Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BUSINESS AND ORGANIZATION
Modiv Inc. (the “Company”) was incorporated on May 15, 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, of which 2,000,000 shares are designated as 7.375% Series A cumulative redeemable perpetual preferred stock (“Series A Preferred Stock”), 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. The Company files its reports with the Securities and Exchange Commission (the “SEC”) as a smaller reporting company under Rule 12b-2 of the Securities Exchange Act of 1934, as amended. The Company's 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. The Company's 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 the Company's Class C common stock (see details of the initial listed offering (the “Listed Offering”) below).
The Company holds its investments in real property primarily 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 approximate 73% partnership interest in, the Operating Partnership as of March 31, 2023 and December 31, 2022. The Operating Partnership's limited partners include holders of several classes of units with various vesting and enhancement terms as further described in Note 11.
As of March 31, 2023, the Company's portfolio of approximately 3.4 million square feet of aggregate leasable space consisted of investments in 48 real estate properties, comprised of: 29 industrial properties, including an approximate 72.7% tenant-in-common interest in a Santa Clara, California property (the “TIC Interest”), which represent approximately 61% of the portfolio, 12 retail properties, which represent approximately 20% of the portfolio, and seven office properties, which represent approximately 19% of the portfolio (expressed as a percentage of annual base rent (“ABR”) as of March 31, 2023).
Common Stock Offerings
Since the Company’s initial registered offering of common stock was declared effective by the SEC in 2016, the Company has raised an aggregate of $212,682,267 pursuant to: (i) non-listed offerings of common stock registered with the SEC (collectively, the “Registered Offering”), (ii) offerings of common stock exempt from registration pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), (iii) distribution reinvestment plan (“DRP”) offerings of common stock registered with the SEC, (iv) a private offering of common stock pursuant to Regulation D under the Securities Act, (v) a qualified offering of common stock pursuant to Regulation A under the Securities Act and (vi) an offering of common stock listed on the NYSE.
On December 8, 2021, the Company filed with the SEC a Registration Statement on Form S-11 (File No. 333-261529), and, on February 9, 2022, the Company filed with the SEC Amendment No. 1 to the Registration Statement on Form S-11, in connection with the Listed Offering of the Company’s Class C common stock, which became effective on February 10, 2022. The Listed Offering of the Company's Class C common stock closed on February 15, 2022. In connection with the Listed Offering, the Company sold 40,000 shares of its Class C common stock at $25.00 per share to a major stockholder who was formerly a related party (see Note 8 for more details).
On March 30, 2022, the Company filed a Registration Statement on Form S-3 (File No. 333-263985), and on May 27, 2022, the Company filed Amendment No. 1 to the Registration Statement on Form S-3, 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. The Form S-3, as amended, became effective on June 2, 2022 and the Company filed a prospectus supplement for the Company's at-the-market offering of up to $50,000,000 of its Class C common stock (the “ATM Offering”) on June 6, 2022. As of March 31, 2023, no shares have been issued in connection with the Company's ATM Offering.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Preferred Stock Offering
On September 17, 2021, the Company and the Operating Partnership completed the issuance and sale of 2,000,000 shares of the Company’s Series A Preferred Stock in an underwritten public offering (the “Preferred Offering”) at a price per share of $25.00 (see Note 8 for additional information).
Distribution Reinvestment Plan
On February 15, 2022, the Company's board of directors amended and restated the DRP (the “Second Amended and Restated DRP”) with respect to the Class C common stock to change the purchase price at which the Class C common stock is issued to stockholders who elect to participate in the DRP. The purpose of this change was to reflect the fact that the Company's Class C common stock is now listed on the NYSE and no longer priced based on net asset value (“NAV”) per share. As more fully described in the Second Amended and Restated DRP, the purchase price for the Class C common stock under the DRP depends on whether the Company issues new shares to DRP participants or the Company or any third-party administrator obtains shares to be issued to DRP participants by purchasing them in the open market or in privately negotiated transactions. The purchase price for the Class C common stock issued directly by the Company is 97%, reflecting a 3% discount (or such other discount as may then be in effect) of the Market Price (as defined in the Second Amended and Restated DRP) of the Class C common stock. This discount is subject to change from time to time, in the Company’s sole discretion, but will be between 0% to 5% of the Market Price.
The purchase price for the Class C common stock that the Company or any third-party administrator purchases from parties other than the Company, either in the open market or in privately negotiated transactions, will be 100% of the “average price per share” (as described in the Second Amended and Restated DRP) actually paid for such shares of Class C common stock, excluding any processing fees. The Second Amended and Restated DRP also reflects the $0.05 per share processing fee that will be paid to the Company's transfer agent by DRP participants for each share of Class C common stock purchased through the DRP. The Second Amended and Restated DRP was effective beginning with distributions paid in February 2022. From February 2022 through March 31, 2023, the Company issued 262,984 shares of Class C common stock under the DRP.
Share Repurchase Program
On February 15, 2022, the Company's board of directors authorized up to $20,000,000 in repurchases of the Company's outstanding shares of common stock through December 31, 2022 (“2022 SRP”). On December 21, 2022, the Company's board of directors authorized up to $15,000,000 in repurchases of the Company's outstanding shares of common stock and Series A Preferred Stock from January 1, 2023 through December 31, 2023 (“2023 SRP”). Repurchases made pursuant to the 2023 SRP 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 the Company in its 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.
Under the 2022 SRP, the Company repurchased an aggregate of 250,153 shares of its Class C common stock for an aggregate value of $4,161,618 at an average cost of $16.64 per share. Under the 2023 SRP, during the three months ended March 31, 2023, the Company repurchased an aggregate of 4,465 shares of its Class C common stock for an aggregate value of $49,682 at an average cost of $11.13 per share.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(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 as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 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, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2023.
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, 2022 included herein was derived from the audited financial statements.
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. Other than the noncontrolling interests related to an “UPREIT” transaction completed in January 2022, as discussed in Note 11, all noncontrolling interests currently represent non-voting, non-distribution accruing interests with no allocation of profits or losses, but have various conversion rights to obtain future rights to distributions and allocation of profits and losses as discussed in Note 11.
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. Actual results may differ from those estimates.
Business Combinations
The Company accounts for business combinations in accordance with FASB 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 whereas in a business combination the total consideration transferred is allocated among the fair value of the identifiable tangible and intangible assets and liabilities assumed. 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 accounts for leases in accordance with FASB ASU No. 2016-02, Leases (“Topic 842”), and the related FASB ASU Nos. 2018-10, 2018-11, 2018-20 and 2019-01, which provide practical expedients, technical corrections and improvements for certain aspects of ASU No. 2016-02 (collectively “Topic 842”). Topic 842 established 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. Topic 842 also impacts the Company's accounting as a lessee; however, such impact 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. 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.
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.
The Company records tenant reimbursements on a gross basis in instances when its tenants reimburse the Company for lessor costs, including real estate taxes, which the Company incurs. Conversely, the Company records lessor costs on a net basis when these costs are paid directly by the Company's tenants to suppliers and service providers, including taxing authorities, on the Company's behalf. To the extent any tenant responsible for these obligations under the applicable lease defaults on such lease, or if it is deemed probable that the tenant will fail to pay for these obligations, the Company records a liability for such obligations.
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)
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.
Gain or Loss on Sale of Real Estate Investments
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 during the three months ended March 31, 2022 met these criteria at closing. When properties are sold, operating results of the properties remain 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.
Impairment of Investment in Real Estate Properties
The Company monitors events and changes in circumstances that could indicate that the carrying amounts of investments in real estate properties may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of investments in real estate properties may not be recoverable, management assesses whether the carrying value of the investments in real estate properties 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 investments in real estate properties, the Company records an impairment charge to the extent the carrying value exceeds the estimated fair value of the investments in real estate properties.
Treasury Stock
Effective on the date of the Listed Offering, the Company accounts for repurchased shares of its Class C common stock as treasury stock. Treasury shares are recorded at cost and are included as a component of equity in the Company's unaudited condensed consolidated balance sheets as of March 31, 2023 and 2022.
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. For the three months ended March 31, 2023 and 2022, the Company presented both Basic EPS and Diluted EPS reflecting its reported net loss attributable to common stockholders for each period (see Note 12 for additional information).
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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, tenant receivables, prepaid expenses and other assets and accounts payable, accrued and other liabilities: These balances approximate their fair values due to their short maturities.
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.
Credit facility: The fair values of the Company’s credit facility approximate the carrying value as their interest rate and other terms are comparable to those available in the marketplace for similar credit facilities.
Mortgage notes payable: The fair values of the Company’s mortgage notes payable are 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 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.
Related party transactions: The Company has concluded that it is not practical to determine the estimated fair value of related party transactions. Disclosure rules for fair value measurements require that for financial instruments for which it is not practicable to estimate fair value, information pertinent to those instruments be disclosed. Further information as to these financial transactions with related parties is included in Note 9.
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 as of the balance sheet date: (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 investments held for sale, net” and “assets related to real estate investments held for sale,” respectively, in the accompanying unaudited condensed consolidated balance sheets. Other liabilities related to real estate investments held for sale are classified as “liabilities related to real estate investments held for sale” 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.
Derivative Instruments and Hedging Activities
The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates on its variable rate debt. The Company does not enter into derivatives for speculative purposes. The Company records derivative instruments at fair value on its unaudited condensed consolidated balance sheets. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The accounting for changes in fair value of the derivative instrument depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. If the derivative instrument meets the hedge accounting criteria, the change in the fair value of a derivative instrument may be designated as a cash flow hedge where the unrealized holding gain or loss on the interest rate swap is presented in the Company's unaudited condensed consolidated statements of comprehensive loss and accumulated other comprehensive income in the Company's unaudited condensed consolidated balance sheets. If the derivative instrument does not meet the hedge accounting criteria, the change in the fair value of the derivative is recorded as a gain or loss on the interest rate swap and included in interest expense in the Company's unaudited condensed consolidated statements of operations.
