UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
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: 000-55623
RICH UNCLES REAL ESTATE INVESTMENT TRUST I
(Exact name of registrant as specified in its charter)
California | 37-6511147 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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:)
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 x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ¨ No x
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.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company x |
(Do not check if a 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 x
As of August 10, 2018, there were 8,362,891 shares of common stock outstanding.
RICH UNCLES REAL ESTATE INVESTMENT TRUST I
FORM 10-Q
JUNE 30, 2018
INDEX
2 |
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 U.S. 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:
• | 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. | |
• | We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all. | |
• | 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. | |
• | Our properties, intangible assets and other assets may be subject to impairment charges. |
• | We could be subject to unexpected costs or unexpected liabilities that may arise from potential dispositions of properties and may be unable to dispose such 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, which may affect our ability to pay dividends, and expose us to interest rate fluctuation risk and the risk of default under our debt obligations. | |
• | We may be affected by risk related to the incurrence of additional secured or unsecured debt. |
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 (f/k/a Rich Uncles, LLC), may not be an indication of our future results.
• | We may not be able to attain or maintain profitability. | |
• | Cash for dividend distributions to investors will be from net rental income (including sales of properties) or waiver or deferral of reimbursements or fees paid to BrixInvest, LLC, our Advisor and Sponsor. | |
• | We may not generate cash flows sufficient to pay our dividends to shareholders 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 REIT for U.S. federal income tax purposes. | |
• | Our business, financial condition and results of operations may be adversely affected by an ongoing investigation by the SEC. | |
• | We are dependent upon our Advisor which has the right to terminate the advisory agreement upon 60 days’ written notice without cause or penalty. | |
• | Our advisor, sponsor and their affiliates, including all of our executive officers and our affiliated trust managers 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 shareholders. | |
• | An increasing portion of our business operations are conducted over the Internet, putting us at risk from cybersecurity attacks, including attempts to gain unauthorized access to our confidential data, viruses, ransomware, and other electronic security breaches. Such cyber-attacks can range from individual attempts to gain unauthorized access to our information technology systems to more sophisticated security threats that could impact day-to-day operations. While we employ a number of measures to prevent, detect and mitigate these threats, there is no guarantee such efforts will be successful at preventing a cyber-attack. Cybersecurity incidents could compromise confidential information of our investors, tenants, employees, and vendors and cause system failures and disruptions 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 Part II, Item 1A of this Quarterly Report on Form 10-Q and Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.
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.
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PART I – FINANCIAL INFORMATION
RICH UNCLES REAL ESTATE INVESTMENT TRUST I
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, 2018 | December 31, 2017 | |||||||
Assets | ||||||||
Real estate investments: | ||||||||
Land | $ | 29,691,680 | $ | 29,896,957 | ||||
Buildings and improvements | 97,617,118 | 97,857,500 | ||||||
Tenant origination and absorption costs | 12,706,234 | 12,699,134 | ||||||
