Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BUSINESS AND ORGANIZATION
Modiv Inc. (the “Company”) was incorporated on May 14, 2015 as a Maryland corporation. The Company has the authority to issue 450,000,000 shares of stock, consisting of 50,000,000 shares of preferred stock, $0.001 par value per share, 300,000,000 shares of Class C common stock, $0.001 par value per share, and 100,000,000 shares of Class S common stock, $0.001 par value per share. Effective February 1, 2021, with the authorization of the board of directors, the Company filed Articles of Amendment to the Company’s charter in the State of Maryland in order to effect a 1:3 reverse stock split of the Company’s Class C common stock and Class S common stock and, following the implementation of the reverse stock split, to decrease the par value of each post-split share of the Company’s Class C common stock and Class S common stock from $0.003 per share to $0.001 per share.
The Company was initially formed to primarily invest in single-tenant income-producing commercial properties located in the United States, leased to creditworthy tenants under long-term net leases. Since December 31, 2019, the Company has been internally managed following its December 31, 2019 acquisition of the business of BrixInvest, LLC, a Delaware limited liability company and the Company’s former sponsor (“BrixInvest”), and the Company’s merger with Rich Uncles Real Estate Investment Trust I (“REIT I”). The Company has created one of the largest non-listed real estate investment funds to be raised via crowdfunding technology and the first real estate crowdfunding platform to be completely investor-owned. The Company plans to expand beyond its traditional single-tenant portfolio of triple-net leased properties to provide individual investors access to a diversified portfolio of real estate and real estate-related investments designed to provide both income and long-term growth. During 2020, the Company acquired the intellectual property of buildingbits.com (“BuildingBITs”), an innovative online real estate crowd funding platform, and the REITless investment platform (“REITless”), an online investment platform for commercial real estate investment offerings. In 2021, the Company will continue to seek opportunities to be an aggregator within the non-listed real estate product industry, utilizing the combination of its deep understanding of both the crowd funding and real estate markets and the strength of its stockholder-owned, self-managed business model.
The Company holds its investments in real property through special purpose limited liability companies which are wholly-owned subsidiaries of Modiv Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”). The Operating Partnership was formed on January 28, 2016. The Company is the sole general partner of and owned an 83% partnership interest in the Operating Partnership on March 31, 2021. The Operating Partnership limited partners include holders of several classes of ownership with various vesting and enhancement terms as further described in Note 11.
As of March 31, 2021, the Company's portfolio of approximately 2.3 million square feet of aggregate leasable space consisted of investments in 38 real estate properties, comprised of: 12 retail properties, 14 office properties and 12 industrial properties, including 14 of the original 20 operating properties which were acquired through the Merger (defined below) on December 31, 2019, an approximate 72.7% tenant-in-common interest in a Santa Clara, California industrial property (the “TIC Interest”) and one retail property which is classified as held for sale as of March 31, 2021 (see Note 3 for additional discussion).
Special Purpose Acquisition Company
To further the Company’s mission of being the leading provider of alternative real estate-related products, and to capitalize on opportunities in the public marketplace, the Company is sponsoring Modiv Acquisition Corp. (“MACS”), a special purpose acquisition company (“SPAC”). Modiv Venture Fund, LLC (“MVF”), an indirect subsidiary of Modiv TRS, LLC, the Company’s taxable REIT subsidiary, is the sponsor of MACS. MVF formed MACS on January 15, 2021 with the intention of completing an initial public offering (“IPO”) of MACS as a SPAC. On January 29, 2021, MVF subscribed for 2,875,000 shares of common stock of MACS for $25,000, with 375,000 shares being cancellable if the underwriters’ over-allotment option is not exercised, which would result in MVF owning 20% of MACS upon completion of the IPO.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
MACS publicly filed its registration statement on Form S-1 with the SEC on March 24, 2021 and plans to raise $100,000,000, or $115,000,000 if the over-allotment option is exercised, in its IPO. In connection with the public filing of the Form S-1, MVF deposited $4,500,000 in escrow with the attorneys for MACS. The $4,500,000 will be released from escrow upon (i) completion of the IPO and used to purchase 9,000,000 warrants to purchase additional shares of MACS or (ii) the Company's decision not to proceed with the IPO. Each warrant has the right to purchase 0.5 of a share of MACS common stock and can be exercised at a strike price of $11.50 per share. However, there has been significant disruption in the IPO market for SPACs during the second quarter of 2021 and there can be no assurance that MACS can complete an IPO. In addition, the Company is evaluating how to respond to the changes in the market and may decide to either modify MACS’s IPO or not proceed with the IPO. In the event that MACS does not complete an IPO, the $4,500,000 deposit will be released from escrow and returned to MVF.
MACS was formed for the purpose of entering into a business combination with one or more businesses or entities, and intends to focus on targets located in North America that are focused on fintech and proptech, with a focus on companies whose core purpose is related to the real estate industry. Within those parameters, and subject to completion of its IPO, MACS intends to pursue a business combination with companies that use technology driven platforms and solutions to disrupt or revolutionize the real estate capital markets, transactional marketplaces and investment management industry.
Self-Management Transaction and Merger on December 31, 2019
The Company was externally managed through December 31, 2019 by its former advisor, Rich Uncles NNN REIT Operator, LLC, a Delaware limited liability company, pursuant to the Second Amended and Restated Advisory Agreement dated August 11, 2017, as amended (the “Advisory Agreement”). The former advisor was wholly-owned by the Company’s former sponsor, BrixInvest, whose members include Aaron S. Halfacre and Raymond Wirta, the Company’s Chief Executive Officer and Chairman of the Board, respectively.
On December 31, 2019, a self-management transaction was completed, whereby the Company, the Operating Partnership, BrixInvest and Daisho (defined below) effectuated a contribution agreement dated September 19, 2019 (the “Contribution Agreement”) pursuant to which the Company acquired substantially all of the assets and assumed certain liabilities of BrixInvest in exchange for 657,949.5 Class M OP Units in the Operating Partnership (the “Self-Management Transaction”). As a result of the completion of the Self-Management Transaction, the Company became self-managed and eliminated all fees for acquisitions, dispositions and management of its properties, except for third-party property management fees. Following completion of the Self-Management Transaction, the Company owned an approximately 87% partnership interest in the Operating Partnership. Daisho OP Holdings, LLC, a formerly wholly-owned subsidiary of BrixInvest (“Daisho”) which was spun off from BrixInvest on December 31, 2019, was issued and held 657,949.5 units of Class M limited partnership interest (the “Class M OP Units”), or an approximate 12% limited partnership interest, in the Operating Partnership as of December 31, 2019. The Class M OP Units were distributed to the members of Daisho during 2020. In connection with the Self-Management Transaction, the Company's Chief Executive Officer and Chief Financial Officer were issued an aggregate of 56,029 units of Class P limited partnership interest (the “Class P OP Units”) in the Operating Partnership and thereby owned the remaining approximate 1% limited partnership interest in the Operating Partnership as of December 31, 2019. Following the issuance of 360,000 units (adjusted for the 1:3 reverse stock split) of Class R limited partnership interest (the “Class R OP Units”) in the Operating Partnership to the Company’s employees, including the Chief Executive Officer and Chief Financial Officer, in January 2021 as further described in Note 11, the Company holds an approximately 83% partnership interest, the Daisho members hold an approximately 12% limited partnership interest and employees of the Company hold an approximately 5% limited partnership interest in the Operating Partnership.
On December 31, 2019, pursuant to an Agreement and Plan of Merger dated September 19, 2019 (the “Merger Agreement”), REIT I merged with and into Katana Merger Sub, LP (“Merger Sub”), a Delaware limited partnership and wholly-owned subsidiary of the Company, with Merger Sub surviving as a direct, wholly-owned subsidiary of the Company (the “Merger”). At such time, the separate existence of REIT I ceased. As a result, the Company issued 2,680,740.5 shares (adjusted for the 1:3 reverse stock split) of its Class C common stock to former shareholders of REIT I. On December 31, 2020, Merger Sub was merged into the Operating Partnership and ceased to exist.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Offering
On July 15, 2015, the Company filed a registration statement on Form S-11 (File No. 333-205684) with the SEC to register an initial public offering of a maximum of 30,000,000 (adjusted for the 1:3 reverse stock split) of its shares of common stock for sale to the public (the “Primary Offering”). The Company also registered a maximum of 3,333,333 (adjusted for the 1:3 reverse stock split) of its shares of common stock pursuant to the Company's distribution reinvestment plan (the “DRP”) (the “Initial DRP Offering” and together with the Primary Offering, the “Initial Registered Offering”). During 2016, the SEC declared the Company's registration statement effective and the Company began offering shares of common stock to the public. Pursuant to the Initial Registered Offering, the Company sold shares of Class C common stock directly to investors, with a minimum investment in shares of $500. Commencing in August 2017, the Company began selling shares of its Class C common stock only to U.S. persons as defined under Rule 903 promulgated under the Securities Act, and began selling shares of its Class S common stock as a result of the commencement of the Class S Offering (as defined below) to non-U.S. Persons.
In August 2017, the Company began offering up to 33,333,333 shares (adjusted for the 1:3 reverse stock split) of Class S common stock exclusively to non-U.S. Persons as defined under Rule 903 promulgated under the Securities Act, pursuant to an exemption from the registration requirements of the Securities Act and in accordance with Regulation S of the Securities Act (the “Class S Offering” and, together with the Registered Offerings (as defined below), the “Offerings”). The Class S common stock has similar features and rights as the Class C common stock, including with respect to voting and liquidation, except that the Class S common stock offered in the Class S Offering may be sold only to non-U.S. Persons and may be sold through brokers or other persons who may be paid upfront and deferred selling commissions and fees.
On December 23, 2019, the Company commenced a follow-on offering pursuant to a new registration statement on Form S-11 (File No. 333-231724) (the “Follow-on Offering” and, together with the Initial Registered Offering and the 2021 DRP Offering (as defined below), the “Registered Offerings”), which registered the offer and sale of up to $800,000,000 in share value of Class C common stock, including $725,000,000 in share value of Class C common stock pursuant to the primary portion of the Follow-on Offering and $75,000,000 in share value of Class C common stock pursuant to the Company's DRP. The Company ceased offering shares pursuant to the Initial Registered Offering concurrently with the commencement of the Follow-on Offering.
In response to the significant economic impacts of the COVID-19 pandemic, effective as of the close of business on May 7, 2020, the Company's board of directors temporarily suspended the primary portion of the Company's Follow-on Offering and Class S Offering until such time as the board of directors approved and established an updated estimated net asset value (“NAV”) per share of the Company’s common stock and determined to resume such primary offerings. On May 20, 2020, the Company's board of directors approved and established an updated estimated NAV per share of the Company's common stock of $21.01 (unaudited and adjusted for the 1:3 reverse stock split) to reflect the valuation of the Company's real estate assets, debt and other assets and liabilities as of April 30, 2020.
Commencing on June 1, 2020, the Company's board of directors resumed the primary portions of the Follow-on Offering and the Class S Offering. The purchase price per share in the primary portion of the Follow-on Offering was decreased from $30.81 (unaudited and adjusted for the 1:3 reverse stock split) to $21.01 (unaudited and adjusted for the 1:3 reverse stock split), and the purchase price per share in the primary portion of the Class S Offering was decreased to $21.01 (unaudited and adjusted for the 1:3 reverse stock split) plus the amount of any applicable upfront commissions and fees. The NAV per share used for purposes of future repurchases pursuant to the share repurchase programs was also decreased from $30.81 (unaudited and adjusted for the 1:3 reverse stock split) to $21.01 (unaudited and adjusted for the 1:3 reverse stock split).
On January 22, 2021, with the authorization of the board of directors, the Company amended and restated its DRP with respect to the Company's shares of Class C common stock in order to reflect its corporate name change and to remove the ability of the Company's stockholders to elect to reinvest only a portion of their cash distributions in shares through the DRP so that investors who elect to participate in the DRP must reinvest all cash distributions in shares. In addition, the amended and restated DRP provides for determinations of the NAV per share by the board of directors more frequently than annually. The amended and restated DRP was effective with respect to distributions that were paid in February 2021.
