UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from____________to____________
Commission file number: 000-55776
RW HOLDINGS NNN REIT, INC.
(Exact name of registrant as specified in its charter)
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| |
Maryland | 47-4156046 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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3090 Bristol Street, Suite 550, Costa Mesa, CA | 92626 |
(Address of principal executive offices) | (Zip Code) |
(855) 742-4862
(Registrant’s telephone number, including area code:)
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading symbols(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨ | Accelerated filer ¨ |
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Non-accelerated filer x | Smaller reporting company x |
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| Emerging growth company x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of July 31, 2019, there were 15,666,057 shares of Class C common stock outstanding and 166,712 shares of Class S common stock outstanding.
RW HOLDINGS NNN REIT, INC.
FORM 10-Q
INDEX
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbor provisions created thereby. For this purpose, any statements made in this Quarterly Report on Form 10-Q that are not historical or current facts may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "anticipates," "believes," "seeks," "estimates," "expects," "intends," "continue," "can," "may," "plans," "potential," "projects," "should," "could," "will," "would" or similar expressions and the negatives of those expressions are intended to identify forward-looking statements. Such statements include, but are not limited to, any statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods.
The forward-looking statements included herein represent our management’s current expectations and assumptions based on information available as of the date of this report. These statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time-to-time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information, which speak only as of the date of this report.
Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time-to-time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual future results to be materially different from those expressed or implied by any forward-looking statements. The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from our forward-looking statements:
| |
• | A special committee of our board of directors, which is comprised of the four independent directors, is conducting an exclusive due diligence process in conjunction with their evaluation of a potential transaction with Rich Uncles Real Estate Investment Trust I ("REIT I"), an affiliated REIT, as further discussed in Note 1 to our condensed consolidated financial statements, and there is no assurance that such process will result in any transaction with REIT I on terms acceptable to us or at all. |
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• | If we are unable to raise substantial funds from our securities offerings, we will be limited in the number and type of investments we may make. |
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• | We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties and we may be unable to acquire, dispose of, or lease properties on a timely basis or on attractive terms. |
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• | We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all. |
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• | Disruptions in the financial markets and uncertain economic conditions affecting us, the geographies or industries in which our properties are concentrated, or our tenants may adversely affect our business, financial condition and results of operations. |
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• | Our properties, intangible assets and other assets may be subject to impairment charges. |
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• | We could be subject to unexpected costs or unexpected liabilities that may arise from potential dispositions of properties and may be unable to dispose of properties on advantageous terms. |
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• | We could be subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally. |
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• | We have substantial indebtedness, which may affect our ability to pay distributions, and expose us to interest rate fluctuation risk and the risk of default under our debt obligations. |
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• | We may be affected by risks related to the incurrence of additional secured or unsecured debt. |
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• | We have only a limited prior operating history, and the prior performance of real estate investment programs sponsored by affiliates of our sponsor, BrixInvest, LLC (d/b/a Rich Uncles LLC), may not be an indication of our future results. |
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• | We may not be able to attain or maintain profitability. |
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• | Cash for distributions to investors will be from net rental income (including sales of properties) or waiver or deferral of reimbursements to our sponsor or fees paid to our advisor. |
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• | We may not generate cash flows sufficient to pay our distributions to stockholders or meet our debt service obligations. |
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• | We may be affected by risks resulting from losses in excess of insured limits. |
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• | We may fail to qualify as a REIT for U.S. federal income tax purposes. |
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• | Our business, financial condition and results of operations may be adversely affected by an ongoing investigation by the SEC. |
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• | We are dependent upon our advisor, sponsor and their affiliates to conduct our operations, and adverse changes in their financial health could cause our operations to suffer; our advisor also has the right to terminate the advisory agreement upon 60 days’ written notice without cause or penalty. |
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• | Our advisor, sponsor and their affiliates, including all of our executive officers and our affiliated directors and other key real estate professionals, face conflicts of interest, which may result in actions that are not in the long-term best interests of our stockholders. |
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• | Risks of security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology networks and related systems, could adversely affect our business and results of operations. |
Our forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in light of the risk factors identified above and the additional risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. We qualify all of our forward-looking statements by these cautionary statements.
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
RW HOLDINGS NNN REIT, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Assets | | | |
Real estate investments: | | | |
Land | $ | 41,126,392 |
| | $ | 41,126,392 |
|
Buildings and improvements | 176,367,798 |
| | 176,367,798 |
|
Tenant origination and absorption costs | 17,717,819 |
| | 17,717,819 |
|
Total investments in real estate property | 235,212,009 |
| | 235,212,009 |
|
Accumulated depreciation and amortization | (15,346,655 | ) | | (10,563,664 | ) |
Total investments in real estate property, net | 219,865,354 |
| | 224,648,345 |
|
Investments in unconsolidated entities (Note 5) | 13,987,073 |
| | 14,275,815 |
|
Total real estate investments, net | 233,852,427 |
| | 238,924,160 |
|
| | | |
Cash and cash equivalents | 10,635,254 |
| | 5,252,686 |
|
Restricted cash | 156,046 |
| | 3,503,242 |
|
Tenant receivables | 4,146,339 |
| | 3,659,114 |
|
Above-market lease intangibles, net | 535,725 |
| | 584,248 |
|
Due from affiliates (Note 8) | 4,236 |
| | 16,838 |
|
Refundable purchase deposits | 200,000 |
| | 100,000 |
|
Prepaid expenses and other assets | 577,619 |
| | 234,399 |
|
Interest rate swap derivatives | — |
| | 151,215 |
|
Total assets | $ | 250,107,646 |
| | $ | 252,425,902 |
|
| | | |
Liabilities and Stockholders' Equity | | | |
Mortgage notes payable, net | $ | 115,032,981 |
| | $ | 122,709,308 |
|
Unsecured credit facility, net | — |
| | 8,998,000 |
|
Accounts payable, accrued and other liabilities | 4,264,232 |
| | 7,164,713 |
|
Share repurchases payable | 822,829 |
| | 584,676 |
|
Below-market lease intangibles, net | 2,358,186 |
| | 2,595,382 |
|
Due to affiliates (Note 8) | 30,282 |
| | 979,174 |
|
Interest rate swap derivatives | 1,023,730 |
| | 300,929 |
|
Total liabilities | 123,532,240 |
| | 143,332,182 |
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| | | |
Commitments and contingencies (Note 9) |
|
| |
|
|
| | | |
Redeemable common stock | 5,762,798 |
| | 6,000,951 |
|
| | | |
Preferred stock, $0.001 par value, 50,000,000 shares authorized, no shares issued and outstanding | — |
| | — |
|
Class C common stock $0.001 par value, 300,000,000 shares authorized, 15,313,171 and 12,943,294 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively. | 15,313 |
| | 12,943 |
|
Class S common stock $0.001 par value, 100,000,000 shares authorized, 166,448 and 17,594 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively. | 166 |
| | 18 |
|
Additional paid-in-capital | 144,011,702 |
| | 119,247,245 |
|
Cumulative distributions and net losses | (23,214,573 | ) | | (16,167,437 | ) |
Total stockholders' equity | 120,812,608 |
| | 103,092,769 |
|
Total liabilities and stockholders' equity | $ | 250,107,646 |
| | $ | 252,425,902 |
|
See accompanying notes to condensed consolidated financial statements.