Total investments in real estate property | 140,015,032 | 140,453,591 | ||||||
Accumulated depreciation and amortization | (12,144,258 | ) | (9,286,921 | ) | ||||
Total investments in real estate property, net | 127,870,774 | 131,166,670 | ||||||
Cash and cash equivalents | 4,144,142 | 5,565,667 | ||||||
Restricted cash | 462,140 | 462,140 | ||||||
Tenant receivables, net | 1,626,029 | 1,494,938 | ||||||
Above-market lease intangibles, net | 799,522 | 817,182 | ||||||
Interest rate swap derivatives | 619,823 | 321,450 | ||||||
Other assets | 38,112 | 25,207 | ||||||
Total assets | $ | 135,560,542 | $ | 139,853,254 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Mortgage note payable, net | $ | 61,839,052 | $ | 62,277,387 | ||||
Accounts payable, accrued and other liabilities | 1,158,268 | 1,254,632 | ||||||
Sales deposit liability (Note 5) | 1,000,000 | 1,000,000 | ||||||
Share repurchase payable | 1,406,413 | 612,099 | ||||||
Below-market lease intangibles, net | 3,535,926 | 3,966,008 | ||||||
Due to affiliates (Note 9) | 79,755 | 51,518 | ||||||
Interest rate swap derivatives | — | 18,998 | ||||||
Total liabilities | 69,019,414 | 69,180,642 | ||||||
Commitments and contingencies (Note 10) | ||||||||
Redeemable common stock | 53,654 | 586,242 | ||||||
Equity | ||||||||
Common stock, par value $0.01 per share, 10,000,000 shares authorized, 8,395,239 and 8,358,254 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively | 83,952 | 83,583 | ||||||
Additional paid-in-capital | 82,519,638 | 82,350,273 | ||||||
Cumulative distributions and net losses | (16,116,116 | ) | (12,347,486 | ) | ||||
Total shareholders’ equity | 66,487,474 | 70,086,370 | ||||||
Total liabilities and shareholders’ equity | $ | 135,560,542 | $ | 139,853,254 |
See accompanying notes to condensed consolidated financial statements.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | 2,738,965 | $ | 2,747,820 | $ | 5,481,525 | $ | 5,117,947 | ||||||||
Tenant reimbursements | 626,198 | 760,131 | 1,114,856 | 1,116,271 | ||||||||||||
Total revenue | 3,365,163 | 3,507,951 | 6,596,381 | 6,234,218 | ||||||||||||
Expenses: | ||||||||||||||||
Fees to affiliates (Note 9) | 299,945 | 193,391 | 585,480 | 355,592 | ||||||||||||
General and administrative | 266,896 | 238,118 | 530,260 | 387,783 | ||||||||||||
Depreciation and amortization | 1,409,093 | 1,452,354 | 2,857,337 | 2,670,428 | ||||||||||||
Interest expense | 631,838 | 761,743 | 1,116,711 | 1,222,944 | ||||||||||||
Property expenses | 640,042 | 673,445 | 1,271,180 | 1,014,404 | ||||||||||||
Impairment of real estate investment property (Note 4) | 862,190 | — | 862,190 | — | ||||||||||||
Total expenses | 4,110,004 | 3,319,051 | 7,223,158 | 5,651,151 | ||||||||||||
Other income: | ||||||||||||||||
Interest income | — | 557 | — | 838 | ||||||||||||
Gain on sale of real estate investment property, net (Note 6) |
— | 747,957 | — | 747,957 | ||||||||||||
Total other income | — | 748,514 | — | 748,795 | ||||||||||||
Net (loss) income | $ | (744,841 | ) | $ | 937,414 | $ | (626,777 | ) | $ | 1,331,862 | ||||||
Net (loss) income per share, basic and diluted | $ | (0.09 | ) | $ | 0.11 | $ | (0.07 | ) | $ | 0.16 | ||||||
Weighted-average number of common shares outstanding, basic and diluted |
8,412,457 | 8,381,613 | 8,410,840 | 8,348,625 | ||||||||||||
Dividends declared per common share | $ | 0.1875 | $ | 0.1875 | $ | 0.3750 | $ | 0.3750 |
See accompanying notes to condensed consolidated financial statements.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
Condensed Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 2018
(Unaudited)
Common Stock | Additional | Cumulative Distributions |
Total | |||||||||||||||||
Shares | Amounts | Paid -in- Capital |
and Net Losses |
Shareholders' Equity |
||||||||||||||||
Balance, December 31, 2017 | 8,358,254 | $ | 83,583 | $ | 82,350,273 | $ | (12,347,486 | ) | $ | 70,086,370 | ||||||||||
Issuance of common stock | 199,983 | 1,999 | 2,126,626 | — | 2,128,625 | |||||||||||||||
Common stock awarded for services | 8,100 | 81 | 86,265 | — | 86,346 | |||||||||||||||
Reclassifications to redeemable common stock | — | — | (261,726 | ) | — | (261,726 | ) | |||||||||||||