The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate term loan. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
Restricted Operating Partnership Unit Awards
Historically, the fair values of the restricted Operating Partnership unit awards issued or granted by the Company were based on an estimated NAV per share (unaudited) 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 prior to the listing of the Company's Class C common stock on the NYSE. The fair value of future grants of restricted Operating Partnership unit awards will be determined based on the NYSE's market closing price of the Company's Class C common stock on the date of grant. Operating Partnership units issued as purchase consideration in connection with the Self-Management Transaction and UPREIT Transaction (each as defined and discussed in Note 11) are recorded in equity under noncontrolling interests in the Operating Partnership in the Company's unaudited condensed consolidated balance sheets and statements of equity. 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 (see Note 11). The Company has 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.
Immaterial Error Corrections
During the first quarter of 2023 with the transition to a new independent registered public accounting firm, management determined that its prior treatment of property taxes in those instances where the Company was responsible for paying property taxes and subsequently seeking tenant reimbursement should be treated differently than those instances where property taxes were paid directly by tenants to taxing authorities. After a thorough review, management determined that property taxes paid directly by tenants to taxing authorities should have not been recorded in the Company’s unaudited condensed consolidated statement of operations for the first quarter of 2022 in accordance with ASU 2018-20 “Leases (Topic 842) - Narrow-Scope Improvements for Lessors.” Accordingly, the Company’s unaudited condensed consolidated statement of operations for the first quarter of 2022 reflects an adjustment to reduce rental income and a corresponding reduction in property expenses of $604,727 for such property taxes and the Company's consolidated balance sheet as of December 31, 2022 reflects a reduction in tenant receivables with a corresponding reduction in accounts payable, accrued and other liabilities of $1,596,127. The corrections did not affect net loss or net loss per share of the first quarter of 2022 unaudited condensed consolidated statement of operations.
During the fourth quarter of 2022, management determined that straight-line rents receivable write-offs associated with real estate investments previously sold should be reclassified as a component of the related gain on sale of the real estate investments rather than as an offset to rental income as previously presented in the Company's statements of operations. Accordingly, the Company’s unaudited condensed consolidated statement of operations for the first quarter of 2022 reflects an increase in rental income and a corresponding reduction in the gain on sale of real estate investments of $525,691. The reclassification did not affect net loss or net loss per share of the first quarter of 2022 unaudited condensed consolidated statement of operations.
Recent Accounting Pronouncements
New Accounting Standards Recently Issued or Adopted
There were no new accounting standards recently issued or adopted during the three months ended March 31, 2023 that will materially affect or affected the Company's consolidated financial statements or operations.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. REAL ESTATE INVESTMENTS, NET
As of March 31, 2023, the Company’s real estate investment portfolio consisted of 48 operating properties located in 17 states comprised of: 29 industrial properties (including the Company's approximate 72.7% TIC Interest in a Santa Clara, California industrial property which is not reflected in the table below but discussed in Note 4), 12 retail properties and seven office properties (including the one held for sale property not reflected in the table below).
The following table provides summary information regarding the Company’s operating properties as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property | | Location | | Acquisition Date | | Property Type | | Land, Buildings and Improvements | | Equipment | | Tenant Origination and Absorption Costs | | Accumulated Depreciation and Amortization | | Total Investment in Real Estate Property, Net |
| Northrop Grumman | | Melbourne, FL | | 3/7/2017 | | Industrial | | $ | 13,608,084 | | | $ | — | | | $ | 1,469,737 | | | $ | (4,130,132) | | | $ | 10,947,689 | |
| Northrop Grumman Parcel | | Melbourne, FL | | 6/21/2018 | | Land | | 329,410 | | | — | | | — | | | — | | | 329,410 | |
| Husqvarna | | Charlotte, NC | | 11/30/2017 | | Industrial | | 11,840,200 | | | — | | | 1,013,948 | | | (1,917,112) | | | 10,937,036 | |
| AvAir | | Chandler, AZ | | 12/28/2017 | | Industrial | | 27,357,899 | | | — | | | — | | | (3,672,797) | | | 23,685,102 | |
| 3M | | DeKalb, IL | | 3/29/2018 | | Industrial | | 14,762,819 | | | — | | | 3,037,057 | | | (5,732,211) | | | 12,067,665 | |
| Taylor Fresh Foods | | Yuma, AZ | | 10/24/2019 | | Industrial | | 34,194,369 | | | — | | | 2,894,017 | | | (4,570,787) | | | 32,517,599 | |
| Levins | | Sacramento, CA | | 12/31/2019 | | Industrial | | 4,429,390 | | | — | | | 221,927 | | | (716,978) | | | 3,934,339 | |
| Labcorp | | San Carlos, CA | | 12/31/2019 | | Industrial | | 9,672,174 | | | — | | | 408,225 | | | (664,043) | | | 9,416,356 | |
| WSP USA | | San Diego, CA | | 12/31/2019 | | Industrial | | 9,869,520 | | | — | | | 539,633 | | | (1,203,450) | | | 9,205,703 | |
| ITW Rippey | | El Dorado, CA | | 12/31/2019 | | Industrial | | 7,071,143 | | | — | | | 304,387 | | | (911,705) | | | 6,463,825 | |
| L3Harris | | San Diego, CA | | 12/31/2019 | | Industrial | | 11,690,952 | | | — | | | 662,101 | | | (1,384,511) | | | 10,968,542 | |
| Arrow-TruLine | | Archbold, OH | | 12/3/2021 | | Industrial | | 11,518,084 | | | — | | | — | | | (535,376) | | | 10,982,708 | |
| Kalera | | Saint Paul, MN | | 1/31/2022 | | Industrial | | 3,690,009 | | | 4,429,000 | | | — | | | (410,756) | | | 7,708,253 | |
| Lindsay | | Colorado Springs 1, CO | | 4/19/2022 | | Industrial | | 2,311,934 | | | — | | | — | | | (55,892) | | | 2,256,042 | |
| Lindsay | | Colorado Springs 2, CO | | 4/19/2022 | | Industrial | | 3,314,406 | | | — | | | — | | | (33,262) | | | 3,281,144 | |
| Lindsay | | Dacano, CO | | 4/19/2022 | | Industrial | | 6,561,054 | | | — | | | — | | | (80,636) | | | 6,480,418 | |
| Lindsay | | Alachua, FL | | 4/19/2022 | | Industrial | | 8,518,123 | | | — | | | — | | | (347,502) | | | 8,170,621 | |
| Lindsay | | Franklinton, NC | | 4/19/2022 | | Industrial | | 7,181,113 | | | — | | | — | | | (153,208) | | | 7,027,905 | |
| Lindsay | | Canal Fulton 1, OH | | 4/19/2022 | | Industrial | | 11,345,533 | | | — | | | — | | | (329,518) | | | 11,016,015 | |
| Lindsay | | Canal Fulton 2, OH | | 4/19/2022 | | Industrial | | 10,190,942 | | | — | | | — | | | (301,915) | | | 9,889,027 | |
| Lindsay | | Rock Hill, SC | | 4/19/2022 | | Industrial | | 6,555,983 | | | — | | | — | | | (161,234) | | | 6,394,749 | |
| Producto | | Endicott, NY | | 7/15/2022 | | Industrial | | 2,362,310 | | | — | | | — | | | (55,357) | | | 2,306,953 | |
| Producto | | Jamestown, NY | | 7/15/2022 | | Industrial | | 3,073,686 | | | — | | | — | | | (67,769) | | | 3,005,917 | |
| Valtir | | Centerville, UT | | 7/26/2022 | | Industrial | | 4,685,355 | | | — | | | — | | | (82,954) | | | 4,602,401 | |
| Valtir | | Orangeburg, SC | | 7/26/2022 | | Industrial | | 4,243,308 | | | — | | | — | | | (98,700) | | | 4,144,608 | |
| Valtir | | Fort Worth, TX | | 7/26/2022 | | Industrial | | 3,278,522 | | | — | | | — | | | (44,021) | | | 3,234,501 | |
| Valtir | | Lima, OH | | 8/4/2022 | | Industrial | | 9,921,943 | | | — | | | — | | | (231,092) | | | 9,690,851 | |
| Plastic Products | | Princeton, MN | | 1/26/2023 | | Industrial | | 6,118,411 | | | — | | | 553,780 | | | (122,317) | | | 6,549,874 | |
| Stealth Manufacturing | | Savage, MN | | 3/31/2023 | | Industrial | | 5,526,310 | | | — | | | — | | | (7,068) | | | 5,519,242 | |
| Dollar General | | Litchfield, ME | | 11/4/2016 | | Retail | | 1,281,812 | | | — | | | 116,302 | | | (256,554) | | | 1,141,560 | |
| Dollar General | | Wilton, ME | | 11/4/2016 | | Retail | | 1,543,776 | | | — | | | 140,653 | | | (328,334) | | | 1,356,095 | |
| Dollar General | | Thompsontown, PA | | 11/4/2016 | | Retail | | 1,199,860 | | | — | | | 106,730 | | | (246,502) | | | 1,060,088 | |
| Dollar General | | Mt. Gilead, OH | | 11/4/2016 | | Retail | | 1,174,188 | | | — | | | 111,847 | | | (236,340) | | | 1,049,695 | |
| Dollar General | | Lakeside, OH | | 11/4/2016 | | Retail | | 1,112,872 | | | — | | | 100,856 | | | (242,558) | | | 971,170 | |
| Dollar General | | Castalia, OH | | 11/4/2016 | | Retail | | 1,102,086 | | | — | | | 86,408 | | | (235,669) | | | 952,825 | |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Operating properties table continued) | | | | | | | | | | | | | | |
| Property | | Location | | Acquisition Date | | Property Type | | Land, Buildings and Improvements | | Equipment | | Tenant Origination and Absorption Costs | | Accumulated Depreciation and Amortization | | Total Investment in Real Estate Property, Net |
| Dollar General | | Bakersfield, CA | | 12/31/2019 | | Retail | | 4,899,714 | | | — | | | 261,630 | | | (478,180) | | | 4,683,164 | |
| Dollar General | | Big Spring, TX | | 12/31/2019 | | Retail | | 1,281,683 | | | — | | | 76,351 | | | (165,648) | | | 1,192,386 | |
| Dollar Tree | | Morrow, GA | | 12/31/2019 | | Retail | | 1,320,367 | | | — | | | 73,298 | | | (230,459) | | | 1,163,206 | |
| PreK Education | | San Antonio, TX | | 12/31/2019 | | Retail | | 12,477,027 | | | — | | | 555,767 | | | (1,502,738) | | | 11,530,056 | |
| Walgreens | | Santa Maria, CA | | 12/31/2019 | | Retail | | 5,223,442 | | | — | | | 335,945 | | | (432,122) | | | 5,127,265 | |
| KIA/Trophy of Carson | | Carson, CA | | 1/18/2022 | | Retail | | 69,286,444 | | | — | | | 118,606 | | | (1,283,084) | | | 68,121,966 | |
| exp US Services | | Maitland, FL | | 3/27/2017 | | Office | | 6,283,631 | | | — | | | 388,247 | | | (1,346,851) | | | 5,325,027 | |
| Cummins | | Nashville, TN | | 4/4/2018 | | Office | | 11,047,348 | | | — | | | 1,558,739 | | | (3,922,239) | | | 8,683,848 | |
| Costco | | Issaquah, WA | | 12/20/2018 | | Office | | 27,585,182 | | | — | | | 2,765,136 | | | (5,612,690) | | | 24,737,628 | |
| GSA (MSHA) | | Vacaville, CA | | 12/31/2019 | | Office | | 3,112,076 | | | — | | | 243,307 | | | (445,575) | | | 2,909,808 | |
| Solar Turbines | | San Diego, CA | | 12/31/2019 | | Office | | 7,161,231 | | | — | | | 324,221 | | | (799,378) | | | 6,686,074 | |
| OES (1) | | Rancho Cordova, CA | | 12/31/2019 | | Office | | 29,630,504 | | | — | | | 1,616,610 | | | (4,237,159) | | | 27,009,955 | |
| | | | | | | | $ | 441,946,229 | | | $ | 4,429,000 | | | $ | 20,085,465 | | | $ | (50,024,383) | | | $ | 416,436,311 | |
(1) Effective December 31, 2022, the Company and Sutter Health agreed to the early termination of the Sutter Health lease. The property was then leased to the State of California's Office of Emergency Services (“OES”) effective January 4, 2023 for 12 years through December 31, 2034. OES has a purchase option which OES can exercise any time from May 1, 2024 through December 31, 2026. OES also has an early termination option which OES can exercise any time on or after December 31, 2028 by giving written notice at least 120 days prior to the date of early termination.