RW HOLDINGS NNN REIT, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Rental income | $ | 5,896,266 |
| | $ | 4,383,966 |
| | $ | 11,781,711 |
| | $ | 7,841,944 |
|
| | | | | | | |
Expenses: | | | | | | | |
Fees to affiliates (Note 8) | 812,019 |
| | 477,915 |
| | 1,624,037 |
| | 879,230 |
|
General and administrative | 853,940 |
| | 836,996 |
| | 1,393,445 |
| | 1,449,183 |
|
Depreciation and amortization | 2,391,495 |
| | 1,712,469 |
| | 4,782,991 |
| | 3,026,745 |
|
Interest expense | 2,076,725 |
| | 1,203,260 |
| | 4,237,075 |
| | 2,293,876 |
|
Property expenses | 1,111,936 |
| | 701,244 |
| | 2,174,588 |
| | 1,194,222 |
|
Total expenses | 7,246,115 |
| | 4,931,884 |
| | 14,212,136 |
| | 8,843,256 |
|
Less: Expenses reimbursed by Sponsor or affiliates (Note 8) | (148,233 | ) | | (293,939 | ) | | (236,232 | ) | | (653,453 | ) |
Net expenses | 7,097,882 |
| | 4,637,945 |
| | 13,975,904 |
| | 8,189,803 |
|
| | | | | | | |
Other income: | | | | | | | |
Interest income | 5,645 |
| | 4,244 |
| | 11,031 |
| | 7,920 |
|
Income from investments in unconsolidated entities, net | 55,955 |
| | 38,606 |
| | 129,988 |
| | 93,485 |
|
Total other income | 61,600 |
| | 42,850 |
| | 141,019 |
| | 101,405 |
|
Net loss | $ | (1,140,016 | ) | | $ | (211,129 | ) | | $ | (2,053,174 | ) | | $ | (246,454 | ) |
| | | | | | | |
Net loss per share, basic and diluted (Note 2) | $ | (0.08 | ) | | $ | (0.02 | ) | | $ | (0.14 | ) | | $ | (0.02 | ) |
| | | | | | | |
Weighted-average number of common shares outstanding, basic and diluted | 14,846,259 |
| | 10,603,387 |
| | 14,218,770 |
| | 10,054,089 |
|
| | | | | | | |
Dividends declared per common share | $ | 0.176 |
| | $ | 0.176 |
| | $ | 0.352 |
| | $ | 0.410 |
|
See accompanying notes to condensed consolidated financial statements.
RW HOLDINGS NNN REIT, INC.
Condensed Consolidated Statements of Stockholders' Equity
Three Months Ended June 30, 2019 and 2018
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Cumulative Distributions and Net Losses | | Total Stockholders' Equity |
| Class C | | Class S | |
| Shares | | Amounts | | Shares | | Amounts | |
Balance, March 31, 2019 | 14,201,229 |
| | $ | 14,201 |
| | 132,517 |
| | $ | 133 |
| | $ | 132,742,525 |
| | $ | (19,469,289 | ) | | $ | 113,287,570 |
|
Issuance of common stock | 1,329,089 |
| | 1,329 |
| | 33,931 |
| | 33 |
| | 13,846,925 |
| | — |
| | 13,848,287 |
|
Stock compensation expense | 5,414 |
| | 5 |
| | — |
| | — |
| | 54,995 |
| | — |
| | 55,000 |
|
Offering costs | — |
| | — |
| | — |
| | — |
| | (415,299 | ) | | — |
| | (415,299 | ) |
Repurchase of common stock | (222,561 | ) | | (222 | ) | | — |
| | — |
| | (2,217,444 | ) | | — |
| | (2,217,666 | ) |
Distributions declared | — |
| | | | — |
| | — |
| | — |
| | (2,605,268 | ) | | (2,605,268 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (1,140,016 | ) | | (1,140,016 | ) |
Balance, June 30, 2019 | 15,313,171 |
| | $ | 15,313 |
| | 166,448 |
| | $ | 166 |
| | $ | 144,011,702 |
| | $ | (23,214,573 | ) | | $ | 120,812,608 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Cumulative Distributions and Net Losses | | Total Stockholders' Equity |
| Class C | | Class S | |
| Shares | | Amounts | | Shares | | Amounts | |
Balance, March 31, 2018 | 10,098,354 |
| | $ | 10,087 |
| | 3,065 |
| | $ | 3 |
| | $ | 93,582,794 |
| | $ | (8,292,416 | ) | | $ | 85,300,468 |
|
Issuance of common stock | 1,281,493 |
| | 1,293 |
| | 33 |
| | — |
| | 12,878,052 |
| | — |
| | 12,879,345 |
|
Stock compensation expense | 4,300 |
| | 4 |
| | — |
| | — |
| | 43,211 |
| | — |
| | 43,215 |
|
Offering costs | — |
| | — |
| | — |
| | — |
| | (386,203 | ) | | — |
| | (386,203 | ) |
Repurchase of common stock | (201,658 | ) | | (201 | ) | | — |
| | — |
| | (1,979,438 | ) | | — |
| | (1,979,639 | ) |
Distributions declared | — |
| | | | — |
| | — |
| | — |
| | (1,864,493 | ) | | (1,864,493 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (211,129 | ) | | (211,129 | ) |
Balance, June 30, 2018 | 11,182,489 |
| | $ | 11,183 |
| | 3,098 |
| | $ | 3 |
| | $ | 104,138,416 |
| | $ | (10,368,038 | ) | | $ | 93,781,564 |
|
See accompanying notes to condensed consolidated financial statements.
RW HOLDINGS NNN REIT, INC.
Condensed Consolidated Statements of Stockholders' Equity
Six Months Ended June 30, 2019 and 2018
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Cumulative Distributions and Net Losses | | Total Stockholders' Equity |
| Class C | | Class S | |
| Shares | | Amounts | | Shares | | Amounts | |
Balance, December 31, 2018 | 12,943,294 |
| | $ | 12,943 |
| | 17,594 |
| | $ | 18 |
| | $ | 119,247,245 |
| | $ | (16,167,437 | ) | | $ | 103,092,769 |
|
Issuance of common stock | 2,806,991 |
| | 2,807 |
| | 148,854 |
| | 148 |
| | 30,002,536 |
| | — |
| | 30,005,491 |
|
Stock compensation expense | 10,335 |
| | 10 |
| | — |
| | — |
| | 104,990 |
| | — |
| | 105,000 |
|
Offering costs | — |
| | — |
| | — |
| | — |
| | (899,863 | ) | | — |
| | (899,863 | ) |
Repurchase of common stock | (447,449 | ) | | (447 | ) | | — |
| | — |
| | (4,443,206 | ) | | — |
| | (4,443,653 | ) |
Distributions declared | — |
| | | | — |
| | | | — |
| | (4,993,962 | ) | | (4,993,962 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (2,053,174 | ) | | (2,053,174 | ) |
Balance, June 30, 2019 | 15,313,171 |
| | $ | 15,313 |
| | 166,448 |
| | $ | 166 |
| | $ | 144,011,702 |
| | $ | (23,214,573 | ) | | $ | 120,812,608 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Cumulative Distributions and Net Losses | | Total Stockholders' Equity |
| Class C | | Class S | |
| Shares | | Amounts | | Shares | | Amounts | |
Balance, December 31, 2017 | 8,838,002 |
| | $ | 8,838 |
| | 3,032 |
| | $ | 3 |
| | $ | 85,324,921 |
| | $ | (6,083,896 | ) | | $ | 79,249,866 |
|
Issuance of common stock | 2,710,514 |
| | 2,711 |
| | 66 |
| | — |
| | 27,217,751 |
| | — |
| | 27,220,462 |
|
Stock compensation expense | 8,100 |
| | 8 |
| | — |
| | — |
| | 81,397 |
| | — |
| | 81,405 |
|
Offering costs | — |
| | — |
| | — |
| | — |
| | (816,297 | ) | | — |
| | (816,297 | ) |
Reclassification to redeemable common stock | — |
| | — |
| | — |
| | — |
| | (4,006,748 | ) | | — |
| | (4,006,748 | ) |
Repurchase of common stock | (374,127 | ) | | (374 | ) | | — |
| | — |
| | (3,662,608 | ) | | — |
| | (3,662,982 | ) |
Distributions declared | — |
| | | | — |
| | — |
| | — |
| | (4,037,688 | ) | | (4,037,688 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (246,454 | ) | | (246,454 | ) |
Balance, June 30, 2018 | 11,182,489 |
| | $ | 11,183 |
| | 3,098 |
| | $ | 3 |
| | $ | 104,138,416 |
| | $ | (10,368,038 | ) | | $ | 93,781,564 |
|
See accompanying notes to condensed consolidated financial statements.
