000 | ||||||
| (D) | Assumes the sale of the Company's Sanofi property on December 31, 2021. The sale closed on January 6, 2022. The Company assumes that the net proceeds from this sale were used to partially fund the acquisition of the CIM Portfolio. |
| (E) | Represents the allocation of the purchase price for the CIM Portfolio acquisition (for Acquired Properties and Properties To Be Acquired), including transaction costs, as if the transaction was completed as of December 31, 2021. The acquisition is considered an asset acquisition in accordance with accounting principles generally accepted in the United States of America, and accordingly, the Company allocated the total purchase price to the assets acquired based on relative fair value. The following table details the typical useful lives of the assets acquired: |
| Useful Lives | ||
| Land | N/A | |
| Buildings and improvements | 40 years | |
| Acquired intangible assets | 9 to 15 years |
| (F) | Represents total cash paid upon the closings of the Acquired Properties. |
| (G) | The purchase and sale agreement included the planned issuance of shares of the Company's Class A common stock or Class A units in the Operating Partnership of up to $53.4 million in value. The number of shares or units to be issued at the applicable closing will be based on the value of the shares or units that may be issued at such closing divided by the per-share volume weighted average price of the Company's Class A common stock measured over a five-day consecutive trading period immediately preceding (but not including) the date on which written notice is delivered, indicating the seller’s election to receive either shares or units, to the Operating Partnership (the price of which is to be limited by a 7.5% collar in either direction from the per share volume weighted-average price of the Company’s Class A common stock measured over a ten-day consecutive trading period immediately preceding (but not including) the effective date of the PSA, which was $8.34 per share. The Company concluded that this arrangement constituted an embedded derivative which requires separate accounting. The initial value of the embedded derivative was an asset upon the signing of the PSA of $1.7 million, and was a liability of $2.3 million as of December 31, 2021 in the Company’s balance sheet. Upon consummation, the stock portion of the transactions closed at values which were within the collar and, accordingly, the liability for the derivative at closing should be reduced from $2.3 million at December 31, 2021 to zero. |
| (H) | Represents the issuance of 6,450,107 shares of the Company's Class A common stock with a redemption value of $53.4 million, which was issued at $3.4 million above its fair value used in purchase accounting. The Sellers have rights to redeem these securities which are conditional on events that are outside of the Company's control, including the registration of the securities for resale within a defined period of time. Accordingly, the Company does not include redeemable securities with permanent equity, rather, such securities are reflected at their redemption value with any difference from their issuance carrying value reflected as an adjustment to additional paid-in capital. |
| (I) | Represents total cash paid upon the closing of the Properties To Be Acquired. |
| (J) | Represents mortgages assumed upon the closing of the Acquired Properties and the Properties To Be Acquired recorded at estimated fair value. These mortgages have a weighted average rate of 4.46% and 3.87%, respectively, and mature through 2023 and 2024, respectively. |
| (K) | Represents the net impact on equity assuming the sale of the Sanofi property closed on December 31, 2021: |
| (In thousands) | ||||
| Net proceeds from sale of the Sanofi property - closed January 6, 2022 | $ | 254,518 | ||
| Net carrying value of the Sanofi-property related assets and liabilities as of December 31, 2021 | (200,506 | ) | ||
| Pro forma gain on sale of Sanofi property if closed as of December 31, 2021 | $ | 54,012 | ||
THE NECESSITY RETAIL REIT, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2021
(In thousands, except per share amounts)
| CIM Transaction and Financing | Other Relevant Transactions | |||||||||||||||||||||||||||||||
| Historical RTL | Acquired Properties | Properties To Be Acquired | Pro Forma Adjustments | Credit Facility Draw | Issuance of 4.50% Senior Notes | Disposition of Sanofi Property | Pro Forma RTL | |||||||||||||||||||||||||
| (A) | (B) | (B) | (C) | (D) | (E) | (F) | ||||||||||||||||||||||||||
| Revenue from tenants | $ | 335,156 | $ | 97,542 | $ | 55,866 | $ | (4,895 | )(H) | $ | — | $ | — | $ | (17,195 | ) | $ | 466,474 | ||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Asset management fees to related party | 32,804 | — | — | — | — | — | — | 32,804 | ||||||||||||||||||||||||
| Property operating expense | 55,431 | 33,262 | 17,853 | — | — | — | (104 | ) | 106,442 | |||||||||||||||||||||||
| Impairment of real estate assets | 33,261 | — | — | — | — | — | — | 33,261 | ||||||||||||||||||||||||
| Acquisition, transaction and other costs | 4,378 | — | — | — | — | — | — | 4,378 | ||||||||||||||||||||||||
| Equity-based compensation | 17,264 | — | — | — | — | — | — | 17,264 | ||||||||||||||||||||||||