Impairment Charge
In March 2023, the Company recorded an impairment charge of $3,499,438 related to its property located in Nashville, Tennessee leased to Cummins Inc. through February 29, 2024. The Company determined that an impairment charge was triggered by expectations of a shortened holding period and estimated the property's fair value based upon current market comparables.
Acquisitions:
Three Months Ended March 31, 2023
During the three months ended March 31, 2023, the Company acquired the following industrial real estate properties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property | | Location | | Acquisition Date | | Land | | Buildings and
Improvements | | Tenant
Origination
and
Absorption
Costs | | Below-
Market
Lease Intangibles | | Acquisition Price |
| Plastic Products | | Princeton, MN | | 1/26/2023 | | $ | 421,997 | | | $ | 5,696,414 | | | $ | 553,780 | | | $ | (285,139) | | | 6,387,052 | |
| Stealth Manufacturing | | Savage, MN | | 3/31/2023 | | 770,752 | | | 4,755,558 | | | — | | | — | | | 5,526,310 | |
| | | | | | $ | 1,192,749 | | | $ | 10,451,972 | | | $ | 553,780 | | | $ | (285,139) | | | $ | 11,913,362 | |
During the three months ended March 31, 2023, the Company recognized $115,574 of total revenue related to the above-acquired properties.
Acquired Properties Lease Expirations:
The noncancellable lease terms of the properties acquired during the three months ended March 31, 2023 are as follows:
| | | | | | | | |
| Property | | Lease Expiration |
| Plastic Products | | 10/31/2028 |
| Stealth Manufacturing | | 3/31/2043 |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Three Months Ended March 31, 2022
During the three months ended March 31, 2022, the Company acquired the following retail and industrial real estate properties: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property | | Location | | Acquisition Date | | Land | | Buildings and
Improvements | | Equipment | | Tenant
Origination
and
Absorption
Costs | | Acquisition Price |
| KIA/Trophy of Carson | | Carson, CA | | 1/18/2022 | | $ | 32,741,781 | | | $ | 36,544,663 | | | $ | — | | | $ | 118,606 | | | $ | 69,405,050 | |
| Kalera | | St. Paul, MN | | 1/31/2022 | | 562,356 | | | 3,127,653 | | | 4,429,000 | | | — | | | 8,119,009 | |
| | | | | | $ | 33,304,137 | | | $ | 39,672,316 | | | $ | 4,429,000 | | | $ | 118,606 | | | $ | 77,524,059 | |
During the three months ended March 31, 2022, the Company recognized $1,378,265 of total revenue related to the above-acquired properties.
Acquired Properties Lease Expirations:
The noncancellable lease terms of the properties acquired during the three months ended March 31, 2022 are as follows:
| | | | | | | | |
| Property | | Lease Expiration |
| KIA/Trophy of Carson | | 1/17/2047 |
| Kalera | | 2/28/2042 |
Dispositions:
Three Months Ended March 31, 2023 and 2022
There were no properties sold during the three months ended March 31, 2023. During the three months ended March 31, 2022, the Company sold the following real estate properties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property | | Location | | Disposition Date | | Property Type | | Rentable Square Feet | | Contract Sale Price | | Gain on Sale |
| Bon Secours | | Richmond, VA | | 2/11/2022 | | Office | | 72,890 | | | $ | 10,200,000 | | | $ | 28,595 | |
| Omnicare | | Richmond, VA | | 2/11/2022 | | Flex | | 51,800 | | | 8,760,000 | | | 1,890,624 | |
| Texas Health | | Dallas, TX | | 2/11/2022 | | Office | | 38,794 | | | 7,040,000 | | | 87,480 | |
| Accredo | | Orlando, FL | | 2/24/2022 | | Office | | 63,000 | | | 14,000,000 | | | 4,868,387 | |
| | | | | | | | 226,484 | | | $ | 40,000,000 | | | $ | 6,875,086 | |
On February 11, 2022, the Company completed the sale of two medical office properties in Dallas, Texas and Richmond, Virginia leased to Texas Health and Bon Secours, respectively, and one flex property in Richmond, Virginia leased to Omnicare for an aggregate sales price of $26,000,000, which generated net proceeds of $11,892,305 after payment of commissions, closing costs and existing mortgages.
On February 24, 2022, the Company completed the sale of a medical office property in Orlando, Florida leased to Accredo for a sales price of $14,000,000, which generated net proceeds of $5,012,724 after payment of commissions, closing costs and repayment of the existing mortgage.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Asset Concentration:
As of March 31, 2023 and December 31, 2022, the Company’s real estate portfolio asset concentration (greater than 10% of total assets) was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Property and Location | | Net Carrying Value | | Percentage of
Total Assets | | Net Carrying Value | | Percentage of
Total Assets |
| KIA, Carson, CA | | $ | 68,121,966 | | | 14.7 | % | | $ | 68,387,431 | | | 15.0 | % |
Lindsay, eight properties acquired in Colorado (three), Ohio (two), North Carolina, South Carolina and Florida | | 54,515,921 | | | 11.7 | % | | 54,661,221 | | | 12.0 | % |
| Total | | $ | 122,637,887 | | | 26.4 | % | | $ | 123,048,652 | | | 27.0 | % |
Rental Income Concentration:
During the three months ended March 31, 2023 and 2022, the Company’s rental income concentration (greater than 10% of rental income) was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| Property and Location | | Rental Income | | Percentage of
Total Rental Income | | Rental Income | | Percentage of
Total Rental Income |
| KIA, Carson, CA | | $ | 1,291,851 | | | 12.5 | % | | $ | 1,018,245 | | | 10.6 | % |
Lindsay, eight properties acquired in Colorado (three), Ohio (two), North Carolina, South Carolina and Florida | | $ | 1,212,864 | | | 11.8 | % | | (1) | | (1) |
(1) The Lindsay properties represented the source of greater than 10% of total rental income during the three months ended March 31, 2023 but not the three months ended March 31, 2022 since the Lindsay properties were acquired on April 19, 2022.
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.
Effective December 31, 2022, the Company and Sutter Health agreed to the early termination of the Sutter Health lease. The property was then leased to OES effective January 4, 2023 for 12 years through December 31, 2034, with a purchase option which OES can exercise any time from May 1, 2024 through December 31, 2026 and an early termination option which OES can exercise any time on or after December 31, 2028.
As discussed above, the Company also acquired two properties during the three months ended March 31, 2023.
