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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
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
MODIV INC.
(Exact name of registrant as specified in its charter)
Maryland
47-4156046
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
120 Newport Center Drive, Newport Beach, CA
92660
(Address of principal executive offices)(Zip Code)
(888) 686-6348
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
NoneNoneNone
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  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  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
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 
As of April 30, 2021, there were 7,526,158 shares of Class C common stock outstanding and 63,182 shares of Class S common stock outstanding.


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Modiv Inc.
FORM 10-Q
INDEX
2

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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, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 (the “SEC”). 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:
The magnitude and duration of the novel coronavirus (“COVID-19”) pandemic and its impact on our tenants, operations and liquidity is uncertain as of the filing date of this Quarterly Report on Form 10-Q and may continue to have an adverse impact on our business and results of operations.
We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties.
Our properties, intangible assets and other assets may be subject to further impairment charges.
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 or dispose of, or lease, our properties on advantageous terms.
We could be subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally.
We have substantial indebtedness, and may incur additional secured or unsecured debt, which may affect our ability to pay distributions, expose us to interest rate fluctuation risk, impose limitations on how we operate and expose us to the risk of default under our debt obligations.
We may not be able to extend or refinance existing indebtedness before it becomes due.
We may not be able to attain or maintain profitability.
The only sources of cash for distributions to investors will be cash flow from our operations (including sales of properties) or any net proceeds that result from financing or refinancing our properties.
We may not generate cash flows sufficient to pay our distributions to stockholders or meet our debt service obligations.
We may be affected by risks resulting from losses in excess of insured limits.
We may fail to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.
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, 2020.
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.
3

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PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
Modiv Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
March 31,
2021
December 31, 2020
Assets
Real estate investments:
Land$65,358,321 $65,358,321 
Buildings and improvements272,397,472 272,397,472 
Tenant origination and absorption costs24,122,471 23,792,057 
Total investments in real estate property361,878,264 361,547,850 
Accumulated depreciation and amortization(35,655,770)(32,091,211)
Total investments in real estate property, net326,222,494 329,456,639 
Investment in unconsolidated entity9,995,456 10,002,368 
Total real estate investments, net336,217,950 339,459,007 
Real estate investments held for sale, net11,378,685 24,585,739 
Total real estate investments347,596,635 364,044,746 
Cash and cash equivalents5,365,144 8,248,412 
Restricted cash170,136 129,118 
Deposit for investment in special purpose acquisition company4,500,000  
Receivable from sale of real estate property1,824,383 1,824,383 
Tenant receivables7,132,378 6,665,790 
Above-market lease intangibles, net788,387 820,842 
Prepaid expenses and other assets3,100,243 2,171,717 
Other assets related to real estate investments held for sale1,019,131 1,079,361 
Goodwill, net17,320,857 17,320,857 
Intangible assets, net4,667,644 5,127,788 
Total assets$393,484,938 $407,433,014 
Liabilities and Equity
Mortgage notes payable, net$177,428,620 $175,925,918 
Mortgage notes payable related to real estate investments held for sale, net6,487,754 9,088,438 
Total mortgage notes payable, net183,916,374 185,014,356 
Credit facility, net5,867,164 5,978,276 
Economic relief note payable 517,000 
Accounts payable, accrued and other liabilities6,857,373 7,579,624 
Share repurchases payable897,742 2,980,559 
Below-market lease intangibles, net12,198,162 12,565,737 
Interest rate swap derivatives1,330,936 1,743,889 
Other liabilities related to real estate investments held for sale379,434 801,337 
Total liabilities211,447,185 217,180,778 
Commitments and contingencies (Note 10)
Redeemable common stock9,891,059 7,365,568 
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, 7,524,210 and 7,874,541 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
7,524 7,874 
Class S common stock $0.001 par value, 100,000,000 shares authorized, 63,101 and 62,860 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
63 63 
Additional paid-in-capital216,444,117 224,288,417 
Cumulative distributions and net losses(94,908,010)(92,012,686)
Total Modiv Inc. equity121,543,694 132,283,668 
Noncontrolling interests in the Operating Partnership50,603,000 50,603,000 
Total equity172,146,694 182,886,668 
Total liabilities and equity$393,484,938 $407,433,014 
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
Modiv Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
20212020
Rental income$9,040,863 $11,054,409 
Expenses:
General and administrative3,282,884 2,555,005 
Depreciation and amortization4,024,703 4,635,524 
Interest expense1,781,136 3,904,656 
Property expenses1,754,947 1,948,719 
Impairment of real estate investment properties 9,157,068 
Impairment of goodwill and intangible assets 34,572,403 
Reserve for loan guarantee 3,129,290 
Total expenses10,843,670 59,902,665 
Other operating income:
Gain on sale of real estate investments289,642  
Real estate operating loss(1,513,165)(48,848,256)
Other income:
Interest income50 4,217 
Income from investment in unconsolidated entity72,467 20,753 
Gain on forgiveness of economic relief note payable517,000  
Other20,000  
Total other income609,517 24,970 
Net loss$(903,648)$(48,823,286)
Net loss per share, basic and diluted (Note 2)$(0.12)$(6.14)
Weighted-average number of common shares outstanding, basic and diluted7,706,621 7,951,071 
Distributions declared per common share$0.263 $0.525 
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
Modiv Inc.