RW HOLDINGS NNN REIT, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| | | | | | | |
| Six Months Ended |
| June 30, 2019 | | June 30, 2018 |
Cash Flows from Operating Activities: | | | |
Net loss | $ | (2,053,174 | ) | | $ | (246,454 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 4,782,991 |
| | 3,026,745 |
|
Stock compensation expense | 176,667 |
| | 81,405 |
|
Amortization of deferred rents | (683,886 | ) | | (609,000 | ) |
Amortization of deferred financing costs | 390,096 |
| | 518,391 |
|
Amortization of above-market lease intangibles | 48,523 |
| | 48,523 |
|
Amortization of below-market lease intangibles | (237,196 | ) | | (169,135 | ) |
Amortization of deferred lease incentives | 30,602 |
| | — |
|
Unrealized loss (gain) on interest rate swap valuation | 874,016 |
| | (220,571 | ) |
Income from investments in unconsolidated entities | (129,988 | ) | | (93,485 | ) |
Distributions from investments in unconsolidated entities | 418,730 |
| | 453,167 |
|
Change in operating assets and liabilities: | | | |
Decrease (increase) in tenant receivables | 196,660 |
| | (245,400 | ) |
Decrease in due from affiliates | 12,602 |
| | 7,746 |
|
Increase in prepaid and other assets | (311,094 | ) | | (14,041 | ) |
Decrease in accounts payable, accrued and other liabilities | 319,774 |
| | (509,586 | ) |
Decrease in due to affiliate | (949,192 | ) | | (710,290 | ) |
Net cash provided by operating activities | 2,886,131 |
| | 1,318,015 |
|
| | | |
Cash Flows from Investing Activities: | | | |
Acquisition of real estate investments | — |
| | (31,103,596 | ) |
Additions to existing real estate investments | — |
| | (749,095 | ) |
Payment for tenant improvements | (3,387,699 | ) | | — |
|
Payment of acquisition fees to affiliate | — |
| | (930,000 | ) |
Refundable purchase deposits | (100,000 | ) | | (250,000 | ) |
Net cash used in investing activities | (3,487,699 | ) | | (33,032,691 | ) |
| | | |
Cash Flows from Financing Activities: | | | |
Borrowings from unsecured credit facility | 4,869,000 |
| | 9,000,000 |
|
Repayments of unsecured credit facility | (13,869,000 | ) | | (21,000,000 | ) |
Proceeds from mortgage notes payable | 6,350,000 |
| | 37,845,000 |
|
Principal payments on mortgage notes payable | (14,240,853 | ) | | (12,442,642 | ) |
Refundable loan deposits | — |
| | (35,360 | ) |
Payments of deferred financing costs to third parties | (172,797 | ) | | (676,190 | ) |
Payments of financing fees to affiliates | (63,500 | ) | | (209,550 | ) |
Proceeds from issuance of common stock and investor deposits | 26,340,968 |
| | 24,551,789 |
|
Payments of offering costs | (899,863 | ) | | (829,325 | ) |
Payments of commissions to Class S distributor | (51,044 | ) | | — |
|
Repurchase of common stock | (4,443,653 | ) | | (3,662,982 | ) |
Distributions paid to common stockholders | (1,182,318 | ) | | (727,230 | ) |
Net cash provided by financing activities | 2,636,940 |
| | 31,813,510 |
|
| | | |
Net increase in cash, cash equivalents and restricted cash | 2,035,372 |
| | 98,834 |
|
| | | |
Cash, cash equivalents and restricted cash, beginning of period | 8,755,928 |
| | 4,182,755 |
|
| | | |
Cash, cash equivalents and restricted cash, end of period | $ | 10,791,300 |
| | $ | 4,281,589 |
|
| | | |
Supplemental Disclosure of Cash Flow Information: | | | |
Cash paid for interest | $ | 2,979,031 |
| | $ | 1,852,121 |
|
| | | |
Supplemental Schedule of Noncash Investing and Financing Activities: | | | |
Reclassification to redeemable common stock | $ | (238,153 | ) | | $ | (4,006,748 | ) |
Reinvested distributions from common stockholders | $ | 3,664,523 |
| | $ | 2,668,673 |
|
Increase in share repurchases payable | $ | 238,153 |
| | $ | 502,508 |
|
Accrued dividends | $ | 896,291 |
| | $ | 643,202 |
|
See accompanying notes to condensed consolidated financial statements.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BUSINESS AND ORGANIZATION
RW Holdings NNN REIT, Inc. (the "Company") was incorporated on May 14, 2015 as a Maryland corporation. The Company has the authority to issue 450,000,000 shares of stock, consisting of 50,000,000 shares of preferred stock, $0.001 par value per share, 300,000,000 shares of Class C common stock, $0.001 par value per share, and 100,000,000 shares of Class S common stock, $0.001 par value per share. The Company was formed to primarily invest, directly or indirectly through investments in real estate owning entities, in single-tenant income-producing properties located in the United States, which are leased to creditworthy tenants under long-term net leases. The Company’s goal is to generate current income for investors and long-term capital appreciation in the value of its properties.
The Company holds its investments in real property through special purpose, wholly-owned limited liability companies, which are wholly-owned subsidiaries of Rich Uncles NNN Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership") or through the Operating Partnership. The Operating Partnership was formed on January 28, 2016. The Company is the sole general partner of, and owns a 99% partnership interest in, the Operating Partnership. Rich Uncles NNN LP, LLC, a Delaware limited liability company formed on May 13, 2016 ("NNN LP"), owns the remaining 1% partnership interest in the Operating Partnership and is the sole limited partner. NNN LP is wholly-owned by the Company.
The Company is externally managed by its advisor, Rich Uncles NNN REIT Operator, LLC (the "Advisor"), a Delaware limited liability company, pursuant to an advisory agreement, as amended (the "Advisory Agreement"). The Advisor is wholly-owned by the Company’s sponsor, BrixInvest, LLC (f/k/a Rich Uncles, LLC, the "Sponsor"), a Delaware limited liability company whose members include Aaron S. Halfacre and Raymond Wirta, the Company’s Chief Executive Officer and Chairman of the Board of Directors, respectively. On each of June 24, 2015 and December 31, 2015, the Company issued 10,000 shares of its Class C common stock to the Sponsor, for a total of 20,000 shares of Class C common stock, at a purchase price of $10.00 per share. As of June 30, 2019 and December 31, 2018, the Sponsor held 10,740 shares of the Company’s Class C common stock.
On July 15, 2015, the Company filed a registration statement on Form S-11 with the U.S. Securities and Exchange Commission (the "SEC") to register an initial public offering of a maximum of 90,000,000 shares of common stock for sale to the public (the "Primary Offering"). The Company also registered a maximum of 10,000,000 shares of common stock pursuant to the Company’s distribution reinvestment plan (the "Registered DRP Offering" and, together with the Primary Offering, the "Registered Offering"). The SEC declared the Company’s registration statement effective on June 1, 2016 and on July 20, 2016, the Company began offering shares of common stock to the public. Pursuant to its securities offering registered with the SEC, the Company sells shares of its "Class C" common stock directly to investors, with a minimum investment in shares of $500. Commencing in August 2017, the Company began selling shares of its Class C common stock only to U.S. persons as defined under Rule 903 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Under applicable SEC rules, the current registration statement for the Registered Offering was scheduled to terminate on June 1, 2019, unless the Company filed a new registration statement on Form S-11 with the SEC prior to such date to extend the Registered Offering in accordance with Rule 415 of the Securities Act. On May 24, 2019, the Company filed a new registration statement on Form S-11 with the SEC so that the Company may continue to offer shares of its Class C common stock. The Company’s current registration statement on Form S-11 will terminate when the new registration statement is declared effective by the SEC. As required by some states, the Company is also required to renew the registration statement for the Registered Offering annually or file a new registration statement to continue the Registered Offering.
On August 11, 2017, the Company began offering up to 100,000,000 shares of its Class S common stock exclusively to non-U.S. Persons as defined under Rule 903 promulgated under the Securities Act pursuant to an exemption from the registration requirements of the Securities Act and in accordance with Regulation S of the Securities Act (the "Class S Offering" and, together with the Registered Offering, the "Offerings"). The Class S common stock has similar features and rights as the Class C common stock with respect to voting and liquidation except that the Class S common stock offered in the Class S offering may be sold through brokers or other persons who may be paid upfront and/or deferred selling commissions and fees.
On January 11, 2019, the Company’s board of directors approved and established an estimated net asset value ("NAV") per share of the Company’s common stock of $10.16 (unaudited). Effective January 14, 2019, the purchase price per share of the Company’s common stock in the Offerings and share repurchase program increased from $10.05 (unaudited) to $10.16 (unaudited).