Repurchase of common stock | (171,098 | ) | (1,711 | ) | (1,781,800 | ) | — | (1,783,511 | ) | |||||||||||
Dividends declared | — | — | — | (3,141,853 | ) | (3,141,853 | ) | |||||||||||||
Net loss | — | — | — | (626,777 | ) | (626,777 | ) | |||||||||||||
Balance, June 30, 2018 | 8,395,239 | $ | 83,952 | $ | 82,519,638 | $ | (16,116,116 | ) | $ | 66,487,474 |
See accompanying notes to condensed consolidated financial statements.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended | ||||||||
June 30, 2018 | June 30, 2017 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net (loss) income | $ | (626,777 | ) | $ | 1,331,862 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,857,337 | 2,670,428 | ||||||
Provision for doubtful accounts | (58,328 | ) | — | |||||
Stock compensation expense | 86,346 | 60,000 | ||||||
Deferred rents | (183,044 | ) | (358,410 | ) | ||||
Amortization of deferred financing costs | 172,896 | 145,776 | ||||||
Amortization of above-market leases | 17,660 | 14,266 | ||||||
Amortization of below-market leases | (430,082 | ) | (438,007 | ) | ||||
Impairment of real estate investment property | 862,190 | — | ||||||
Gain on sale of real estate investment, net | — | (747,957 | ) | |||||
Unrealized gain on interest rate swap valuation | (317,371 | ) | (30,892 | ) | ||||
Expensed organization and offering costs | — | 65,241 | ||||||
Changes in operating assets and liabilities: | ||||||||
Tenant receivables | 110,281 | (290,083 | ) | |||||
Other assets | (12,905 | ) | (20,478 | ) | ||||
Accounts payable, accrued and other liabilities | (96,364 | ) | 510,205 | |||||
Due to affiliates | 92,002 | (364,396 | ) | |||||
Net cash provided by operating activities | 2,473,841 | 2,547,555 | ||||||
Cash Flows from Investing Activities: | ||||||||
Acquisitions of real estate investments | — | (30,664,507 | ) | |||||
Additions to existing real estate investments | (423,631 | ) | (367,771 | ) | ||||
Payment of acquisition fees and costs | — | (677,029 | ) | |||||
Payment of seller holdback | — | (250,000 | ) | |||||
Refundable purchase deposits | — | (250,000 | ) | |||||
Net proceeds from sale of real estate investment property | — | 3,245,286 | ||||||
Net cash used in investing activities | (423,631 | ) | (28,964,021 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from mortgage notes payable | — | 24,865,612 | ||||||
Repayments of mortgage notes payable | (611,231 | ) | (523,514 | ) | ||||
Refundable loan deposits | — | (85,380 | ) | |||||
Payments of deferred financing costs to third parties | — | (545,958 | ) | |||||
Payment of offering costs to affiliates | (63,765 | ) | (74,576 | ) | ||||
Repurchase of common stock | (1,783,511 | ) | (1,142,010 | ) | ||||
Dividends paid to common shareholders | (1,013,228 | ) | (933,053 | ) | ||||
Net cash (used in) provided by financing activities | (3,471,735 | ) | 21,561,121 | |||||
Net decrease in cash, cash equivalents and restricted cash | (1,421,525 | ) | (4,855,345 | ) | ||||
Cash, cash equivalents and restricted cash, beginning of period | 6,027,807 | 13,465,152 | ||||||
Cash, cash equivalents and restricted cash, end of period | $ | 4,606,282 | $ | 8,609,807 | ||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Cash paid for interest | $ | 1,277,569 | $ | 982,039 | ||||
Supplemental Schedule of Noncash Investing and Financing Activities: | ||||||||
Reclassifications to redeemable common stock | $ | 261,726 | $ | 312,612 | ||||
Increase in share redemptions payable | $ | 794,314 | $ | 885,908 | ||||
Reinvested dividends from common shareholders | $ | 2,128,625 | $ | 2,174,711 | ||||
Purchase deposits applied to acquisition of real estate | $ | — | $ | 1,500,000 | ||||
Security deposits assumed and prorations from acquisitions | $ | — | $ | 107,029 |
See accompanying notes to condensed consolidated financial statements.
7 |
RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BUSINESS AND ORGANIZATION
Rich Uncles Real Estate Investment Trust I (the “Company”) was formed on March 7, 2012. The Company is an unincorporated real estate investment trust (“REIT’) under the laws of the State of California. The Company elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with the year ended December 31, 2014.