Condensed Consolidated Statements of Equity
Three Months Ended March 31, 2021 and 2020
(Unaudited)
Common StockAdditional
Paid-in
Capital
Cumulative
Distributions
and Net
Losses
Total
Stockholders'
Equity
Noncontrolling Interests in the Operating PartnershipTotal
Equity
Class CClass S
SharesAmountsSharesAmounts
Balance, December 31, 20207,874,541 $7,874 62,860 $63 $224,288,417 $(92,012,686)$132,283,668 $50,603,000 $182,886,668 
Issuance of common stock
127,556 128 241 — 2,756,908 — 2,757,036 — 2,757,036 
Stock compensation expense
4,052 4 — — 91,246 — 91,250 — 91,250 
Class OP Units compensation expense— — — — 534,645 — 534,645 — 534,645 
Offering costs— — — — (409,844)— (409,844)— (409,844)
Reclassification to redeemable common stock— — — — (442,674)— (442,674)— (442,674)
Repurchase of common stock
(481,939)(482)— — (10,374,581)— (10,375,063)— (10,375,063)
Distributions declared
— — — — — (1,991,676)(1,991,676)— (1,991,676)
Net loss— — — — — (903,648)(903,648)— (903,648)
Balance, March 31, 20217,524,210 $7,524 63,101 $63 $216,444,117 $(94,908,010)$121,543,694 $50,603,000 $172,146,694 
Common StockAdditional
Paid-in
Capital
Cumulative
Distributions
and Net
Losses
Total
Stockholders'
Equity
Noncontrolling Interests in the Operating PartnershipTotal
Equity
Class CClass S
SharesAmountsSharesAmounts
Balance, December 31, 20197,882,489 $7,882 62,202 $62 $220,730,566 $(31,168,948)$189,569,562 $50,603,000 $240,172,562 
Issuance of common stock
300,861 301 345 1 9,240,894 — 9,241,196 — 9,241,196 
Stock compensation expense
1,955 6 — — 59,578 — 59,584 — 59,584 
Class OP Units compensation expense— — — — 88,783 — 88,783 — 88,783 
Offering costs— — — — (557,652)— (557,652)— (557,652)
Reclassification to redeemable common stock— — — — 4,393,863 — 4,393,863 — 4,393,863 
Repurchase of common stock
(298,405)(895)— — (9,090,252)— (9,091,147)— (9,091,147)
Distributions declared
— — — — — (4,189,102)(4,189,102)— (4,189,102)
Net loss— — — — — (48,823,286)(48,823,286)— (48,823,286)
Balance, March 31, 20207,886,899 $7,294 62,547 $63 $224,865,780 $(84,181,336)$140,691,801 $50,603,000 $191,294,801 
See accompanying notes to condensed consolidated financial statements.
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Modiv Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31, 2021March 31, 2020
Cash Flows from Operating Activities:
Net loss$(903,648)$(48,823,286)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization4,024,703 4,635,524 
Stock compensation expense604,645 160,866 
Deferred rents(274,823)(370,848)
Amortization of deferred lease incentives65,301 15,301 
Amortization of deferred financing costs and premium/discount99,069 133,240 
Amortization of above-market lease intangibles32,455 49,483 
Amortization of below-market lease intangibles(367,575)(389,822)
Impairment of real estate investment properties 9,157,068 
Impairment of goodwill and intangible assets 34,572,403 
Allowance for bad debt 112,916 
Reserve for loan guarantee 3,129,290 
Gain on forgiveness of economic relief note payable(517,000) 
Gain on sale of real estate investments(289,642) 
Unrealized (gain) loss on interest rate swap valuation(427,119)1,284,967 
Income from investment in unconsolidated entity(72,467)(20,753)
Distributions from investment in unconsolidated entity79,379 165,031 
Change in operating assets and liabilities:
Increase in tenant receivables(183,201)(533,824)
Increase in prepaid and other assets(991,512)(780,042)
Decrease in accounts payable, accrued and other liabilities(776,474)(386,353)
Decrease in due to affiliates (170,356)
Operating lease right-of-use asset/operating lease liability, net 6,700 
Net cash provided by operating activities102,091 1,947,505 
Cash Flows from Investing Activities:
Additions to existing real estate investments(330,414)(2,132,535)
Additions to intangible assets (323,690)
Deposit for investment in special purpose acquisition company(4,500,000) 
Net proceeds from sale of real estate investments13,221,509  
Additions to lease incentives (990,000)
Net cash provided by (used in) investing activities8,391,095 (3,446,225)
Cash Flows from Financing Activities:
Borrowings from credit facilities6,000,000 4,260,000 
Repayments of prior credit facility(6,000,000) 
Proceeds from mortgage notes payable12,136,000 4,000,000 
Principal payments on mortgage notes payable(13,198,773)(1,310,245)
Principal payments on short-term notes payable (3,775,250)
Payments of deferred financing costs to third parties(246,587)(24,997)
Proceeds from issuance of common stock and investor deposits1,627,707 6,880,682 
Payments of offering costs(409,844)(557,652)
Payments of selling commissions on Class S common stock(1,466)(4,176)
Repurchases of common stock(10,375,063)(9,091,147)
Distributions paid to common stockholders(867,410)(1,379,751)
Net cash used in financing activities(11,335,436)(1,002,536)
Net decrease in cash, cash equivalents and restricted cash(2,842,250)(2,501,256)
Cash, cash equivalents and restricted cash, beginning of period8,377,530 6,936,930 
Cash, cash equivalents and restricted cash, end of period$5,535,280 $4,435,674 
Three Months Ended
March 31, 2021March 31, 2020
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest$1,549,932 $1,661,405 
Supplemental Schedule of Noncash Investing and Financing Activities:
Reclassification to redeemable common stock$442,674 $4,393,863 
Reinvested distributions from common stockholders$1,129,329 $2,360,514 
Increase in share repurchases payable$(2,082,817)$ 
Accrued distributions$6,528 $448,837 
Supplemental disclosure related to real estate investment held for sale, net:
Real estate investments held for sale, net$13,207,054 $ 
Other assets related to real estate investments held for sale$60,230 $ 
Increase in above-market lease intangibles, net$(50,549)$ 
Mortgage notes payable related to real estate investments held for sale, net$(2,600,684)$ 
Other liabilities related to real estate investments held for sale$(421,903)$ 
Increase in below-market lease intangibles, net$325,734 $ 
Increase in interest swap derivatives$14,166 $ 
See accompanying notes to condensed consolidated financial statements.