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Through June 30, 2019, the Company had sold 16,834,959 shares of Class C common stock in the Registered Offering, including 1,263,675 shares of Class C common stock sold under its Registered DRP Offering, for aggregate gross offering proceeds of $169,200,530, and 166,448 shares of Class S common stock in the Class S Offering, including 1,154 shares of Class S common stock sold under its dividend reinvestment plan applicable to Class S common stock, for aggregate gross offering proceeds of $1,689,029.
As of June 30, 2019, the Company had invested in (i) 24 operating properties, comprised of: nine retail properties, 10 office properties and five industrial properties; (ii) one parcel of land, which currently serves as an easement to one of the Company’s office properties; (iii) an approximate 72.7% tenant-in-common interest in a Santa Clara office property (the "TIC Interest"); and (iv) an approximate 4.8% interest in Rich Uncles Real Estate Investment Trust I ("REIT I"), an affiliated REIT.
On January 14, 2019, REIT I announced that it had retained a real estate financial advisor to assist it in evaluating strategic alternatives, which includes marketing its entire real estate properties portfolio (the "REIT I Portfolio") for disposition by sale, merger or other transaction structure. In connection with REIT I’s announcement, on March 19, 2019, the Company announced that it intended to explore a potential acquisition of REIT I or the REIT I Portfolio and that the Company’s board of directors has formed a special committee of the board of directors (the "Special Committee"), consisting solely of independent directors, that is evaluating the potential for a transaction with REIT I.
The members of the Special Committee, comprised of four of the Company’s six directors, have no affiliation with REIT I or the Sponsor. The special committee has engaged UBS Investment Bank as its financial advisor and Morris Manning and Martin, LLP as its legal advisor to assist the Special Committee as it conducts a review of a potential acquisition of REIT I or the REIT I Portfolio.
On June 21, 2019, the Company announced that REIT I conducted a multi-round process whereby bidders submitted proposals to a special committee of the REIT I board of trust managers for preliminary review. As a result of such process, REIT I and the Company determined to commence an exclusive due diligence process. Both parties and their advisors are continuing to evaluate a potential transaction and the Special Committee has not set a definitive timetable for completion of its evaluation. There can be no assurance that the Company will be able to enter into any transaction with REIT I on acceptable terms or at all.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial statements and the rules and regulations of the SEC. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Such unaudited condensed consolidated financial statements and accompanying notes are the representations of the Company’s management, which is responsible for their integrity and objectivity. These unaudited condensed consolidated financial statements should be read in conjunction with the December 31, 2018 audited consolidated financial statements included in the Company’s Form 10-K filed with the SEC on March 29, 2019.
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 its financial position, results of operations and cash flows. All significant intercompany balances and transactions are eliminated in consolidation. The December 31, 2018 balance sheet included herein was derived from the audited financial statements but does not include all disclosures or notes required by GAAP for complete financial statements.
Use of Estimates
The preparation of the 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 condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
RW HOLDINGS NNN REIT, 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, restricted cash, tenant receivables, due from affiliates, purchase and other deposits, prepaid expenses and other assets, accounts payable, accrued and other liabilities and due to affiliates: These balances approximate their fair values due to the short maturities of these items.
Derivative Instruments: The Company’s derivative instruments are presented at fair value in the accompanying 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.
Unsecured Credit Facility: The fair value of the Company’s Unsecured Credit Facility (as defined in Note 6) approximates its carrying value as the interest rates and other terms are comparable to those available in the market place for a similar credit facility.
Mortgage notes payable: The fair value of the Company’s mortgage notes payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Restricted Cash
Restricted cash is comprised of funds which are restricted for use as required by certain lenders in conjunction with an acquisition or debt financing and for on-site and tenant improvements. Restricted cash as of June 30, 2019 and December 31, 2018 amounted to $156,046 and $3,503,242, respectively.
Pursuant to lease agreements, the Company had obligations to pay for $156,046 and $3,535,163 in site and tenant improvements to be incurred by tenants as of June 30, 2019 and December 31, 2018, respectively, including a 72.7% share of tenant improvements for the Santa Clara property at both balance sheet dates. At June 30, 2019 and December 31, 2018, the Company's restricted cash held to fund the improvements totaled $99,228 and $3,486,927, respectively. As of June 30, 2019 and December 31, 2018, the Company also held restricted cash to fund an impounded property tax. During the second quarter of 2019, $3,387,699 of restricted cash was released to a tenant to reimburse it for tenant improvement costs under the terms of its lease agreement.
Other Comprehensive Loss
For all periods presented, other comprehensive loss is the same as net loss.
Reclassifications
Certain prior period revenue account balances in the statement of operations have been reclassified to conform with the current year presentation. The reclassifications had no impact on net loss.
Per Share Data
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted loss per share of common stock equals basic loss per share of common stock as there were no potentially dilutive securities outstanding during the three and six months ended June 30, 2019 and 2018.
For the three and six months ended June 30, 2019 and 2018, the Company has presented net loss per share amounts on the accompanying condensed consolidated statements of operations for Class C and S share classes as a combined common share class. Application of the two-class method for allocating income (loss) in accordance with the provisions of Accounting Standards Codification ("ASC") 260, Earnings per Share, would have resulted in a net loss per share of $(0.06) and $(0.02) for Class C shares for the three months ended June 30, 2019 and 2018, respectively, and $(0.10) and $(0.07) for Class S shares for the three months ended June 30, 2019 and 2018, respectively. The two-class method would have resulted in a net loss per share of $(0.13) and $(0.02) for Class C shares for the six months ended June 30, 2019 and 2018, respectively, and $(0.18) and $(0.11) for Class S shares for the six months ended June 30, 2019 and 2018, respectively.
The differences in net loss per share if allocated under this method primarily reflect the lower effective dividends per share for Class S shareholders as a result of the payment of the deferred commission to the Class S distributor of these shares, and also reflect the impact of the timing of the declaration of the dividends relative to the time the shares were outstanding.
Distributions
The Company’s board of directors may declare distributions in advance of the periods to which they relate. Because such distributions relate to operations and cash available for distributions to be produced in future periods, these distributions will not included in distributions that are recorded in the current period being reported.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following are the Company’s updated significant accounting policies that have been affected by the adoption of Topic 842 as discussed below in New Accounting Standards Issued and Adopted:
Revenue Recognition
The Company recognizes rental income, tenant reimbursements and other lease-related revenue when all of the following criteria are met: (i) the agreement has been fully executed and delivered, (ii) services have been rendered, (iii) the amount is fixed or determinable and (iv) payment has been received or the collectability of the amount due is probable. Lease termination fees are amortized over the remaining lease term, if applicable. If there is no remaining lease term, they are recognized when received and realized. Minimum annual rental revenues are recognized in rental income on a straight-line basis over the non-cancelable term of the related lease.
The recognition of rental income commences when the tenant takes possession or controls the physical use of the leased property. In order for the tenant to take possession, the leased property must be substantially complete and ready for its intended use. In order to determine whether the leased property is substantially complete and ready for its intended use, the Company begins by determining whether the Company or the tenant owns the tenant improvements, if the lease agreement provides for tenant improvements.
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. |
When the Company concludes that it is the owner of tenant improvements, rental income recognition begins when the tenant takes possession of the completed property, which is generally when Company-owned tenant improvements are substantially complete. In addition, when the Company concludes that it is the owner of tenant improvements, the Company records the costs to construct the tenant improvements, including costs paid for or reimbursed by the tenants, as a capital asset. For these tenant improvements, the Company records the amount funded by or reimbursed by the tenants as deferred revenue, which is amortized on a straight-line basis as additional rental income over the term of the related lease.
When the Company concludes that the tenant is the owner of tenant improvements, rental income recognition begins when the tenant takes possession of or controls the physical use of the leased property. 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. In addition, when the Company concludes that the tenant is the owner of tenant improvements for accounting purposes, the Company records its contribution towards such improvements as a lease incentive, which is included in deferred leasing costs and acquisition-related intangible assets, net in its consolidated balance sheets and amortized as a reduction to rental income on a straight-line basis over the term of the related lease.
Tenant Reimbursements
Tenant reimbursements, consisting of amounts due from tenants for common area maintenance, property taxes and other recoverable costs, are recognized in rental income in the period the recoverable costs are incurred. Tenant reimbursements are recorded on a gross basis when the Company pays the associated costs directly to third-party vendors and are reimbursed subsequently by the tenants.
