MODIV INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
You should read the following discussion and analysis of our financial condition, results of operations and cash flows together with the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the fiscal year ended
December 31, 2021included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission(the "SEC") on March 23, 2022. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. See "Forward-Looking Statements" above. Management's discussion and analysis of financial condition and results of operations are based upon our accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America("GAAP"). The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management's historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
We are an internally-managed real estate investment trust ("REIT") with publicly traded shares of common stock and Series A Preferred Stock (defined below). We acquire, own and manage a diversified portfolio of predominantly single-tenant net-lease industrial, retail and office properties throughout
the United States, with a focus on strategically important and mission critical properties. We were formed on May 15, 2015as a Marylandcorporation that elected to be taxed as a REIT for federal income tax purposes beginning with our taxable year ended December 31, 2016and we intend to continue to operate so as to remain qualified as a REIT for federal income tax purposes. We have been internally managed since our December 31, 2019acquisition of the business of BrixInvest, LLC, a Delawarelimited liability company and our former sponsor ("BrixInvest"), and our merger with Rich Uncles Real Estate InvestmentTrust I ("REIT I") on December 31, 2019. Through the merger with REIT I and acquisitions, we 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. Our Series A Preferred Stock is listed on the New York Stock Exchange(the "NYSE") under the symbol "MDV.PA" and has been trading since September 17, 2021. Our Class C common stock is listed on the NYSE under the symbol "MDV" and has been trading since February 11, 2022. Prior to that date, there was no public trading market for our Class C common stock. In connection with and upon listing on the NYSE, each share of our Class S common stock converted into one share of Class C common stock (see details of the Listed Offering as defined below). We have the authority to issue 450,000,000 shares of stock, consisting of 50,000,000 shares of preferred stock, $0.001par value per share, 300,000,000 shares of Class C common stock, $0.001par value per share, and 100,000,000 shares of Class S common stock, $0.001par value per share. Our five-year emerging growth company registration with the SECended on December 31, 2021but we continue to report with the SECas a smaller reporting company under Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in entities that own and operate real estate. We will make substantially all acquisitions of our real estate investments directly through Modiv Operating Partnership, LP, a Delawarelimited partnership (the "Operating Partnership"), or indirectly through limited liability companies or limited partnerships, including through other REITs, or through investments in joint ventures, partnerships, tenants-in-common, co-tenancies or other co-ownership arrangements with other owners of properties, some of which may be affiliated with us or our executive officers or directors. The Operating Partnershipwas formed on January 28, 2016. We are the sole general partner of, and owned an approximate 73% partnership interest in the Operating Partnershipon March 31, 2022. The Operating Partnershiplimited partners include holders of several classes of units with various vesting and enhancement terms as further described in Note 12 to our accompanying unaudited condensed consolidated financial statements. 38
Table of Contents Common Stock Offerings Since our initial registered offering of common stock was declared effective by the
SECin 2016, we have raised an aggregate of $289,839,103pursuant to offerings of common stock registered with the SEC(collectively, the "Registered Offering"), offerings of common stock exempt from registration pursuant to Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), distribution reinvestment plan ("DRP") offerings of common stock registered with the SEC, a private offering of common stock pursuant to Regulation D under the Securities Act, a qualified offering of common stock pursuant to Regulation A under the Securities Act and an offering of common stock listed on the NYSE. On January 22, 2021, we filed a registration statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000in share value of Class C common stock to be issued pursuant to the DRP (the "Registered DRP Offering"). We commenced offering shares of Class C common stock pursuant to the Registered DRP Offering upon termination of the Registered Offering described below. On December 8, 2021, we filed with the SECa Registration Statement on Form S-11 (File No. 333-261529), and, on February 9, 2022, we filed with the SEC Amendment No. 1 to the Registration Statement on Form S-11, in connection with the listing of our Class C common stock, which became effective on February 10, 2022(the "Listed Offering"). In connection with and upon listing on the NYSE, each share of our Class S common stock converted into one share of Class C common stock. The Listed Offering of our Class C common stock closed on February 15, 2022. In connection with the Listed Offering, we sold 40,000 shares of our Class C common stock at $25.00per share to a major stockholder who was formerly a related party. On March 30, 2022, we filed a registration statement on Form S-3 (File No. 333-263985) to issue and sell from time to time, together or separately, the following securities at an aggregate public offering price that will not exceed $200,000,000: Class C common stock, preferred stock, warrants, rights and units.
Preferred Share Offering
September 14, 2021, we and the Operating Partnershipentered into an underwriting agreement (the "Preferred Stock Underwriting Agreement") with B. Riley Securities, Inc., as representative of the underwriters listed on Schedule I thereto (collectively, the "Underwriters"), pursuant to which we agreed to issue and sell 1,800,000 shares of our 7.375% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001par value per share (the "Series A Preferred Stock") in an underwritten public offering (the "Preferred Offering") at a price per share of $25.00. In addition, we granted the Underwriters a 30-day option to purchase up to an additional 200,000 shares of the Series A Preferred Stock, which the Underwriters exercised in full on September 16, 2021. The issuance and sale of the shares of Series A Preferred Stock, including the Underwriters' full exercise of their option to purchase additional shares, closed on September 17, 2021. The shares of Series A Preferred Stock trade on the NYSE under the symbol "MDV.PA" (see Note 9 to our accompanying unaudited condensed consolidated financial statements for additional information).
We believe we continue to qualify and operate as a REIT, which requires us to annually distribute at least 90% of our taxable income (excluding net capital gains) in the form of distributions to our stockholders. Our primary business consists of acquiring, financing and owning predominantly single-tenant net-lease industrial, retail and office real estate properties throughout
the United Statesleased to creditworthy tenants on long-term leases, with a focus on strategically important and mission critical properties. We primarily generate revenues by leasing properties to tenants pursuant to net leases. As of March 31, 2022, our real estate investment portfolio consisted of 36 properties as further described below. The net book value of our real estate investments as of March 31, 2022was $381,159,581.