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Modiv Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BUSINESS AND ORGANIZATION
Modiv Inc. (the “Company”) was incorporated on May 14, 2015 as a Maryland corporation. The Company has the authority to issue 450,000,000 shares of stock, consisting of 50,000,000 shares of preferred stock, $0.001 par value per share, 300,000,000 shares of Class C common stock, $0.001 par value per share, and 100,000,000 shares of Class S common stock, $0.001 par value per share. Effective February 1, 2021, with the authorization of the board of directors, the Company filed Articles of Amendment to the Company’s charter in the State of Maryland in order to effect a 1:3 reverse stock split of the Company’s Class C common stock and Class S common stock and, following the implementation of the reverse stock split, to decrease the par value of each post-split share of the Company’s Class C common stock and Class S common stock from $0.003 per share to $0.001 per share.
The Company was initially formed to primarily invest in single-tenant income-producing commercial properties located in the United States, leased to creditworthy tenants under long-term net leases. Since December 31, 2019, the Company has been internally managed following its December 31, 2019 acquisition of the business of BrixInvest, LLC, a Delaware limited liability company and the Company’s former sponsor (“BrixInvest”), and the Company’s merger with Rich Uncles Real Estate Investment Trust I (“REIT I”). The Company has created one of the largest non-listed real estate investment funds to be raised via crowdfunding technology and the first real estate crowdfunding platform to be completely investor-owned. The Company plans to expand beyond its traditional single-tenant portfolio of triple-net leased properties to provide individual investors access to a diversified portfolio of real estate and real estate-related investments designed to provide both income and long-term growth. During 2020, the Company acquired the intellectual property of buildingbits.com (“BuildingBITs”), an innovative online real estate crowd funding platform, and the REITless investment platform (“REITless”), an online investment platform for commercial real estate investment offerings. In 2021, the Company will continue to seek opportunities to be an aggregator within the non-listed real estate product industry, utilizing the combination of its deep understanding of both the crowd funding and real estate markets and the strength of its stockholder-owned, self-managed business model.
The Company holds its investments in real property through special purpose limited liability companies which are wholly-owned subsidiaries of Modiv Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”). The Operating Partnership was formed on January 28, 2016. The Company is the sole general partner of and owned an 83% partnership interest in the Operating Partnership on March 31, 2021. The Operating Partnership limited partners include holders of several classes of ownership with various vesting and enhancement terms as further described in Note 11.
As of March 31, 2021, the Company's portfolio of approximately 2.3 million square feet of aggregate leasable space consisted of investments in 38 real estate properties, comprised of: 12 retail properties, 14 office properties and 12 industrial properties, including 14 of the original 20 operating properties which were acquired through the Merger (defined below) on December 31, 2019, an approximate 72.7% tenant-in-common interest in a Santa Clara, California industrial property (the “TIC Interest”) and one retail property which is classified as held for sale as of March 31, 2021 (see Note 3 for additional discussion).
Special Purpose Acquisition Company
To further the Company’s mission of being the leading provider of alternative real estate-related products, and to capitalize on opportunities in the public marketplace, the Company is sponsoring Modiv Acquisition Corp. (“MACS”), a special purpose acquisition company (“SPAC”). Modiv Venture Fund, LLC (“MVF”), an indirect subsidiary of Modiv TRS, LLC, the Company’s taxable REIT subsidiary, is the sponsor of MACS. MVF formed MACS on January 15, 2021 with the intention of completing an initial public offering (“IPO”) of MACS as a SPAC. On January 29, 2021, MVF subscribed for 2,875,000 shares of common stock of MACS for $25,000, with 375,000 shares being cancellable if the underwriters’ over-allotment option is not exercised, which would result in MVF owning 20% of MACS upon completion of the IPO.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
MACS publicly filed its registration statement on Form S-1 with the SEC on March 24, 2021 and plans to raise $100,000,000, or $115,000,000 if the over-allotment option is exercised, in its IPO. In connection with the public filing of the Form S-1, MVF deposited $4,500,000 in escrow with the attorneys for MACS. The $4,500,000 will be released from escrow upon (i) completion of the IPO and used to purchase 9,000,000 warrants to purchase additional shares of MACS or (ii) the Company's decision not to proceed with the IPO. Each warrant has the right to purchase 0.5 of a share of MACS common stock and can be exercised at a strike price of $11.50 per share. However, there has been significant disruption in the IPO market for SPACs during the second quarter of 2021 and there can be no assurance that MACS can complete an IPO. In addition, the Company is evaluating how to respond to the changes in the market and may decide to either modify MACS’s IPO or not proceed with the IPO. In the event that MACS does not complete an IPO, the $4,500,000 deposit will be released from escrow and returned to MVF.
MACS was formed for the purpose of entering into a business combination with one or more businesses or entities, and intends to focus on targets located in North America that are focused on fintech and proptech, with a focus on companies whose core purpose is related to the real estate industry. Within those parameters, and subject to completion of its IPO, MACS intends to pursue a business combination with companies that use technology driven platforms and solutions to disrupt or revolutionize the real estate capital markets, transactional marketplaces and investment management industry.
Self-Management Transaction and Merger on December 31, 2019
The Company was externally managed through December 31, 2019 by its former advisor, Rich Uncles NNN REIT Operator, LLC, a Delaware limited liability company, pursuant to the Second Amended and Restated Advisory Agreement dated August 11, 2017, as amended (the “Advisory Agreement”). The former advisor was wholly-owned by the Company’s former sponsor, BrixInvest, whose members include Aaron S. Halfacre and Raymond Wirta, the Company’s Chief Executive Officer and Chairman of the Board, respectively.