Allowances for Tenant and Deferred Rent Receivables
The Company carries its tenant and deferred rent receivables net of allowances for amounts that may not be collected. Prior to the Company’s adoption of Topic 842 on January 1, 2019, the allowances were increased or decreased through provision for bad debts in the Company’s condensed consolidated statement of operations. Upon the adoption of Topic 842 on January 1, 2019, the determination of the adequacy of the Company's allowances for tenant and deferred rent receivables includes a binary assessment of whether the amounts due under a tenant’s lease agreement are probable of collection.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 current and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination.
Recent Accounting Pronouncements
New Accounting Standards Issued and Adopted
Effective January 1, 2019, the Company adopted Financial Accounting Standards Board ("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 2016-02, on a modified retrospective basis (collectively "Topic 842"). Topic 842 establishes a single comprehensive model for entities to use in accounting for leases and supersedes the existing leasing guidance. 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. The Company currently does not have any exposure to Topic 842 from the perspective of a lessee as the operating lease is borne by the Sponsor. The Company's exposure to Topic 842 is primarily as a lessor. The Company has elected to apply the applicable practical expedients provided by Topic 842.
Lessor Accounting
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. Under Topic 842, the lease of space is considered a lease component while the common area maintenance, property taxes and other recoverable costs billings are considered nonlease components, which fall under revenue recognition guidance in Topic 606. However, upon adopting the guidance in Topic 842, the Company determined that its tenant leases met the criteria to apply the practical expedient provided by ASU 2018-11 to recognize the lease and non-lease components together as one single component. This conclusion was based on the consideration that 1) the timing and pattern of transfer of the nonlease components and associated lease component are the same, and 2) the lease component, if accounted for separately, would be classified as an operating lease. As the lease of properties is the predominant component of the Company’s leasing arrangements, the Company accounted for all lease and nonlease components as one-single component under Topic 842. As a result, the adoption of Topic 842 did not have any impact on the Company’s timing or pattern of recognition of rental revenues as compared to previous guidance. To reflect recognition as one lease component, rental income and tenant reimbursements and other lease related property income that meet the requirements of the practical expedient provided by ASU 2018-11 have been combined under rental income subsequent to the adoption of Topic 842 for the three and six months ended June 30, 2019 in the Company’s consolidated statements of operations. The Company also made a conforming reclassification for the prior year’s tenant reimbursements. For the three month periods ended June 30, 2019 and 2018, tenant reimbursements included in rental income amounted to $1,098,603 and $732,934, respectively, and for the six month periods ended June 30, 2019 and 2018, tenant reimbursements included in rental income amounted to $2,186,463 and $1,261,519, respectively.
Prior to the adoption of Topic 842, lessor costs for certain services directly reimbursed by tenants have already been presented by the Company on a gross basis in revenues and expenses.
Leasing Costs
Upon adoption of Topic 842, the Company elected to apply the package of practical expedients provided and did not reassess the following as of January 1, 2019: 1) whether any expired or existing contracts are leases or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Under Topic 842, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, beginning January 1, 2019, the Company will no longer capitalize internal leasing costs and third-party legal leasing costs and will instead expense these costs as incurred. These expenses will be included in legal leasing costs under general and administrative expenses in our consolidated statements of operations. During the three months ended March 31, 2019, the Company did not incur any indirect leasing costs which would have been capitalized prior to the adoption of Topic 842. The election of the package of practical expedients described above permits us to continue to account for our leases that commenced before January 1, 2019 under the previously existing lease accounting guidance for the remainder of their lease terms, and to apply the new lease accounting guidance to leases commencing or modified after January 1, 2019.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Allowances for Tenant and Deferred Rent Receivables
Upon the adoption of Topic 842 on January 1, 2019, 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 consolidated statements of operations.
New Accounting Standards Recently Issued and Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework -Changes to the Disclosure Requirements for Fair Value Measurement ("ASU No. 2018-13"). ASU No. 2018-13 removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and to disclose the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop the Level 3 fair value measurement. In addition, public entities are required to provide information about the measurement uncertainty of recurring Level 3 fair value measurements from the use of significant unobservable inputs if those inputs reasonably could have been different at the reporting date. ASU 2016-02 is effective for the Company beginning January 1, 2020. Entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is still evaluating the impact of adopting ASU No. 2018-13 on its consolidated financial statements.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS
Tenant Receivables
Tenant receivables consisted of the following:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Straight-line rent | $ | 2,915,852 |
| | $ | 2,231,966 |
|
Tenant rent | 76 |
| | 312,171 |
|
Tenant reimbursements | 1,065,650 |
| | 1,019,355 |
|
Tenant other | 164,761 |
| | 95,622 |
|
Total | $ | 4,146,339 |
| | $ | 3,659,114 |
|
Accounts Payable, Accrued and Other Liabilities
Accounts payable, accrued and other liabilities were comprised of the following:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accounts payable | $ | 470,188 |
| | $ | 227,793 |
|
Accrued expenses | 1,612,897 |
| | 1,421,197 |
|
Accrued dividends | 896,291 |
| | 749,170 |
|
Accrued interest payable | 429,256 |
| | 445,481 |
|
Unearned rent | 749,865 |
| | 827,338 |
|
Deferred commission payable | 1,350 |
| | 1,650 |
|
Tenant improvement obligation | 104,385 |
| | 3,492,084 |
|
Total | $ | 4,264,232 |
| | $ | 7,164,713 |
|
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 4. REAL ESTATE INVESTMENTS, NET
As of June 30, 2019, the Company’s real estate investment portfolio consisted of 24 operating properties and one parcel of land in 13 states, consisting of: (i) nine retail, (ii) 10 office and (iii) five industrial properties and (iv) one parcel of land, which currently serves as an easement to one of the Company’s office properties. The following table provides summary information regarding the Company’s real estate investment portfolio as of June 30, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | |
Property | | Location | | Acquisition Date | | Property Type | | Land, Buildings and Improvements | | Tenant Origination and Absorption Costs | | Accumulated Depreciation and Amortization | | Total Investment in Real Estate Property, Net |
Accredo Health | | Orlando, FL | | 6/15/2016 | | Office | | $ | 9,855,847 |
| | $ | 1,053,637 |
| | $ | (1,516,731 | ) | | $ | 9,392,753 |
|
Walgreens | | Stockbridge, GA | | 6/21/2016 | | Retail | | 4,147,948 |
| | 705,423 |
| | (997,540 | ) | | 3,855,831 |
|
Dollar General | | Litchfield, ME | | 11/4/2016 | | Retail | | 1,281,812 |
| | 116,302 |
| | (105,640 | ) | | 1,292,474 |
|
Dollar General | | Wilton, ME | | 11/4/2016 | | Retail | | 1,543,776 |
| | 140,653 |
| | (135,196 | ) | | 1,549,233 |
|
Dollar General | | Thompsontown, PA | | 11/4/2016 | | Retail | | 1,199,860 |
| | 106,730 |
| | (101,501 | ) | | 1,205,089 |
|
Dollar General | | Mt. Gilead, OH | | 11/4/2016 | | Retail | | 1,174,188 |
| | 111,847 |
| | (97,316 | ) | | 1,188,719 |
|
Dollar General | | Lakeside, OH | | 11/4/2016 | | Retail | | 1,112,872 |
| | 100,857 |
| | (99,877 | ) | | 1,113,852 |
|
Dollar General | | Castalia, OH | | 11/4/2016 | | Retail | | 1,102,086 |
| | 86,408 |
| | (97,041 | ) | | 1,091,453 |
|
Dana | | Cedar Park, TX | | 12/27/2016 | | Industrial | | 8,392,906 |
| | 1,210,874 |
| | (1,246,883 | ) | | 8,356,897 |
|
Northrop Grumman | | Melbourne, FL | | 3/7/2017 | | Office | | 12,382,991 |
| | 1,341,199 |
| | (1,794,441 | ) | | 11,929,749 |
|
exp US Services | | Maitland, FL | | 3/27/2017 | | Office | | 5,920,121 |
| | 388,248 |
| | (497,611 | ) | | 5,810,758 |
|
Harley | | Bedford, TX | | 4/13/2017 | | Retail | | 13,178,288 |
| | — |
| | (734,877 | ) | | 12,443,411 |
|
Wyndham | | Summerlin, NV | | 6/22/2017 | | Office | | 10,406,483 |