The Company was formed primarily to invest in single-tenant income-producing corporate properties located in California and that are leased to creditworthy tenants under long-term net leases, however, the Company may invest up to 20% of the net proceeds of its offering in properties located outside of California. 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 directly and/or through special purpose wholly-owned limited liability companies or other subsidiaries. The Company holds a 70.14% interest in one property subject to a tenancy-in-common agreement.
The Company is externally managed by its advisor and sponsor, BrixInvest, LLC, formerly Rich Uncles LLC (the “Advisor” or the “Sponsor”) whose members include Harold Hofer and Ray Wirta, the Company’s Chief Executive Officer and President and Chairman of the Board of Trust Managers, respectively. The Advisor is a Delaware limited liability company registered to do business in California. The Company has entered into an agreement (the “Advisory Agreement”) with the Advisor.
The current term of the Advisory Agreement is scheduled to expire on May 10, 2019. The Advisory Agreement may be renewed for an unlimited number of successive one-year periods upon the mutual consent of the Company and the Advisor. The Advisory Agreement is terminable by a majority of the Company’s independent trust managers or the Advisor on 60 days’ written notice with or without cause. Upon termination of the Advisory Agreement, the Advisor may be entitled to a termination fee.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements are unaudited and 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 Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. 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, 2017 audited consolidated financial statements included in the Company’s Form 10-K filed with the SEC on April 2, 2018.
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual 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, 2017 condensed consolidated 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.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Use of Estimates
The preparation of the condensed consolidated financial statements and 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.
Fair Value Disclosures
The fair value for certain financial instruments is derived using a combination of market quotes, pricing models, and other 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, other assets, accounts payable, accrued expenses and other liabilities, sales deposit liability, share repurchase payable, and due to affiliates: These balances approximate their fair values due to the short nature of these items.
Derivative Instruments: The Company’s derivative instruments are presented at fair value in the accompanying 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 value 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.
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. 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 tenant improvements.
Other Comprehensive Income (Loss)
For all periods presented, other comprehensive income (loss) is the same as net income (loss).
Per Share Data
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock equals basic earnings per share of common stock as there were no potentially dilutive securities outstanding during the three and six months ended June 30, 2018 and 2017.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Impairment of Investment in Real Estate Property
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 will record an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset. As more fully discussed in Note 4, the Company recorded an impairment charge of $862,190 related to its Antioch, California property during the three months ended June 30, 2018. The impairment charge is less than 1% of the Company’s investments in real estate property.
Reclassifications
Certain prior year 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 income.
Recent Accounting Pronouncements
New Accounting Standards Issued and Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09, as amended, requires an entity to use a five-step model to determine when to recognize revenue from customer contracts in an effort to increase consistency and comparability throughout global capital markets and across industries. ASU 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry specific guidance throughout the Industry Topics of the Codification. This ASU requires an entity to recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and to provide certain additional disclosures. The Company has evaluated each of its revenue streams and their related accounting policies under ASU 2014-09. Rental income and tenant reimbursements earned from leasing its real estate properties are excluded from ASU 2014-09 and are assessed with the adoption of the ASU for leases as discussed below. The Company adopted ASU 2014-09 beginning January 1, 2018 and utilized the modified retrospective basis. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements. However, future real estate sales contracts will qualify as sales to noncustomers. The Company will assess and implement any future recognition of gain or loss on sales of properties according to the provisions of ASU 2014-09.