On December 31, 2019, a self-management transaction was completed, whereby the Company, the Operating Partnership, BrixInvest and Daisho (defined below) effectuated a contribution agreement dated September 19, 2019 (the “Contribution Agreement”) pursuant to which the Company acquired substantially all of the assets and assumed certain liabilities of BrixInvest in exchange for 657,949.5 Class M OP Units in the Operating Partnership (the “Self-Management Transaction”). As a result of the completion of the Self-Management Transaction, the Company became self-managed and eliminated all fees for acquisitions, dispositions and management of its properties, except for third-party property management fees. Following completion of the Self-Management Transaction, the Company owned an approximately 87% partnership interest in the Operating Partnership. Daisho OP Holdings, LLC, a formerly wholly-owned subsidiary of BrixInvest (“Daisho”) which was spun off from BrixInvest on December 31, 2019, was issued and held 657,949.5 units of Class M limited partnership interest (the “Class M OP Units”), or an approximate 12% limited partnership interest, in the Operating Partnership as of December 31, 2019. The Class M OP Units were distributed to the members of Daisho during 2020. In connection with the Self-Management Transaction, the Company's Chief Executive Officer and Chief Financial Officer were issued an aggregate of 56,029 units of Class P limited partnership interest (the “Class P OP Units”) in the Operating Partnership and thereby owned the remaining approximate 1% limited partnership interest in the Operating Partnership as of December 31, 2019. Following the issuance of 360,000 units (adjusted for the 1:3 reverse stock split) of Class R limited partnership interest (the “Class R OP Units”) in the Operating Partnership to the Company’s employees, including the Chief Executive Officer and Chief Financial Officer, in January 2021 as further described in Note 11, the Company holds an approximately 83% partnership interest, the Daisho members hold an approximately 12% limited partnership interest and employees of the Company hold an approximately 5% limited partnership interest in the Operating Partnership.
On December 31, 2019, pursuant to an Agreement and Plan of Merger dated September 19, 2019 (the “Merger Agreement”), REIT I merged with and into Katana Merger Sub, LP (“Merger Sub”), a Delaware limited partnership and wholly-owned subsidiary of the Company, with Merger Sub surviving as a direct, wholly-owned subsidiary of the Company (the “Merger”). At such time, the separate existence of REIT I ceased. As a result, the Company issued 2,680,740.5 shares (adjusted for the 1:3 reverse stock split) of its Class C common stock to former shareholders of REIT I. On December 31, 2020, Merger Sub was merged into the Operating Partnership and ceased to exist.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Offering
On July 15, 2015, the Company filed a registration statement on Form S-11 (File No. 333-205684) with the SEC to register an initial public offering of a maximum of 30,000,000 (adjusted for the 1:3 reverse stock split) of its shares of common stock for sale to the public (the “Primary Offering”). The Company also registered a maximum of 3,333,333 (adjusted for the 1:3 reverse stock split) of its shares of common stock pursuant to the Company's distribution reinvestment plan (the “DRP”) (the “Initial DRP Offering” and together with the Primary Offering, the “Initial Registered Offering”). During 2016, the SEC declared the Company's registration statement effective and the Company began offering shares of common stock to the public. Pursuant to the Initial Registered Offering, the Company sold shares of Class C common stock directly to investors, with a minimum investment in shares of $500. Commencing in August 2017, the Company began selling shares of its Class C common stock only to U.S. persons as defined under Rule 903 promulgated under the Securities Act, and began selling shares of its Class S common stock as a result of the commencement of the Class S Offering (as defined below) to non-U.S. Persons.
In August 2017, the Company began offering up to 33,333,333 shares (adjusted for the 1:3 reverse stock split) of Class S common stock exclusively to non-U.S. Persons as defined under Rule 903 promulgated under the Securities Act, pursuant to an exemption from the registration requirements of the Securities Act and in accordance with Regulation S of the Securities Act (the “Class S Offering” and, together with the Registered Offerings (as defined below), the “Offerings”). The Class S common stock has similar features and rights as the Class C common stock, including with respect to voting and liquidation, except that the Class S common stock offered in the Class S Offering may be sold only to non-U.S. Persons and may be sold through brokers or other persons who may be paid upfront and deferred selling commissions and fees.
On December 23, 2019, the Company commenced a follow-on offering pursuant to a new registration statement on Form S-11 (File No. 333-231724) (the “Follow-on Offering” and, together with the Initial Registered Offering and the 2021 DRP Offering (as defined below), the “Registered Offerings”), which registered the offer and sale of up to $800,000,000 in share value of Class C common stock, including $725,000,000 in share value of Class C common stock pursuant to the primary portion of the Follow-on Offering and $75,000,000 in share value of Class C common stock pursuant to the Company's DRP. The Company ceased offering shares pursuant to the Initial Registered Offering concurrently with the commencement of the Follow-on Offering.
In response to the significant economic impacts of the COVID-19 pandemic, effective as of the close of business on May 7, 2020, the Company's board of directors temporarily suspended the primary portion of the Company's Follow-on Offering and Class S Offering until such time as the board of directors approved and established an updated estimated net asset value (“NAV”) per share of the Company’s common stock and determined to resume such primary offerings. On May 20, 2020, the Company's board of directors approved and established an updated estimated NAV per share of the Company's common stock of $21.01 (unaudited and adjusted for the 1:3 reverse stock split) to reflect the valuation of the Company's real estate assets, debt and other assets and liabilities as of April 30, 2020.
Commencing on June 1, 2020, the Company's board of directors resumed the primary portions of the Follow-on Offering and the Class S Offering. The purchase price per share in the primary portion of the Follow-on Offering was decreased from $30.81 (unaudited and adjusted for the 1:3 reverse stock split) to $21.01 (unaudited and adjusted for the 1:3 reverse stock split), and the purchase price per share in the primary portion of the Class S Offering was decreased to $21.01 (unaudited and adjusted for the 1:3 reverse stock split) plus the amount of any applicable upfront commissions and fees. The NAV per share used for purposes of future repurchases pursuant to the share repurchase programs was also decreased from $30.81 (unaudited and adjusted for the 1:3 reverse stock split) to $21.01 (unaudited and adjusted for the 1:3 reverse stock split).
On January 22, 2021, with the authorization of the board of directors, the Company amended and restated its DRP with respect to the Company's shares of Class C common stock in order to reflect its corporate name change and to remove the ability of the Company's stockholders to elect to reinvest only a portion of their cash distributions in shares through the DRP so that investors who elect to participate in the DRP must reinvest all cash distributions in shares. In addition, the amended and restated DRP provides for determinations of the NAV per share by the board of directors more frequently than annually. The amended and restated DRP was effective with respect to distributions that were paid in February 2021.