On January 22, 2021, the Company filed a registration statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000 in share value of Class C common stock to be issued pursuant to the amended and restated DRP (the “2021 DRP Offering” and, collectively with the Initial DRP Offering, the “Registered DRP Offering”). The Company commenced offering shares of Class C common stock pursuant to the 2021 DRP Offering upon termination of the Follow-on Offering.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Effective January 27, 2021, the board of directors terminated the Company’s Follow-on Offering. In connection with the termination of the Follow-on Offering, the Company stopped accepting investor subscriptions on January 22, 2021. As of January 27, 2021, the Company had $600,547,672 in share value of unsold shares in the Follow-on Offering, which were deregistered with the SEC. On February 1, 2021, the Company commenced a private offering of Class C common stock under Regulation D promulgated under the Securities Act and is accepting investor subscriptions from accredited investors.
On February 1, 2021, with the authorization of the board of directors, the Company amended and restated its Class C common stock share repurchase program (the “Class C SRP”) in order to (i) revise the minimum holding period before a stockholder may participate in the Class C SRP from three months to six months, (ii) revise the limitations on the share repurchase price so that shares held for less than two years will be repurchased at 98% of the most recently published NAV per share and shares held for at least two years will be repurchased at 100% of the most recently published NAV per share (as opposed to a repurchase price of 97% of the most recently published NAV per share for shares held less than one year, 98% of the most recently published NAV per share for shares held for more than one year but less than two years, 99% of the most recently published NAV per share for shares held for more than two years but less than three years, and 100% of the most recently published NAV per share for shares held for at least three years), (iii) increase the minimum share value (based on the most recently published NAV per share) at which the Company has the right to repurchase all of a stockholder’s shares, if as a result of a repurchase request a stockholder holds less than the minimum share value, from $500 to $1,000, and (iv) include language that provides that the Class C SRP will automatically terminate if the Company’s shares of common stock are listed on any national securities exchange. The minimum holding period before a stockholder may participate in the Class C SRP for shares purchased prior to February 1, 2021 will remain at three months.
With the authorization of the board of directors, the Company also amended and restated its Class S common stock share repurchase program (“Class S SRP”) on February 1, 2021 in order to (i) allow the Company to waive the minimum one year holding period before a holder of Class S shares may participate in the Class S SRP in the event of extraordinary circumstances which would place undue hardship on a stockholder, (ii) increase the minimum Class S share value (based on the most recently published NAV per Class S share) at which the Company has the right to repurchase all of a stockholder’s shares, if as a result of a repurchase request a stockholder holds less than the minimum Class S share value, from $500 to $1,000, and (iii) include language that provides that the Class S SRP will automatically terminate if the Company’s shares of common stock are listed on any national securities exchange.
On January 27, 2021, the Company’s board of directors approved and established an updated estimated NAV per share of the Company’s Class C common stock and Class S common stock of $23.03 (unaudited and adjusted for the 1:3 reverse stock split which was effective on February 1, 2021) as of December 31, 2020. On May 5, 2021, the Company’s board of directors approved and established an updated estimated NAV per share of the Company’s Class C common stock and Class S common stock of $24.61 (unaudited) as of March 31, 2021. Effective May 5, 2021, the purchase price per share of the Company’s Class C common stock was increased from $23.03 (unaudited and adjusted for the 1:3 reverse stock split) to $24.61 (unaudited). Also, commencing May 5, 2021, the purchase price per share in the primary portion of the Class S Offering was increased to $24.61 (unaudited) plus the amount of any applicable upfront commissions and fees, and the NAV per share used for purposes of the share repurchase programs was increased to $24.61 (unaudited).
Additional information on the determination of the Company's most recent estimated NAV per share, including the process used to determine its estimated NAV per share, can be found in the Company's Current Report on Form 8-K filed with the SEC on May 5, 2021. Beginning with distributions scheduled to be paid to stockholders on May 25, 2021, the purchase price per share of the Company’s common stock in the Class C and the Class S DRPs was increased from $23.03 (unaudited and adjusted for the 1:3 reverse stock split) to $24.61 (unaudited).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements and the rules and regulations of the SEC. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Such unaudited condensed consolidated financial statements and accompanying notes are the representations of the Company’s management, which is responsible for their integrity and objectivity. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2021.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which are normal and recurring, necessary to fairly state the Company's financial position, results of operations and cash flows. All significant intercompany balances and transactions are eliminated in consolidation. The unaudited condensed consolidated balance sheet as of December 31, 2020 included herein was derived from the audited financial statements.
Reverse Stock Split
On February 1, 2021, the Company effected a 1:3 reverse stock split of its Class C common stock and Class S common stock and, following the implementation of the reverse stock split, decreased the par value of each share of the Company’s Class C common stock and Class S common stock from $0.003 per share to $0.001 per share. The Company has reflected the effect of the reverse stock split in the accompanying unaudited condensed consolidated financial statements and related notes as if it had occurred at the beginning of the earliest period presented.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements and the accompanying notes thereto in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience, including considerations related to the COVID-19 pandemic (see Notes 3 and 5 for the prior year's impairment charges related primarily to COVID-19). Actual results may differ from those estimates.
Noncontrolling Interests in the Operating Partnership
The Company accounts for the noncontrolling interests in its Operating Partnership in accordance with the related accounting guidance. Due to the Company's control of the Operating Partnership through its general partnership interest therein and the limited rights of the limited partners, the Operating Partnership, including its wholly-owned subsidiaries, are consolidated with the Company, and the limited partner interests not held by the Company are reflected as noncontrolling interests in the accompanying unaudited condensed consolidated balance sheets and statements of equity. The noncontrolling interests were issued on December 31, 2019 and represent non-voting, non-dividend accruing interests with no allocation of profits or losses. As described in Note 11, the interests were not able to be converted or exchanged prior to (i) December 31, 2020, the one-year anniversary of the closing of the Self-Management Transaction (in the case of the Class M OP Units), or (ii) the expiration of the Lockup Period (as defined in Note 11) (in the case of the Class P OP Units).
Business Combinations
The Company accounts for business combinations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”) and applicable Accounting Standards Updates (each, an “ASU”), whereby the total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to any non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired in a business combination.
ASC 805 defines a business as an integrated set of activities and assets (collectively, a “set”) that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. To be considered a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. ASC 805 provides a practical screen to determine when a set would not be considered a business. If the screen is not met and further assessment determines that the set is not a business, then the set is an asset acquisition. The primary difference between a business combination and an asset acquisition is that an asset acquisition requires cost accumulation and allocation at relative fair value. Acquisition costs are capitalized for an asset acquisition and expensed for a business combination.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Revenue Recognition
The Company adopted FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), effective January 1, 2018. The Company’s revenue impacted by ASU No. 2014-09 included revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at the Company’s properties. Such revenues are recognized when the services are provided and the performance obligations are satisfied. Tenant reimbursements, consisting of amounts due from tenants for common area maintenance, property taxes and other recoverable costs, are recognized in rental income subsequent to the adoption of Topic 842, as discussed below, in the period the recoverable costs are incurred. Tenant reimbursements, for which the Company pays the associated costs directly to third-party vendors and is reimbursed by the tenants, are recognized and recorded on a gross basis.
The Company adopted FASB ASU No. 2016-02, Leases (Topic 842), and the related FASB ASU Nos. 2018-10, 2018-11, 2018-20 and 2019-01 effective January 1, 2019, which provide practical expedients, technical corrections and improvements for certain aspects of ASU 2016-02, on a modified retrospective basis (collectively, “Topic 842”). Topic 842 establishes a single comprehensive model for entities to use in accounting for leases. Topic 842 applies to all entities that enter into leases. Lessees are required to report assets and liabilities that arise from leases. Lessor accounting has largely remained unchanged; however, certain refinements were made to conform with revenue recognition guidance, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Topic 842 impacts the Company's accounting for leases primarily as a lessor. However, Topic 842 also impacts the Company's accounting as a lessee but is considered not material.
As a lessor, the Company's leases with tenants generally provide for the lease of real estate properties, as well as common area maintenance, property taxes and other recoverable costs. To reflect recognition as one lease component, rental income and tenant reimbursements and other lease related property income that meet the requirements of the practical expedient provided by ASU No. 2018-11 have been combined under rental income in the Company's unaudited condensed consolidated statements of operations. For the three months ended March 31, 2021 and 2020, tenant reimbursements included in rental income amounted to $1,691,387 and $2,360,919, respectively.
The Company recognizes rental income from tenants under operating leases on a straight-line basis over the noncancelable term of the lease when collectability of such amounts is reasonably assured. Recognition of rental income on a straight-line basis includes the effects of rental abatements, lease incentives and fixed and determinable increases in lease payments over the lease term. If the lease provides for tenant improvements, management of 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 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 (including amounts that the tenant can take in the form of cash or a credit against its rent) 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:
•whether the lease stipulates how a tenant improvement allowance may be spent;
•whether the amount of a tenant improvement allowance is in excess of market rates;
•whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
•whether the tenant improvements are unique to the tenant or general-purpose in nature; and
•whether the tenant improvements are expected to have any residual value at the end of the lease.
Tenant reimbursements of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred and presented gross if the Company is the primary obligor and, with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk. In instances where the operating lease agreement has an early termination option, the termination penalty is based on a predetermined termination fee or based on the unamortized tenant improvements and leasing commissions.
The Company evaluates the collectability of rents and other receivables on a regular basis based on factors including, among others, payment history, credit rating, the asset type, and current economic conditions. If the Company’s evaluation of these factors indicates it may not recover the full value of the receivable, it provides an allowance against the portion of the receivable that it estimates may not be recovered. This analysis requires the Company to determine whether there are factors indicating a receivable may not be fully collectible and to estimate the amount of the receivable that may not be collected.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Gain or Loss on Sale of Real Estate Property
The Company recognizes gain or loss on sale of real estate property when the Company has executed a contract for sale of the property, transferred controlling financial interest in the property to the buyer and determined that it is probable that the Company will collect substantially all of the consideration for the property. The Company's real estate property sale transactions for the three months ended March 31, 2021 met these criteria at closing. Operating results of the property that is sold remains in continuing operations, and any associated gain or loss from the disposition is included in gain or loss on sale of real estate investments in the Company’s accompanying unaudited condensed consolidated statements of operations.
Bad Debts and Allowances for Tenant and Deferred Rent Receivables
The Company's determination of the adequacy of its allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. In addition, for tenant and deferred rent receivables deemed probable of collection, the Company also may record an allowance under other authoritative GAAP depending upon the Company's evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income in the Company's unaudited condensed consolidated statements of operations.
With respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt allowance for the tenant’s receivable balance and generally will not recognize subsequent rental income until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.
Leasing Costs
Internal leasing costs and third-party legal fees and leasing commissions are charged to expense as incurred. These expenses are included in legal leasing costs under property expenses in the Company's unaudited condensed consolidated statements of operations.
Impairment of Investment in Real Estate Properties
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of and eventual disposition of the property. If, based on the analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company records an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset. As more fully discussed in Note 3, the Company recorded impairment charges of $9,157,068 related to four of its real estate properties during the three months ended March 31, 2020. The Company did not incur any impairment charges for its real estate properties during the three months ended March 31, 2021.