New Accounting Standards Recently Issued and Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The amendments in ASU 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. Under ASU 2016-02, the accounting applied by a lessor is largely unchanged from that applied under Topic 840 leases. The large majority of operating leases shall remain classified as operating leases and lessors should continue to recognize rental income for those leases on a straight-line basis over the lease term. ASU 2016-02 may impact the timing, recognition, presentation and disclosures related to the Company’s tenant reimbursements earned from leasing its real estate properties, although the Company does not expect a significant impact. ASU 2016-02 is effective for the Company on January 1, 2019. The Company expects to adopt the practical expedients available for implementation under ASU 2016-02. By adopting the practical expedients, the Company will not be required to reassess (i) whether an expired or existing contract meets the definition of a lease and (ii) the lease classification at the adoption date for expired or existing leases. ASU 2016-02 will also require new disclosures within the notes to its consolidated financial statements. The Company does not expect the adoption of ASU 2016-02 will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 3. CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS
Tenant Receivables, Net
Tenant receivables, net consisted of the following:
June 30, 2018 |
December 31, 2017 |
|||||||
Straight-line rent | $ | 1,265,125 | $ | 1,082,080 | ||||
Tenant rent | 61,026 | 301,588 | ||||||
Unbilled tenant reimbursements | 273,580 | 93,420 | ||||||
Other | 26,298 | 76,178 | ||||||
1,626,029 | 1,553,266 | |||||||
Less allowance for doubtful accounts | — | (58,328 | ) | |||||
Net | $ | 1,626,029 | $ | 1,494,938 |
Accounts Payable, Accrued and Other Liabilities
Accounts payable, accrued and other liabilities were comprised of the following:
June 30, 2018 |
December 31, 2017 |
|||||||
Accounts payable | $ | 30,179 | $ | 45,029 | ||||
Accrued expenses | 167,446 | 205,774 | ||||||
Accrued interest payable | 205,492 | 215,700 | ||||||
Unearned rent | 485,045 | 518,023 | ||||||
Tenant security deposits | 270,106 | 270,106 | ||||||
Total | $ | 1,158,268 | $ | 1,254,632 |
NOTE 4. REAL ESTATE INVESTMENTS
The following table provides summary information regarding the Company’s 21 real estate investments as of June 30, 2018:
Property | Location | Acquisition Date | Property Type | Land, Building and Improvements | Tenant
Origination and Absorption Costs | Accumulated Depreciation and Amortization | Total
Real Estate Investments, Net | |||||||||||||||||
Chase Bank and Great Clips (1) | Antioch, CA | 8/22/2014 | Retail | $ | 2,297,845 | $ | 668,201 | $ | (1,099,681 | ) | $ | 1,866,365 | ||||||||||||
Chevron Gas Station | San Jose, CA | 5/29/2015 | Retail | 2,775,000 | — | (121,133 | ) | 2,653,867 | ||||||||||||||||
Levins | Sacramento, CA | 8/19/2015 | Industrial | 3,750,000 | 7,100 | (612,361 | ) | 3,144,739 | ||||||||||||||||
Chevron Gas Station (see Note 5) | Roseville, CA | 9/30/2015 | Retail | 2,800,000 | — | (266,786 | ) | 2,533,214 | ||||||||||||||||
Island Pacific Supermarket | Elk Grove, CA | 10/1/2015 | Retail | 3,151,460 | 568,539 | (458,904 | ) | 3,261,095 | ||||||||||||||||
Dollar General | Bakersfield, CA | 11/11/2015 | Retail | 4,632,567 | 689,020 | (504,104 | ) | 4,817,483 | ||||||||||||||||
Rite Aid | Lake Elsinore, CA | 12/7/2015 | Retail | 6,663,446 | 968,285 | (606,375 | ) | 7,025,356 | ||||||||||||||||
PMI Preclinical | San Carlos, CA | 12/9/2015 | Industrial | 8,920,000 | — | (522,574 | ) | 8,397,426 | ||||||||||||||||
EcoThrift | Sacramento, CA | 3/17/2016 | Retail | 4,486,993 | 541,729 | (555,055 | ) | 4,473,667 | ||||||||||||||||
GSA (MSHA) | Vacaville, CA | 4/5/2016 | Office | 2,998,232 | 456,645 | (320,205 | ) | 3,134,672 | ||||||||||||||||
PreK San Antonio | San Antonio, TX | 4/8/2016 | Retail | 11,851,540 | 1,593,451 | (2,016,462 | ) | 11,428,529 | ||||||||||||||||
Dollar Tree | Morrow, GA | 4/22/2016 | Retail | 1,295,879 | 206,844 | (204,989 | ) | 1,297,734 | ||||||||||||||||
Dinan Cars | Morgan Hill, CA | 6/21/2016 | Industrial | 4,651,845 | 654,155 | (776,301 | ) | 4,529,699 | ||||||||||||||||