On January 23, 2023, the Company executed a lease extension for the property leased to Solar Turbines for an additional two years through July 31, 2025 with a 14.0% increase in rent effective August 1, 2023 and a 3.0% increase in rent effective August 1, 2024. This is the third lease extension executed by Solar Turbines, which has occupied the Company's property located in San Diego, California since 2008.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
As of March 31, 2023, the future minimum contractual rent payments due to the Company under the Company’s non-cancellable operating leases, including lease amendments executed though the date of this report, if any, are as follows:
| | | | | | | | |
| April through December 2023 | | $ | 24,711,192 | |
| 2024 | | 33,286,621 | |
| 2025 | | 32,081,095 | |
| 2026 | | 28,487,549 | |
| 2027 | | 26,908,539 | |
| Thereafter | | 345,488,929 | |
| | $ | 490,963,925 | |
Intangible Assets, Net Related to the Company's Real Estate
As of March 31, 2023 and December 31, 2022, intangible assets, net related to the Company's real estate were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Tenant Origination and Absorption Costs | | Above-Market Lease Intangibles | | Below-Market Lease Intangibles | | Tenant Origination and Absorption Costs | | Above-Market Lease Intangibles | | Below-Market Lease Intangibles |
| Cost | $ | 20,085,465 | | | $ | 2,485,510 | | | $ | (15,092,940) | | | $ | 19,499,749 | | | $ | 2,485,510 | | | $ | (14,378,808) | |
| Accumulated amortization | (13,096,823) | | | (677,027) | | | 5,368,223 | | | (12,722,558) | | | (634,754) | | | 4,703,122 | |
| Net | $ | 6,988,642 | | | $ | 1,808,483 | | | $ | (9,724,717) | | | $ | 6,777,191 | | | $ | 1,850,756 | | | $ | (9,675,686) | |
The intangible assets acquired in connection with the acquisitions have a weighted average amortization period of approximately 10.4 years as of March 31, 2023. As of March 31, 2023, the amortization of intangible assets for the remaining nine months ending December 31, 2023 and for each 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 2023 | $ | 962,477 | | | $ | 124,171 | | | $ | (714,522) | |
| 2024 | 1,234,762 | | | 161,813 | | | (952,695) | |
| 2025 | 1,018,968 | | | 157,767 | | | (952,695) | |
| 2026 | 649,307 | | | 132,836 | | | (947,293) | |
| 2027 | 576,957 | | | 76,550 | | | (937,381) | |
| Thereafter | 2,546,171 | | | 1,155,346 | | | (5,220,131) | |
| $ | 6,988,642 | | | $ | 1,808,483 | | | $ | (9,724,717) | |
| | | | | |
| Weighted-average remaining amortization period | 8.3 years | | 19.3 years | | 10.5 years |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Real Estate Investments Held For Sale
As of March 31, 2023 and December 31, 2022, the Company classified a real estate investment property located in Rocklin, California formerly leased to Gap through February 28, 2023 as held for sale. This property formerly leased to Gap is under contract to be sold by May 31, 2023 (see Note 13).
The following table summarizes the major components of assets and liabilities related to the real estate investment held for sale as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| Assets related to real estate investments held for sale: | | | | |
| Land, buildings and improvements | | $ | 6,357,172 | | | $ | 6,357,172 | |
| Tenant origination and absorption costs | | 355,252 | | | 355,252 | |
| Accumulated depreciation and amortization | | (1,456,699) | | | (1,456,699) | |
| Real estate investments held for sale, net | | 5,255,725 | | | 5,255,725 | |
| Other assets, net | | 15,939 | | | 12,765 | |
| Total assets related to real estate investments held for sale: | | $ | 5,271,664 | | | $ | 5,268,490 | |
| | | | |
| Liabilities related to real estate investments held for sale: | | | | |
| Other liabilities, net | | $ | 51,918 | | | $ | 117,881 | |
| Total liabilities related to real estate investments held for sale: | | $ | 51,918 | | | $ | 117,881 | |
NOTE 4. UNCONSOLIDATED INVESTMENT IN REAL ESTATE PROPERTY
The Company’s investment in unconsolidated entity as of March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| The TIC Interest | | $ | 9,997,292 | | | $ | 10,007,420 | |
The Company’s income from investment in unconsolidated entity for the three months ended March 31, 2023 and 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2023 | | 2022 |
| The TIC Interest | | | | | | $ | 55,567 | | | $ | 95,464 | |
TIC Interest
During 2017, the Company, through a wholly-owned subsidiary of the Operating Partnership, acquired an approximate 72.7% interest in a 91,740 square foot industrial property in Santa Clara, California in a tenants-in-common ownership structure which requires a unanimous vote for significant decisions about the property. 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 was a member of the Company's board of directors from December 2019 to December 2021. The interest in the Santa Clara property over which we have the ability to exercise significant influence, but for which we do not have financial or operating control is accounted for using the equity method of accounting. The Company receives approximately 72.7% of the cash flow distributions and recognizes approximately 72.7% of the results of operations for this property.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
During the three months ended March 31, 2023 and 2022, the Company received $65,696 and $95,367 in cash distributions, respectively.
The following is summarized financial information for the Santa Clara property as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| Assets: | | | | |
| Real estate investments, net | | $ | 29,028,589 | | | $ | 29,294,081 | |
| Cash and cash equivalents | | 578,939 | | | 300,405 | |
| Other assets | | 22,225 | | | 43,159 | |
| Total assets | | $ | 29,629,753 | | | $ | 29,637,645 | |
| Liabilities: | | | | |
| Mortgage note payable, net | | $ | 12,862,832 | | | $ | 12,936,929 | |
| Below-market lease, net | | 2,477,603 | | | 2,514,199 | |
| Other liabilities | | 539,776 | | | 424,662 | |
| Total liabilities | | 15,880,211 | | | 15,875,790 | |
| Total equity | | 13,749,542 | | | 13,761,855 | |
| Total liabilities and equity | | $ | 29,629,753 | | | $ | 29,637,645 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2023 | | 2022 |
| Total revenues | | | | | | $ | 666,146 | | | $ | 714,978 | |
| Expenses: | | | | | | | | |
| Depreciation and amortization | | | | | | 267,052 | | | 261,956 | |
| Interest expense | | | | | | 131,325 | | | 134,294 | |
| Other expenses | | | | | | 189,729 | | | 187,434 | |
| Total expenses | | | | | | 588,106 | | | 583,684 | |
| Net income | | | | | | $ | 78,040 | | | $ | 131,294 | |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 5. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS
Tenant Receivables, Net
As of March 31, 2023 and December 31, 2022, tenant receivables consisted of the following:
| | | | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| Straight-line rent | | $ | 7,785,240 | | | $ | 6,607,220 | |
| Tenant rent and billed reimbursements | | 403,806 | | | 196,477 | |
| Accrued tenant reimbursements | | 464,504 | | | 459,505 | |
| Total | | $ | 8,653,550 | | | $ | 7,263,202 | |
Prepaid Expenses and Other Assets
As of March 31, 2023 and December 31, 2022, prepaid expenses and other assets were comprised of the following:
| | | | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| Deferred tenant allowance | | $ | 2,476,235 | | | $ | 2,564,806 | |
| Miscellaneous receivables | | 71,360 | | | 170,293 | |
| Prepaid expenses | | 1,659,099 | | | 1,364,946 | |
| Deposits | | 674,362 | | | 885,538 | |
| Deferred financing costs on credit facility revolver | | 1,023,681 | | | 1,115,354 | |
Total | | $ | 5,904,737 | | | $ | 6,100,937 | |
Accounts Payable, Accrued and Other Liabilities
As of March 31, 2023 and December 31, 2022, accounts payable, accrued and other liabilities were comprised of the following:
| | | | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| Accounts payable | | $ | 562,211 | | | $ | 1,001,411 | |
| Accrued expenses | | 2,421,351 | | | 2,163,821 | |
| Accrued distributions | | 1,773,431 | | | 1,768,068 | |
| Accrued interest payable | | 348,287 | | | 285,392 | |
| Unearned rent | | 1,683,152 | | | 1,870,057 | |
| Lease incentive obligation | | 550,242 | | | 561,057 | |
| Total | | $ | 7,338,674 | | | $ | 7,649,806 | |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 6. DEBT
The breakdown of debt as of March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| Mortgage notes payable, net | | $ | 44,338,481 | | | 44,435,556 | |
| Credit facility: | | | | |
| Revolver | | — | | | 3,000,000 | |
| Term loan, net | | 168,140,752 | | | 148,018,164 | |
| Total | | $ | 212,479,233 | | | $ | 195,453,720 | |
Mortgage Notes Payable, Net
As of March 31, 2023 and December 31, 2022, the Company’s mortgage notes payable consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Collateral | | 2023 Principal
Amount | | 2022 Principal
Amount | | Contractual Interest
Rate (1) | | Effective
Interest Rate (2) | | Loan
Maturity |
| Costco property | | $ | 18,850,000 | | | $ | 18,850,000 | | | 4.85% | | 4.85% | | 1/01/2030 |
| Taylor Fresh Foods property | | 12,350,000 | | | 12,350,000 | | | 3.85% | | 3.85% | | 11/01/2029 |
| OES property | | 13,236,983 | | | 13,315,009 | | | 4.50% | | 4.50% | | 3/09/2024 |
| Total mortgage notes payable | | 44,436,983 | | | 44,515,009 | | | | | | | |
| Plus unamortized mortgage premium, net (3) | | 92,962 | | | 119,245 | | | | | | | |
| Less unamortized deferred financing costs | | (191,464) | | | (198,698) | | | | | | | |
| Mortgage notes payable, net | | $ | 44,338,481 | | | $ | 44,435,556 | | | | | | | |
(1)Contractual interest rate represents the interest rate in effect under the mortgage note payable as of March 31, 2023 for the three mortgages that were not refinanced through a drawdown from the Credit Facility (defined and discussed below) with KeyBank National Association (“KeyBank”) in January 2022 given their prepayment penalties.
(2)Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2023 and December 31, 2022 consisting of the contractual interest rate.
(3)Represents unamortized net mortgage premium acquired through the merger with Rich Uncles Real Estate Investment Trust I.