| General and administrative | 20,856 | — | — | — | — | — | (4 | ) | 20,852 | |||||||||||||||||||||||
| Depreciation and amortization | 130,464 | — | — | 78,248 | (I) | — | — | (9,432 | ) | 199,280 | ||||||||||||||||||||||
| Total operating expenses | 294,458 | 33,262 | 17,853 | 78,248 | — | — | (9,540 | ) | 414,281 | |||||||||||||||||||||||
| Operating income before gain on sale/exchange of real estate investments | 40,698 | 64,280 | 38,013 | (83,143 | ) | — | — | (7,655 | ) | 52,193 | ||||||||||||||||||||||
| Gain on sale/exchange of real estate investments | 4,757 | — | — | — | — | — | 44,580 | (K) | 49,337 | |||||||||||||||||||||||
| Operating income | 45,455 | 64,280 | 38,013 | (83,143 | ) | — | — | 36,925 | 101,530 | |||||||||||||||||||||||
| Other (expense) income: | ||||||||||||||||||||||||||||||||
| Interest expense | (81,784 | ) | — | — | (13,621 | )(J) | (13,361 | )(J) | (9,804 | )(J) | — | (118,570 | ) | |||||||||||||||||||
| Other income | 91 | 80 | 180 | — | — | — | — | 351 | ||||||||||||||||||||||||
| Loss on non-designated derivatives | (3,950 | ) | — | — | 2,250 | (L) | — | — | — | (1,700 | ) | |||||||||||||||||||||
| Total other expenses, net | (85,643 | ) | 80 | 180 | (11,371 | ) | (13,361 | ) | (9,804 | ) | — | (119,919 | ) | |||||||||||||||||||
| Net loss | (40,188 | ) | 64,360 | 38,193 | (94,514 | ) | (13,361 | ) | (9,804 | ) | 36,925 | (18,389 | ) | |||||||||||||||||||
| Net loss attributable to non-controlling interests | 9 | — | — | — | — | — | — | 9 | ||||||||||||||||||||||||
| Allocation for preferred stock | (23,262 | ) | — | — | — | — | — | — | (23,262 | ) | ||||||||||||||||||||||
| Net loss attributable to common stockholders | $ | (63,441 | ) | $ | 64,360 | $ | 38,193 | $ | (94,514 | ) | $ | (13,361 | ) | $ | (9,804 | ) | $ | 36,925 | $ | (41,642 | ) | |||||||||||
| Weighted-average shares outstanding — Basic and Diluted (G) | 115,404,635 | 121,398,160 | ||||||||||||||||||||||||||||||
| Net loss per share attributable to common stockholders — Basic and Diluted | $ | (0.56 | ) | $ | (0.34 | ) | ||||||||||||||||||||||||||
Notes to Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2021:
| (A) | Reflects the historical Consolidated Statement of Operations of the Company for the year ended December 31, 2021 as presented in the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2022. |
| (B) | Represents the historical operating results attributable to the Acquired Properties and the Properties To Be Acquired of the CIM Portfolio for the year ended December 31, 2021 as presented in Exhibit 99.1 to this Form 8-K. |
| (C) | This column represents pro forma accounting impacts of the acquisition of the CIM Portfolio as if the transaction was completed on January 1, 2021. For purposes of these pro forma financial statements, the Company has assumed that the transaction will be accounted for as an asset acquisition. No assumptions were made for the potential exclusion of any properties or earnout amounts. |
| (D) | Assumes a draw on the Company's Credit Facility to partially fund the closings of the Acquired Properties and the Properties To Be Acquired of the acquisition of the CIM Portfolio on January 1, 2021. |
| (E) | Reflects the issuance of the Company's Senior Notes on October 7, 2021 as if this transaction had occurred on January 1, 2021. |
| (F) | This column reflects the removal of amounts related to the Company's Sanofi property, assumed to be sold on January 1, 2021 for the purposes of this pro forma financial statement. The sale is expected to close in the first quarter of 2022. |
| (G) | The pro forma weighted average common shares outstanding are calculated as if the issuance of the 6,450,107 shares that were issued to purchase the CIM Properties had occurred on January 1, 2021. |
| (H) | Represents adjustments to estimated straight-line rent using the most recent data for lease terms, assuming an acquisition date of January 1, 2021 for both the Acquired Properties and the Properties To Be Acquired. For purposes of this pro forma financial statement, no assumptions were made for potential lease renewals. |
| (In thousands) | Acquired Properties | Properties To Be Acquired | Total | |||||||||
| Straight-line rent and other adjustments - remainder of CIM Portfolio | $ | (5,131 | ) | $ | 97 | $ | (5,034 | ) | ||||
| Accretion of below market leases | 2,726 | — | 2,726 | |||||||||
| Amortization of above market leases | (2,587 | ) | — | (2,587 | ) | |||||||
| Total | $ | (4,992 | ) | $ | 97 | $ | (4,895 | ) | ||||
| (I) | Represents the pro forma adjustment for depreciation and amortization expense, which is based on the Company’s basis in the assets that would have been recorded assuming the CIM Portfolio was acquired on January 1, 2021. Depreciation and amortization amounts were determined in accordance with the Company’s policies and are based on management’s valuation of the estimated useful lives of the property and intangibles. The amounts allocated to buildings and improvements are depreciated over the estimated useful life (generally 40 years for buildings and 15 years or less for improvements), beginning on the assumed acquisition date of January 1, 2021, while the amounts allocated to lease intangibles are amortized over the remaining life of the related leases. The following table details the depreciation and amortization expense for both the Acquired Properties and the Properties To Be Acquired for the year ended December 31, 2021: |