Other Comprehensive Loss
For all periods presented, other comprehensive loss is the same as net loss.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Per Share Data
The Company reports a dual presentation of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS excludes dilution and is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted EPS uses the treasury stock method or the if-converted method, where applicable, to compute for the potential dilution that would occur if dilutive securities or commitments to issue common stock were exercised. Diluted EPS is the same as Basic EPS for the three months ended March 31, 2021 and 2020 as the Company had a net loss for all reported periods. As of March 31, 2021, there were 657,949.5 Class M OP Units, 56,029 Class P OP Units and 360,000 Class R OP Units (adjusted for the 1:3 reverse stock split) that are convertible to Class C OP Units at a conversion ratio of 1.6667 Class C OP Units for each one Class M OP Unit or Class P OP Unit, and at a conversion ratio of 1:1 of Class C OP Unit for each Class R OP Unit, as applicable, after a specified period of time (see Note 11). The holders of Class C OP Units may exchange such Class C OP Units for shares of the Company's Class C common stock on a 1-for-1 basis or, at the Company’s sole and absolute discretion, for cash. The Class M OP Units, Class P OP Units and Class R OP Units, and the shares of Class C common stock into which they may ultimately be converted, were excluded from the computation of Diluted EPS because their effect would not be dilutive. There were no other outstanding securities or commitments to issue common stock that would have a dilutive effect for the periods then ended.
The Company has presented the basic and diluted net loss per share amounts on the accompanying unaudited condensed consolidated statements of operations for Class C and Class S share classes as a combined common share class. Application of the two-class method for allocating net loss in accordance with the provisions of ASC 260, Earnings per Share, would have resulted in a net loss of $(0.12) and $(6.14) per share for Class C shares for the three months ended March 31, 2021 and 2020, respectively, and a net loss of $(0.12) and $(6.14) per share for Class S shares for the three months ended March 31, 2021 and 2020, respectively. Any difference in net loss per share if allocated under this method primarily reflects the lower effective distributions per share for Class S shareholders as a result of the payment of the deferred commission to the Class S distributor of these shares, and also reflects the impact of the timing of the declaration of the distributions relative to the time the shares were outstanding.
Fair Value Disclosures
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an existing price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy, which is based on three levels of inputs, the first two of which are considered observable and the last unobservable, that may be used to measure fair value, is as follows:
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instrument for which it is practicable to estimate the fair value:
Cash and cash equivalents, restricted cash, deposit for investment in special purpose acquisition company, receivable from sale of real estate property, tenant receivables, prepaid expenses and other assets and accounts payable, accrued and other liabilities: These balances approximate their fair values due to the short maturities of these items.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Derivative Instruments: The Company’s derivative instruments are presented at fair value in the accompanying unaudited condensed consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.
Goodwill and Intangible Assets: The fair value measurements of goodwill and intangible assets are considered Level 3 nonrecurring fair value measurements. For goodwill, fair value measurement involves the determination of fair value of a reporting unit. The Company uses a Monte Carlo simulation model to estimate future performance, generating the fair value of the reporting unit's business. For intangible assets, fair value measurements include assumptions with inherent uncertainty, including projected offerings volumes and related projected revenues and long-term growth rates, among others. The carrying value of intangible assets is at risk of impairment if future projected offerings proceeds, revenues or long-term growth rates are lower than those currently projected.
Credit facilities and economic relief note payable: The fair values of the Company’s credit facilities and economic relief note payable approximate the carrying values of the credit facility and economic relief note payable as their interest rates and other terms are comparable to those available in the market place for a similar credit facility and short-term note, respectively.
Mortgage notes payable: The fair value of the Company’s mortgage notes payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.
Restricted Cash
Restricted cash is comprised of funds which are restricted for use as required by certain lenders in conjunction with an acquisition or debt financing or modification and for on-site and tenant improvements or property taxes. Restricted cash as of March 31, 2021 and December 31, 2020 amounted to $170,136 and $129,118, respectively.
Pursuant to lease agreements, the Company has obligations to pay $60,598 for site and tenant improvements to be incurred by tenants as of both March 31, 2021 and December 31, 2020, including a 72.7% share of tenant improvements for the Santa Clara property at both balance sheet dates. At both March 31, 2021 and December 31, 2020, the Company's restricted cash held to fund other improvements totaled $92,684. As of March 31, 2021 and December 31, 2020, the Company also held restricted cash of $77,452 and $36,434, respectively, for lender reserves.
Deposit for Investment in Special Purpose Acquisition Company
Deposit for investment in special purpose acquisition company held in escrow represents cash placed in escrow for the Company's initial investment in a SPAC. The $4,500,000 will be released from escrow upon (i) completion of the IPO and used to purchase 9,000,000 warrants to purchase additional shares of MACS or (ii) the Company’s decision not to proceed with the IPO. Each warrant has the right to purchase 0.5 of a share of MACS common stock and can be exercised at a strike price of $11.50 per share. However, there has been significant disruption in the IPO market for SPACs during the second quarter of 2021 and there can be no assurance that MACS can complete an IPO. In the event that MACS does not complete an IPO, the $4,500,000 deposit will be released from escrow and returned to MVF.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Real Estate Investments Held for Sale
The Company generally considers a real estate investment to be “held for sale” when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value, (iv) the sale of the property within one year is considered probable and (v) significant changes to the plan to sell are not expected. Real estate that is held for sale and its related assets are classified as “real estate investment held for sale, net” and “assets related to real estate investment held for sale,” respectively, in the accompanying unaudited condensed consolidated balance sheets. Mortgage notes payable and other liabilities related to real estate investments held for sale are classified as “mortgage notes payable related to real estate investments held for sale, net” and “liabilities related to real estate investments held for sale,” respectively, in the accompanying unaudited condensed consolidated balance sheets. Real estate investments classified as held for sale are no longer depreciated and are reported at the lower of their carrying value or their estimated fair value less estimated costs to sell. Operating results of properties that were classified as held for sale in the ordinary course of business are included in continuing operations in the Company’s accompanying unaudited condensed consolidated statements of operations.
Goodwill and Other Intangible Assets
The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. The Company evaluates goodwill and other intangible assets for possible impairment in accordance with ASC 350, Intangibles–Goodwill and Other, on an annual basis, or more frequently when events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit has declined below its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized.
In assessing goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of such reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary.
However, if the Company concludes otherwise, or if it elects to bypass the qualitative analysis, then it is required to perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit.
Intangible assets consist of purchased customer-related intangible assets, marketing-related intangible assets, developed or acquired technology and other intangible assets. Intangible assets are amortized over their estimated useful lives using the straight-line method ranging from three years to five years. No significant residual value is estimated for intangible assets. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. The Company evaluates long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.
Restricted Stock and Restricted Stock Unit Awards
The fair values of the Operating Partnership's units or restricted stock unit awards issued or granted by the Company are based on an estimated value per share of the Company’s common stock on the date of issuance or grant, adjusted for an illiquidity discount due to the illiquid nature of the underlying equity. Operating Partnership units issued as purchase consideration in connection with the Self-Management Transaction discussed in Note 11 are recorded in equity under noncontrolling interests in the Operating Partnership in the Company's unaudited condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 and unaudited condensed consolidated statements of equity for the three months ended March 31, 2021 and 2020. For units granted to employees of the Company that are not included in the purchase consideration, the fair value of the award is amortized using the straight-line method over the requisite service period of the award, which is generally the vesting period. We have elected to record forfeitures as they occur.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Company determines the accounting classification of equity instruments (e.g. restricted stock units) that are issued as purchase consideration or part of the purchase consideration in a business combination, as either liability or equity, by first assessing whether the equity instruments meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”), and then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“ASC 815-40”). Under ASC 480-10, equity instruments are classified as liabilities if the equity instruments are mandatorily redeemable, obligate the issuer to settle the equity instruments or the underlying shares by paying cash or other assets, or must or may require an unconditional obligation that must be settled by issuing a variable number of shares.
If equity instruments do not meet liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the equity instruments do not require liability classification under ASC 815-40, in order to conclude equity classification, the Company assesses whether the equity instruments are indexed to its common stock and whether the equity instruments are classified as equity under ASC 815-40 or other applicable GAAP guidance. After all relevant assessments are made, the Company concludes whether the equity instruments are classified as liability or equity. Liability classified equity instruments are required to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded in the statements of operations as a gain or loss. Equity classified equity instruments are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date.
Reclassifications
Certain prior year balance sheet accounts have been reclassified to conform with the current year presentation. The reclassification did not affect the balances in the prior year statement of operations.
Recent Accounting Pronouncements
New Accounting Standards Recently Issued and Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 eases the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discounted because of reference rate reform.
Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate, and the modification would be considered “minor” so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company is currently evaluating the effect that ASU 2020-04 will have on the Company’s consolidated financial statements.