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, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Face Value | | Carrying
Value | | Fair Value | | Face value | | Carrying
Value | | Fair Value |
| Mortgage notes payable | | $ | 44,436,983 | | | $ | 44,338,481 | | | $ | 41,369,328 | | | $ | 44,515,009 | | | $ | 44,435,556 | | | $ | 41,293,644 | |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Credit Facility, Net
On January 18, 2022, the Company's Operating Partnership entered into a $250,000,000 credit agreement (‘‘Credit Agreement’’) providing for a $100,000,000 four-year revolving line of credit, which may be extended by up to 12 months subject to certain conditions (the ‘‘Revolver’’), and a $150,000,000 five-year term loan (the ‘‘Term Loan’’ and together with the ‘‘Revolver,’’ the ‘‘Credit Facility’’) with KeyBank and the other lending institutions party thereto (collectively, the ‘‘Lenders’’), including KeyBank as Agent for the Lenders (in such capacity, the ‘‘Agent’’), BMO Capital Markets, Truist Bank and The Huntington National Bank as Co-Syndication Agents (the “Co-Syndication Agents”) and KeyBanc Capital Markets Inc., BMO Capital Markets, Inc., Truist Securities, Inc. and The Huntington National Bank as 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 grid that fluctuates based on the Company's actual leverage ratio at the end of the prior quarter. With the Company's leverage ratio at 38% as of December 31, 2022, the spread over the Secured Overnight Financing Rate (‘‘SOFR’’), including a 10-basis point credit adjustment, is 165 basis points for the Revolver and the interest rate on the Revolver was 6.463% on March 31, 2023; however, there was no outstanding balance on the Revolver. The Company also pays an annual unused fee of up to 25 basis points on the Revolver, depending on the daily amount of the unused commitment, and paid total unused fees of $93,667 and $22,233 for the three months ended March 31, 2023 and 2022, respectively.
On October 21, 2022, the Company exercised the accordion feature of its Credit Facility and increased the Credit Facility to $400,000,000, comprised of a $150,000,000 Revolver and a $250,000,000 Term Loan. The Credit Facility includes an updated accordion option that allows the Company to request additional Revolver and Term Loan lender commitments up to a total of $750,000,000 subject to customary conditions, including the receipt of new commitments from the Lenders. On December 20, 2022, the Credit Agreement was amended to allow the Company to draw on the additional $100,000,000 Term Loan commitment up to five times between December 20, 2022 and April 19, 2023 in exchange for a quarterly unused fee, which amounted to $92,569 during the quarter ended March 31, 2023. The Company drew $20,000,000 of the delayed draw Term Loan during the first quarter of 2023 as described below and drew the remaining $80,000,000 during April 2023 as described in Note 13 – Subsequent Events. The maturities for the Company's Revolver and Term Loan remain unchanged with the Revolver’s maturity in January 2026 with options to extend for a total of 12 months, and the Term Loan’s maturity in January 2027.
On May 10, 2022, the Company entered into a swap agreement, effective May 31, 2022, to fix SOFR at 2.258% with respect to its original $150,000,000 Term Loan as described in Note 7, which results in a fixed interest rate of 3.858% on the Term Loan based on the Company's leverage ratio of 40% as of March 31, 2023.
On October 26, 2022, the Company entered into a swap agreement, effective November 30, 2022, to fix SOFR at 3.44% with respect to its expanded Term Loan as described in Note 7, results in a fixed interest rate of 5.040% on the additional $100,000,000 to be borrowed under the Term Loan based on the Company's leverage ratio of 40% as of March 31, 2023.
The Credit Facility includes customary representations, warranties and covenants, including covenants regarding minimum fixed charge coverage of 1.50x, minimum tangible net worth of $208,629,727 plus 85% of net offering proceeds after January 18, 2022, and maximum consolidated leverage of 60%. The Company was in compliance with these covenants as of March 31, 2023. The Credit Facility is secured by a pledge of all of the Operating Partnership’s equity interests in certain of the single-purpose, property-owning entities (the ‘‘Subsidiary Guarantors’’) that are indirectly owned by the Company, and various cash collateral owned by the Operating Partnership and the Subsidiary Guarantors. In connection with the Credit Facility, the Company and each of the Subsidiary Guarantors entered into an Unconditional Guaranty of Payment and Performance in favor of the Agent, pursuant to which the Company and each of the Subsidiary Guarantors agreed to guarantee the full and prompt payment of the Operating Partnership’s obligations under the Credit Agreement.
While the Credit Facility allows for borrowings up to 60% of the Company's borrowing base, the Company is targeting leverage of 40% or lower over the long-term once it achieves scale; however, the Company will consider higher leverage in the near-term if it identifies attractive acquisition opportunities in advance of completing dispositions or raising additional equity.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Credit Facility Drawdown and Repayments
On January 25, 2023, the Company borrowed $10,000,000 under its additional $100,000,000 Term Loan commitment in advance of acquiring a property located in Princeton, Minnesota leased to Plastic Products Company, Inc. On March 29, 2023, the Company again borrowed $10,000,000 under its Term Loan commitment in advance of acquiring a property located in Savage, Minnesota leased to Stealth Manufacturing.
On January 5, 2023, the Company repaid $3,000,000 of the outstanding balance on its Revolver with available cash on hand to reduce interest expense.
Subsequent to March 31, 2023, additional draws aggregating $80,000,000 were made on the Term Loan as described in Note 13.
Compliance with All Debt Agreements
Pursuant to the terms of mortgage notes payable on certain of the Company’s properties and the Credit Facility, the Company and/or the subsidiary borrowers are subject to certain financial loan covenants. The Company and/or the subsidiary borrowers were in compliance with such financial loan covenants as of March 31, 2023.
Future Principal Payments
The following summarizes the future principal repayments of the Company’s mortgage notes payable and Credit Facility as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Mortgage Notes | | Credit Facility | | |
| | Payable | | Revolver | | Term Loan | | Total |
| April through December 2023 | | $ | 239,292 | | | $ | — | | | $ | — | | | $ | 239,292 | |
| 2024 | | 13,267,307 | | | — | | | — | | | 13,267,307 | |
| 2025 | | 543,886 | | | — | | | — | | | 543,886 | |
| 2026 | | 568,369 | | | — | | | — | | | 568,369 | |
| 2027 | | 593,972 | | | — | | | 170,000,000 | | | 170,593,972 | |
| Thereafter | | 29,224,157 | | | — | | | — | | | 29,224,157 | |
| Total principal | | 44,436,983 | | | — | | | 170,000,000 | | | 214,436,983 | |
| Plus unamortized mortgage premium, net of unamortized discount | | 92,962 | | | — | | | — | | | 92,962 | |
| Less deferred financing costs | | (191,464) | | | — | | | (1,859,248) | | | (2,050,712) | |
| Net principal | | $ | 44,338,481 | | | $ | — | | | $ | 168,140,752 | | | $ | 212,479,233 | |
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, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2023 | | 2022 |
| Mortgage notes payable: | | | | | | | | |
| Interest expense | | | | | | $ | 471,939 | | | $ | 812,718 | |
| Amortization of deferred financing costs | | | | | | 7,235 | | | 7,225 | |
| Credit facility: | | | | | | | | |
| Interest expense | | | | | | 2,388,935 | | | 567,997 | |
| Unused commitment fees | | | | | | 186,236 | | | 22,233 | |
| Derivative cash settlements (1) | | | | | | (1,074,085) | | | — | |
| Amortization of deferred financing costs | | | | | | 214,261 | | | 100,690 | |
| Unrealized loss on interest rate swap valuation for first swap (2) | | | | | | 1,144,018 | | | — | |
| Amortization of interest rate swap valuation (2) | | | | | | (250,311) | | | — | |
| Unrealized loss on interest rate swap valuation for second swap (3) | | | | | | 828,476 | | | — | |
| Other | | | | | | 102,088 | | | 57,312 | |
| Total interest expense | | | | | | $ | 4,018,792 | | | $ | 1,568,175 | |
(1) The Company entered into two swap transaction instruments for its original $150,000,000 Credit Facility Term Loan (first swap) and additional $100,000,000 Term Loan commitment (second swap) effective May 31, 2022 and November 30, 2022, respectively, as described in detail in Note 7.
(2) Due to the Company's $150,000,000 derivative instrument's failure to qualify as a cash flow hedge because it was deemed ineffective for the quarterly period ended March 31, 2023 as described in Note 7, the $1,144,018 change in the swap valuation is recognized as an increase in interest expense and the unrealized gain on interest rate swap derivative previously recorded in accumulated other comprehensive income and noncontrolling interest in operating partnership is being amortized on a straight-line basis as a reduction to interest expense through the maturity date of the loan agreement (see Note 7 for more details).
(3) The Company's $100,000,000 derivative instrument was not designated as a cash flow hedge and, therefore, the change in the valuation of this swap is reflected as an increase in interest expense (see Note 7 for more details).
NOTE 7. INTEREST RATE SWAP DERIVATIVES
The Company, through its Operating Partnership, entered into a five-year swap agreement on May 10, 2022 to fix SOFR at 2.258% effective May 31, 2022 related to the variable interest rate on its original $150,000,000 Term Loan. The Company designated the pay-fixed, receive-floating interest rate swap with the terms described in the table below as of July 1, 2022 as a cash flow hedge. The swap agreement matures on January 15, 2027 and the financial institution counterparty has a one-time option to cancel the swap on December 31, 2024. The Company granted this cancellation option because it reduced the swap rate by approximately 50 basis points. The derivative instrument failed to qualify as a cash flow hedge for the quarter ended March 31, 2023 as described below.