Details of our diversified portfolio of 36 properties in operation, including a common tenant interest of approximately 72.7% in a
property (the “TIC Interest”), from
•12 industrial properties, including the TIC Interest, which represent approximately 40% of the portfolio, 13 retail properties which represent approximately 21% of the portfolio, and 11 office properties which represent approximately 39% of the portfolio (expressed as a percentage of annualized base rent ("ABR") as of
March 31, 2022);
•Occupancy rate of 100.0%;
•Located in 14 states;
•Leased to 29 different commercial tenants doing business in 15 different industries;
• Approximately 2.3 million square feet of total leasable space, including TIC’s participation;
39 -------------------------------------------------------------------------------- •An average leasable space per property of approximately 64,000 square feet; approximately 121,000 square feet per industrial property; approximately 18,000 square feet per retail property and approximately 57,000 square feet per office property; and
• Balance of outstanding mortgage notes payable from
March 31, 2022, all 36 operating properties in our portfolio are single-tenant net-lease properties and all 36 properties were leased, with a weighted average remaining lease term ("WALT"), excluding rights to extend a lease at the option of the tenant, of approximately 9.1 years. Following the April 2022acquisition of eight industrial properties leased to Lindsay Precast, LLC("Lindsay") as described in Note 14 to our accompanying unaudited condensed consolidated financial statements, we now own 44 operating properties located in 16 states. On a pro forma basis, after giving effect to the Lindsay acquisition as if it was completed on March 31, 2022, our real estate portfolio is comprised of 20 industrial properties, including the TIC Interest, which represent approximately 46% of the portfolio, 13 retail properties which represent approximately 19% of the portfolio, and 11 office properties which represent approximately 35% of the portfolio (expressed as a percentage of ABR as of March 31, 2022), and has a pro forma WALT of 10.6 years. As of March 31, 2022, we held an approximate 72.7% TIC Interest in a 91,740 square foot industrial property located in Santa Clara, California. The remaining approximately 27.3% of undivided interest in the Santa Claraproperty 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 Hagg Lane II, LLCand Hagg Lane III, LLCwas an independent member of our board of directors ("Board") from December 2019to December 2021.
Main investment objectives
Our main investment objectives are:
•deliver attractive growth in adjusted funds from operations (“AFFO”) and sustainable cash distributions;
•realize added value through proactive investment selection and asset management;
•offer future opportunities for growth and value creation; and
•to offer an investment alternative to shareholders wishing to allocate part of their long-term investment portfolio to business real estate.
While future purchases of properties will be partially funded with cash on hand and funds received from the future sale of shares of Class C common stock, we anticipate incurring mortgage or borrowing base debt (not to exceed 55% of the total value of all of our properties) against pools of individual properties, and pledging such properties as security for that debt to obtain funds to acquire additional properties. Over the near term we are targeting leverage of 40% of the aggregate fair value of our real estate properties plus our cash and cash equivalents, with a long-term goal of lower leverage, although our maximum leverage as defined and approved by our Board is 55% of the aggregate fair value of our real estate properties, plus our cash and cash equivalents. We may exceed the targeted leverage of 40% if we identify attractive acquisition opportunities in advance of raising additional equity or completing dispositions. We are striving to improve the composition of our portfolio by acquiring industrial properties and disposing of office properties, subject to market conditions and prices that we consider attractive. We make no assurance that we will achieve our investment objectives. See the Part I, Item 1A. Risk Factors section of our Annual Report on Form 10-K filed with the
SECon March 23, 2022and the Part II, Item 1A. Risk Factors of the Quarterly Report on Form 10-Q included herein.
In pursuit of our primary investment objectives, we maintain the ability to expand beyond our traditional single-tenant portfolio of predominantly net leased properties, and seek to acquire a diversified portfolio of income-generating commercial real estate investments throughout
the United Statesdiversified by corporate credit, physical geography, product type, and lease duration. We are primarily focused on acquiring industrial properties, but we may also acquire other assets, including, without limitation, retail properties, data centers and storage properties. We may also invest in commercial real estate properties outside the United States. We intend to acquire assets consistent with our acquisition philosophy by focusing primarily on properties located in primary, secondary and certain select tertiary markets and leased to tenants, at the time we acquire them, with strong financial statements and typically subject to long-term leases with defined rental rate increases. 40 -------------------------------------------------------------------------------- We may also acquire assets with short-term leases or that require some amount of capital investment in order to be renovated or repositioned. We generally will limit investment in new developments on a standalone basis, but may consider development that is ancillary to an overall investment. We do not designate specific geography or sector allocations for the portfolio; rather we intend to invest in regions or asset classes where we see the best opportunities that support our investment objectives. We are in the process of increasing our asset allocations to the industrial sector and decreasing our allocations to the office sector. To a lesser extent, we may also invest in real estate debt and equity securities and other real estate-related investments to provide current income, portfolio diversification and a source of liquidity for distributions to stockholders, cash management and other purposes.
SCPIs and Unlisted Real Estate Products or Managers
We believe there may be opportunities to acquire non-listed REITs and real estate products or managers given the current fragmented nature of the industry. There are many smaller non-listed REITs that have not been able to raise sufficient capital to grow their investment portfolio and provide liquidity to their stockholders. Given their limited alternatives, some of these non-listed REITs may be receptive to potential acquisitions by us.
We cannot assure our shareholders that any of the properties we acquire will result in the benefits described above.
Cash and capital resources
Generally, our cash requirements for property acquisitions, debt payments, capital expenditures and other investments will be funded by offerings of shares of our common stock, bank borrowings from financial institutions, mortgage indebtedness on our properties, asset sales and internally generated funds. Our cash requirements for operating and interest expenses, dividends on our Series A Preferred Stock and distributions on our common stock will generally be funded by internally generated funds. On
January 18, 2022, our Operating Partnershipentered into a $250,000,000credit agreement (''Credit Agreement'') providing for a $100,000,000four-year revolving line of credit, which may be extended by up to 12 months subject to certain conditions (the ''Revolver''), and a $150,000,000five-year term loan (the ''Term Loan'' and together with the ''Revolver,'' the ''Credit Facility'') with KeyBank National Association('' KeyBank'') and the other lending institutions party thereto (collectively, the ''Lenders''), including KeyBankas Agent for the Lenders (in such capacity, the ''Agent''), BMO Capital Markets, Truist Bankand The Huntington National Bankas Co-Syndication Agents (the "Co-Syndication Agents") and KeyBanc Capital Markets Inc., BMO Capital Markets, Inc., Truist Securities, Inc.and The Huntington National Bankas Joint-Lead Arrangers (the "Lead Arrangers"). The Credit Facility is available for general corporate purposes, including, but not limited to, acquisitions, repayment of existing indebtedness and capital expenditures. The Credit Facility is priced on a leverage-based pricing grid that fluctuates based on our actual leverage ratio. If our leverage ratio is between 45% to 50%, the interest rate on the Revolver will be 185 basis points over the Secured Overnight Financing Rate (''SOFR'') including a 10 basis points credit adjustment, which resulted in a floating interest rate of 2.1625% based on the pro forma leverage ratio of 46% as of September 30, 2021when the Credit Facility closed and after reflecting the January 2022acquisition of the KIA auto dealership property. With our leverage ratio at 34% as of March 31, 2022, the spread over SOFR, including the credit adjustment, is 165 basis points and the interest rate on the Revolver was 1.9625% as of April 30, 2022. Following the Federal Reserve Bank's May 4, 2022increase in the target range for federal funds by 50 basis points, the interest rate on the Revolver is 2.4625%. See Note 14 to our accompanying unaudited condensed consolidated financial statements regarding our entry into a swap agreement to hedge the interest rate on our $150,000,000Term Loan. The Credit Facility includes customary covenants, including minimum fixed charge coverage of 1.50x, minimum tangible net worth of $208,629,727plus 85% of net offering proceeds and maximum leverage of 60% of our borrowing base. We were in compliance with these covenants as of March 31, 2022. The Credit Facility is secured by a pledge of all of the Operating Partnership'sequity interests in certain of the single-purpose, property-owning entities (the ''Subsidiary Guarantors'') that we indirectly own, and various cash collateral owned by the Operating Partnershipand the Subsidiary Guarantors. In connection with the Credit Facility, we and each of the Subsidiary Guarantors entered into an Unconditional Guaranty of Payment and Performance in favor of the Agent, pursuant to which we and each of the Subsidiary Guarantors agreed to guarantee the full and prompt payment of the Operating Partnership'sobligations under the Credit Agreement. 41 -------------------------------------------------------------------------------- While the Credit Facility allows for borrowings up to 60% of our borrowing base and our Board has approved a maximum leverage ratio of 55% of the aggregate fair value of our real estate properties plus our cash and cash equivalents, over the near term, we are targeting leverage of 40% with a long-term goal of lower leverage. However, we may exceed the targeted leverage if we identify attractive acquisition opportunities in advance of raising additional equity or completing dispositions. We also have the right to increase the Credit Facility to a maximum of $500,000,000, subject to customary conditions, including the receipt of new commitments from the Lenders.