NOTE 3. REAL ESTATE INVESTMENTS, NET
As of March 31, 2021, the Company’s real estate investment portfolio consisted of 38 operating properties located in 14 states comprised of: 12 retail properties, including one property held for sale, 14 office properties and 12 industrial properties, including a 72.7% undivided TIC Interest in an industrial property in Santa Clara, California, not reflected in the table below, but discussed in Note 4.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following table provides summary information regarding the Company’s operating properties as of March 31, 2021:
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Property
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Location
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Acquisition Date
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Property Type
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Land, Buildings and Improvements
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Tenant Origination and Absorption Costs
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Accumulated Depreciation and Amortization
|
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Total Investment in Real Estate Property, Net
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Accredo Health
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Orlando, FL
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|
6/15/2016
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Office
|
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$
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9,855,847
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|
|
$
|
1,269,350
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|
|
$
|
(2,338,015)
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|
|
$
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8,787,182
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Dollar General
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Litchfield, ME
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|
11/4/2016
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Retail
|
|
1,281,812
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|
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116,302
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|
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(176,067)
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|
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1,222,047
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Dollar General
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Wilton, ME
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|
11/4/2016
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Retail
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1,543,776
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140,653
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(225,327)
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1,459,102
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Dollar General
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Thompsontown, PA
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|
11/4/2016
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Retail
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1,199,860
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106,730
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|
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(169,168)
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|
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1,137,422
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Dollar General
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Mt. Gilead, OH
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|
11/4/2016
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|
Retail
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|
1,174,188
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|
|
111,847
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|
|
(162,194)
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|
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1,123,841
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Dollar General
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Lakeside, OH
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|
11/4/2016
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Retail
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1,112,872
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100,857
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(166,461)
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|
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1,047,268
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Dollar General
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Castalia, OH
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|
11/4/2016
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Retail
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1,102,086
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86,408
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(161,734)
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1,026,760
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Dana (1)
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Cedar Park, TX
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12/27/2016
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Industrial
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6,802,876
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531,439
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(1,909,462)
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5,424,853
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Northrop Grumman
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Melbourne, FL
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|
3/7/2017
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Office
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12,382,991
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|
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1,598,274
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|
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(3,164,742)
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|
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10,816,523
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exp US Services
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Maitland, FL
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|
3/27/2017
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Office
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6,056,668
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|
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388,248
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|
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(889,269)
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5,555,647
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Wyndham
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Summerlin, NV
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6/22/2017
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Office
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10,406,483
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669,232
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|
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(1,258,845)
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|
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9,816,870
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Williams Sonoma
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Summerlin, NV
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6/22/2017
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Office
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8,079,612
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|
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550,486
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|
|
(1,136,343)
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|
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7,493,755
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Omnicare
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Richmond, VA
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|
7/20/2017
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Industrial
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7,262,747
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|
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281,442
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|
|
(893,624)
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|
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6,650,565
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EMCOR
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Cincinnati, OH
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|
8/29/2017
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|
Office
|
|
5,960,610
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|
|
463,488
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|
|
(649,013)
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|
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5,775,085
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Husqvarna
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Charlotte, NC
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|
11/30/2017
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Industrial
|
|
11,840,200
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|
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1,013,948
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|
|
(1,202,924)
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|
|
11,651,224
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AvAir
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Chandler, AZ
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|
12/28/2017
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Industrial
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|
27,357,900
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|
|
—
|
|
|
(2,284,653)
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|
|
25,073,247
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|
3M
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|
DeKalb, IL
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|
3/29/2018
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|
Industrial
|
|
14,762,819
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|
|
2,356,361
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|
|
(3,787,923)
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|
|
13,331,257
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|
Cummins
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|
Nashville, TN
|
|
4/4/2018
|
|
Office
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|
14,465,491
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|
|
1,536,998
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|
|
(2,350,578)
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|
|
13,651,911
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Northrop Grumman Parcel
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|
Melbourne, FL
|
|
6/21/2018
|
|
Land
|
|
329,410
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|
|
—
|
|
|
—
|
|
|
329,410
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|
Texas Health
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Dallas, TX
|
|
9/13/2018
|
|
Office
|
|
6,976,703
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|
|
713,221
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|
|
(755,669)
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|
|
6,934,255
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Bon Secours
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Richmond, VA
|
|
10/31/2018
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|
Office
|
|
10,388,751
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|
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800,356
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|
|
(1,091,539)
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|
|
10,097,568
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Costco
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Issaquah, WA
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|
12/20/2018
|
|
Office
|
|
27,330,797
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|
|
2,765,136
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|
|
(2,979,998)
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|
|
27,115,935
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Taylor Fresh Foods
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Yuma, AZ
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|
10/24/2019
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|
Industrial
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34,194,369
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|
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2,894,017
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|
|
(1,927,440)
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|
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35,160,946
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Levins
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Sacramento, CA
|
|
12/31/2019
|
|
Industrial
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|
4,429,390
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|
|
221,927
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|
|
(275,761)
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|
|
4,375,556
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|
Dollar General
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|
Bakersfield, CA
|
|
12/31/2019
|
|
Retail
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|
4,899,714
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|
|
261,630
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|
|
(183,915)
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|
|
4,977,429
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|
PMI Preclinical
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San Carlos, CA
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|
12/31/2019
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|
Industrial
|
|
9,672,174
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|
|
408,225
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|
|
(255,401)
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|
|
9,824,998
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|
GSA (MSHA)
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|
Vacaville, CA
|
|
12/31/2019
|
|
Office
|
|
3,112,076
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|
|
243,307
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|
|
(173,143)
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|
|
3,182,240
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|
PreK Education
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|
San Antonio, TX
|
|
12/31/2019
|
|
Retail
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|
12,447,287
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|
|
447,927
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|
|
(749,285)
|
|
|
12,145,929
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|
Dollar Tree
|
|
Morrow, GA
|
|
12/31/2019
|
|
Retail
|
|
1,320,367
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|
|
73,298
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|
|
(88,638)
|
|
|
1,305,027
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|
Solar Turbines
|
|
San Diego, CA
|
|
12/31/2019
|
|
Office
|
|
7,133,241
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|
|
284,026
|
|
|
(422,859)
|
|
|
6,994,408
|
|
Wood Group
|
|
San Diego, CA
|
|
12/31/2019
|
|
Industrial
|
|
9,731,220
|
|
|
539,633
|
|
|
(678,156)
|
|
|
9,592,697
|
|
ITW Rippey
|
|
El Dorado, CA
|
|
12/31/2019
|
|
Industrial
|
|
7,071,143
|
|
|
304,387
|
|
|
(379,614)
|
|
|
6,995,916
|
|
Dollar General
|
|
Big Spring, TX
|
|
12/31/2019
|
|
Retail
|
|
1,281,683
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|
|
76,351
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|
|
(63,711)
|
|
|
1,294,323
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|
Gap
|
|
Rocklin, CA
|
|
12/31/2019
|
|
Office
|
|
8,378,276
|
|
|
360,377
|
|
|
(599,133)
|
|
|
8,139,520
|
|
L-3 Communications
|
|
San Diego, CA
|
|
12/31/2019
|
|
Industrial
|
|
11,631,857
|
|
|
454,035
|
|
|
(588,529)
|
|
|
11,497,363
|
|
Sutter Health
|
|
Rancho Cordova, CA
|
|
12/31/2019
|
|
Office
|
|
29,555,055
|
|
|
1,616,610
|
|
|
(1,350,436)
|
|
|
29,821,229
|
|
Walgreens
|
|
Santa Maria, CA
|
|
12/31/2019
|
|
Retail
|
|
5,223,442
|
|
|
335,945
|
|
|
(166,201)
|
|
|
5,393,186
|
|
|
|
|
|
|
|
|
|
$
|
337,755,793
|
|
|
$
|
24,122,471
|
|
|
$
|
(35,655,770)
|
|
|
$
|
326,222,494
|
|
Prior Year Impairment Charges
During late March 2020, the Company learned that there would be a substantial impact on the commercial real estate market and specifically on fitness centers such as the Company's property leased at that time to 24 Hour Fitness USA, Inc. (“24 Hour Fitness”) due to the COVID-19 pandemic and the requirement of an indefinite and potentially extended period of store closures.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
On March 31, 2020, the Company received written notice from 24 Hour Fitness that due to circumstances beyond its control, including the response to the COVID-19 pandemic and directives and mandates of various governmental authorities affecting the Las Vegas, Nevada 24 Hour Fitness store leased from the Company, it would not make the April 2020 rent payment. Despite negotiations with the tenant, no further rent payments were received and on June 15, 2020, the Company received written notice that the lease was formally rejected in connection with 24 Hour Fitness' Chapter 11 bankruptcy proceeding and the premises were surrendered to the Company's subsidiary. The lender on the property agreed to temporarily reduce its $32,000 monthly mortgage payment by $8,000 from May through August 2020 and the Company's special purpose subsidiary determined that if it was unable to secure a replacement tenant, then it would consider allowing the lender to foreclose on, and take possession of, the property. As such, the Company concluded that it was necessary to record an impairment charge to reduce the net book value of the property to its estimated fair value.
In addition, the Company determined that the effects of the COVID-19 pandemic on the overall economy and commercial real estate market would also have negative impacts on the Company's ability to re-lease two vacant properties, the property formerly leased to Dinan Cars located in Morgan Hill, CA through January 31, 2020 and the property leased to Dana, but currently unoccupied, located in Cedar Park, Texas.
Based on an evaluation of the value of these properties, the Company determined that impairment charges were required during the three months ended March 31, 2020 to reflect the reduction in value due to the uncertainty regarding leasing or sale prospects.
As of March 31, 2020, the Company recorded impairment charges aggregating $9,157,068, based on the estimated fair values of the aforementioned real estate properties. These impairment charges represented the excess of the property's carrying value over the property's sale price less estimated selling costs. The aggregate impairment charges of $9,157,068 represented approximately 2.2% of the Company’s total investments in real estate property before impairments as of March 31, 2020. The properties formerly leased by Dinan Cars and 24 Hour Fitness were sold in October and December 2020, respectively.
There were no impairment charges recorded during the three months ended March 31, 2021. The details of the Company's real estate impairment charges for the three months ended March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
Location
|
|
Three Months Ended March 31, 2020
|
Dana
|
|
Cedar Park, TX
|
|
$
|
2,184,395
|
|
24 Hour Fitness
|
|
Las Vegas, NV
|
|
5,664,517
|
|
Dinan Cars
|
|
Morgan Hill, CA
|
|
1,308,156
|
|
Total
|
|
|
|
$
|
9,157,068
|
|
Acquisitions
The Company did not acquire any real estate properties during the three months ended March 31, 2021 or March 31, 2020.
Dispositions
The Company did not dispose of any property during the three months ended March 31, 2020. The Company sold the following properties during the three months ended March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
Location
|
|
Disposition Date
|
|
Property Type
|
|
Rentable Square Feet
|
|
Contract Sale Price
|
|
Gain on Sale
|
Chevron Gas Station
|
|
Roseville, CA
|
|
1/7/2021
|
|
Retail
|
|
3,300
|
|
|
$
|
4,050,000
|
|
|
$
|
228,769
|
|
EcoThrift
|
|
Sacramento, CA
|
|
1/29/2021
|
|
Retail
|
|
38,536
|
|
|
5,375,300
|
|
|
51,415
|
|
Chevron Gas Station
|
|
San Jose, CA
|
|
2/12/2021
|
|
Retail
|
|
1,060
|
|
|
4,288,888
|
|
|
9,458
|
|
Total
|
|
|
|
|
|
|
|
42,896
|
|
|
$
|
13,714,188
|
|
|
$
|
289,642
|
|
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
On January 7, 2021, the Company completed the sale of its Roseville, California retail property, which was leased to the operator of a Chevron gas station, for $4,050,000, which generated net proceeds of $3,914,909 after payment of commissions and closing costs.
On January 29, 2021, the Company completed the sale of its Sacramento, California retail property, which was leased to EcoThrift, for $5,375,300, which generated net proceeds of $2,647,286 after repayment of the existing mortgage, commissions and closing costs.
On February 12, 2021, the Company completed the sale of its San Jose, California retail property, which was leased to the operator of a Chevron gas station, for $4,288,888, which generated net proceeds of $4,055,657 after payment of commissions and closing costs.
Asset Concentration
The Company holds no real estate property with a net book value that is greater than 10% of its total assets as of March 31, 2021 or December 31, 2020.
Revenue Concentration
No tenant represented the source of 10% of total revenues during the three months ended March 31, 2021 or March 31, 2020.
Operating Leases
The Company’s real estate properties are primarily leased to tenants under net leases for which terms and expirations vary. The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies or lease guarantors) that are rated by nationally recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants (or their parent companies or lease guarantors), and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
During the first four months of 2020, the Company paid an aggregate of $990,000 in lease incentives to cancel certain termination options related to two leases with Walgreens for its Santa Maria, California and Stockbridge, Georgia properties, resulting in extension of the leases for approximately 10 years each. The Stockbridge property was sold on August 27, 2020. These costs were capitalized and are amortized over the period of the extension for the Santa Maria property and were charged to cost of sale for the Stockbridge property in August 2020.
As of March 31, 2021, the future minimum contractual rent payments due to the Company under the Company’s non-cancellable operating leases, including lease amendments executed subsequent to March 31, 2021 and excluding rents due related to real estate investments held for sale, are as follows:
|
|
|
|
|
|
|
|
|
April through December 2021
|
|
$
|
19,293,560
|
|
2022
|
|
24,100,393
|
|
2023
|
|
20,156,671
|
|
2024
|
|
19,674,111
|
|
2025
|
|
16,455,437
|
|
2026
|
|
9,610,427
|
|
Thereafter
|
|
34,217,069
|
|
|
|
$
|
143,507,668
|
|
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Lease Intangible Assets, Net
As of March 31, 2021, the Company’s lease intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant Origination and Absorption Costs
|
|
Above-Market Lease Intangibles
|
|
Below-Market Lease Intangibles
|
Cost
|
$
|
24,122,471
|
|
|
$
|
1,128,549
|
|
|
$
|
(15,163,672)
|
|
Accumulated amortization
|
(10,745,424)
|
|
|
(340,162)
|
|
|
2,965,510
|
|
Net amount
|
$
|
13,377,047
|
|
|
$
|
788,387
|
|
|
$
|
(12,198,162)
|
|
The intangible assets acquired in connection with the acquisitions have a weighted average amortization period of approximately 9.4 years as of March 31, 2021. As of March 31, 2021, the amortization of intangible assets for the nine months ending December 31, 2021 and for each year of the next five years and thereafter is expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant Origination and Absorption Costs
|
|
Above-Market Lease Intangibles
|
|
Below-Market Lease Intangibles
|
April through December 2021
|
$
|
2,614,179
|
|
|
$
|
97,367
|
|
|
$
|
(1,095,172)
|
|
2022
|
2,694,760
|
|
|
129,823
|
|
|
(1,217,042)
|
|
2023
|
1,817,760
|
|
|
127,174
|
|
|
(921,169)
|
|
2024
|
1,700,917
|
|
|
122,543
|
|
|
(917,750)
|
|
2025
|
1,323,773
|
|
|
115,996
|
|
|
(917,750)
|
|
2026
|
655,564
|
|
|
78,557
|
|
|
(912,347)
|
|
Thereafter
|
2,570,094
|
|
|
116,927
|
|
|
(6,216,932)
|
|
|
$
|
13,377,047
|
|
|
$
|
788,387
|
|
|
$
|
(12,198,162)
|
|
|
|
|
|
|
|
Weighted-average remaining amortization period
|
7.1 years
|
|
7.0 years
|
|
12.0 years
|
Real Estate Investments Held For Sale
As a result of the COVID-19 pandemic discussed in Note 1, starting during the second quarter of 2020, the Company deemed it necessary to sell certain of its real estate investment properties to generate funds for share repurchases and certain debt obligations.