| | 669,232 |
| | (638,485 | ) | | 10,437,230 |
|
Williams Sonoma | | Summerlin, NV | | 6/22/2017 | | Office | | 8,079,612 |
| | 550,486 |
| | (591,123 | ) | | 8,038,975 |
|
Omnicare | | Richmond, VA | | 7/20/2017 | | Industrial | | 7,262,747 |
| | 281,442 |
| | (465,575 | ) | | 7,078,614 |
|
EMCOR | | Cincinnati, OH | | 8/29/2017 | | Office | | 5,960,610 |
| | 463,488 |
| | (335,108 | ) | | 6,088,990 |
|
Husqvarna | | Charlotte, NC | | 11/30/2017 | | Industrial | | 11,840,200 |
| | 1,013,948 |
| | (578,086 | ) | | 12,276,062 |
|
AvAir | | Chandler, AZ | | 12/28/2017 | | Industrial | | 27,357,900 |
| | — |
| | (1,070,027 | ) | | 26,287,873 |
|
3M | | DeKalb, IL | | 3/29/2018 | | Industrial | | 14,762,819 |
| | 2,356,361 |
| | (1,608,573 | ) | | 15,510,607 |
|
Cummins | | Nashville, TN | | 4/4/2018 | | Office | | 14,465,491 |
| | 1,536,998 |
| | (960,095 | ) | | 15,042,394 |
|
Northrop Grumman Parcel | | Melbourne, FL | | 6/21/2018 | | Land | | 329,410 |
| | — |
| | — |
| | 329,410 |
|
24 Hour Fitness | | Las Vegas, NV | | 7/27/2018 | | Retail | | 11,453,337 |
| | 1,204,973 |
| | (428,401 | ) | | 12,229,909 |
|
Texas Health | | Dallas, TX | | 9/13/2018 | | Office | | 6,976,703 |
| | 713,221 |
| | (235,372 | ) | | 7,454,552 |
|
Bon Secours | | Richmond, VA | | 10/31/2018 | | Office | | 10,042,551 |
| | 800,356 |
| | (308,484 | ) | | 10,534,423 |
|
Costco | | Issaquah, WA | | 12/20/2018 | | Office | | 27,263,632 |
| | 2,765,136 |
| | (702,672 | ) | | 29,326,096 |
|
| | | | | | | | $ | 217,494,190 |
| | $ | 17,717,819 |
| | $ | (15,346,655 | ) | | $ | 219,865,354 |
|
Current Year Acquisitions and Dispositions
The Company did not acquire or dispose of any property during the six months ended June 30, 2019.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Prior Year Acquisitions
During the six months ended June 30, 2018, the Company acquired the following properties:
|
| | | | | | | | | | | | | | | | | | | | | | |
Property | | Acquisition Date | | Land | | Buildings and Improvements | | Tenant Origination and Absorption Costs | | Below- Market Lease Intangibles | | Total |
3M | | 3/29/2018 | | $ | 758,780 |
| | $ | 14,004,039 |
| | $ | 2,356,361 |
| | $ | (1,417,483 | ) | | $ | 15,701,697 |
|
Cummins | | 4/4/2018 | | 3,347,959 |
| | 11,117,532 |
| | 1,536,998 |
| | — |
| | 16,002,489 |
|
Northrop Grumman Parcel | | 6/21/2018 | | 329,410 |
| | — |
| | — |
| | — |
| | 329,410 |
|
| | | | $ | 4,436,149 |
| | $ | 25,121,571 |
| | $ | 3,893,359 |
| | $ | (1,417,483 | ) | | $ | 32,033,596 |
|
|
| | | | |
Purchase price | | $ | 32,033,596 |
|
Acquisition fees to affiliate | | (930,000 | ) |
Cash paid for acquisition of real estate investments | | $ | 31,103,596 |
|
The capitalized acquisition fees paid to the Advisor for properties acquired during the six months ended June 30, 2018 are as follows:
|
| | | | |
Property | | Amount |
3M | | $ | 456,000 |
|
Cummins | | 465,000 |
|
Northrop Grumman Parcel | | 9,000 |
|
Total | | $ | 930,000 |
|
The Company also paid the Advisor capitalized acquisition fees of $49,507 during the six months ended June 30, 2018 related to additions to real estate investments. During the three and six months ended June 30, 2018, the Company recognized $906,155 and $929,127, respectively, of total revenue related to the acquired properties.
The non-cancelable lease terms of the properties acquired during the six months ended June 30, 2018 are as follows:
|
| | |
Property | | Lease Expiration |
3M | | 7/31/2022 |
Cummins | | 2/28/2023 |
The purchase price allocations reflected in the condensed consolidated financial statements are based upon estimates and assumptions at the time of acquisition that are subject to change which may impact the fair value of the assets and liabilities above (including real estate investments, other assets and accrued liabilities).
Prior Year Disposition
The Company did not dispose of any property during the six months ended June 30, 2018.
Operating Leases
The Company’s real estate properties are primarily leased to tenants under triple-net or double 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 national 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.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
As of June 30, 2019, the future minimum contractual rent payments due to the Company under the Company’s non-cancelable operating leases, excluding any renewal periods, are as follows:
|
| | | | |
July through December 2019 | | $ | 8,838,687 |
|
2020 | | 17,834,035 |
|
2021 | | 16,752,518 |
|
2022 | | 15,520,338 |
|
2023 | | 13,317,933 |
|
2024 | | 12,958,858 |
|
Thereafter | | 46,224,832 |
|
| | $ | 131,447,201 |
|
Revenue Concentration
The Company’s revenue concentration based on tenants representing greater than 10% of total revenues for the three and six months ended June 30, 2019 and 2018 were as follows:
|
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
Property and Location | | Revenue | | Percentage of Total Revenue | | Revenue | | Percentage of Total Revenue |
Costco, Issaquah, WA | | $ | 697,522 |
| | 11.8 | % | | $ | — |
| | — | % |
AvAir, Chandler, AZ | | $ | 666,774 |
| | 11.3 | % | | $ | 653,374 |
| | 14.9 | % |
3M, DeKalb, IL | | $ | — |
| | — | % | | $ | 506,229 |
| | 11.5 | % |
|
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
Property and Location | | Revenue | | Percentage of Total Revenue | | Revenue | | Percentage of Total Revenue |
Costco, Issaquah, WA | | $ | 1,376,025 |
| | 11.7 | % | | $ | — |
| | — | % |
AvAir, Chandler, AZ | | $ | 1,333,549 |
| | 11.3 | % | | $ | 1,289,146 |
| | 16.4 | % |
Asset Concentration
As of June 30, 2019 and December 31, 2018, the Company’s portfolio’s asset concentration (greater than 10% of total assets) was as follows:
|
| | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Property and Location | | Net Carrying Value | | Percentage of Total Assets | | Net Carrying Value | | Percentage of Total Assets |
Costco, Issaquah, WA | | $ | 29,326,096 |
| | 11.7 | % | | $ | 29,974,716 |
| | 11.9 | % |
AvAir, Chandler, AZ | | $ | 26,287,873 |
| | 10.5 | % | | $ | 26,634,909 |
| | 10.6 | % |
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Intangibles
As of June 30, 2019, the Company’s lease intangibles were as follows:
|
| | | | | | | | | | | |
| Tenant Origination and Absorption Costs | | Above-Market Lease Intangibles | | Below-Market Lease Intangibles |
Cost | $ | 17,717,819 |
| | $ | 783,115 |
| | $ | (3,071,253 | ) |
Accumulated amortization | (4,569,358 | ) | | (247,390 | ) | | 713,067 |
|
Net amount | $ | 13,148,461 |
| | $ | 535,725 |
| | $ | (2,358,186 | ) |
The intangible assets acquired in connection with these acquisitions have a weighted average amortization period of approximately 7.4 years as of June 30, 2019. The amortization of intangible assets over the next five years is expected to be as follows:
|
| | | | | | | | | | | |
| Tenant Origination and Absorption Costs | | Above-Market Lease Intangibles | | Below-Market Lease Intangibles |
July through December 2019 | $ | 1,396,105 |
| | $ | 48,524 |
| | $ | (237,195 | ) |
2020 | 2,792,209 |
| | 97,045 |
| | (474,391 | ) |
2021 | 2,375,949 |
| | 78,994 |
| | (474,391 | ) |
2022 | 1,839,880 |
| | 63,719 |
| | (306,829 | ) |
2023 | 1,214,116 |
| | 63,719 |
| | (78,369 | ) |
2024 | 1,066,544 |
| | 63,719 |
| | (67,420 | ) |
Thereafter | 2,463,658 |
| | 120,005 |
| | (719,591 | ) |
| $ | 13,148,461 |
| | $ | 535,725 |
| | $ | (2,358,186 | ) |
| | | | | |
Weighted-average remaining amortization period | 7.0 years |
| | 6.8 years |
| | 9.7 years |
|
NOTE 5. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company’s investments in unconsolidated entities are as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
TIC Interest | $ | 10,627,777 |
| | $ | 10,749,332 |
|
REIT I | 3,359,296 |
| | 3,526,483 |
|
| $ | 13,987,073 |
| | $ | 14,275,815 |
|
The Company’s income from investments in unconsolidated entities, net is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
TIC Interest | $ | 71,703 |
| | $ | 70,907 |
| | $ | 152,063 |
| | $ | 120,687 |
|
REIT I | (15,748 | ) | | (32,301 | ) | | (22,075 | ) | | (27,202 | ) |
| $ | 55,955 |
| | $ | 38,606 |
| | $ | 129,988 |
| | $ | 93,485 |
|
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
TIC Interest
On September 28, 2017, the Company, through a wholly-owned subsidiary of the Operating Partnership, acquired an approximate 72.7% interest in an office property in San Clara, California. The remaining approximate 27.3% of undivided interest in the Santa Clara property is held by Hagg Lane II, LLC (an approximate 23.4%) and Hagg Lane III, LLC (an approximate 3.9%). The manager of Hagg Lane II, LLC and Hagg Lane III, LLC is a board member of the Sponsor. The Santa Clara property does not qualify as a variable interest entity and consolidation is not required as the Company’s TIC Interest does not control the property. Therefore, the Company accounts for the TIC Interest using the equity method. The Company receives approximately 72.7% of the cash flow distributions and recognizes approximately 72.7% of the results of operations. During the three months ended June 30, 2019 and 2018, the Company received $109,720 and $136,849 in cash distributions from its TIC Interest, respectively, and during the six months ended June 30, 2019 and 2018, the Company received $273,618 and $316,535, respectively.