Drawdown on credit facility
We used a portion of the additional proceeds from the Credit Facility to repay 20 property mortgages, and related interest aggregating
$153,428,764, including the $36,465,449mortgage on the KIA auto dealership property which was acquired on January 18, 2022, as discussed in Note 3 to our accompanying unaudited condensed consolidated financial statements, and our prior line of credit outstanding balance of $8,022,000. The 20 mortgages that were paid off were for the following 27 properties: eight DollarGenerals, Northrop Grumman, exp Maitland, Wyndham, Williams Sonoma, EMCOR, Husqvarna, AvAir, 3M, Cummins, Levins, Labcorp, GSA (MHSA), PreK Education, ITW Rippey, Solar Turbines, Wood Group, Gap, L3Harris and Walgreens. After the 20 property mortgages were paid-off, seven property mortgages as of December 31, 2021remained outstanding, including four property mortgages related to assets held for sale. Those four mortgages were paid-off pursuant to sales of the properties in February 2022as discussed above. On March 8, 2022, we prepaid $35,000,000of the outstanding balance on the Revolver with cash on hand in order to reduce interest expense. As of March 31, 2022, following this prepayment, we had availability under the Credit Facility of $80,800,000which can be drawn for general corporate purposes, including pending and future acquisitions. In April 2022, we borrowed $44,000,000to fund the acquisition of the eight-property portfolio of industrial properties leased to Lindsay as further described in Note 14 to our accompanying unaudited condensed consolidated financial statements, drew the remaining $50,000,000available under the Term Loan commitment and reduced the Revolver to $14,775,000in connection with the swap agreement as further described in Note 14 to our accompanying unaudited condensed consolidated financial statements. Following these transactions, there is $36,800,000available to be drawn on the Revolver, based on the value of our properties included in the borrowing base. Our aggregate borrowings, secured and unsecured, must be reasonable in relation to our tangible assets. Our maximum leverage as defined and approved by our Board is 55% of the aggregate fair value of our real estate properties, plus our cash and cash equivalents. We use available leverage based on the relative cost of debt and equity capital, and to address strategic borrowing advantages potentially available to us. Our borrowings on one or more individual properties may exceed 55% of their individual cost, so long as our overall leverage does not exceed 55% of the aggregate fair value of our real estate properties, plus our cash and cash equivalents. There is no limitation on the amount we may borrow for the purchase of any single asset. As of March 31, 2022, our leverage ratio was 34%. We may borrow amounts from our affiliates including directors and executive officers if such loan is approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, as being fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances. While we intend for the Credit Facility to be our primary source of financing, we may continue to use mortgage debt financing for certain real estate investments and acquisitions. This financing may be obtained at the time an asset is acquired or an investment is made or at such later time as determined to be appropriate. In addition, debt financing may be used from time-to-time for property improvements, lease inducements, tenant improvements and other working capital needs.
See Note 7 to our accompanying unaudited condensed consolidated financial statements for loan maturities of our three remaining mortgage notes payable at
March 31, 2022, the outstanding principal balance of our mortgage notes payable on our operating properties and our Credit Facility were $44,734,220and $120,775,000, respectively. As of March 31, 2022, our approximately 72.7% pro-rata share of the TIC Interest's mortgage note payable was $9,653,689, which is not included in our accompanying unaudited condensed consolidated balance sheets. 42 --------------------------------------------------------------------------------
Acquisitions and disposals of real estate investments
During the three months ended
March 31, 2022, we acquired the following real estate properties: Tenant Origination Buildings and and Absorption Property and Location Acquisition Date Land Improvements Costs Equipment Acquisition Price KIA, Carson, CA 1/18/2022 $
$ 69,405,050Kalera, St. Paul, MN 1/31/2022 562,356 3,127,653 - 4,429,000 8,119,009 $ 33,304,137 $ 39,672,316 $ 118,606 $ 4,429,000 $ 77,524,059
In the three months ended
Contract Sale Property Location Disposition Date Rentable Square Feet Price Net Proceeds Gain on Sale Bon Secours (1) Richmond, VA 2/11/2022 72,890
$ 8,760,000$ - $ 179,404Omnicare (1) Richmond, VA 2/11/2022 51,800 10,200,000 - 2,062,890 Texas Health (1) Dallas, TX 2/11/2022 38,794 7,040,000 11,883,639 160,377 Accredo Orlando, FL 2/24/2022 63,000 14,000,000 5,000,941 4,998,106 Total 226,484 $ 40,000,000 $ 16,884,580 $ 7,400,777
(1) Combined net proceeds from
Listed offer – Class
November 2, 2021, our Board terminated our offering of Class C common stock pursuant to a Regulation A Offering Statement on Form 1-A (the "Reg A Offering") effective upon the close of business on November 24, 2021and directed management to seek the listing of our Class C common stock on a national securities exchange in early 2022. Our Board also terminated our Class C and Class S share repurchase programs. On December 8, 2021, we filed with the SECa Registration Statement on Form S-11 (File No. 333-261529), and, on February 9, 2022, we filed with the SEC Amendment No. 1 to the Registration Statement on Form S-11, in connection with the Listed Offering of our Class C common stock, which became effective on February 10, 2022. In connection with and upon listing on the NYSE, each share of our Class S common stock converted into one share of Class C common stock. The Listed Offering of our Class C common stock closed on February 15, 2022. In connection with the Listed Offering, we sold 40,000 shares of our Class C common stock at $25.00per share to a major stockholder who was formerly a related party (see Note 9 to our accompanying unaudited condensed consolidated financial statements for additional information), for aggregate net proceeds to us of $114,500, after deducting the underwriting discount of $70,000and other offering costs of $815,500. On March 30, 2022, we filed a registration statement on Form S-3 (File No. 333-263985) to issue and sell from time to time, together or separately, the following securities at an aggregate public offering price that will not exceed $200,000,000: Class C common stock, preferred stock, warrants, rights and units.