The Company, through its Operating Partnership, entered into another five-year swap agreement on October 26, 2022 to fix SOFR at 3.440% effective November 30, 2022 related to the variable interest rate on its additional $100,000,000 Term Loan commitment. The Company did not designate the pay-fixed, receive-floating interest rate swap with the terms described in the table below as of November 30, 2022 as a cash flow hedge. The swap agreement matures on November 30, 2027 and the financial institution counterparty has a one-time option to cancel the swap on December 31, 2024. The Company granted this cancellation option because it reduced the swap rate by approximately 50 basis points.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Interest Rate Derivative
Instruments | | Number of Instruments | | Notional
Amount (i) | | Reference
Rate | | Weighted Average Fixed Pay Rate (ii) | | Weighted
Average
Remaining Term | | Number of Instruments | | Notional
Amount (i) | | Reference Rate | | Fixed Pay Rate (ii) | |
Remaining Term |
| Designated | | — | | $ | — | | | — | | — | % | | 0 years | | 1 | | $ | 150,000,000 | | | USD - SOFR | | 3.86 | % | | 4.1 years |
| Non-designated | | 2 | | $ | 250,000,000 | | | USD - SOFR | | 4.33 | % | | 3.8 years | | 1 | | $ | 100,000,000 | | | USD - SOFR | | 5.04 | % | | 4.1 years |
(i)The notional amount of the Company’s swaps correspond to the drawable principal balance on the Term Loan. The minimum notional amount (outstanding principal balance at the maturity date) as of March 31, 2023 and December 31, 2022 was $250,000,000.
(ii)Based on the terms of the Credit Facility, the fixed pay rate increases if the Company's leverage ratio increases above 40%.
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 as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2023 | | December 31, 2022 | | |
| Derivative Instrument | | Balance Sheet Location | | Number of
Instruments | | Fair Value (1) | | Number of
Instruments | | Fair Value | | Change in Fair Value |
| Interest Rate Swaps | | Asset - Interest rate swap derivatives, at fair value | | 1 | | $ | 3,485,684 | | | 1 | | $ | 4,629,702 | | | $ | (1,144,018) | |
| Interest Rate Swaps | | Liability - Interest rate swap derivatives, at fair value | | 1 | | $ | (1,327,342) | | | 1 | | $ | (498,866) | | | $ | (828,476) | |
The interest rate swap derivative on the original $150,000,000 Term Loan was designated as a cash flow hedge for financial accounting purposes from July 1, 2022 through December 31, 2022. Based on the Company's prospective effectiveness testing of the derivative instrument for the three months ended March 31, 2023, the derivative instrument failed to qualify as a cash flow hedge because the swap was deemed ineffective due to the potential for a reduced term of the swap that could result from the cancellation option described above as compared with the maturity of the Term Loan. If there is a significant drop in interest rates in the future, this interest rate swap derivative could potentially qualify again as a cash flow hedge.
As a result, the change in fair value of the original Term Loan swap of $1,144,018 for the three months ended March 31, 2023 was recorded as unrealized loss on interest rate swap valuation as of March 31, 2023 and reflected as an increase to interest expense in the Company's unaudited condensed consolidated statements of operations. This increase in interest expense was partially offset by the $250,311 amortization of the unrealized gain on this swap as further described below.
Due to the above $150,000,000 Term Loan derivative instrument's failure to qualify as a cash flow hedge for the quarterly period ended March 31, 2023, the unrealized gain on interest rate swap derivative of $4,105,103 as of December 31, 2022 (recorded in the Company's balance sheet as follows: (i) $3,502,616 of accumulated other comprehensive income and (ii) $602,487 of noncontrolling interest in operating partnership) is being amortized on a straight-line basis as a reduction to interest expense through the maturity date of the swap agreement. The amortization of the unrealized gain on interest rate swap derivative for the three months ended March 31, 2023 was $250,311. There is no income tax expense resulting from this amortization.
As of March 31, 2023, the Company's unamortized unrealized gain on interest rate swap derivative in accumulated other comprehensive income and noncontrolling interest in operating partnership amounted to $3,854,792. The Company estimates that $764,840 of the remaining unrealized gain on interest rate swap derivative will be reclassified from accumulated other comprehensive income and noncontrolling interest in operating partnership as a reduction to interest expense in the Company's unaudited condensed consolidated statements of operations over the next nine months.
The interest rate swap derivative on the additional $100,000,000 Term Loan commitment was not designated as a cash flow hedge for financial accounting purposes. The change in its fair value of $828,476 for the three months ended March 31, 2023 was recorded as an unrealized loss on interest rate swap valuation as of March 31, 2023 and reflected as an increase to interest expense in the Company's unaudited condensed consolidated statements of operations.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 8. PREFERRED STOCK AND COMMON STOCK
Preferred Stock
The Company is authorized to issue up to 50,000,000 shares of preferred stock. In connection with an underwritten public offering in September 2021 (discussed below in detail), the Company classified and designated 2,000,000 shares of its authorized preferred stock as authorized shares of Series A Preferred Stock. As of March 31, 2023 and December 31, 2022, 2,000,000 shares of authorized Series A Preferred Stock were issued and outstanding. The issuance and sale of the shares of Series A Preferred Stock began trading on the NYSE on September 17, 2021. The gross proceeds from the Preferred Offering were $50,000,000 and the net proceeds were $47,607,309, after deducting the underwriting discount of $1,575,000 and other offering costs of $817,691.
The Company contributed $48,425,000 of the net proceeds from the Preferred Offering prior to other offering costs to the Operating Partnership in exchange for a new class of 7.375% Series A Cumulative Redeemable Perpetual Preferred Units of the Operating Partnership, which have economic interests that are substantially similar to the designations, preferences and other rights of Series A Preferred Stock.
Series A Preferred Stock - Terms
Holders of Series A Preferred Stock are entitled to cumulative dividends in the amount of $1.84375 per share each year, which is equivalent to the rate of 7.375% of the $25.00 liquidation preference per share per annum. The Series A Preferred Stock has no stated maturity and will remain outstanding indefinitely unless redeemed, converted or otherwise repurchased. Except in limited circumstances relating to the Company's qualification as a REIT for U.S. federal income tax purposes, and as described in the articles supplementary governing the terms of the Series A Preferred Stock (the “Articles Supplementary”), the Series A Preferred Stock is not redeemable prior to September 17, 2026.
On and after September 17, 2026, at any time and from time to time, the Series A Preferred Stock will be redeemable in whole or in part, at the Company's option, at a cash redemption price of $25.00 per share, plus an amount equal to all dividends accrued and unpaid (whether or not authorized or declared), if any, to, but not including, the redemption date. In addition, upon the occurrence of a Delisting Event or a Change of Control (each as defined in the Articles Supplementary), the Company may, subject to certain conditions, at its option, redeem the Series A Preferred Stock, in whole or in part, (i) after the first date on which the Delisting Event occurred or (ii) on, or within 120 days after, the first date on which the Change of Control occurred, as applicable, by paying the liquidation preference of $25.00 per share, plus an amount equal to all dividends accrued and unpaid (whether or not authorized or declared), if any, to, but not including, the redemption date.
Upon the occurrence of a Change of Control during a continuing Delisting Event, unless the Company has elected to exercise its redemption right, holders of the Series A Preferred Stock will have certain rights to convert the Series A Preferred Stock into shares of the Company’s Class C common stock. In addition, upon the occurrence of a Delisting Event, the dividend rate will be increased on the day after the occurrence of the Delisting Event by 2.00% per annum to the rate of 9.375% of the $25.00 liquidation preference per share per annum (equivalent to $2.34375 per share each year) from and after the date of the Delisting Event. Following the cure of such Delisting Event, the dividend rate will revert to the rate of 7.375% of the $25.00 liquidation preference per share per annum. The necessary conditions to convert the Series A Preferred Stock into the Company's Class C common stock have not been met as of March 31, 2023.
The Series A Preferred Stock ranks senior to the Company's Class C common stock with respect to dividend rights and rights upon the Company’s voluntary or involuntary liquidation, dissolution or winding up.
Voting rights for holders of Series A Preferred Stock exist primarily with respect to the ability to elect two additional directors to the board of directors if six or more quarterly dividends (whether or not authorized or declared or consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to the Company’s charter (which includes the Articles Supplementary) that materially and adversely affect the rights of the Series A Preferred Stock or create additional classes or series of shares of the Company’s capital stock that are senior to the Series A Preferred Stock. Other than the limited circumstances described above and in the Articles Supplementary, holders of Series A Preferred Stock do not have any voting rights.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Series A Preferred Stock Dividend
Dividends on the Company's Series A Preferred Stock accrue in an amount equal to $1.84375 per share each year ($0.460938 per share per quarter) to holders of Series A Preferred Stock, which is equivalent to 7.375% of the $25.00 liquidation preference per share per annum. Dividends on the Series A Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year (or, if not a business day, the next succeeding business day) to holders of record on the applicable record date. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock become part of the liquidation preference thereof.
On November 11, 2021, the Company’s board of directors declared Series A Preferred Stock distributions payable of $1,065,278 for the fourth quarter of 2021, including $143,403 of accrued dividends as of September 30, 2021, all of which were accrued as of December 31, 2021 and paid on January 18, 2022. On March 18, 2022, June 15, 2022, September 15, 2022 and November 7, 2022 the Company’s board of directors declared Series A Preferred Stock dividends payable of $921,875 for each of the first, second, third and fourth quarters of 2022, which were paid on April 15, 2022, July 15, 2022, October 17, 2022 and January 17, 2023, respectively. On March 9, 2023, the Company’s board of directors declared Series A Preferred Stock dividends payable of $921,875 for the first quarter of 2023. This amount was accrued as of March 31, 2023 and paid on April 17, 2023 (see Note 13).
Common Stock Listed Offering
On February 10, 2022, the Company and the Operating Partnership entered into an underwriting agreement (the “Class C Common Stock Underwriting Agreement”) with B. Riley Securities, Inc., as the underwriter listed on Schedule I thereto, pursuant to which the Company agreed to issue and sell 40,000 shares of the Company’s Class C common stock in an underwritten Listed Offering at a price per share of $25.00. On February 15, 2022, the Company completed the Listed Offering of its Class C common stock, and in connection with the Listed Offering, the Company sold to Mr. Wirta, the Company’s former Chairman of the board of directors, all 40,000 shares of its Class C common stock offered in the Listed Offering at $25.00 per share for aggregate net proceeds of $114,500, after deducting the underwriting discount of $70,000, and other offering costs of $815,500. The primary purpose of the Listed Offering was to provide liquidity to the Company’s existing stockholders. The shares of Class C common stock began trading on the NYSE on February 11, 2022.