During 2020, the Company identified nine properties (eight retail properties and one industrial property) as real estate investment properties as held for sale. During the second half of 2020, five of the nine properties (four retail properties and one industrial property) were sold. Of the four remaining retail properties held for sale as of December 31, 2020, the Company sold three retail properties during the first quarter of 2021: the EcoThrift property and the two Chevron properties (see Dispositions above for more details). The only remaining retail property held for sale as of March 31, 2021 is the Harley Davidson property, which was identified as held for sale as of September 30, 2020.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following table summarizes the major components of assets and liabilities related to real estate investments held for sale as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
Assets related to real estate investments held for sale:
|
|
|
|
|
Land, buildings and improvements
|
|
$
|
12,546,055
|
|
|
$
|
25,675,459
|
|
Tenant origination and absorption costs
|
|
—
|
|
|
554,788
|
|
Accumulated depreciation and amortization
|
|
(1,167,370)
|
|
|
(1,644,508)
|
|
Real estate investments held for sale, net
|
|
11,378,685
|
|
|
24,585,739
|
|
Other assets, net
|
|
1,019,131
|
|
|
1,079,361
|
|
Total assets related to real estate investments held for sale:
|
|
$
|
12,397,816
|
|
|
$
|
25,665,100
|
|
|
|
|
|
|
Liabilities related to real estate investments held for sale:
|
|
|
|
|
Mortgage notes payable, net
|
|
$
|
6,487,754
|
|
|
$
|
9,088,438
|
|
Other liabilities, net
|
|
379,434
|
|
|
801,337
|
|
Total liabilities related to real estate investments held for sale:
|
|
$
|
6,867,188
|
|
|
$
|
9,889,775
|
|
The following table summarizes the major components of rental income, expenses and impairment related to real estate investments held for sale as of March 31, 2021 and 2020, which were included in continuing operations for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
Total revenues
|
|
$
|
281,063
|
|
|
$
|
331,316
|
|
Expenses:
|
|
|
|
|
Interest expense
|
|
77,708
|
|
|
79,836
|
|
Depreciation and amortization
|
|
—
|
|
|
86,713
|
|
Other expenses
|
|
58,501
|
|
|
56,753
|
|
Total expenses
|
|
136,209
|
|
|
223,302
|
|
Net income
|
|
$
|
144,854
|
|
|
$
|
108,014
|
|
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 4. INVESTMENT IN UNCONSOLIDATED ENTITY
The Company’s investment in unconsolidated entity as of March 31, 2021 and December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
The TIC Interest
|
|
$
|
9,995,456
|
|
|
$
|
10,002,368
|
|
The Company’s income from investment in unconsolidated entity for the three months ended March 31, 2021 and 2020, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2021
|
|
2020
|
The TIC Interest
|
|
$
|
72,467
|
|
|
$
|
20,753
|
|
TIC Interest
During 2017, the Company, through a wholly-owned subsidiary of the Operating Partnership, acquired an approximate 72.7% interest in an industrial property in Santa Clara, California. The remaining approximate 27.3% of undivided interest in the Santa Clara property is held by Hagg Lane II, LLC (an approximate 23.4% interest) and Hagg Lane III, LLC (an approximate 3.9% interest). The manager of both Hagg Lane II, LLC and Hagg Lane III, LLC became a member of the Company's board of directors in December 2019. The Santa Clara property does not qualify as a variable interest entity and consolidation is not required as the Company’s TIC Interest does not control the property. Therefore, the Company accounts for the TIC Interest using the equity method. The Company receives approximately 72.7% of the cash flow distributions and recognizes approximately 72.7% of the results of operations. During the three months ended March 31, 2021 and 2020, the Company received $79,379 and $165,031 in cash distributions, respectively.
The following is summarized financial information for the Santa Clara property as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
Assets:
|
|
|
|
|
Real estate investments, net
|
|
$
|
29,656,131
|
|
|
$
|
29,906,146
|
|
Cash and cash equivalents
|
|
493,419
|
|
|
380,774
|
|
Other assets
|
|
199,368
|
|
|
164,684
|
|
Total assets
|
|
$
|
30,348,918
|
|
|
$
|
30,451,604
|
|
Liabilities:
|
|
|
|
|
Mortgage notes payable
|
|
$
|
13,420,833
|
|
|
$
|
13,489,126
|
|
Below-market lease, net
|
|
2,770,376
|
|
|
2,806,973
|
|
Other liabilities
|
|
104,206
|
|
|
92,777
|
|
Total liabilities
|
|
16,295,415
|
|
|
16,388,876
|
|
Total equity
|
|
14,053,503
|
|
|
14,062,728
|
|
Total liabilities and equity
|
|
$
|
30,348,918
|
|
|
$
|
30,451,604
|
|
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2021
|
|
2020
|
Total revenues
|
|
$
|
673,976
|
|
|
$
|
597,920
|
|
Expenses:
|
|
|
|
|
Interest expense
|
|
137,606
|
|
|
141,703
|
|
Depreciation and amortization
|
|
250,015
|
|
|
249,218
|
|
Other expenses
|
|
186,688
|
|
|
178,457
|
|
Total expenses
|
|
574,309
|
|
|
569,378
|
|
Net income
|
|
$
|
99,667
|
|
|
$
|
28,542
|
|
NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill, Net
The changes in carrying value of goodwill as of March 31, 2021 and December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
Beginning balance
|
|
$
|
17,320,857
|
|
|
$
|
50,588,000
|
|
Impairment of goodwill for the three and the 12 months period ended, respectively
|
|
—
|
|
|
(33,267,143)
|
|
Ending balance
|
|
$
|
17,320,857
|
|
|
$
|
17,320,857
|
|
The current COVID-19 pandemic in the United States and globally, and the magnitude and uncertain duration of the economic impacts have resulted in challenges in attracting investor equity during this period of economic weakness and volatility. The disruption in the Company's Offerings had a protracted impact on capital raising, and the recessionary pressures on the economy resulted in real estate market uncertainty and an approximate 14% decrease in the estimated fair value of the Company’s real estate properties as of April 30, 2020 as compared with the estimated fair value of the Company’s real estate properties as of December 31, 2019. Given these circumstances, the Company revised its capital raise projections, its projections of new investment and other factors contributing to the Company's analysis of estimated fair value of its consolidated business operations as of March 31, 2020. Since the Company is a single reporting unit, the Company performed a quantitative analysis to compare the estimated fair value of the Company’s net tangible and intangible assets to the carrying value of its net tangible and intangible assets as of March 31, 2020. Since the estimated fair value of the Company’s net tangible and intangible assets was less than the carrying amount of its net tangible and intangible assets, the Company recorded a goodwill impairment charge of $33,267,143, which was reflected in the Company’s net loss for the three months ended March 31, 2020. The Company conducted its annual impairment analysis as of December 31, 2020 using qualitative factors and concluded that no additional impairment to goodwill was necessary. Management did not identify any triggering events for the three months ended March 31, 2021 requiring a qualitative assessment.
Intangible Assets, Net
The following table sets forth the Company's intangible assets, net as of March 31, 2021 and December 31, 2020 and their related useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
Weighted-Average Useful Life
|
|
March 31,
2021
|
|
December 31,
2020
|
Investor list, net
|
|
5.0 years
|
|
$
|
3,494,740
|
|
|
$
|
3,494,740
|
|
Web services technology, domains and licenses
|
|
3.0 years
|
|
3,466,102
|
|
|
3,466,102
|
|
|
|
|
|
6,960,842
|
|
|
6,960,842
|
|
Accumulated amortization
|
|
|
|
(2,293,198)
|
|
|
(1,833,054)
|
|
Net
|
|
|
|
$
|
4,667,644
|
|
|
$
|
5,127,788
|
|
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Amortization expense for the three months ended March 31, 2021 and 2020 amounted to $460,144 and $487,219, respectively.
As discussed above, the COVID-19 pandemic caused significant disruptions in the economy and uncertainties in the investment markets. Based on the impacts on the Company's investors and the economy, the Company evaluated the fair value of intangibles to determine if they exceeded the respective carrying values and determined that a portion of the investor list would no longer be viable and, therefore, the Company recorded an impairment charge of $1,305,260, which was reflected in the Company’s net loss for the three months ended March 31, 2020.
The estimated amortization expense for the succeeding fiscal years is as follows: April 2021 to December 2021, $1,380,432; 2022, $1,840,576; 2023, $749,978; and 2024, $696,658.