On January 22, 2021, the Company filed a registration statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000 in share value of Class C common stock to be issued pursuant to the amended and restated DRP (the “2021 DRP Offering” and, collectively with the Initial DRP Offering, the “Registered DRP Offering”). The Company commenced offering shares of Class C common stock pursuant to the 2021 DRP Offering upon termination of the Follow-on Offering.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Effective January 27, 2021, the board of directors terminated the Company’s Follow-on Offering. In connection with the termination of the Follow-on Offering, the Company stopped accepting investor subscriptions on January 22, 2021. As of January 27, 2021, the Company had $600,547,672 in share value of unsold shares in the Follow-on Offering, which were deregistered with the SEC. On February 1, 2021, the Company commenced a private offering of Class C common stock under Regulation D promulgated under the Securities Act and is accepting investor subscriptions from accredited investors.
On February 1, 2021, with the authorization of the board of directors, the Company amended and restated its Class C common stock share repurchase program (the “Class C SRP”) in order to (i) revise the minimum holding period before a stockholder may participate in the Class C SRP from three months to six months, (ii) revise the limitations on the share repurchase price so that shares held for less than two years will be repurchased at 98% of the most recently published NAV per share and shares held for at least two years will be repurchased at 100% of the most recently published NAV per share (as opposed to a repurchase price of 97% of the most recently published NAV per share for shares held less than one year, 98% of the most recently published NAV per share for shares held for more than one year but less than two years, 99% of the most recently published NAV per share for shares held for more than two years but less than three years, and 100% of the most recently published NAV per share for shares held for at least three years), (iii) increase the minimum share value (based on the most recently published NAV per share) at which the Company has the right to repurchase all of a stockholder’s shares, if as a result of a repurchase request a stockholder holds less than the minimum share value, from $500 to $1,000, and (iv) include language that provides that the Class C SRP will automatically terminate if the Company’s shares of common stock are listed on any national securities exchange. The minimum holding period before a stockholder may participate in the Class C SRP for shares purchased prior to February 1, 2021 will remain at three months.
With the authorization of the board of directors, the Company also amended and restated its Class S common stock share repurchase program (“Class S SRP”) on February 1, 2021 in order to (i) allow the Company to waive the minimum one year holding period before a holder of Class S shares may participate in the Class S SRP in the event of extraordinary circumstances which would place undue hardship on a stockholder, (ii) increase the minimum Class S share value (based on the most recently published NAV per Class S share) at which the Company has the right to repurchase all of a stockholder’s shares, if as a result of a repurchase request a stockholder holds less than the minimum Class S share value, from $500 to $1,000, and (iii) include language that provides that the Class S SRP will automatically terminate if the Company’s shares of common stock are listed on any national securities exchange.
On January 27, 2021, the Company’s board of directors approved and established an updated estimated NAV per share of the Company’s Class C common stock and Class S common stock of $23.03 (unaudited and adjusted for the 1:3 reverse stock split which was effective on February 1, 2021) as of December 31, 2020. On May 5, 2021, the Company’s board of directors approved and established an updated estimated NAV per share of the Company’s Class C common stock and Class S common stock of $24.61 (unaudited) as of March 31, 2021. Effective May 5, 2021, the purchase price per share of the Company’s Class C common stock was increased from $23.03 (unaudited and adjusted for the 1:3 reverse stock split) to $24.61 (unaudited). Also, commencing May 5, 2021, the purchase price per share in the primary portion of the Class S Offering was increased to $24.61 (unaudited) plus the amount of any applicable upfront commissions and fees, and the NAV per share used for purposes of the share repurchase programs was increased to $24.61 (unaudited).
Additional information on the determination of the Company's most recent estimated NAV per share, including the process used to determine its estimated NAV per share, can be found in the Company's Current Report on Form 8-K filed with the SEC on May 5, 2021. Beginning with distributions scheduled to be paid to stockholders on May 25, 2021, the purchase price per share of the Company’s common stock in the Class C and the Class S DRPs was increased from $23.03 (unaudited and adjusted for the 1:3 reverse stock split) to $24.61 (unaudited).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements and the rules and regulations of the SEC. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Such unaudited condensed consolidated financial statements and accompanying notes are the representations of the Company’s management, which is responsible for their integrity and objectivity. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2021.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which are normal and recurring, necessary to fairly state the Company's financial position, results of operations and cash flows. All significant intercompany balances and transactions are eliminated in consolidation. The unaudited condensed consolidated balance sheet as of December 31, 2020 included herein was derived from the audited financial statements.
Reverse Stock Split
On February 1, 2021, the Company effected a 1:3 reverse stock split of its Class C common stock and Class S common stock and, following the implementation of the reverse stock split, decreased the par value of each share of the Company’s Class C common stock and Class S common stock from $0.003 per share to $0.001 per share. The Company has reflected the effect of the reverse stock split in the accompanying unaudited condensed consolidated financial statements and related notes as if it had occurred at the beginning of the earliest period presented.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements and the accompanying notes thereto in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience, including considerations related to the COVID-19 pandemic (see Notes 3 and 5 for the prior year's impairment charges related primarily to COVID-19). Actual results may differ from those estimates.
Noncontrolling Interests in the Operating Partnership
The Company accounts for the noncontrolling interests in its Operating Partnership in accordance with the related accounting guidance. Due to the Company's control of the Operating Partnership through its general partnership interest therein and the limited rights of the limited partners, the Operating Partnership, including its wholly-owned subsidiaries, are consolidated with the Company, and the limited partner interests not held by the Company are reflected as noncontrolling interests in the accompanying unaudited condensed consolidated balance sheets and statements of equity. The noncontrolling interests were issued on December 31, 2019 and represent non-voting, non-dividend accruing interests with no allocation of profits or losses. As described in Note 11, the interests were not able to be converted or exchanged prior to (i) December 31, 2020, the one-year anniversary of the closing of the Self-Management Transaction (in the case of the Class M OP Units), or (ii) the expiration of the Lockup Period (as defined in Note 11) (in the case of the Class P OP Units).