February 15, 2022, our Board authorized up to $20,000,000in repurchases of our outstanding shares of common stock through December 31, 2022. Purchases made pursuant to the program will be made from time-to-time in the open market, in privately negotiated transactions or in any other manner as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by us in our discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time.
From the beginning of the program until
Class C OP Units
January 18, 2022, we completed the acquisition of a KIA auto dealership property in an "UPREIT" transaction pursuant to a contribution agreement whereby an affiliate of the seller received 1,312,382 units of Class C limited partnership interest in the Operating Partnership(the "Class C OP Units") based on an agreed upon value of $25.00per unit, representing approximately 47% of the property's value. Following expiration of the lock-up period ending on August 11, 2022, the holder of the Class C OP Units may require the redemption of all or a portion of these units and we have the option to redeem the units for cash or shares of Class C common stock. The Class C OP Units received $251,539in distributions during the three months ended March 31, 2022(also see the "Distributions" section below).
Cash flow summary
The following table summarizes our cash flow activity for the three months ended
March 31, 2022and 2021: Three Months Ended March 31, 2022 2021 Net cash (used in) provided by operating activities $ (1,083,310) $ 100,625Net cash (used in) provided by investing activities $ (8,857,451) $ 8,391,095Net cash used in financing activities $ (23,122,696)
Cash flow from operating activities
The cash used in operating activities of
$1,083,310during the three months ended March 31, 2022primarily reflects adjustments to our net loss of $12,073,164to exclude net non-cash losses of $13,745,954related to depreciation and amortization, impairment of goodwill, stock compensation expense, amortization of deferred financing costs and premium, amortization of deferred lease incentives and amortization of above market lease intangibles, which were partially offset by gain on sale of real estate investments, unrealized gain on interest rate swap valuation, amortization of below-market lease intangibles, amortization of deferred rents and undistributed income from our unconsolidated investment in a real estate property. Cash used in operations also included cash used in changes in operating assets and liabilities of $2,851,467during the three months ended March 31, 2022due to increases in tenant receivables and prepaid and other assets and a decrease in accounts payable, accrued and other liabilities. These cash uses were partially offset by distributions received from our unconsolidated investment in a real estate property of $95,367. The cash provided by operating activities of $100,625during the three months ended March 31, 2021primarily reflects adjustments to our net loss of $903,648to exclude net non-cash charges of $2,877,547related to depreciation and amortization, stock compensation expense, amortization of deferred financing costs, amortization of deferred lease incentives and amortization of above market leases, which were partially offset by amortization of below-market lease intangibles, gain on forgiveness of economic relief note payable, unrealized gain on interest rate swap valuation, gain on sale of real estate investments, amortization of deferred rents and undistributed income from an unconsolidated investment in a real estate property. Cash used in operations also included net use of cash for changes in operating assets and liabilities of $1,952,653during the three months ended March 31, 2021, due to increases in tenant receivables, prepaid and other assets and a decrease in accounts payable, accrued and other liabilities. These cash uses were partially offset by distributions from our unconsolidated investment in real estate property of $79,379. Cash flows from operating activities for the three months ended March 31, 2022were disproportionately affected by annual costs paid during the first quarter. We expect that cash flows will be positive in the next twelve months, in part due to an increase in our investments in operating assets as a result of our recent acquisitions; however, there can be no assurance that this expectation will be realized. 44 --------------------------------------------------------------------------------
Cash flow from investing activities
Net cash used in investing activities was
•$44,714,508 for acquisition of the Kalera and Kia real estate investments and refinancing the KIA mortgage; •$749,481 of additions to existing real estate investments; •$2,000,000 payment of a lease incentive for the PreK Education property; and •$500,000 payment of a refundable purchase deposit for the Lindsay acquisition.
These uses were partially offset by:
•Proceeds of $38,911,538 from the sale of four real estate investments; and • Receipt of $195,000 of notes receivable.
Net cash from investing activities was
•$13,221,509 net proceeds from the sale of three real estate investments.
These products were partially offset by:
•$4,500,000 of deposit for investment in special purpose acquisition company; and •$330,414 of additions to existing real estate investments.
Cash flow from financing activities
Net cash used in financing activities was
•$130,277,534 of mortgage note principal payments upon entering the Credit Facility and sale of four properties; •$2,186,468 of deferred financing cost payments to third parties; •$1,418,783 of cash distributions paid to common stockholders; •$1,065,278 of cash dividends paid to preferred stockholders; •$852,721 used for repurchases of common shares; and •$189,412 for payments of offering costs.
These uses were partially offset by:
•$100,000,000 in proceeds from borrowings on our Credit Facility Term Loan; •$20,775,000 of net proceeds from our Credit Facility Revolver, partially offset by repayment of
$8,022,000on the prior credit facility with Banc of California (the "Prior Credit Facility"); and •$114,500 in net proceeds from issuance of common stock in the Listed Offering.
Net cash used in financing activities was
• $13,198,773 principal repayments of mortgage notes; •$10,375,063 used for common share repurchases; • $867,410 in cash distributions paid to common shareholders; •$409,844 for the payment of placement fees and commissions; and • $246,587 of deferred financing fee payments to third parties.
These uses were partially offset by:
•$12,136,000 of proceeds from mortgage notes payable; and • $1,627,707 of proceeds from the issuance of common shares.