NOTE 6. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS
Tenant Receivables, Net
Tenant receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
Straight-line rent
|
|
$
|
4,668,259
|
|
|
$
|
4,344,388
|
|
Tenant rent
|
|
528,516
|
|
|
204,775
|
|
Tenant reimbursements
|
|
1,720,249
|
|
|
1,979,963
|
|
Tenant other
|
|
215,354
|
|
|
136,664
|
|
Total
|
|
$
|
7,132,378
|
|
|
$
|
6,665,790
|
|
Accounts Payable, Accrued and Other Liabilities
Accounts payable, accrued and other liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
Accounts payable
|
|
$
|
1,490,929
|
|
|
$
|
1,136,954
|
|
Accrued expenses
|
|
2,191,671
|
|
|
3,068,714
|
|
Accrued distributions
|
|
674,842
|
|
|
706,106
|
|
Accrued interest payable
|
|
604,254
|
|
|
629,628
|
|
Unearned rent
|
|
1,890,520
|
|
|
2,033,065
|
|
Lease incentive obligation
|
|
5,157
|
|
|
5,157
|
|
Total
|
|
$
|
6,857,373
|
|
|
$
|
7,579,624
|
|
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 7. DEBT
Mortgage Notes Payable, Net
As of March 31, 2021 and December 31, 2020, the Company’s mortgage notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
|
|
2021 Principal
Amount
|
|
2020 Principal
Amount
|
|
Contractual Interest
Rate (1)
|
|
Effective
Interest Rate (1)
|
|
Loan
Maturity
|
Accredo property
|
|
$
|
8,538,000
|
|
|
$
|
8,538,000
|
|
|
3.80%
|
|
3.80%
|
|
08/01/2025
|
Six Dollar General properties
|
|
3,728,947
|
|
|
3,747,520
|
|
|
4.69%
|
|
4.69%
|
|
04/01/2022
|
Dana property
|
|
4,444,310
|
|
|
4,466,865
|
|
|
4.56%
|
|
4.56%
|
|
04/01/2023
|
Northrop Grumman property
|
|
5,479,471
|
|
|
5,518,589
|
|
|
4.40%
|
|
4.40%
|
|
07/02/2022
|
exp US Services property
|
|
3,305,060
|
|
|
3,321,931
|
|
|
(3)
|
|
4.25%
|
|
11/17/2024
|
Wyndham property (2)
|
|
5,579,100
|
|
|
5,607,000
|
|
|
One-month LIBOR + 2.05%
|
|
4.34%
|
|
06/05/2027
|
Williams Sonoma property (2)
|
|
4,415,100
|
|
|
4,438,200
|
|
|
One-month LIBOR + 2.05%
|
|
4.34%
|
|
06/05/2022
|
Omnicare property
|
|
4,171,894
|
|
|
4,193,171
|
|
|
4.36%
|
|
4.36%
|
|
05/01/2026
|
EMCOR property
|
|
2,797,942
|
|
|
2,811,539
|
|
|
4.35%
|
|
4.35%
|
|
12/01/2024
|
Husqvarna property
|
|
6,379,182
|
|
|
6,379,182
|
|
|
(4)
|
|
4.60%
|
|
02/20/2028
|
AvAir property
|
|
19,950,000
|
|
|
19,950,000
|
|
|
3.80%
|
|
3.80%
|
|
08/01/2025
|
3M property
|
|
8,134,500
|
|
|
8,166,000
|
|
|
One-month LIBOR + 2.25%
|
|
5.09%
|
|
03/29/2023
|
Cummins property
|
|
8,300,100
|
|
|
8,332,200
|
|
|
One-month LIBOR + 2.25%
|
|
5.16%
|
|
04/04/2023
|
Texas Health property
|
|
4,343,283
|
|
|
4,363,203
|
|
|
4.00%
|
|
4.00%
|
|
12/05/2024
|
Bon Secours property
|
|
5,160,458
|
|
|
5,180,552
|
|
|
5.41%
|
|
5.41%
|
|
09/15/2026
|
Costco property
|
|
18,850,000
|
|
|
18,850,000
|
|
|
4.85%
|
|
4.85%
|
|
01/01/2030
|
Taylor Fresh Foods
|
|
12,350,000
|
|
|
12,350,000
|
|
|
3.85%
|
|
3.85%
|
|
11/01/2029
|
Levins property (5)
|
|
2,700,000
|
|
|
2,032,332
|
|
|
3.75%
|
|
3.75%
|
|
02/16/2026
|
Dollar General Bakersfield property (5)
|
|
2,280,000
|
|
|
2,268,922
|
|
|
3.65%
|
|
3.65%
|
|
02/16/2028
|
PMI Preclinical property (5)
|
|
5,400,000
|
|
|
4,020,418
|
|
|
3.75%
|
|
3.75%
|
|
02/16/2026
|
GSA (MSHA) property (5)
|
|
1,756,000
|
|
|
1,752,092
|
|
|
3.65%
|
|
3.65%
|
|
02/16/2026
|
PreK San Antonio property (6)
|
|
5,010,639
|
|
|
5,037,846
|
|
|
4.25%
|
|
4.25%
|
|
12/01/2021
|
Solar Turbines, Amec Foster, ITW Rippey properties (6)
|
|
9,157,247
|
|
|
9,214,700
|
|
|
3.35%
|
|
3.35%
|
|
11/01/2026
|
Dollar General Big Spring property (6)
|
|
596,781
|
|
|
599,756
|
|
|
4.50%
|
|
4.50%
|
|
04/01/2022
|
Gap property (6)
|
|
3,550,419
|
|
|
3,569,990
|
|
|
4.15%
|
|
4.15%
|
|
08/01/2023
|
L-3 Communications property (6)
|
|
5,159,513
|
|
|
5,185,929
|
|
|
4.69%
|
|
4.69%
|
|
04/01/2022
|
Sutter Health property (6)
|
|
13,808,042
|
|
|
13,879,655
|
|
|
4.50%
|
|
4.50%
|
|
03/09/2024
|
Walgreens property (6)
|
|
3,146,370
|
|
|
3,172,846
|
|
|
4.25%
|
|
4.25%
|
|
07/16/2030
|
Total mortgage notes payable
|
|
178,492,358
|
|
|
176,948,438
|
|
|
|
|
|
|
|
Plus unamortized mortgage premium, net (7)
|
|
415,323
|
|
|
447,471
|
|
|
|
|
|
|
|
Less unamortized deferred financing costs
|
|
(1,479,061)
|
|
|
(1,469,991)
|
|
|
|
|
|
|
|
Mortgage notes payable, net
|
|
$
|
177,428,620
|
|
|
$
|
175,925,918
|
|
|
|
|
|
|
|
(1)Contractual interest rate represents the interest rate in effect under the mortgage note payable as of March 31, 2021. Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2021, consisting of the contractual interest rate and the effect of the interest rate swap, if applicable (see Note 8 for further information regarding the Company’s derivative instruments).
(2)The loans on each of the Williams Sonoma and Wyndham properties (collectively, the “Property”) located in Summerlin, Nevada were originated by Nevada State Bank (“Bank”). The loans are collateralized by a deed of trust and a security agreement with assignment of rents and fixture filing. In addition, the individual loans are subject to a cross collateralization and cross default agreement whereby any default under, or failure to comply with the terms of any one or both of the loans, is an event of default under the terms of both loans. The value of the Property must be in an amount sufficient to maintain a loan to value ratio of no more than 60%. If the loan to value ratio is ever more than 60%, the borrower shall, upon the Bank’s written demand, reduce the principal balance of the loans so that the loan to value ratio is no more than 60%.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
(3)The initial contractual interest rate is 4.25% and starting November 18, 2022, the interest rate becomes the U.S. Treasury Bill index rate plus 3.25%.
(4)The initial contractual interest rate is 4.60% through February 20, 2023 and then the greater of 4.60% or five-year Treasury Constant Maturity (“TCM”) plus 2.45% through February 20, 2028.
(5)The mortgage note as of March 31, 2021 was refinanced on March 5, 2021 with a new lender and terms. The mortgage note as of December 31, 2020 was acquired through the Merger on December 31, 2019.
(6)The loan was acquired through the Merger on December 31, 2019.
(7)Represents unamortized net mortgage premium acquired through the Merger.
The following summarizes the face value, carrying amount and fair value of the Company’s mortgage notes payable (Level 3 measurement) as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
Face Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Face value
|
|
Carrying
Value
|
|
Fair Value
|
Mortgage notes payable
|
$
|
178,492,358
|
|
|
$
|
177,428,620
|
|
|
$
|
179,576,868
|
|
|
$
|
176,948,438
|
|
|
$
|
175,925,918
|
|
|
$
|
177,573,106
|
|
Disclosures of the fair values of financial instruments are based on pertinent information available to the Company as of the period end and require a significant amount of judgment. The actual value could be materially different from the Company’s estimate of fair value.
Mortgage Notes Payable Related to Real Estate Investments Held For Sale, Net
As discussed in detail in Note 3, the Company classified one and two properties as real estate held for sale as of March 31, 2021 and December 31, 2020, respectively, which were collateral for mortgage notes payable. The following table summarizes the Company's mortgage notes payable related to real estate investments held for sale as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
|
|
March 31,
2021
|
|
December 31,
2020
|
Harley Davidson property
|
|
$
|
6,590,162
|
|
|
$
|
6,623,346
|
|
EcoThrift property
|
|
—
|
|
|
2,573,509
|
|
Total
|
|
6,590,162
|
|
|
9,196,855
|
|
Plus unamortized mortgage premium
|
|
—
|
|
|
1,550
|
|
Less deferred financing costs
|
|
(102,408)
|
|
|
(109,967)
|
|
Mortgage notes payable, net
|
|
$
|
6,487,754
|
|
|
$
|
9,088,438
|
|
Credit Facility, Net
The details of the Company's credit facilities as of March 31, 2021 and December 31, 2020 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2021
|
|
December 31,
2020
|
Credit facility
|
|
$
|
6,000,000
|
|
|
$
|
6,000,000
|
|
Less unamortized deferred financing costs
|
|
(132,836)
|
|
|
(21,724)
|
|
Credit facility, net
|
|
$
|
5,867,164
|
|
|
$
|
5,978,276
|
|
On March 29, 2021, the Company entered into a new credit facility with Banc of California (the “Credit Facility”) for an aggregate line of credit of $22,000,000 with a maturity date of March 30, 2023 which replaced the prior credit facility provided by Pacific Mercantile Bank (“PMB”) with a balance outstanding of $6,000,000 as of December 31, 2020. The Company borrowed $6,000,000 under the Credit Facility and repaid the $6,000,000 that was owed to PMB on March 31, 2021. The Credit Facility provides the Company with a $17,000,000 revolving line of credit for real estate acquisitions (including the $6,000,000 borrowed to repay PMB) and an additional $5,000,000 revolving line of credit for working capital. Under the terms of the Credit Facility, the Company will pay a variable rate of interest on outstanding amounts equal to one percentage point over the prime rate published in The Wall Street Journal, provided that the interest rate in effect on any one day shall not be less than 4.75% per annum. The Company paid Banc of California origination fees of $77,000 in connection with the Credit Facility and will pay an
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
unused commitment fee of 0.15% per annum of the unused portion of the Credit Facility, charged quarterly in arrears based on the average unused commitment available under the Credit Facility.
The Credit Facility is secured by substantially all of the Company’s tangible and intangible assets, including intellectual property. The Credit Facility requires the Company to maintain a minimum debt service coverage ratio of 1.25 to 1.00 and minimum tangible NAV (as defined in the loan agreement) of $120,000,000, measured quarterly. Mr. Wirta, the Company’s Chairman, has guaranteed the $6,000,000 initial borrowing, which guarantee will expire upon repayment of the $6,000,000 which is due by September 30, 2021. Mr. Wirta has also guaranteed the $5,000,000 revolving line of credit for working capital. On March 29, 2021, the Company entered into an updated indemnification agreement with Mr. Wirta and the Wirta Trust with respect to their guarantees of borrowings under the Credit Facility pursuant to which the Company agreed to indemnify Mr. Wirta and the Wirta Trust if they are required to make payments to Banc of California pursuant to such guarantees.
As of December 31, 2020, the Company, Rich Uncles NNN LP, LLC, the Operating Partnership, Merger Sub, BrixInvest and modiv, LLC were the borrowers under a Loan and Security Agreement (the “Prior Credit Facility”) with PMB. The Prior Credit Facility was a line of credit for a maximum principal amount of $12,000,000 and as of December 31, 2020, the Prior Credit Facility had an outstanding balance of $6,000,000. The Prior Credit Facility was repaid in full with proceeds from the Credit Facility on March 31, 2021.
In connection with an August 13, 2020 amendment to the Prior Credit Facility, the Company's Chairman, Mr. Wirta, and the Wirta Trust guaranteed the Company’s obligations under the Prior Credit Facility. On July 30, 2020, the Company entered into an indemnification agreement with Mr. Wirta and the Wirta Trust with respect to their guarantees of the Company’s $12,000,000 Prior Credit Facility with PMB pursuant to which the Company agreed to indemnify Mr. Wirta and the Wirta Trust if they were required to make payments to PMB pursuant to such guarantees.
Under the terms of the Prior Credit Facility, the borrowers paid a variable rate of interest on outstanding amounts equal to one percentage point over the prime rate published in The Wall Street Journal, provided that the interest rate in effect on any one day was not be less than 5.50% per annum. The interest rate was 5.50% as of December 31, 2020.
To secure the payment and performance of all obligations under the Prior Credit Facility, each of modiv, LLC and BrixInvest granted to PMB a security interest in all of their right, title and interest in their accounts, inventory, equipment, deposit accounts, intellectual property, general intangibles, investment property and other property.
The Credit Facility contains customary representations, warranties and covenants, which are substantially similar to those in the Company's Prior Credit Facility. The Company’s ability to borrow under the Credit Facility will be subject to its ongoing compliance with various affirmative and negative covenants, including with respect to indebtedness, guaranties, mergers and asset sales, liens, tangible net worth, corporate existence and financial reporting obligations. The Credit Facility also contains customary events of default, including, without limitation, nonpayment of principal, interest, fees or other amounts when due, violation of covenants, breaches of representations or warranties and change of ownership. Upon the occurrence of an event of default, Banc of California may accelerate the repayment of amounts outstanding under the Credit Facility, take possession of any collateral securing the Credit Facility and exercise other remedies subject, in certain instances, to the expiration of an applicable cure period.