Common Stock Distributions
Aggregate distributions declared per share of Class C common stock were $0.29 and $0.39 for the three months ended March 31, 2023 and 2022, respectively, which reflect an annualized distribution rate of $1.15 per share for both periods, along with a special 13th distribution for the year ended December 31, 2021, which was declared and paid in January 2022.
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 and by issuing shares of Class C common stock to them. Total fees incurred and paid or accrued for board of directors' services to the Company for the three months ended March 31, 2023 and 2022, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| Board of Directors Compensation | | | | | | 2023 | | 2022 |
| Payments for services rendered | | | | | | $ | 67,500 | | | $ | 67,500 | |
| Value of shares issued for services rendered | | | | | | 82,500 | | | 82,500 | |
| Total | | | | | | $ | 150,000 | | | $ | 150,000 | |
| | | | | | | | |
| Number of shares issued for services rendered | | | | | | 7,761 | | | 4,599 | |
Transactions with Other Related Parties
On January 31, 2022, the Company acquired an industrial property and related equipment leased to Kalera Inc. (“Kalera”) in Saint Paul, Minnesota for $8,079,000. Kalera was introduced to the Company by Curtis B. McWilliams, one of the Company’s independent directors. Since Mr. McWilliams was serving as an executive of Kalera at the time of the acquisition, all of the disinterested members of the Company’s board of directors approved this transaction in January 2022.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
On April 4, 2023, Kalera filed a voluntary petition for bankruptcy relief under Chapter 11 of Title 11 of the United States Code. In April 2023, Mr. McWilliams was appointed as Kalera’s independent director as Kalera continues to operate its business while in bankruptcy. Mr. McWilliams will recuse himself from any matters that relate to the Company’s property in Saint Paul, Minnesota that is leased to Kalera. Filings made by Kalera in the bankruptcy case indicate that Kalera is conducting an auction of all of its assets, with all bids due on June 9, 2023 and the closing of any asset sales scheduled to be completed by the end of June 2023. A sale of Kalera’s business, including its interest in the Company's lease for the Saint Paul, Minnesota property, could occur in the auction process, or Kalera could decide to reject the Company's lease. In the event of the latter outcome, the Company would seek to find a new tenant or sell the property.
Related Party Transactions with Unconsolidated Investment in a Real Estate Property
The Company's taxable REIT subsidiary serves as the asset manager of the TIC Interest property and earned asset management fees of $65,993 for both of the three months ended March 31, 2023 and 2022, including the Company's share, which was $47,984 for both of the three months ended March 31, 2023 and 2022.
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, 2023 and December 31, 2022, the Company had obligations to pay $1,776,652 and $1,789,027, respectively, for on-site and tenant improvements to be incurred by tenants.
Kalera Mechanics Liens
As discussed in Note 9 – Related Party Transactions, Kalera filed a voluntary petition for bankruptcy relief under Chapter 11 of Title 11 of the United States Code on April 4, 2023. Between January 2023 and the filing date of this Quarterly Report on Form 10-Q, the Company received mechanics lien statements from the general contractor and nine subcontractors who performed work on behalf of Kalera to complete various interior improvements at the Company's property located in Saint Paul, Minnesota. The mechanics lien statements refer to construction materials that were delivered and related work that was performed to make this facility operational and amount to $3,405,585 in the aggregate. The Company has been advised that the contractors who have filed such liens are stayed from foreclosing on the Company’s property in Saint Paul, Minnesota under the pending Chapter 11 bankruptcy proceeding (see Note 9 – Related Party Transactions for further information about potential outcomes that could result from the bankruptcy process).
Legal Matters
From time-to-time, the Company may become party to legal proceedings that arise in the ordinary course of its business. Except for the Kalera bankruptcy proceeding described in Note 9 – Related Party Transactions, the Company, including its subsidiaries, 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)
NOTE 11. OPERATING PARTNERSHIP UNITS
Class M OP Units
On September 19, 2019, the Company, the Operating Partnership, BrixInvest, LLC, a Delaware limited liability company and the Company's former sponsor (“BrixInvest”), the Company’s former external advisor, and Daisho OP Holdings, LLC, a formerly wholly owned subsidiary of BrixInvest (“Daisho”) which was spun off from BrixInvest on December 31, 2019, entered into a contribution agreement pursuant to which the Company agreed to acquire substantially all of the net assets of BrixInvest in exchange for 657,949.5 units of Class M limited partnership interest in the Operating Partnership (“Class M OP Units”) and assumed certain liabilities (the “Self-Management Transaction”). As a result of the Self-Management Transaction, the Company became self-managed and eliminated all fees for acquisitions, dispositions and management of its properties, which were previously paid to its former external advisor. The consideration transferred as of December 31, 2019 was determined to have a fair value of $50,603,000 based on a probability weighted analysis of achieving the requisite assets under management (“AUM”) and adjusted funds from operations (“AFFO”) hurdles.
The Class M OP Units were issued to Daisho on December 31, 2019 in connection with the Self-Management Transaction and are non-voting, non-dividend accruing, and were not able to be converted or exchanged prior to the one-year anniversary of the Self-Management Transaction. Investors holding units in BrixInvest received Daisho units in a ratio of 1:1 for an aggregate of 657,949.5 Daisho units. During 2020, Daisho distributed the Class M OP Units to its members. The Class M OP Units are convertible into units of Class C limited partnership interest in the Operating Partnership (“Class C OP Units”) at a conversion ratio of 1.6667 Class C OP Units for each one Class M OP Unit, subject to a reduction in the conversion ratio (which reduction will vary depending upon the amount of time held) if the exchange occurs prior to the four-year anniversary of the completion of the Self-Management Transaction.
In the event that the Class M OP Units are converted into Class C OP Units prior to December 31, 2023, such Class M OP Units shall be exchanged at the rate indicated below:
| | | | | | | | |
| Date of Exchange | | Early Conversion Rate |
| From December 31, 2020 to December 30, 2021 | | 50% of the Class M conversion ratio |
| From December 31, 2021 to December 30, 2022 | | 60% of the Class M conversion ratio |
| From December 31, 2022 to December 30, 2023 | | 70% of the Class M conversion ratio |
As of March 31, 2023, no Class M OP Units had been converted to Class C OP Units.
The Class M OP Units are eligible for an increase in the conversion ratio (conversion ratio enhancement) if the Company achieves both of the targets for AUM and AFFO in a given year as set forth below:
| | | | | | | | | | | | | | | | | | | | |
| | Hurdles | | |
| | AUM | | AFFO | | Class M |
| | ($ 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 |
The AUM and AFFO per share hurdles for the Class M OP Units were not met for fiscal years 2022 or 2021.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Based on the current conversion ratio of 1.6667 Class C OP Units 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 NYSE closing share price of $10.63 as of March 31, 2023, the last trading day of the first quarter of 2023, a Class M OP Unit would be valued at $17.72. This value does not reflect the early conversion rate or the future conversion enhancement ratio of the Class M OP Units, as discussed above, and the units of Class P limited partnership interest in the Operating Partnership (“Class P OP Units”), as discussed below.
Class P OP Units
The Company issued 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 Limited Partnership Agreement of the Operating Partnership (as amended, the “Operating Partnership 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 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 AUM and AFFO per share hurdles for the Class P OP Units were not met for fiscal year 2022 or 2021. The Company will adjust stock compensation expense prospectively if the future conversion enhancement ratio is expected to be achieved during the remainder of fiscal 2023.
On December 31, 2019, the Company issued a total of 56,029 Class P OP Units to Aaron S. Halfacre, the Company’s Chief Executive Officer and President, 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 both executives as signing bonuses and 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) when issued on December 31, 2019 and the expected minimum conversion ratio of 1.6667 Class C OP Units 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, 2023 and 2022, the Company amortized and charged $88,783 to stock compensation expense for both quarters for Class P OP Units. The unamortized value of these units was $355,133 as of March 31, 2023.
Under the Operating Partnership 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. As of March 31, 2023, these interests represent a combined total of approximately 11.5% of the equity in the Operating Partnership.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 40,000 units of Class R limited partnership interest in the Operating Partnership (“Class R OP Units”) to Mr. Halfacre in recognition of his voluntary reduction in his 2020 compensation plus 170,667 Class R OP Units to Mr. Halfacre as equity incentive compensation for the next three years, and the grant of 33,333 Class R OP Units to Mr. Pacini as equity incentive compensation for the next three years. An additional 116,000 Class R OP Units were granted to the remainder of the employees of the Company for a total of 360,000 Class R OP Units granted. All Class R OP Units granted vest and are 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. Given that there are a large number of uncertainties that could impact the Company's funds from operations for the remainder of the year, including, but not limited to, the risks of potential tenant vacancies and/or bankruptcies, inflation, rising interest rates, changes in the value of interest rate swap derivatives, potential dispositions of non-core assets and tightening credit markets, the Company concluded that as of each quarter end, including March 31, 2023, achieving the performance target to trigger the increased conversion ratio for the Class R OP Units is not yet deemed probable. The Company will adjust compensation expense prospectively if achieving the enhancement is deemed probable through the remainder of the vesting period.
Stock compensation expense related to the Class R OP Units is based on the estimated value per share, including a discount for the illiquid nature of the underlying equity, and is being recognized over the vesting period. Of the 360,000 Class R OP Units granted due to the departure of employees, 43,657 units were forfeited through December 31, 2022. There were no forfeitures during the three months ended March 31, 2023. The units, at the discretion of the board of directors, may be reallocated to existing or new employees. The cumulative number of units forfeited and not yet reallocated through March 31, 2023 was 43,657 units.