Funds from operations and adjusted funds from operations
In order to provide a more complete understanding of the operating performance of a REIT, the
National Association of Real Estate Investment Trusts("Nareit") promulgated a measure known as Funds from Operations ("FFO"). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures, preferred dividends and real estate impairments. Because FFO calculations adjust for such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current Nareit definition or may interpret the current Nareit definition differently than we do, making comparisons less meaningful. Additionally, we use AFFO as a non-GAAP financial measure to evaluate our operating performance. AFFO excludes non-routine and certain non-cash items such as revenues in excess of cash received, amortization of stock-based compensation, deferred rent, amortization of in-place lease valuation intangibles, acquisition-related costs, deferred financing fees, gain or loss from the extinguishment of debt, unrealized gains (losses) on derivative instruments, write-offs of transaction costs and other one-time transactions. We also believe that AFFO is a recognized measure of sustainable operating performance of the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies. Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current distribution level. More specifically, AFFO isolates the financial results of our operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management's analysis of long-term operating activities. For all of these reasons, we believe the non-GAAP measures of FFO and AFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and AFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and AFFO. AFFO is useful in assisting management and investors in assessing our ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods. However, FFO and AFFO are not useful measures in evaluating net asset value ("NAV") because impairments are taken into account in determining NAV but not in determining FFO and AFFO. Therefore, FFO and AFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or cash flows from operating activities and each should be reviewed in connection with GAAP measurements. Neither the SEC, Nareit, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, the SECor Nareit may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure. Furthermore, as described in Note 12 to our accompanying unaudited condensed consolidated financial statements, the conversion ratios for units of Class M limited partnership interest in the Operating Partnership("Class M OP Units"), units of Class P limited partnership interest in the Operating Partnership("Class P OP Units") and units of Class R limited partnership interest in the Operating Partnership("Class R OP Units") can increase if the specified performance hurdles are achieved, which would increase the fully-diluted weighted average shares outstanding. 46 -------------------------------------------------------------------------------- The following are the calculations of FFO and AFFO for the three months ended March 31, 2022and 2021: Three Months Ended March 31, 2022 2021 Net loss (in accordance with GAAP) $ (12,073,164) $ (903,648)Preferred stock dividends (921,875) -
Net loss attributable to common shareholders and Class C OP units
(12,995,039) (903,648) FFO adjustments: Add: Depreciation and amortization 3,300,492 3,564,560 Amortization of lease incentives 71,394 65,301
Depreciation allowances for unconsolidated investment in real estate
190,468 181,786 Less: Gain on sale of real estate investments, net (7,400,777) (289,642) FFO attributable to common stockholders and Class C OP Units (16,833,462) 2,618,357 AFFO adjustments: Add: Amortization of corporate intangibles - 460,143 Impairment of goodwill 17,320,857 - Stock compensation 511,865 604,645 Deferred financing costs 1,266,725 99,069 Non-recurring loan prepayment penalties 615,336 - Swap termination costs 733,000 23,900 Amortization of above-market intangible leases 32,456 32,455
Acquisition costs and due diligence costs, including discontinued lawsuit costs
586,669 10,744 Less: Deferred rents (110,505) (274,823) Unrealized gains on interest rate swaps (788,016) (427,119) Amortization of below-market intangible leases (363,074) (367,575) Gain on forgiveness of economic relief note payable - (517,000)
Other adjustments for unconsolidated investment in real estate
AFFO Attributable to Common Shareholders and Class C OP Units
$ 2,971,663 $ 2,230,602Weighted average shares outstanding: Basic 7,533,158 7,706,621 Fully diluted (1) 10,193,498 8,926,585 FFO Per Share: Basic $ (2.23) $ 0.34Fully Diluted $ (2.23) $ 0.29AFFO Per Share: Basic $ 0.39 $ 0.29Fully Diluted $ 0.29 $ 0.25
(1) Includes Class M, Class P and Class R OP units to calculate the weighted average number of shares.
March 31, 2022, we owned 36 operating properties, including the TIC Interest. We acquired two properties (one industrial and one retail) during the first three of months 2022 compared with no real estate acquisitions during the first three of months 2021. Four properties (three office and one industrial, which were classified as held for sale as of December 31, 2021) were sold during the first three months of 2022. Three retail properties were sold during the first three months of 2021, which were classified as held for sale as of December 31, 2020. The operating results of such properties that were classified as held for sale are included in our continuing results of operations. We expect that rental income, tenant reimbursements, depreciation and amortization expense, and interest expense will increase for the full year of 2022 as compared with the full year of 2021, as a result of the two property acquisitions during the first quarter of 2022, the acquisition of an eight property industrial portfolio on April 19, 2022and our plan to acquire additional properties during the remainder of 2022, partially offset by five dispositions in 2021 (three during the first quarter and one each during the third and fourth quarters) and four dispositions in February 2022. Our results of operations for the three months ended March 31, 2022may not be indicative of those expected for the full year of 2022 or in future periods. Due to the continuing COVID-19 pandemic, including the recent spread of its variants, in the United Statesand globally, our tenants and operating partners continue to be impacted. The continued impact of the COVID-19 pandemic and its variants on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information regarding mutations of COVID-19, the success of actions taken to contain or treat COVID-19, the effectiveness of the current vaccines to contain the COVID-19 variants, and reactions by consumers, companies, governmental entities and capital markets. We, including our tenants, may also by impacted by the worsening inflation, interest rate environment and disruption of supply chains in the U.S.and globally. The effects of these challenging economic factors may be mitigated by the number of credit tenants in our portfolio and the diversity of our property locations and tenant industries.
Comparison of the three months ended
Rental Income Rental income, including tenant reimbursements, for the three months ended
March 31, 2022and 2021 was $9,648,649and $8,974,870, respectively. The increase of $673,779, or 8%, as compared with the first quarter of 2021 primarily reflects the rental income contribution from our acquisition of a KIA auto dealership property in Carson, Californiaon January 18, 2022, which contributed approximately 12.9% of our total rental income during the first quarter of 2022 (see Note 3 to our accompanying unaudited condensed consolidated financial statements for more details). This increase together with the rental income contributions of three other property acquisitions (one industrial property acquired at the end of January 2022and two properties acquired during the second half of 2021 (one industrial and one retail)) were partially offset by the decrease in rental income from the sale of six properties (four properties sold in February 2022(one industrial and three office) and two properties sold during the second half of 2021 (one industrial and one retail)). Pursuant to most of our lease agreements, tenants are required to pay or reimburse all or a portion of the property operating expenses. The ABR of the operating properties owned as of March 31, 2022was $30,624,617, which increased to $34,358,758with the April 2022acquisition of eight properties leased to Lindsay which is described in Note 14 to our accompanying unaudited condensed consolidated financial statements.
General and administrative
General and administrative expenses were
$2,106,183and $2,678,239for the three months ended March 31, 2022and 2021, respectively. The decrease of $572,056, or 21%, as compared with the first quarter of 2021 primarily reflects decreases in marketing, legal and consulting fees and technology services in the current year quarter compared to the prior year quarter.