The following is summarized financial information for the Santa Clara property:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Assets: | | | |
Real estate investments, net | $ | 31,172,028 |
| | $ | 31,668,300 |
|
Cash and cash equivalents | 523,176 |
| | 466,379 |
|
Other assets | 183,352 |
| | 117,075 |
|
Total assets | $ | 31,878,556 |
| | $ | 32,251,754 |
|
Liabilities: | | | |
Mortgage notes payable | $ | 13,871,312 |
| | $ | 13,994,844 |
|
Below-market lease, net | 3,028,569 |
| | 3,103,778 |
|
Other liabilities | 53,779 |
| | 61,188 |
|
Total liabilities | 16,953,660 |
| | 17,159,810 |
|
Total equity | 14,924,896 |
| | 15,091,944 |
|
Total liabilities and equity | $ | 31,878,556 |
| | $ | 32,251,754 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Total revenues | $ | 693,571 |
| | $ | 713,218 |
| | $ | 1,359,992 |
| | $ | 1,322,012 |
|
Expenses: | | | | | | | |
Interest expense | 143,367 |
| | 145,960 |
| | 285,886 |
| | 290,985 |
|
Depreciation and amortization | 248,136 |
| | 248,136 |
| | 496,272 |
| | 495,349 |
|
Other expenses | 203,452 |
| | 223,358 |
| | 368,697 |
| | 369,694 |
|
Total expenses | 594,955 |
| | 617,454 |
| | 1,150,855 |
| | 1,156,028 |
|
Net income | $ | 98,616 |
| | $ | 95,764 |
| | $ | 209,137 |
| | $ | 165,984 |
|
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
REIT I
The Company’s investment in REIT I represented an approximate 4.8% ownership interest as of June 30, 2019 and December 31, 2018. The Company recorded its share of loss of REIT I based on REIT I’s results of operations for the three and six months ended June 30, 2019 and 2018. During the three months ended June 30, 2019 and 2018, the Company received $75,746 and $68,316 in cash distributions, respectively, related to its investment in REIT I and during the six months ended June 30, 2019 and 2018, the Company received $145,112 and $136,632, respectively. The following is summarized financial information for REIT I:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Assets: | | | |
Real estate investments, net | $ | 120,644,631 |
| | $ | 125,075,537 |
|
Cash and cash equivalents and restricted cash | 3,258,934 |
| | 3,376,145 |
|
Other assets | 2,647,717 |
| | 3,070,475 |
|
Total assets | $ | 126,551,282 |
| | $ | 131,522,157 |
|
Liabilities: | | | |
Mortgage notes payable, net | $ | 62,033,836 |
| | $ | 61,446,068 |
|
Below-market lease intangibles, net | 2,675,761 |
| | 3,105,843 |
|
Other liabilities | 1,535,864 |
| | 3,359,618 |
|
Total liabilities | 66,245,461 |
| | 67,911,529 |
|
Redeemable common stock | — |
| | 163,572 |
|
Total shareholders’ equity | 60,305,821 |
| | 63,447,056 |
|
Total liabilities and shareholders’ equity | $ | 126,551,282 |
| | $ | 131,522,157 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Total revenues | $ | 3,277,710 |
| | $ | 3,365,163 |
| | $ | 6,566,354 |
| | $ | 6,596,381 |
|
Expenses: | | | | | | | |
Depreciation and amortization | 1,444,354 |
| | 1,409,093 |
| | 2,886,414 |
| | 2,857,337 |
|
Interest expense | 982,223 |
| | 631,838 |
| | 1,845,396 |
| | 1,116,711 |
|
Impairment of real estate investment property (1) | — |
| | 862,190 |
| | — |
| | 862,190 |
|
Other expenses | 1,175,029 |
| | 1,206,883 |
| | 2,403,892 |
| | 2,386,920 |
|
Total expenses | 3,601,606 |
| | 4,110,004 |
| | 7,135,702 |
| | 7,223,158 |
|
Other income: | | | | | | | |
Other income (2) | — |
| | — |
| | 113,773 |
| | — |
|
Net loss | $ | (323,896 | ) | | $ | (744,841 | ) | | $ | (455,575 | ) | | $ | (626,777 | ) |
(1) During the three months ended June 30, 2018, REIT I recorded an impairment charge of $862,190 related to its investment in a property in Antioch, California due to the expiration of the tenant’s lease term at December 31, 2017 and REIT I’s subsequent difficulties encountered during the first half of 2018 in its efforts to re-lease the property at acceptable rent rates and without incurring substantial potential tenant improvement costs. The impairment charge was less than 1.0% of REIT I’s total investments in real estate property and the book value of the property after the impairment charge was less than 2.0% of REIT I’s total investments in real estate property as of June 30, 2018.