| (In thousands) | Acquired Properties | Properties To Be Acquired | Total | |||||||||
| Depreciation expense | $ | 17,467 | $ | 8,718 | $ | 26,185 | ||||||
| Amortization expense — In-place leases | 39,357 | 12,706 | 52,063 | |||||||||
| Total | $ | 56,824 | $ | 21,424 | $ | 78,248 | ||||||
| (J) | Represents interest expense on debt assumed from the CIM Portfolio, the additional Credit Facility draw and the issuance of the Senior Notes, partially offset by the removal of interest expense from the Sanofi mortgage and credit facility paydown, as if all of these borrowings occurred on January 1, 2021, as follows: |
| Principal | Rate | Fixed/Variable | Interest Expense | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
| Assumed mortgage debt from the Acquired Properties (1) | $ | 19,526 | 4.46 | % | Fixed | $ | 871 | |||||||||
| Assumed mortgage debt from the Properties To Be Acquired (2) | $ | 329,448 | 3.87 | % | Fixed | 12,750 | ||||||||||
| Total interest expense adjustments related to assumed mortgage debt | $ | 13,621 | ||||||||||||||
| Borrowings on the Credit Facility to partially fund the Acquired Properties (3) | $ | 378,000 | 2.71 | % | Variable | $ | 10,244 | |||||||||
| Borrowings on the Credit Facility to partially fund the Properties To Be Acquired (3) | $ | 115,000 | 2.71 | % | Variable | 3,117 | ||||||||||
| Total interest expense adjustments related to draws on the Credit Facility | $ | 13,361 | ||||||||||||||
| Issuance of the Senior Notes (4) | $ | 500,000 | 4.50 | % | Fixed | $ | 17,187 | |||||||||
| Removal of interest expense related to the Credit Facility repayment | $ | 186,242 | 2.71 | % | Variable | (5,047 | ) | |||||||||
| Removal of interest expense related to the Sanofi mortgage | $ | 125,000 | 3.27 | % | Fixed by swap | (3,350 | ) | |||||||||
| Amortization of deferred financing costs from Senior Notes (4) | 1,014 | |||||||||||||||
| Total interest expense adjustments related to issuance of Senior Notes | $ | 9,804 | ||||||||||||||
| (1) | Represents estimated fair value of debt assumed for $19.3 million of principal mortgage debt assumed with the closing of the Acquired Properties. |
| (2) | Represents estimated principal amounts of debt to be assumed upon the closings of the Properties To Be Acquired. |
| (3) | Calculated using the weighted average interest rate on the Credit Facility for the year ended December 31, 2021. |
| (4) | Represents the incremental amount of interest adjustments to assume a January 1, 2021 issuance of the Senior Notes, which were issued on October 7, 2021. |
| (K) | Reflects the gain on the sale of the Sanofi property as if it occurred on January 1, 2021. This is a one-time, non-recurring transaction and therefore is only included in the consolidated pro forma statement of operations for the year ended December 31, 2021. Additional details are as follows: |
| (In thousands) | ||||
| Net proceeds from sale of the Sanofi property - closed January 6, 2022 | $ | 254,518 | ||
| Net carrying value of the Sanofi-property related assets and liabilities as of December 31, 2021 | (200,506 | ) | ||
| Pro forma gain on sale of Sanofi property if closed as of December 31, 2021 | 54,012 | |||
| Less: Depreciation from January 1, 2021 to December 31, 2021 | (9,432 | ) | ||
| Pro forma gain on sale of Sanofi property if closed as of January 1, 2021 | $ | 44,580 | ||
| (L) | The purchase and sale agreement included the planned issuance of shares of the Company’s Class A common stock or Class A units in the Operating Partnership of up to $53.4 million in value. The number of shares or units to be issued at the applicable closing will be based on the value of the shares or units that may be issued at such closing divided by the per-share volume weighted average price of the Company’s Class A common stock measured over a five-day consecutive trading period immediately preceding (but not including) the date on which written notice is delivered, indicating the seller’s election to receive either shares or units, to the Operating Partnership (the price of which is to be limited by a 7.5% collar in either direction from the per share volume weighted-average price of the Company’s Class A common stock measured over a ten-day consecutive trading period immediately preceding (but not including) the effective date of the PSA, which was $8.34 per share. The Company concluded that this arrangement constituted an embedded derivative which requires separate accounting. The initial value of the embedded derivative was an asset upon the signing of the PSA of $1.7 million, and was a liability of $2.3 million as of December 31, 2021 in the Company’s balance sheet. Upon consummation, the stock portion of the transaction closed at values which were within the collar and accordingly, the liability for the derivative at closing should be reduced from $2.3 million to zero. The adjusted loss represents the original value of the embedded derivative (which is also part of purchase accounting). This is expected to be a non-recurring loss. |