Stock compensation expense
Stock compensation expense was
$511,865and $604,645for the three months ended March 31, 2022and 2021, respectively. The decrease of $92,780, or 15%, as compared with the first quarter of 2021 primarily reflects forfeitures due to employee terminations during the second half of 2021 through the first quarter of 2022. 48 --------------------------------------------------------------------------------
Depreciation and amortization
Depreciation and amortization expense was
$3,300,492and $4,024,703for the three months ended March 31, 2022and 2021, respectively. The purchase price of properties acquired is allocated to tangible assets, identifiable intangibles and assumed liabilities, if any, and depreciated or amortized over their estimated useful lives. The decrease of $724,211, or 18%, as compared with the first quarter of 2021 primarily reflects the absence of amortization of corporate intangibles, which were impaired during the fourth quarter of 2021, and the absence of depreciation and amortization expenses related to the sale of four properties (three office and one industrial) held for sale during the current year quarter and two properties (one industrial and one retail) sold during the second half of 2021, offset in part by the depreciation and amortization of two properties (one industrial and one retail) acquired during the current year quarter and two properties (one industrial and one retail) acquired during the second half of 2021.
Interest expense was
$1,568,175and $1,781,136for the three months ended March 31, 2022and 2021, respectively (see Note 7 to our accompanying unaudited condensed consolidated financial statements for details of the components of interest expense). On January 18, 2022, we used funds from our initial borrowing from our Credit Facility to pay off 20 existing property mortgages for 27 properties, the $36,465,449mortgage on the KIA auto dealership property which we acquired and repayment of our Prior Credit Facility and related interest, aggregating $153,428,764(see Note 7 to our accompanying unaudited condensed consolidated financial statements for more details). In addition, four interest rate swap agreements related to four property mortgages were terminated in connection with the prepayment of the property mortgages. The decrease of $212,961, or 12%, as compared with the first quarter of 2021 primarily reflects a decrease in interest expense of approximately $537,000due to the pay-off of mortgage notes and the Prior Credit Facility discussed above. This decrease in interest expense was partially offset by the absence of unrealized gains on the valuation of interest rate swaps of approximately $304,000(net of swap termination costs of $23,900in 2021) and an increase in amortization of deferred financing costs and other costs of approximately $20,000during the first quarter of 2022 compared with the first quarter of 2021.
Real estate expenses
Property expenses were
$2,764,592and $1,754,947for the three months ended March 31, 2022and 2021, respectively. These expenses primarily relate to property taxes and repairs and maintenance expenses, the majority of which are reimbursed by tenants. The increase of $1,009,645, or 58%, as compared with the first quarter of 2021 reflects increases in property and other taxes during the current year quarter and approximately $587,000in write-offs of costs related to our proposed acquisition of 10 properties leased to Walgreens which we abandoned due to inability to obtain the mortgage servicer's approval prior to the February 18, 2022contract termination date and changes in market conditions. These write-offs included legal and due diligence costs and forfeiture of $375,000of our $1,000,000earnest money deposit.
The impairment of goodwill of
$17,320,857for the three months ended March 31, 2022reflects the significant decline in the market value of our common stock since it began trading on the NYSE in February 2022. Our stock price is materially below both our historical net asset value and the book value of our equity, reflecting the negative impacts of rising inflation and interest rates, declining office occupancy rates affecting owners of real estate properties and fears of a potential recession. We, therefore, reduced the carrying value of goodwill to zero (see Note 5 to our accompanying unaudited condensed consolidated financial statements for additional details).
Gain on sale of real estate investments
The gain on sale of investments of
$7,400,777and $289,642for the three months ended March 31, 2022and 2021, respectively, relates to the sale of four properties (three office and one industrial) during the current year quarter and three retail properties during the prior year quarter (see Note 3 to our accompanying unaudited condensed consolidated financial statements for more details).
Other (expenses) income
Interest income was
and 2021, respectively.
Income from unconsolidated investment in a real estate property was
$95,464and $72,467for the three months ended March 31, 2022and 2021, respectively. This reflects our approximate 72.7% TIC Interest in the Santa Claraproperty's results of operations for the first quarters of 2022 and 2021, respectively. 49 -------------------------------------------------------------------------------- Loss on early extinguishment of debt of $1,725,318for the three months ended March 31, 2022reflects non-cash charges of $1,164,998for deferred financing costs and prepayment penalties of $615,336upon repayment of 20 mortgages for 27 properties, full repayment of our Prior Credit Facility and mortgage repayments related to four asset sales, as well as $733,000of swap termination fees related to the four mortgage refinancings and the related recognition of termination gains of $788,016(see Notes 7 and 8 to our accompanying unaudited condensed consolidated financial statements for more details). Other income of $65,993and $85,993for the three months ended March 31, 2022and 2021, respectively, primarily reflects our monthly management fee from the entities that own the TIC Interest property which is equal to 0.1% of the total investment value of the property.
Organizing and offering costs
Organizational and offering costs include all costs incurred in connection with the offerings prior to the Listed Offering, including investor relations' payroll costs and other costs incurred in connection with the offerings of our stock, including, but not limited to legal fees, federal and state filing fees, and other costs. Through
November 24, 2021, the termination date of the Reg A Offering, we had recorded cumulative organizational and offering costs of $8,298,499, including $5,429,105paid to our former sponsor or affiliates through December 31, 2019. In connection with our Listed Offering of Class C common stock, we incurred organizational and offering costs in the aggregate of $885,500through March 31, 2022. We also incurred additional organizational and offering costs of $189,412during the three months ended March 31, 2022related to our registration statement on Form S-3 (File No. 333-263985) that we filed on March 30, 2022to issue and sell from time to time, together or separately, the following securities at an aggregate public offering price that will not exceed $200,000,000: Class C common stock, preferred stock, warrants, rights and units. Distributions Preferred Dividends On March 18, 2022, our Board declared Series A Preferred Stock dividends payable of $921,875for the first quarter of 2022. This amount was accrued as of March 31, 2022and paid on April 15, 2022(see Note 14 to our accompanying unaudited condensed consolidated financial statements for more details).