Business Combinations
The Company accounts for business combinations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”) and applicable Accounting Standards Updates (each, an “ASU”), whereby the total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to any non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired in a business combination.
ASC 805 defines a business as an integrated set of activities and assets (collectively, a “set”) that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. To be considered a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. ASC 805 provides a practical screen to determine when a set would not be considered a business. If the screen is not met and further assessment determines that the set is not a business, then the set is an asset acquisition. The primary difference between a business combination and an asset acquisition is that an asset acquisition requires cost accumulation and allocation at relative fair value. Acquisition costs are capitalized for an asset acquisition and expensed for a business combination.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Revenue Recognition
The Company adopted FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), effective January 1, 2018. The Company’s revenue impacted by ASU No. 2014-09 included revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at the Company’s properties. Such revenues are recognized when the services are provided and the performance obligations are satisfied. Tenant reimbursements, consisting of amounts due from tenants for common area maintenance, property taxes and other recoverable costs, are recognized in rental income subsequent to the adoption of Topic 842, as discussed below, in the period the recoverable costs are incurred. Tenant reimbursements, for which the Company pays the associated costs directly to third-party vendors and is reimbursed by the tenants, are recognized and recorded on a gross basis.
The Company adopted FASB ASU No. 2016-02, Leases (Topic 842), and the related FASB ASU Nos. 2018-10, 2018-11, 2018-20 and 2019-01 effective January 1, 2019, which provide practical expedients, technical corrections and improvements for certain aspects of ASU 2016-02, on a modified retrospective basis (collectively, “Topic 842”). Topic 842 establishes a single comprehensive model for entities to use in accounting for leases. Topic 842 applies to all entities that enter into leases. Lessees are required to report assets and liabilities that arise from leases. Lessor accounting has largely remained unchanged; however, certain refinements were made to conform with revenue recognition guidance, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Topic 842 impacts the Company's accounting for leases primarily as a lessor. However, Topic 842 also impacts the Company's accounting as a lessee but is considered not material.
As a lessor, the Company's leases with tenants generally provide for the lease of real estate properties, as well as common area maintenance, property taxes and other recoverable costs. To reflect recognition as one lease component, rental income and tenant reimbursements and other lease related property income that meet the requirements of the practical expedient provided by ASU No. 2018-11 have been combined under rental income in the Company's unaudited condensed consolidated statements of operations. For the three months ended March 31, 2021 and 2020, tenant reimbursements included in rental income amounted to $1,691,387 and $2,360,919, respectively.
The Company recognizes rental income from tenants under operating leases on a straight-line basis over the noncancelable term of the lease when collectability of such amounts is reasonably assured. Recognition of rental income on a straight-line basis includes the effects of rental abatements, lease incentives and fixed and determinable increases in lease payments over the lease term. If the lease provides for tenant improvements, management of the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by the Company.
When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that the tenant can take in the form of cash or a credit against its rent) that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
whether the lease stipulates how a tenant improvement allowance may be spent;
whether the amount of a tenant improvement allowance is in excess of market rates;
whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
whether the tenant improvements are unique to the tenant or general-purpose in nature; and
whether the tenant improvements are expected to have any residual value at the end of the lease.
Tenant reimbursements of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred and presented gross if the Company is the primary obligor and, with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk. In instances where the operating lease agreement has an early termination option, the termination penalty is based on a predetermined termination fee or based on the unamortized tenant improvements and leasing commissions.
The Company evaluates the collectability of rents and other receivables on a regular basis based on factors including, among others, payment history, credit rating, the asset type, and current economic conditions. If the Company’s evaluation of these factors indicates it may not recover the full value of the receivable, it provides an allowance against the portion of the receivable that it estimates may not be recovered. This analysis requires the Company to determine whether there are factors indicating a receivable may not be fully collectible and to estimate the amount of the receivable that may not be collected.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Gain or Loss on Sale of Real Estate Property
The Company recognizes gain or loss on sale of real estate property when the Company has executed a contract for sale of the property, transferred controlling financial interest in the property to the buyer and determined that it is probable that the Company will collect substantially all of the consideration for the property. The Company's real estate property sale transactions for the three months ended March 31, 2021 met these criteria at closing. Operating results of the property that is sold remains in continuing operations, and any associated gain or loss from the disposition is included in gain or loss on sale of real estate investments in the Company’s accompanying unaudited condensed consolidated statements of operations.
Bad Debts and Allowances for Tenant and Deferred Rent Receivables
The Company's determination of the adequacy of its allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. In addition, for tenant and deferred rent receivables deemed probable of collection, the Company also may record an allowance under other authoritative GAAP depending upon the Company's evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income in the Company's unaudited condensed consolidated statements of operations.
With respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt allowance for the tenant’s receivable balance and generally will not recognize subsequent rental income until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.
Leasing Costs
Internal leasing costs and third-party legal fees and leasing commissions are charged to expense as incurred. These expenses are included in legal leasing costs under property expenses in the Company's unaudited condensed consolidated statements of operations.
Impairment of Investment in Real Estate Properties
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of and eventual disposition of the property. If, based on the analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company records an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset. As more fully discussed in Note 3, the Company recorded impairment charges of $9,157,068 related to four of its real estate properties during the three months ended March 31, 2020. The Company did not incur any impairment charges for its real estate properties during the three months ended March 31, 2021.
Other Comprehensive Loss
For all periods presented, other comprehensive loss is the same as net loss.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Per Share Data
The Company reports a dual presentation of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS excludes dilution and is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted EPS uses the treasury stock method or the if-converted method, where applicable, to compute for the potential dilution that would occur if dilutive securities or commitments to issue common stock were exercised. Diluted EPS is the same as Basic EPS for the three months ended March 31, 2021 and 2020 as the Company had a net loss for all reported periods. As of March 31, 2021, there were 657,949.5 Class M OP Units, 56,029 Class P OP Units and 360,000 Class R OP Units (adjusted for the 1:3 reverse stock split) that are convertible to Class C OP Units at a conversion ratio of 1.6667 Class C OP Units for each one Class M OP Unit or Class P OP Unit, and at a conversion ratio of 1:1 of Class C OP Unit for each Class R OP Unit, as applicable, after a specified period of time (see Note 11). The holders of Class C OP Units may exchange such Class C OP Units for shares of the Company's Class C common stock on a 1-for-1 basis or, at the Company’s sole and absolute discretion, for cash. The Class M OP Units, Class P OP Units and Class R OP Units, and the shares of Class C common stock into which they may ultimately be converted, were excluded from the computation of Diluted EPS because their effect would not be dilutive. There were no other outstanding securities or commitments to issue common stock that would have a dilutive effect for the periods then ended.