Short-term Notes Payable
In connection with the Self-Management Transaction, the Company assumed from BrixInvest its unsecured short-term notes payable (formerly known as “Convertible Promissory Notes”) of $4,800,000 on December 31, 2019. The notes represented private party notes and bore interest at a fixed rate of 8% with all interest and principal due on the maturity date. Except for six notes from one borrower aggregating $1,024,750 for which the maturity date was extended to April 30, 2020, all notes were repaid prior to March 31, 2020. In exchange for the maturity date extension, the Company agreed to pay 2% of the principal and accrued interest, or $24,845, as an extension fee and agreed to an increase in the interest rate from 8% to 10% per annum during the extension period. The maturity date for the $490,000 of the extended short-term notes was subsequently accelerated to April 6, 2020 in exchange for a $10,000 reduction in the extension fee to $14,845 and these notes were repaid on April 6, 2020.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Economic Relief Notes Payable
On April 20, 2020, a subsidiary of the Company entered into a loan agreement and promissory note evidencing an unsecured loan in the aggregate amount of $517,000 made to this subsidiary under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP is administered by the U.S. Small Business Administration (the “SBA”). Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. In December 2020, the subsidiary of the Company submitted its application for forgiveness of the total amount of the loan to PMB. After PMB’s review, the Company updated its forgiveness application on February 10, 2021, PMB submitted the application to the SBA on February 10, 2021, and on February 16, 2021, the subsidiary of the Company was notified by PMB that the Company's application for forgiveness of the PPP loan had been approved by the SBA in the full amount of $517,000. Accordingly, the forgiveness of the PPP loan is reflected in other income for the three months ended March 31, 2021.
Compliance with All Debt Agreements
The Company's charter limits the amount the Company may borrow to 300% of its net assets, unless any excess borrowing is approved by a majority of the Company's independent directors and disclosed to the Company's stockholders in its next quarterly report, along with a justification for such increase. The Company's maximum leverage, as defined and approved by the board of directors, including all of the independent directors, is 55% of the aggregate value of the Company’s tangible assets. The Company uses available leverage based on the relative cost of debt and equity capital, and to address strategic borrowing advantages potentially available to the Company.
Pursuant to the terms of mortgage notes payable on certain of the Company’s properties and the Credit Facility, the Company and/or the borrowers are subject to certain financial loan covenants. The Company and/or the borrowers were in compliance with all terms and conditions of the applicable loan agreements as of March 31, 2021.
The following summarizes the future principal repayments of the Company’s mortgage notes payable, unsecured credit facility and short-term notes payable as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Notes
Payable
|
|
Credit Facility
|
|
Total
|
April through December 2021
|
|
$
|
6,733,921
|
|
|
$
|
—
|
|
|
$
|
6,733,921
|
|
2022
|
|
21,222,168
|
|
|
6,000,000
|
|
|
27,222,168
|
|
2023
|
|
26,002,800
|
|
|
—
|
|
|
26,002,800
|
|
2024
|
|
24,972,155
|
|
|
—
|
|
|
24,972,155
|
|
2025
|
|
28,583,552
|
|
|
—
|
|
|
28,583,552
|
|
2026
|
|
26,084,091
|
|
|
—
|
|
|
26,084,091
|
|
Thereafter
|
|
44,893,671
|
|
|
—
|
|
|
44,893,671
|
|
Total principal
|
|
178,492,358
|
|
|
6,000,000
|
|
|
184,492,358
|
|
Plus unamortized mortgage premium, net of unamortized discount
|
|
415,323
|
|
|
—
|
|
|
415,323
|
|
Less deferred financing costs
|
|
(1,479,061)
|
|
|
(132,836)
|
|
|
(1,611,897)
|
|
Net principal
|
|
$
|
177,428,620
|
|
|
$
|
5,867,164
|
|
|
$
|
183,295,784
|
|
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Interest Expense
The following is a reconciliation of the components of interest expense for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2021
|
|
2020
|
Mortgage notes payable:
|
|
|
|
|
Interest expense
|
|
$
|
1,833,824
|
|
|
$
|
2,184,977
|
|
Amortization of deferred financing costs
|
|
111,043
|
|
|
119,031
|
|
Prepayment penalties
|
|
23,900
|
|
|
—
|
|
(Gain) loss on interest rate swaps (1)
|
|
(328,043)
|
|
|
1,365,491
|
|
Credit facilities:
|
|
|
|
|
Interest expense
|
|
78,752
|
|
|
154,624
|
|
Amortization of deferred financing costs
|
|
21,724
|
|
|
32,460
|
|
Other
|
|
39,936
|
|
|
48,073
|
|
Total interest expense
|
|
$
|
1,781,136
|
|
|
$
|
3,904,656
|
|
(1) Includes unrealized (gain) loss on interest rate swaps of $(427,119) and $1,284,967 for the three months ended March 31, 2021 and 2020, respectively (see Note 8). Accrued interest payable of $56,781 and $45,636 as of March 31, 2021 and December 31, 2020, respectively, represents the unsettled portion of the interest rate swaps for the period from origination of the interest rate swap through the respective balance sheet dates.
NOTE 8. INTEREST RATE SWAP DERIVATIVES
The Company, through its limited liability company subsidiaries, entered into interest rate swap agreements with amortizing notional amounts relating to four of its mortgage notes payable. Four additional swap agreements assumed in conjunction with the Merger which were in place as of December 31, 2020 were terminated in due course or were terminated in connection with asset sales and refinancings during the three months ended March 31, 2021. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks.
The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of March 31, 2021 and December 31, 2020, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
Derivative
Instruments
|
|
Number of Instruments
|
|
Notional
Amount (i)
|
|
Reference
Rate (ii)
|
|
Weighted Average Fixed Pay Rate
|
|
Weighted
Average
Remaining
Term
|
|
Number
of
Instruments
|
|
Notional
Amount (i)
|
|
Reference
Rate (iii)
|
|
Weighted Average Fixed Pay Rate
|
|
Weighted
Average
Remaining
Term
|
Interest Rate Swap Derivatives (iv)
|
|
4
|
|
$
|
26,428,800
|
|
|
One-month LIBOR + applicable spread/Fixed at 4.05%-5.16%
|
|
3.03
|
%
|
|
2.8 years
|
|
8
|
|
$
|
36,617,164
|
|
|
One-month LIBOR + applicable spread/Fixed at 3.13%-5.16%
|
|
3.35
|
%
|
|
2.2 years
|
(i)The notional amount of the Company’s swaps decreases each month to correspond to the outstanding principal balance on the related mortgage. The minimum notional amounts (outstanding principal balance at the maturity date) as of March 31, 2021 and December 31, 2020 were $24,967,499 and $34,989,063, respectively.
(ii)The reference rate was as of March 31, 2021.
(iii)The reference rate was as of December 31, 2020.
(iv)The Company terminated swap agreements related to the GSA and Eco-Thrift properties during the three months ended March 31, 2021 and terminated the swap agreement related to the Dinan Cars property mortgage loan during the three months ended March 31, 2020 at aggregate costs of $23,900 and $47,000, respectively (see Note 7).
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following table sets forth the fair value of the Company’s derivative instruments (Level 2 measurement), as well as their classification in the unaudited condensed consolidated balance sheets:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
Derivative Instrument
|
|
Balance Sheet Location
|
|
Number of
Instruments
|
|
Fair Value
|
|
Number of
Instruments
|
|
Fair Value
|
Interest Rate Swaps
|
|
Asset - Interest rate swap derivatives, at fair value
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Interest Rate Swaps
|
|
Liability - Interest rate swap derivatives, at fair value
|
|
4
|
|
$
|
(1,330,936)
|
|
|
8
|
|
$
|
(1,743,889)
|
|
The change in fair value of a derivative instrument that is not designated as a cash flow hedge for financial accounting purposes is recorded as interest expense in the unaudited condensed consolidated statements of operations. None of the Company’s derivatives at March 31, 2021 or December 31, 2020 were designated as hedging instruments; therefore, the net unrealized (gain) loss recognized on interest rate swaps of $(427,119) and $1,284,967 was recorded as a (decrease) increase in interest expense for the three months ended March 31, 2021 and 2020, respectively.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company pays the members of its board of directors who are not executive officers for services rendered through cash payments or by issuing shares of Class C common stock to them.
For the three months ended March 31, 2021 and 2020, the total fees incurred for board services was $70,000 and $103,333, respectively. For the three months ended March 31, 2021, none of these fees were paid in cash and the value paid by issuing shares of Class C common stock to directors was $70,000, for which the Company issued 3,040 shares. During the three months ended March 31, 2020, $31,250 was paid in cash and the value paid by issuing shares of Class C common stock was $72,083 for which the Company issued 2,340 shares of Class C common stock (adjusted for the 1:3 reverse stock split) for the first quarter services.
Effective February 3, 2020, the Company's indirect subsidiary, modiv Advisors, LLC, became the advisor to BRIX REIT, Inc., a REIT originally sponsored by BrixInvest, LLC which also sponsored the Company until the Self-Management Transaction on December 31, 2019. During the three months ended March 31, 2021 and 2020, no business transactions occurred between the Company and BRIX REIT, Inc. other than minor expenses advanced.
On March 2, 2020, the Company borrowed a total of $4,000,000, secured by mortgages on its two Chevron properties, from the Company's Chairman, Mr. Wirta. The Company's conflicts committee approved the terms of these mortgages which bore interest at an annual rate of 8% and were scheduled to mature on June 2, 2020. On June 1, 2020, the maturity date of these mortgages was extended to September 1, 2020 on the same terms, along with an option for a further extension to November 30, 2020 at the Company’s election prior to August 18, 2020, which the Company elected not to exercise. On July 31, 2020 and August 28, 2020, the mortgages secured by the Chevron San Jose, CA property and Chevron Roseville, CA property, each for $2,000,000, were repaid along with all related accrued interest.
Due to Affiliates
In connection with the Self-Management Transaction, the Company assumed two notes payable aggregating $630,820 on December 31, 2019 owed to Mr. Wirta, the Company's Chairman. The notes payable had identical terms including a fixed interest rate of 10% paid semi-monthly and a maturity date of April 23, 2020. The remaining principal amount of $218,931 due for each note, aggregating $437,862, was paid on the maturity date. The repayments are reflected in the change in due to affiliates in the accompanying unaudited statement of cash flows for the three months ended March 31, 2020.
Related Party Transactions with Unconsolidated Entities
The Company's taxable REIT subsidiary serves as the asset manager of the TIC property and earned asset management fees for the three months ended March 31, 2021 and March 31, 2020 of $47,984 and $47,984, respectively. The Company's subsidiary earns a monthly management fee equal to 0.1% of the total investment value of the property from this entity, which resulted in a fee of $65,993 for the three months ended March 31, 2021, of which the Company's portion was $47,984, and a fee of $65,993 for the three months ended March 31, 2021, of which the Company's portion was $47,984.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 10. COMMITMENTS AND CONTINGENCIES
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the property could result in future environmental liabilities.
Tenant Improvements
Pursuant to lease agreements, as of March 31, 2021 and December 31, 2020, the Company had obligations to pay $60,598 and $60,598, respectively, for on-site and tenant improvements to be incurred by tenants, including a 72.7% share of the tenant improvements for the Santa Clara, California TIC Interest. As of both March 31, 2021 and December 31, 2020, the Company had $92,684 of restricted cash held to fund other tenant improvements.
Redemption of Common Stock
The Company has a share repurchase program that enables qualifying stockholders to sell their stock to the Company in limited circumstances. The maximum amount of common stock that may be repurchased per month is limited to no more than 2% of the Company’s most recently determined aggregate NAV. Repurchases for any calendar quarter are limited to no more than 5% of its most recently determined aggregate NAV. The foregoing repurchase limitations are based on “net repurchases” during a quarter or month, as applicable. Thus, for any given calendar quarter or month, the maximum amount of repurchases during that quarter or month will be equal to (1) 5% or 2% (as applicable) of the Company’s most recently determined aggregate NAV, plus (2) proceeds from sales of new shares in the Registered Offerings and Class S Offering (including purchases pursuant to its Registered DRP Offering) since the beginning of a current calendar quarter or month, less (3) repurchase proceeds paid since the beginning of the current calendar quarter or month.