During the three months ended March 31, 2023 and 2022, the Company amortized and charged to stock compensation expense $488,886 and $340,582, respectively, for the Class R OP Units. The unamortized value of the remaining 316,343 units was $1,955,552 as of March 31, 2023.
The total stock compensation expenses for the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| Class P OP Units | | $ | 88,783 | | | $ | 88,783 | |
| Class R OP Units | | 488,886 | | | 340,582 | |
Class C common stock issued to the board of directors for services (see Note 9) | | 82,500 | | | 82,500 | |
| Total | | $ | 660,169 | | | $ | 511,865 | |
Class C OP Units
On January 18, 2022, the Company completed the acquisition of a KIA auto dealership property in an “UPREIT” transaction pursuant to a contribution agreement whereby the seller received 1,312,382 Class C OP Units based on the terms of the Operating Partnership Agreement and an agreed upon value of $25.00 per 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 the Company has the option to redeem the units for cash or shares of Class C common stock. The Class C OP Units received $377,298 and $251,539 in distributions during the three months ended March 31, 2023 and 2022, respectively, and were allocated $816,199 and $1,928,029 of the net loss for the three months ended March 31, 2023 and 2022, respectively.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 12. LOSS PER SHARE
The following table presents the computation of the Company's basic and diluted net loss per share attributable to common stockholders for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2023 | | 2022 |
| Numerator - Basic: | | | | | | | | |
| Net loss | | | | | | $ | (4,578,921) | | | $ | (12,073,164) | |
| Net loss attributable to noncontrolling interest in Operating Partnership | | 816,199 | | | 1,928,028 | |
| Preferred stock dividends | | | | | | (921,875) | | | (921,875) | |
| Net loss attributable to common stockholders | | | | | | $ | (4,684,597) | | | $ | (11,067,011) | |
| | | | | | | | |
| Numerator - Diluted | | | | | | | | |
| Net loss | | | | | | $ | (4,578,921) | | | $ | (12,073,164) | |
| Preferred stock dividends | | | | | | (921,875) | | | (921,875) | |
| Net loss attributable to common stockholders | | | | | | $ | (5,500,796) | | | $ | (12,995,039) | |
| | | | | | | | |
| Denominator: | | | | | | | | |
| Weighted average shares outstanding - basic and diluted | | | | | | 7,532,452 | | | 7,533,158 | |
| | | | | | | | |
| Loss per share attributable to common stockholders: | | | | | | |
| Basic and diluted | | | | | | $ | (0.62) | | | $ | (1.47) | |
During the three months ended March 31, 2023 and 2022, the weighted average dilutive effect of 2,818,689 and 2,660,340 shares related to units of limited partnership interest in the Operating Partnership as discussed in Note 11 were excluded from the computation of Diluted EPS because their effect would be anti-dilutive. There were no other outstanding securities or commitments to issue common stock that would have a dilutive effect for the periods then ended.
NOTE 13. SUBSEQUENT EVENTS
The Company evaluates subsequent events until the date the unaudited condensed consolidated financial statements are issued. Significant subsequent events are described below:
Preferred Dividends
On April 17, 2023, the Company paid its Series A Preferred Stock dividends of $921,875 for the first quarter of 2023, which were declared by the Company’s board of directors on March 9, 2023.
Common Stock and Class C OP Unit Distributions
On November 7, 2022, the Company’s board of directors authorized monthly distributions payable to common stockholders and the Class C OP Unit holders of record as of March 31, 2023, which were paid on April 25, 2023. The current monthly distribution amount of $0.09583 per share represents an annualized distribution rate of $1.15 per share of common stock.
On March 9, 2023, the Company’s board of directors authorized monthly distributions payable to common stockholders and Class C OP Unit holders of record as of April 28, 2023, May 31, 2023 and June 30, 2023, which will be paid on or about May 25, 2023, June 26, 2023 and July 25, 2023, respectively. The monthly distribution amount of $0.095833 per share represents an annualized distribution rate of $1.15 per share of common stock.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Share Repurchase Program
Between April 1, 2023 and May 12, 2023, the Company repurchased an additional 58,850 shares of its Class C common stock for a total of $661,971 under its 2023 SRP and these shares are held as treasury stock.
Real Estate Acquisitions
On April 13, 2023, the Company acquired an industrial manufacturing property located in Gap, Pennsylvania leased to Lindsay Precast, LLC (“Lindsay”) for $16,543,624. Lindsay is an industry-leading precast concrete manufacturer and steel fabricator with more than a 60-year operating history. The lease of this property was added to an existing master lease of four other Lindsay properties acquired in April 2022 in an Amended and Restated Master Lease Agreement with a remaining lease term of 24 years and annual rent escalations of 2.2%. In connection with this acquisition, a second master lease for the Lindsay properties acquired in April 2022 was also amended and restated to include a non-refundable deposit of $1,800,000 for future funding of improvements to the property in North Carolina. The seller of the property was not affiliated with the Company or its affiliates.
On April 13, 2023, the Company acquired an industrial manufacturing property located in Reading, Pennsylvania leased to Summit Steel and Manufacturing LLC (“Summit Steel”) for $11,200,000 through an “UPREIT” transaction wherein the seller received 287,516 Class C OP Units valued at $5,175,288, based on an agreed upon value of $18.00 per share, and a cash payment of $6,024,712. Summit Steel services its customers' needs by providing and utilizing its innovative manufacturing processes and fabrication and welding capabilities since 1992. Summit Steel's in-house capabilities include: 2D and 3D laser cutting, bending/forming, computer numerical control turning/milling, Swiss machining, centerless grinding/polishing, powder coating, robotic and manual welding and serve the aerospace, agricultural equipment, alternative energy, automotive, consumer products, medical devices and equipment, military and defense, recreational vehicles and original equipment manufacturers industries. The property is leased for a term of 20 years with annual rent escalations of 2.9%. The seller of the property was not affiliated with the Company or its affiliates.
On April 20, 2023, the Company acquired an industrial manufacturing property located in Roscoe, Illinois leased to Pacific Bearing Company (“PBC Linear”) for $20,000,000. PBC Linear manufactures a broad spectrum of bearings and screw products for a diversified customer base, as it has for 40 years. The property has a lease in place for a remaining term of 20 years and 12.5% rent escalations every five years. The Company received the final $20,000,000 draw under its delayed draw Term Loan commitment in advance of this acquisition. The seller of the property was not affiliated with the Company or its affiliates.
On May 3, 2023, the Company acquired an industrial manufacturing property located in Lansing, Michigan leased to Cameron Tool Company, LLC (“Cameron Tool”) for $5,721,174. Cameron Tool has a 50-year operating history in the tool and die space that services major metal manufacturers that sell to the largest automotive original equipment manufacturers as well as aerospace, defense, alternative energy, and other markets. The property is leased for a term of 20 years with annual rent escalations of 2.5%. The seller of the property was not affiliated with the Company or its affiliates.
On May 5, 2023, the Company acquired three industrial manufacturing properties located in Detroit Lakes and Plymouth, Minnesota and Ashland, Ohio leased to S.J. Electro Systems, LLC (“SJE”) for $15,975,000. SJE was founded in 1975 and is a leading designer, manufacturer and systems integrator of liquid level and flow controls primarily serving residential, commercial and municipal markets. The properties are leased for a term of 17 years with annual rent escalations of 2.8%. The seller of the properties was not affiliated with the Company or its affiliates.
On May 11, 2023, the Company acquired an industrial manufacturing property located in Alleyton, Texas and leased to Titan Production Equipment, LLC (“Titan”) for $17,100,000. Titan is a company engaged in the design, engineering, and fabrication of oil and gas production equipment used to separate, process and treat hydrocarbon steams at the wellhead, gathering and processing stages. Titan services customers in the Permian, Haynesville, Bakken, and Eagle Ford shale basins of Texas, Oklahoma, New Mexico, and Louisiana, respectively. The property is leased for a term of 20 years with annual rent escalations of 2.9%. The seller of the property was not affiliated with the Company or its affiliates.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Real Estate Disposition
The Company and a prospective buyer entered into an agreement for the sale of the office property in Rocklin, California formerly leased to Gap for a sales price of $5,466,960 on December 29, 2022. Effective April 21, 2023, the Company and the prospective buyer entered into a third amendment to their agreement which extended the buyer’s financing contingency to May 22, 2023 and the outside closing date to May 31, 2023 in exchange for the buyer’s release of an additional non-refundable deposit of $75,000 which brought the total of non-refundable purchase deposits to $195,000 which have been released to the Company. In a separate letter agreement on March 27, 2023, the buyer also reimbursed the Company $30,000 for its carrying costs on the property during the extension period which ended on April 12, 2023. There can be no assurances that this disposition will be completed. This property is classified as held for sale as of March 31, 2023 and December 31, 2022.
Term Loan Commitment Drawdowns
On April 12, 2023 and April 18, 2023, the Company borrowed $60,000,000 and $20,000,000, respectively, under its $100,000,000 delayed draw Term Loan commitment, bringing the total Term Loan balance outstanding to the total commitment amount of $250,000,000. The Company drew these proceeds from the Term Loan commitment in advance of acquiring properties located in (i) Gap, Pennsylvania leased to Lindsay; (ii) Reading, Pennsylvania leased to Summit Steel; (iii) Roscoe, Illinois leased to PBC Linear; (iv) Lansing, Michigan leased to Cameron Tool; (v) Detroit Lakes and Plymouth, Minnesota and Ashland, Ohio leased to SJE; and (vi) Alleyton, Texas leased to Titan, as discussed above. As of the date of this report, the Company had $150,000,000 available under the Revolver, subject to borrowing base requirements.
Extension of Lease
Effective April 18, 2023, the Company extended the lease term of its Levins property located in Sacramento, California from September 1, 2023 to December 31, 2024 with a 69% increase in annual rent from $4.14 per square foot to $7.00 per square foot commencing September 1, 2023.