Common stock distributions
We intend to pay distributions on a monthly basis, and we paid our first distribution on
August 10, 2016. The distribution rate is determined by the Board based on our financial condition and such other factors as the Board deems relevant. The Board has not pre-established a percentage range of return for distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders other than as necessary to meet REIT qualification requirements. Distributions declared, distributions paid out, cash flows from operations and our sources of distribution payments were as follows for the first quarter of 2022 and the four quarters of 2021: Cash Flows (Used Total Distributions Paid in) Provided by Quarter End Distributions Distributions Operating Net Rental Accrued Period (1) Declared Declared Per Share Cash Reinvested Activities Income Received Offering Proceeds Distribution 2022 (2) First Quarter $ 2,907,122 $ 0.387499 $ 1,418,783 $ 1,492,404 $ (1,083,310) $ 2,907,122$ - $ 854,5992021 First Quarter $ 1,991,676 $ 0.258903 $ 891,202 $ 1,130,949 $ 102,091 $ 1,991,676$ - $ 675,221Second Quarter 1,976,511 0.261780 835,381 1,131,281 2,981,262 1,976,511 - 650,167 Third Quarter 1,981,725 0.264656 838,868 1,137,501 3,299,330 1,981,725 - 643,025 Fourth Quarter 2,160,966 0.289864 907,927 1,200,880 3,346,002 2,160,966 - 730,445 2021 Totals $ 8,110,878 $ 1.075203 $ 3,473,378 $ 4,600,611 $ 9,728,685 $ 8,110,878$ - 50
(1) The distribution paid per Class S common share was net of deferred selling commissions.
(2) Includes the 13th distribution for 2021 declared on
Prior to 2022, distributions to stockholders were declared and paid based on daily record dates at rates per share per day. The distribution details are as follows: Rate Per Share Per Day Distribution Period (1) Declaration Date Payment Date 2021 January 1-31 $ 0.00287670 December 9, 2020 February 25, 2021 February 1-28 $ 0.00287670 January 27, 2021 March 25, 2021 March 1-31 $ 0.00287670 January 27, 2021 April 26, 2021 April 1-30 $ 0.00287670 March 25, 2021 May 25, 2021 May 1-31 $ 0.00287670 March 25, 2021 June 25, 2021 June 1-30 $ 0.00287670 March 25, 2021 July 26, 2021 July 1-31 $ 0.00287670 June 16, 2021 August 25, 2021 August 1-31 $ 0.00287670 June 16, 2021 September 27, 2021 September 1-30 $ 0.00287670 June 16, 2021 October 25, 2021 October 1-31 $ 0.00315070 August 12, 2021 November 24, 2021 November 1-30 $ 0.00315070 August 12, 2021 December 21, 2021 December 1-31 $ 0.00315070 August 12, 2021 January 5, 2022 13th Distribution (2) $ 0.00027397 January 5, 2022 January 18, 2022 Rate Per Share Per Distribution Period Month Declaration Date Payment Date 2022 January 1-31 $ 0.09583300 January 27, 2022 February 25, 2022 February 1-28 $ 0.09583300 February 17, 2022 March 25, 2022 March 1-31 $ 0.09583300 February 17, 2022 April 25, 2022 April 1-30 $ 0.09583300 March 18, 2022 May 25, 2022 (3) May 1-31 $ 0.09583300 March 18, 2022 June 27, 2022 (3) June 1-30 $ 0.09583300 March 18, 2022 July 25, 2022 (3)
(1) Distributions paid per Class S common share were net of deferred selling commissions.
January 5, 2022, our Board declared a 13th distribution to our common stockholders since our AFFO exceeded 110% of distributions declared for the year ended December 31, 2021. The 13th distribution was based on the outstanding shares of common stock held by stockholders on the record date of January 6, 2022using the following formula: (i) the daily amount of the 13th distribution divided by 365 days (ii) multiplied by the number of days such shares of common stock were held by such stockholder from January 1, 2021through December 31, 2021. Stockholders were only eligible for the 13th distribution if they held such shares as of the close of business on the record date.
(3) Reflects the expected date of payment since the distribution has not been paid as of the date of filing of this Quarterly Report on Form 10-Q.
Our wholly-owned investments in real estate properties as of
March 31, 2022, December 31, 2021and March 31, 2021, and the 91,740 square foot industrial property underlying the TIC Interest for all balance sheet dates presented were as follows: As of March 31, March 31, 2022 December 31, 2021 2021 Number of properties: (1) (2) Industrial, including TIC Interest 12 12 12 Retail 13 12 12 Office 11 14 14 Total operating properties and properties held for sale 36 38 38 Land 1 1 1 Total properties 37 39 39 Leasable square feet: Industrial 1,450,193 1,514,876 1,145,519 Retail 234,029 161,406 291,513 Office 625,352 800,036 853,963 Total 2,309,574 2,476,318 2,290,995
(1) Includes four buildings (three office and one industrial) held for sale to the
(2) Includes a commercial building intended for sale to
We have a limited operating history. In evaluating the above properties as potential acquisitions, including the determination of an appropriate purchase price to be paid for the properties, we considered a variety of factors, including the condition and financial performance of the properties, the terms of the existing leases and the creditworthiness of the tenants, property location, visibility and access, age of the properties, physical condition and curb appeal, neighboring property uses, local market conditions, including vacancy rates, area demographics, including trade area population and average household income and neighborhood growth patterns and economic conditions. We completed the following dispositions during the first three months of 2022 and 2021 as follows: Contract Sales Property Location Disposition Date Property Type Rentable Square Feet Price Net Proceeds 2022 Bon Secours Richmond, VA 2/11/2022 Office 72,890
$ 8,760,000$ - Omnicare Richmond, VA 2/11/2022 Industrial 51,800 10,200,000 - Texas Health Dallas, TX 2/11/2022 Office 38,794 7,040,000 11,883,639 (1) Accredo Orlando, FL 2/24/2022 Office 63,000 14,000,000 5,000,941 226,484 $ 40,000,000 $ 16,884,5802021 Chevron Gas StationRoseville, CA 1/7/2021 Retail 3,300 $ 4,050,000 $ 3,914,909EcoThrift Sacramento, CA 1/29/2021 Retail 38,536 5,375,300 2,684,225 Chevron Gas StationSan Jose, CA 2/12/2021 Retail 1,060 4,288,888 4,054,327 42,896 $ 13,714,188 $ 10,653,461(1) Combined net proceeds for the February 11, 2022disposition are net of commissions, closing costs and repayment of the outstanding mortgages, except there were no outstanding mortgages on the two Chevronproperties at the time of sale. 52 --------------------------------------------------------------------------------
Extension of leases
January 12, 2022, we extended the lease term of our Cummins property located in Nashville, Tennesseefrom March 1, 2023to February 28, 2024with a 2% increase in annual rent commencing March 1, 2023. Cummins accepted the extension of the lease terms and possession of the property on an "AS-IS" basis. We also granted to Cummins an option to extend the lease term for an additional five years commencing March 1, 2024and paid a leasing commission of $30,000in connection with this extension. Effective January 26, 2022, we extended the lease term of our ITW Rippey property located in El Dorado Hills, Californiafrom August 1, 2022to July 31, 2029with a 6% increase in annual rent commencing August 1, 2022and 3% annual escalations thereafter. We also agreed to provide a tenant improvements allowance of $481,250in connection with this extension and granted ITW Rippey an option to extend the lease term for an additional five years commencing August 1, 2029. Effective March 4, 2022, we extended the lease term of our Williams Sonomaproperty located in Summerlin, Nevadafrom October 31, 2022to October 31, 2025with a 4% increase in annual rent commencing November 1, 2022and 2.7% annual escalations thereafter. We also agreed to provide the tenant with one month of free rent, an inducement payment of $100,000and tenant improvements allowance of $166,450and will pay a leasing commission of $90,383in connection with this extension.