The Company has the discretion to repurchase fewer shares than have been requested to be repurchased in a particular month or quarter, or to repurchase no shares at all, in the event that it lacks readily available funds to do so due to market conditions beyond the Company’s control, it needs to maintain liquidity for its operations, or because the Company determines that investing in real property or other investments is a better use of its capital than repurchasing its shares. In the event that the Company repurchases some but not all of the shares submitted for repurchase in a given period, shares submitted for repurchase during such period will be repurchased on a pro-rata basis, subject to any Extraordinary Circumstance Repurchase (defined below).
The Company has the discretion, but not the obligation, under extraordinary market or economic circumstances, to make a special repurchase in equal, nominal quantities of shares from all stockholders who have submitted share repurchase requests during the period (“Extraordinary Circumstance Repurchase”). Extraordinary Circumstance Repurchases will precede any pro rata share repurchases that may be made during the period.
In addition, the Company’s board of directors may amend, suspend or terminate the share repurchase program without stockholder approval upon 10 days’ notice if its directors believe such action is in the Company and its stockholders’ best interests. The Company’s board of directors may also amend, suspend or terminate the share repurchase program due to changes in law or regulation, or if the board of directors becomes aware of undisclosed material information that the Company believes should be publicly disclosed before shares are repurchased.
Legal Matters
From time-to-time, the Company may become party to legal proceedings that arise in the ordinary course of its business. Other than as described below, the Company is not a party to any legal proceeding, nor is the Company aware of any pending or threatened litigation that could have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
On September 18, 2019, a lawsuit was filed in the Superior Court of the State of California, County of Los Angeles (the “State Court Action”), against the former advisor by “John Doe,” a fictitiously-named individual who was one of the former advisor's former employees. The former advisor understands that the plaintiff was its former Chief Digital Officer, who along with six other employees was subject to a reduction in force, communicated to all in advance, that was a result of financial constraints of the former advisor which necessitated the elimination of numerous job positions in May 2019. In the lawsuit, the former employee claims he was terminated in retaliation for his purported whistleblowing with respect to alleged misleading statements made by the former advisor and fraudulently induced arbitration requirements applicable to employees and investors. The complaint seeks to enjoin and rescind the enforcement of the arbitration agreement signed by the former employee and the arbitration requirements related to this complaint. In September 2020, the State Court Action was removed to the United States District Court, Central District of California (“U.S. District Court”). On February 11, 2021, the U.S. District Court ruled in favor of the former advisor’s motion to compel arbitration and to stay the claim before the U.S. District Court and denied plaintiff’s motions to enjoin the arbitration and file a third amended complaint. On March 19, 2021, plaintiff filed a motion for leave to file a third amended complaint and lift the stay, in which he sought to dismiss his first two causes of action, and also sought to lift the stay imposed by the U.S. District Court's February 11, 2021 order. On April 15, 2021, the U.S. District Court granted plaintiff’s motion allowing the third amended complaint to be filed and on May 12, 2021, the U.S. District Court granted plaintiff’s motion to lift the stay. The Company is not a party to the lawsuit. The former advisor has denied all the accusations and allegations in the complaint and the former advisor intends to vigorously defend against the claims made by the plaintiff.
NOTE 11. OPERATING PARTNERSHIP UNITS
Class M OP Units
On September 19, 2019, the Company, the Operating Partnership, BrixInvest and Daisho entered into the Contribution Agreement pursuant to which the Company agreed to acquire substantially all of the net assets of BrixInvest in exchange for 657,949.5 Class M OP Units in the Operating Partnership and assumed certain liabilities. The consideration transferred as of December 31, 2019 was determined to have a fair value of $50,603,000 based on a probability weighted analysis of achieving the requisite assets under management (“AUM”) and adjusted funds from operations (“AFFO”) hurdles.
The Class M OP Units were issued to Daisho on December 31, 2019 in connection with the Self-Management Transaction and are non-voting, non-dividend accruing, and were not able to be converted or exchanged prior to the one-year anniversary of the Self-Management Transaction. Investors holding units in BrixInvest received Daisho units in a ratio of 1:1 for an aggregate of 657,949.5 Daisho units. During 2020, Daisho distributed the Class M OP Units to its members and the Class M OP Units are convertible into units of Class C limited partnership interest in the Operating Partnership (“Class C OP Units”) at a conversion ratio of 1.6667 Class C OP Units for each one Class M OP Unit (adjusted for the 1:3 reverse stock split on February 1, 2021), subject to a reduction in the conversion ratio (which reduction will vary depending upon the amount of time held) if the exchange occurs prior to the four-year anniversary of the completion of the Self-Management Transaction. In the event that the Class M OP Units are converted into Class C OP Units prior to December 31, 2023, such Class M OP Units shall be exchanged at the rate indicated below:
|
|
|
|
|
|
|
|
|
Date of Exchange
|
|
Early Conversion Rate
|
From December 31, 2020 to December 30, 2021
|
|
50% of the Class M conversion ratio
|
From December 31, 2021 to December 30, 2022
|
|
60% of the Class M conversion ratio
|
From December 31, 2022 to December 30, 2023
|
|
70% of the Class M conversion ratio
|
The Class M OP Units are eligible for an increase in the conversion ratio (conversion ratio enhancement) if the Company achieves both of the targets for AUM and AFFO in a given year as set forth below and as adjusted for the 1:3 reverse stock split:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurdles
|
|
|
|
AUM
|
|
AFFO
|
|
Class M
|
|
($ in billions)
|
|
Per Share ($)
|
|
Conversion Ratio
|
Initial Conversion Ratio
|
|
|
|
|
1:1.6667
|
Fiscal Year 2021
|
$
|
0.860
|
|
|
$
|
1.77
|
|
|
1:1.9167
|
Fiscal Year 2022
|
$
|
1.175
|
|
|
$
|
1.95
|
|
|
1:2.5000
|
Fiscal Year 2023
|
$
|
1.551
|
|
|
$
|
2.10
|
|
|
1:3.0000
|
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Based on the current conversion ratio of 1.6667 Class C OP Units (adjusted for the 1:3 reverse stock split) for each one Class M OP Unit, if a Class M OP Unit is converted on or after December 31, 2023, and based on the NAV per share of $24.61 (unaudited) as of March 31, 2021, a Class M OP Unit would be valued at $41.02 (unaudited). This NAV does not reflect the early conversion rate or the future conversion enhancement ratio of the Class M OP Units and Class P OP Units, as discussed above.
Class P OP Units
The Company also issued a portion of the Class P OP Units described below in connection with the Self-Management Transaction. The Class P OP Units are intended to be treated as “profits interests” in the Operating Partnership, which are non-voting, non-dividend accruing, and are not able to be transferred or exchanged prior to the earlier of (1) March 31, 2024, (2) a change of control (as defined in the Third Amended and Restated Agreement of Limited Partnership of the Operating Partnership (the “Amended OP Agreement”)), or (3) the date of the recipient's involuntary termination (as defined in the relevant award agreement for the Class P OP Units) (collectively, the “Lockup Period”). Following the expiration of the Lockup Period, the Class P OP Units are convertible into Class C OP Units at a conversion ratio of 1.6667 Class C OP Units (adjusted for the 1:3 reverse stock split) for each one Class P OP Unit; provided, however, that the foregoing conversion ratio shall be subject to increase on generally the same terms and conditions as the Class M OP Units, as set forth above.
The Company issued a total of 56,029 Class P OP Units to Messrs. Halfacre and Raymond J. Pacini, the Company’s Chief Financial Officer, including 26,318 Class P OP Units issued in exchange for Messrs. Halfacre's and Pacini's agreements to forfeit a similar number of restricted units in BrixInvest in connection with the Self-Management Transaction. The remaining 29,711 Class P OP Units were issued to these executives as a portion of their incentive compensation for 2020 in connection with their entry into restrictive covenant agreements. The 29,711 Class P OP Units were valued based on the estimated NAV per share of $30.48 (unaudited and adjusted for the 1:3 reverse stock split) when issued on December 31, 2019 and the expected minimum conversion ratio of 1.6667 Class C OP Units (adjusted for the 1:3 reverse stock split) for each one Class P OP Unit, which resulted in a valuation of $1,509,319. This amount is amortized on a straight-line basis over 51 months through March 31, 2024, the expected vesting date of the units, as a periodic charge to stock compensation expense. During the three months ended March 31, 2021 and 2020, the Company amortized and charged $88,784 and $88,783, respectively, to stock compensation expense. The unamortized value of these units was $1,065,401 as of March 31, 2021.
Under the Amended OP Agreement, once the Class M OP Units or Class P OP Units are converted into Class C OP Units, they will be exchangeable for the Company’s shares of Class C common stock on a 1-for-1 basis, or for cash at the sole and absolute discretion of the Company. The Company recorded the ownership interests of the Class M OP Units and Class P OP Units as noncontrolling interests in the Operating Partnership, representing a combined total of approximately 13% of the equity in the Operating Partnership on December 31, 2019.
Class R OP Units
On January 25, 2021, the compensation committee of the Company's board of directors recommended, and the board of directors approved, the grant of 120,000 Class R OP Units to Mr. Halfacre in recognition of his voluntary reduction in his 2020 compensation plus 512,000 Class R OP Units to Mr. Halfacre as equity incentive compensation for the next three years, and the grant of 100,000 Class R OP Units to Mr. Pacini as equity incentive compensation for the next three years. An additional 348,000 Class R OP Units were granted to the rest of the employees of the Company. All Class R OP Units granted vest on January 25, 2024 and are then mandatorily convertible into Class C OP Units on March 31, 2024 at a conversion ratio of 1:1, which conversion ratio can increase to 1:2.5 Class C OP Units if the Company generates funds from operations of $1.05, or more, per weighted average fully-diluted share outstanding for the year ending December 31, 2023. The Company concluded that as of March 31, 2021, achieving the performance target is not deemed probable and will adjust compensation expense prospectively if achieving the enhancement is deemed probable in the future.
As a result of the Company’s 1:3 reverse stock split on February 1, 2021, Mr. Halfacre’s, Mr. Pacini’s and the remaining employees’ Class R OP Units were adjusted to 210,667 Class R OP Units, 33,333 Class R OP Units and 116,000 Class R OP Units, respectively, for a total of 360,000 Class R OP Units outstanding after adjustment for the 1:3 reverse stock split on February 1, 2021. Stock compensation expense related to the 360,000 Class R OP Units is based on the estimated value per share, including a discount for the illiquid nature of the underlying equity, and will be recognized over the three-year vesting period. During the three months ended March 31, 2021, the Company amortized and charged $445,861 to stock compensation expense for the Class R OP Units for the period since the grant date. The unamortized value of these units was $6,850,043 as of March 31, 2021.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 12. SUBSEQUENT EVENTS
The Company evaluates subsequent events until the date the unaudited condensed consolidated financial statements are issued. Significant subsequent events are described below:
Distributions
The Company paid the March 2021 distribution of $675,221 on April 26, 2021, based on the daily distribution rate of $0.00287670 per share per day of Class C and Class S common stock, which reflects an annualized distribution rate of $1.05 per share or 4.6% per share based on the Company's estimated NAV per share of $23.03 (unaudited) as of December 31, 2020. The Company generally pays distributions on the 25th day following the end of each month, or the next business day if the 25th day falls on a weekend or holiday.
Redeemable Common Stock
Subsequent to March 31, 2021, the Company redeemed 78,158 shares of Class C common stock for $1,794,959 and no shares of Class S common stock.
Updated Estimated NAV Per Share
On May 5, 2021, the Company’s board of directors approved and established an updated estimated NAV per share of the Company’s Class C common stock and Class S common stock of $24.61 (unaudited) as of March 31, 2021. Additional information on the determination of the Company's updated estimated NAV per share, including the process used to determine its updated estimated NAV per share, can be found in the Company's Current Report on Form 8-K filed with the SEC on May 5, 2021.