The Company has presented the basic and diluted net loss per share amounts on the accompanying unaudited condensed consolidated statements of operations for Class C and Class S share classes as a combined common share class. Application of the two-class method for allocating net loss in accordance with the provisions of ASC 260, Earnings per Share, would have resulted in a net loss of $(0.12) and $(6.14) per share for Class C shares for the three months ended March 31, 2021 and 2020, respectively, and a net loss of $(0.12) and $(6.14) per share for Class S shares for the three months ended March 31, 2021 and 2020, respectively. Any difference in net loss per share if allocated under this method primarily reflects the lower effective distributions per share for Class S shareholders as a result of the payment of the deferred commission to the Class S distributor of these shares, and also reflects the impact of the timing of the declaration of the distributions relative to the time the shares were outstanding.
Fair Value Disclosures
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an existing price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy, which is based on three levels of inputs, the first two of which are considered observable and the last unobservable, that may be used to measure fair value, is as follows:
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instrument for which it is practicable to estimate the fair value:
Cash and cash equivalents, restricted cash, deposit for investment in special purpose acquisition company, receivable from sale of real estate property, tenant receivables, prepaid expenses and other assets and accounts payable, accrued and other liabilities: These balances approximate their fair values due to the short maturities of these items.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Derivative Instruments: The Company’s derivative instruments are presented at fair value in the accompanying unaudited condensed consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.
Goodwill and Intangible Assets: The fair value measurements of goodwill and intangible assets are considered Level 3 nonrecurring fair value measurements. For goodwill, fair value measurement involves the determination of fair value of a reporting unit. The Company uses a Monte Carlo simulation model to estimate future performance, generating the fair value of the reporting unit's business. For intangible assets, fair value measurements include assumptions with inherent uncertainty, including projected offerings volumes and related projected revenues and long-term growth rates, among others. The carrying value of intangible assets is at risk of impairment if future projected offerings proceeds, revenues or long-term growth rates are lower than those currently projected.
Credit facilities and economic relief note payable: The fair values of the Company’s credit facilities and economic relief note payable approximate the carrying values of the credit facility and economic relief note payable as their interest rates and other terms are comparable to those available in the market place for a similar credit facility and short-term note, respectively.
Mortgage notes payable: The fair value of the Company’s mortgage notes payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.
Restricted Cash
Restricted cash is comprised of funds which are restricted for use as required by certain lenders in conjunction with an acquisition or debt financing or modification and for on-site and tenant improvements or property taxes. Restricted cash as of March 31, 2021 and December 31, 2020 amounted to $170,136 and $129,118, respectively.
Pursuant to lease agreements, the Company has obligations to pay $60,598 for site and tenant improvements to be incurred by tenants as of both March 31, 2021 and December 31, 2020, including a 72.7% share of tenant improvements for the Santa Clara property at both balance sheet dates. At both March 31, 2021 and December 31, 2020, the Company's restricted cash held to fund other improvements totaled $92,684. As of March 31, 2021 and December 31, 2020, the Company also held restricted cash of $77,452 and $36,434, respectively, for lender reserves.
Deposit for Investment in Special Purpose Acquisition Company
Deposit for investment in special purpose acquisition company held in escrow represents cash placed in escrow for the Company's initial investment in a SPAC. The $4,500,000 will be released from escrow upon (i) completion of the IPO and used to purchase 9,000,000 warrants to purchase additional shares of MACS or (ii) the Company’s decision not to proceed with the IPO. Each warrant has the right to purchase 0.5 of a share of MACS common stock and can be exercised at a strike price of $11.50 per share. However, there has been significant disruption in the IPO market for SPACs during the second quarter of 2021 and there can be no assurance that MACS can complete an IPO. In the event that MACS does not complete an IPO, the $4,500,000 deposit will be released from escrow and returned to MVF.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Real Estate Investments Held for Sale
The Company generally considers a real estate investment to be “held for sale” when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value, (iv) the sale of the property within one year is considered probable and (v) significant changes to the plan to sell are not expected. Real estate that is held for sale and its related assets are classified as “real estate investment held for sale, net” and “assets related to real estate investment held for sale,” respectively, in the accompanying unaudited condensed consolidated balance sheets. Mortgage notes payable and other liabilities related to real estate investments held for sale are classified as “mortgage notes payable related to real estate investments held for sale, net” and “liabilities related to real estate investments held for sale,” respectively, in the accompanying unaudited condensed consolidated balance sheets. Real estate investments classified as held for sale are no longer depreciated and are reported at the lower of their carrying value or their estimated fair value less estimated costs to sell. Operating results of properties that were classified as held for sale in the ordinary course of business are included in continuing operations in the Company’s accompanying unaudited condensed consolidated statements of operations.
Goodwill and Other Intangible Assets
The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. The Company evaluates goodwill and other intangible assets for possible impairment in accordance with ASC 350, Intangibles–Goodwill and Other, on an annual basis, or more frequently when events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit has declined below its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized.
In assessing goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of such reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary.
However, if the Company concludes otherwise, or if it elects to bypass the qualitative analysis, then it is required to perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit.
Intangible assets consist of purchased customer-related intangible assets, marketing-related intangible assets, developed or acquired technology and other intangible assets. Intangible assets are amortized over their estimated useful lives using the straight-line method ranging from three years to five years. No significant residual value is estimated for intangible assets. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. The Company evaluates long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.