We continue to explore possible lease extensions for some of our other properties.
Other than as discussed below, we do not have other plans to incur any significant costs to renovate, improve or develop the properties. We believe that our properties are adequately insured. Pursuant to lease agreements, as of
March 31, 2022and December 31, 2021, we had obligations to pay approximately $128,538and $189,136, respectively, for on-site and tenant improvement to be incurred by tenants. We expect that the related improvements will be completed during the 2022 calendar year and will be funded from cash on hand, operating cash flow, borrowings under our Revolver or offering proceeds. In addition, we have identified approximately $1,959,000of roof replacement, exterior painting and sealing and parking lot repairs/restriping that are expected to be completed in the next 12 months, including approximately $452,000of building improvements at the Northrop Grumman property which we have agreed to complete in a timely manner. Approximately $994,000of these improvements are expected to be recoverable from the tenant through operating expense reimbursements. We will initially pay for the improvements, and the recoveries will be billed over an extended period of time according to the terms of the leases. The remaining costs of approximately $965,000are not recoverable from tenants. These improvements will be funded from cash on hand, operating cash flows, borrowings under our Revolver or proceeds from the sale of shares of our common stock. Recent Market Conditions The continuing developments in the Russian war against Ukraineand sanctions which have been announced by the United Statesand other countries against Russiahave caused significant uncertainty in the market, adding to continuing concerns about supply chain disruptions, inflation and increases in interest rates. Volatility in stock and bond markets, particularly the rapid rise in yields on U.S. Treasurysecurities, may negatively impact our operating results. In addition, we continue to face significant uncertainties due to the COVID-19 pandemic, including any future variants thereof, although the impacts of the COVID-19 pandemic on the economy appear to have diminished and the general commercial real estate market appears to be recovering from such impacts. Both the investing and leasing environments are currently highly competitive. The COVID-19 pandemic has resulted in significant disruptions in utilization of office and retail properties and uncertainty over how tenants will respond when their leases are scheduled to expire. Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Furthermore, rent abatements for tenants severely impacted by the COVID-19 pandemic, inflation or international business interests, particularly if affected by the Russian war against Ukraine, may also result in decreases in cash flows from investment properties. We have no leases scheduled to expire in 2022 and three leases (two office and one industrial) scheduled to expire in 2023, which comprise an aggregate of 142,146 leasable square feet and represent approximately 4.1% of projected 2022 ABR from properties. The tenants of these properties could reevaluate their use of such properties in light of the impacts of the COVID-19 pandemic, including their ability to have workers succeed in working at home, and determine not to renew these leases or to seek rent or other concessions as a condition of renewing their leases. 53 -------------------------------------------------------------------------------- Potential future declines in economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio, which could have the following negative effects on us: the values of our investments in commercial properties could decrease below the amounts paid for such investments; and/or revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to make distributions or meet our debt service obligations. However, we have successfully negotiated lease extensions for nine properties during 2021 and the first quarter of 2022. We are in the process of negotiating potential lease extensions with other tenants. The debt market remains sensitive to the macro environment, such as inflation, impacts of the COVID-19 pandemic, Federal Reservepolicy, market sentiment or regulatory factors affecting the banking and commercial mortgage-backed securities industries. Increases in interest rates on our floating rate debt will reduce our net income (loss) and cash flows. In January 2022, we refinanced all but four of our properties (including the TIC Interest) with proceeds from the $250,000,000Credit Facility which includes floating rates based on SOFR and our leverage ratio as described above. The mortgage on our Sutter Healthproperty does not mature until March 9, 2024and the other three mortgages do not mature until after September 2027. All four of these mortgages are at fixed rates. Our Revolver does not mature until January 18, 2026and can be extended for an additional 12 months thereafter, while our Term Loan does not mature until January 18, 2027. Any future uncertainties in the capital markets may cause difficulty in refinancing debt obligations prior to maturity at terms as favorable as the terms of existing indebtedness. If we are not able to refinance our indebtedness on attractive terms at the various maturity dates, we may be forced to dispose of some of our assets. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. We continuously review our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure. On May 10, 2022, we purchased a five-year swap at 2.258% on our $150,000,000Term Loan that results in a fixed interest rate of 3.858% on the Term Loan when our leverage ratio is less than or equal to 40%. As part of this transaction, we sold a one-time option to terminate the swap on December 31, 2024, which reduced the swap rate. Under the Credit Facility, the interest rate will continue to vary based on our leverage ratio. Election as a REIT We elected to be taxed as a REIT for U.S.federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. We intend to continue to qualify as a REIT. To continue to qualify and maintain status as a REIT, we must meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally would not be subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the distributions paid deduction and excluding net capital gains). If we fail to maintain our qualification as a REIT in any taxable year, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to qualify as a REIT. We also will be disqualified for the four taxable years following the year during which qualification is lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income (loss) and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to continue to qualify for treatment as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying unaudited condensed consolidated financial statements. We will be subject to certain state and local taxes related to the operations of properties in certain locations. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying unaudited condensed consolidated financial statements.
Significant Accounting Policies and Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included under "Critical Accounting Policies" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K, filed with the
SECon March 23, 2022. There have been no significant changes to our policies during the three months ended March 31, 2022. 54 --------------------------------------------------------------------------------
Commitments and contingencies
We may be subject to certain covenants and contingencies with respect to certain transactions (see Note 11 to our accompanying unaudited condensed consolidated financial statements for a covenant and contingency discussion).
Transactions and agreements with related parties
See Note 10 to our accompanying unaudited condensed consolidated financial statements for more details on the various related party transactions and agreements.
See Note 14 to our accompanying unaudited condensed consolidated financial statements for events occurring after
Recent accounting pronouncements
See Note 2 to our accompanying unaudited condensed consolidated financial statements for recent accounting pronouncements.
Off-balance sheet arrangements
We have no off-balance sheet arrangements that had or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, or capital resources as of
March 31, 2022.
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