(2) The gain on sale of real estate investment property of $113,773 during the six months ended June 30, 2019 was due to the higher mortgage loan balance and related interest payable of the property in Antioch, California compared to its net book value when it was relinquished in a foreclosure sale on March 13, 2019.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 6. DEBT
Mortgage Notes Payable
As of June 30, 2019 and December 31, 2018, the Company’s mortgage notes payable consisted of the following:
|
| | | | | | | | | | | | | | | |
Collateral | | Principal Amount June 30, 2019 | | Principal Amount December 31, 2018 | | Contractual Interest Rate (1) | | Effective Interest Rate (1) | | Loan Maturity |
Accredo/Walgreen properties | | $ | 6,925,661 |
| | $ | 6,996,469 |
| | 3.95% | | 3.95 | % | | 7/1/2021 |
Dana property | | 4,592,001 |
| | 4,632,398 |
| | 4.56% | | 4.56 | % | | 4/1/2023 |
Six Dollar General properties | | 3,852,196 |
| | 3,885,334 |
| | 4.69% | | 4.69 | % | | 4/1/2022 |
Wyndham property (2) | | 5,769,600 |
| | 5,820,600 |
| | One-month LIBOR+2.05% | | 4.34 | % | | 6/5/2027 |
Williams Sonoma property (2) | | 4,573,200 |
| | 4,615,800 |
| | One-month LIBOR+2.05% | | 4.05 | % | | 6/5/2022 |
Omnicare property | | 4,311,660 |
| | 4,349,963 |
| | 4.36% | | 4.36 | % | | 5/1/2026 |
Harley property | | 6,808,386 |
| | 6,868,254 |
| | 4.25% | | 4.25 | % | | 9/1/2024 |
Northrop Grumman property | | 5,738,558 |
| | 5,809,367 |
| | 4.40% | | 4.40 | % | | 3/2/2021 |
EMCOR property | | 2,887,126 |
| | 2,911,577 |
| | 4.35% | | 4.35 | % | | 12/1/2024 |
exp US Services property | | 3,416,049 |
| | 3,446,493 |
| | (3) | | 4.25 | % | | 11/17/2024 |
Husqvarna property | | 6,379,182 |
| | 6,379,182 |
| | (4) | | 4.60 | % | | 2/20/2028 |
AvAir property | | 14,575,000 |
| | 14,575,000 |
| | (5) | | 4.84 | % | | 3/27/2028 |
3M property | | 8,350,000 |
| | 8,360,000 |
| | One-month LIBOR+2.25% | | 5.09 | % | | 3/29/2023 |
Cummins property | | 8,519,800 |
| | 8,530,000 |
| | One-month LIBOR+2.25% | | 5.16 | % | | 4/4/2023 |
24 Hour Fitness property (6) | | 6,333,666 |
| | 8,900,000 |
| | 4.64% | | 4.64 | % | | 4/1/2049 |
Texas Health property (7) | | — |
| | 4,842,500 |
| | One-month LIBOR+4.30% | | 6.56 | % | | 3/13/2019 |
Bon Secours property | | 5,250,000 |
| | 5,250,000 |
| | 5.41% | | 5.41 | % | | 9/15/2026 |
Costco property | | 18,850,000 |
| | 18,850,000 |
| | 4.85% | | 4.85 | % | | 1/1/2030 |
Total mortgage notes payable | | 117,132,085 |
| | 125,022,937 |
| | | | | | |
Less unamortized deferred financing costs | | (2,099,104 | ) | | (2,313,629 | ) | | | | | | |
| | $ | 115,032,981 |
| | $ | 122,709,308 |
| | | | | | |
| |
(1) | Contractual interest rate represents the interest rate in effect under the mortgage note payable as of June 30, 2019. Effective interest rate is calculated as the actual interest rate in effect as of June 30, 2019 consisting of the contractual interest rate and the effect of the interest rate swap, if applicable. For further information regarding the Company’s derivative instruments, see Note 7. |
| |
(2) | The loans on each of the Williams Sonoma and Wyndham properties (collectively, the "Property") located in Summerlin, Nevada were originated by Nevada State Bank ("Bank"). The loans are collateralized by a deed of trust and a security agreement with assignment of rents and fixture filing. In addition, the individual loans are subject to a cross collateralization and cross default agreement whereby any default under, or failure to comply with the terms of any one or both of the loans, is an event of default under the terms of both loans. The value of the Property must be in an amount sufficient to maintain a loan to value ratio of no more than 60%. If the loan to value ratio is ever more than 60%, the borrower shall, upon the Bank’s written demand, reduce the principal balance of the loans so that the loan to value ratio is no more than 60%. |
| |
(3) | The initial contractual interest rate is 4.25% and starting November 18, 2022, the interest rate is T-Bill index plus 3.25%. |
| |
(4) | The initial contractual interest rate is 4.60% for the first five years and starting February 21, 2023, the interest rate is the greater of 4.60% or five-year Treasury Constant Maturity ("TCM") plus 2.45% for the second five years. |
| |
(5) | The initial contractual interest rate is 4.84% for the first five-years and starting March 28, 2023, the interest rate is the greater of 4.60% or five-year TCM plus 2.45% for the second five-years. |
| |
(6) | The loan refinancing on March 7, 2019 reduced the principal amount outstanding and the rate and extended the maturity. The interest rate for the note payable outstanding as of June 30, 2019 adjusts in the 133rd, 253rd and 313th months. |
| |
(7) | The loan was fully repaid on the March 13, 2019 maturity date. |
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following were the face value, carrying amount and fair value of the Company’s mortgage notes payable (Level 3 measurement):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Face Value | | Carrying Value | | Fair Value | | Face value | | Carrying Value | | Fair Value |
Mortgage notes payable | $ | 117,132,085 |
| | $ | 115,032,981 |
| | $ | 123,128,492 |
| | $ | 125,022,937 |
| | $ | 122,709,308 |
| | $ | 123,821,490 |
|
Disclosures of the fair values of financial instruments are based on pertinent information available to the Company as of the period end and require a significant amount of judgment. The actual value could be materially different from the Company’s estimate of value.
Unsecured Credit Facility
The Company, together with the Operating Partnership and NNN LP ("Borrowers"), has a Business Loan Agreement and Promissory Note (the "Unsecured Credit Facility") with Pacific Mercantile Bank ("Lender"). The Unsecured Credit Facility was a revolving unsecured line of credit for a maximum principal amount of $9,000,000 and was scheduled to mature on January 26, 2019, unless earlier terminated. The Borrowers received extensions of the Unsecured Credit Facility through April 30, 2019. On April 30, 2019, Borrowers entered into a new Loan Agreement (the "New Credit Facility") with Lender. The New Credit Facility replaces the $9,000,000 unsecured line of credit with Lender, which expired on April 30, 2019. The New Credit Facility is a revolving unsecured line of credit for a maximum principal amount of $10,000,000 and matures on October 1, 2020, unless earlier terminated. The New Credit Facility has similar terms to the expired facility.
The New Credit Facility is secured by a continuing guaranty executed by the Company’s Sponsor and Advisor, along with springing guaranties executed by Raymond E. Wirta, Chairman of the Board of the Company, and a trust belonging to Mr. Wirta, each in the amount of $10,000,000. Mr. Wirta’s guaranties become effective upon certain triggering events, including the failure by Borrowers to pay one or more subsequent advances within 90 days of disbursement or an event of default under the New Credit Facility.
Under the terms of the New Credit Facility, Borrowers pay a variable rate of interest on outstanding amounts equal to one (1) percentage point over an independent index published in The Wall Street Journal based on the highest rate on corporate loans posted by at least 75% of the largest banks (the "Index"). The interest rate was 6.50% as of June 30, 2019 and December 31, 2018.
The New Credit Facility contains customary representations, warranties and covenants. The Company’s ability to borrow under the New Credit Facility is subject to its ongoing compliance with various affirmative and negative covenants, including with respect to indebtedness, guaranties, mergers and asset sales, liens, dividends, corporate existence and financial reporting obligations. The New Credit Facility also contains customary events of default, including, without limitation, nonpayment of principal, interest, fees or other amounts when due, violation of covenants, breaches of representations or warranties and change of ownership. Upon the occurrence of an event of default, Lender may accelerate the repayment of amounts outstanding under the New Credit Facility and exercise other remedies subject, in certain instances, to the expiration of an applicable cure period.
As of June 30, 2019 and December 31, 2018 the Company had $0 and $9,000,000 of outstanding borrowings, respectively, under the New Credit Facility and Unsecured Credit Facility, as then in effect.
All Debt Agreements
Pursuant to the terms of mortgage notes payable on certain of the Company’s properties and the Unsecured Credit Facility, the Company and/or the Borrowers are subject to certain financial loan covenants. The Company and/or the Borrowers were in compliance with all terms and conditions of the applicable loan agreements as of June 30, 2019.
RW HOLDINGS NNN REIT, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following summarizes the future principal repayments of the Company’s mortgage notes payable and New Credit Facility as of June 30, 2019:
|
| | | | | | | | | | | |
| Mortgage Note Payable | | New Credit Facility | | Total |
July through December 2019 | $ | 637,333 |
| | $ | — |
| | $ | 637,333 |
|
2020 | 1,523,095 |
| | — |
| | 1,523,095 |
|
2021 | 8,223,343 |
| | — |
| | 8,223,343 |
|
2022 | 14,617,593 |
| | |