Restricted Stock and Restricted Stock Unit Awards
The fair values of the Operating Partnership's units or restricted stock unit awards issued or granted by the Company are based on an estimated value per share of the Company’s common stock on the date of issuance or grant, adjusted for an illiquidity discount due to the illiquid nature of the underlying equity. Operating Partnership units issued as purchase consideration in connection with the Self-Management Transaction discussed in Note 11 are recorded in equity under noncontrolling interests in the Operating Partnership in the Company's unaudited condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 and unaudited condensed consolidated statements of equity for the three months ended March 31, 2021 and 2020. For units granted to employees of the Company that are not included in the purchase consideration, the fair value of the award is amortized using the straight-line method over the requisite service period of the award, which is generally the vesting period. We have elected to record forfeitures as they occur.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Company determines the accounting classification of equity instruments (e.g. restricted stock units) that are issued as purchase consideration or part of the purchase consideration in a business combination, as either liability or equity, by first assessing whether the equity instruments meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”), and then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“ASC 815-40”). Under ASC 480-10, equity instruments are classified as liabilities if the equity instruments are mandatorily redeemable, obligate the issuer to settle the equity instruments or the underlying shares by paying cash or other assets, or must or may require an unconditional obligation that must be settled by issuing a variable number of shares.
If equity instruments do not meet liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the equity instruments do not require liability classification under ASC 815-40, in order to conclude equity classification, the Company assesses whether the equity instruments are indexed to its common stock and whether the equity instruments are classified as equity under ASC 815-40 or other applicable GAAP guidance. After all relevant assessments are made, the Company concludes whether the equity instruments are classified as liability or equity. Liability classified equity instruments are required to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded in the statements of operations as a gain or loss. Equity classified equity instruments are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date.
Reclassifications
Certain prior year balance sheet accounts have been reclassified to conform with the current year presentation. The reclassification did not affect the balances in the prior year statement of operations.
Recent Accounting Pronouncements
New Accounting Standards Recently Issued and Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 eases the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discounted because of reference rate reform.
Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate, and the modification would be considered “minor” so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company is currently evaluating the effect that ASU 2020-04 will have on the Company’s consolidated financial statements.
NOTE 3. REAL ESTATE INVESTMENTS, NET
As of March 31, 2021, the Company’s real estate investment portfolio consisted of 38 operating properties located in 14 states comprised of: 12 retail properties, including one property held for sale, 14 office properties and 12 industrial properties, including a 72.7% undivided TIC Interest in an industrial property in Santa Clara, California, not reflected in the table below, but discussed in Note 4.
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MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following table provides summary information regarding the Company’s operating properties as of March 31, 2021:
PropertyLocationAcquisition DateProperty TypeLand, Buildings and ImprovementsTenant Origination and Absorption CostsAccumulated Depreciation and AmortizationTotal Investment in Real Estate Property, Net
Accredo HealthOrlando, FL6/15/2016Office$9,855,847 $1,269,350 $(2,338,015)$8,787,182 
Dollar GeneralLitchfield, ME11/4/2016Retail1,281,812 116,302 (176,067)1,222,047 
Dollar GeneralWilton, ME11/4/2016Retail1,543,776 140,653 (225,327)1,459,102 
Dollar GeneralThompsontown, PA11/4/2016Retail1,199,860 106,730 (169,168)1,137,422 
Dollar GeneralMt. Gilead, OH11/4/2016Retail1,174,188 111,847 (162,194)1,123,841 
Dollar GeneralLakeside, OH11/4/2016Retail1,112,872 100,857 (166,461)1,047,268 
Dollar GeneralCastalia, OH11/4/2016Retail1,102,086 86,408 (161,734)1,026,760 
Dana (1)Cedar Park, TX12/27/2016Industrial6,802,876 531,439 (1,909,462)5,424,853 
Northrop GrummanMelbourne, FL3/7/2017Office12,382,991 1,598,274 (3,164,742)10,816,523 
exp US ServicesMaitland, FL3/27/2017Office6,056,668 388,248 (889,269)5,555,647 
WyndhamSummerlin, NV6/22/2017Office10,406,483 669,232 (1,258,845)9,816,870 
Williams SonomaSummerlin, NV6/22/2017Office8,079,612 550,486 (1,136,343)7,493,755 
OmnicareRichmond, VA7/20/2017Industrial7,262,747 281,442 (893,624)6,650,565 
EMCORCincinnati, OH8/29/2017Office5,960,610 463,488 (649,013)5,775,085 
HusqvarnaCharlotte, NC11/30/2017Industrial11,840,200 1,013,948 (1,202,924)11,651,224 
AvAirChandler, AZ12/28/2017Industrial27,357,900  (2,284,653)25,073,247 
3MDeKalb, IL3/29/2018Industrial14,762,819 2,356,361 (3,787,923)13,331,257 
CumminsNashville, TN4/4/2018Office14,465,491 1,536,998 (2,350,578)13,651,911 
Northrop Grumman ParcelMelbourne, FL6/21/2018Land329,410   329,410 
Texas HealthDallas, TX9/13/2018Office6,976,703 713,221 (755,669)6,934,255 
Bon SecoursRichmond, VA10/31/2018Office10,388,751 800,356 (1,091,539)10,097,568 
CostcoIssaquah, WA12/20/2018Office27,330,797 2,765,136 (2,979,998)27,115,935 
Taylor Fresh FoodsYuma, AZ10/24/2019Industrial34,194,369 2,894,017 (1,927,440)35,160,946 
LevinsSacramento, CA12/31/2019Industrial4,429,390 221,927 (275,761)4,375,556 
Dollar GeneralBakersfield, CA12/31/2019Retail4,899,714 261,630 (183,915)4,977,429 
PMI PreclinicalSan Carlos, CA12/31/2019Industrial9,672,174 408,225 (255,401)9,824,998 
GSA (MSHA)Vacaville, CA12/31/2019Office3,112,076 243,307 (173,143)3,182,240 
PreK EducationSan Antonio, TX12/31/2019Retail12,447,287 447,927 (749,285)12,145,929 
Dollar TreeMorrow, GA12/31/2019Retail