Solar Turbines | San Diego, CA | 7/21/2016 | Office | 5,738,978 | 389,718 | (552,679 | ) | 5,576,017 | ||||||||||||||||
Amec Foster | San Diego, CA | 7/21/2016 | Industrial | 7,010,799 | 485,533 | (372,716 | ) | 7,123,616 | ||||||||||||||||
ITW Rippey | El Dorado, CA | 8/18/2016 | Industrial | 6,178,204 | 407,316 | (445,749 | ) | 6,139,771 | ||||||||||||||||
Dollar General Big Spring | Big Spring, TX | 11/4/2016 | Retail | 1,161,647 | 112,958 | (49,358 | ) | 1,225,247 | ||||||||||||||||
Gap | Rocklin, CA | 12/1/2016 | Office | 7,220,909 | 677,192 | (492,633 | ) | 7,405,468 | ||||||||||||||||
L-3 Communications | San Diego, CA | 12/23/2016 | Industrial | 10,799,500 | 961,107 | (548,987 | ) | 11,211,620 | ||||||||||||||||
Sutter Health | Rancho Cordova, CA | 3/15/2017 | Office | 24,256,632 | 2,870,258 | (1,496,851 | ) | 25,630,039 | ||||||||||||||||
Walgreens | Santa Maria, CA | 6/29/2017 | Retail | 4,667,322 | 448,183 | (120,355 | ) | 4,995,150 | ||||||||||||||||
$ | 127,308,798 | $ | 12,706,234 | $ | (12,144,258 | ) | $ | 127,870,774 |
(1) | See following impairment charge discussion. |
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Impairment charge
During the second quarter of 2018, the Company learned that it was unlikely that a single tenant would be interested in leasing the 5,660 square feet of space at the Antioch, California property that was previously leased by Chase Bank. While the Company has had expressions of interest from potential tenants, they are all interested in smaller spaces at lower rental rates which would require the Company to invest in substantial tenant improvements to subdivide the space. The Company’s special purpose subsidiary that owns this property notified the lender that it is unwilling to make such additional improvements in the Antioch, California property unless it can restructure the existing mortgage which matures in February 2019, or payoff the mortgage at a discount, as discussed in Note 7. Having not reached any agreement with the lender when the August 2018 mortgage payment came due, the Company’s special purpose subsidiary notified the lender that it was defaulting on the mortgage loan which had a balance of $1,869,536 as of June 30, 2018, and that it intends to surrender the property to the lender unless an acceptable agreement can be reached. The book value of the Antioch property after the impairment charge is less than 2.0% of the Company’s total investments in real estate property.
Given the decline in expected rental rates for the Antioch, California property, the Company concluded that it was necessary to record an impairment charge of $862,190, which is less than 1% of the Company’s total investments in real estate property, based on the estimated fair value of the property. This impairment charge has been reflected in the Company’s results of operations for the three months ended June 30, 2018.
Current Year Acquisitions
There were no acquisitions or dispositions during the six months ended June 30, 2018.
Operating Leases
The Company’s real estate properties are primarily leased to tenants under triple-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 new 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.
As of June 30, 2018, the future minimum contractual rental income due under the Company’s non-cancelable operating leases, excluding any renewal periods, are as follows:
July through December 2018 | $ | 4,928,964 | ||
2019 | 10,006,676 | |||
2020 | 10,195,232 | |||
2021 | 9,218,085 | |||
2022 | 7,672,402 | |||
2023 | 5,881,911 | |||
Thereafter | 27,895,682 | |||
$ | 75,798,952 |
Revenue Concentration
The Company’s revenue concentration for the three and six months ended June 30, 2018 is as follows:
Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||||||||||
Property and Location | Revenue | Percentage of Total Revenue | Revenue | Percentage of Total Revenue | ||||||||||||
Sutter Health, Rancho Cordova, CA | $ | 717,183 | 21.3 | % | $ | 1,375,645 | 20.9 | % | ||||||||
ITW Rippey, El Dorado, CA | $ | 476,551 | 14.2 | % | $ | 991,410 | 15.0 | % | ||||||||
PreK San Antonio, San Antonio, TX | $ | 453,426 | 13.5 | % | $ | 856,101 | 13.0 | % |
Intangibles
As of June 30, 2018, the Company’s intangibles were as follows:
Tenant Origination and Absorption Costs | Above-Market Leases | Below-Market Leases | ||||||||||
Cost | $ | 12,706,234 | $ | 872,408 | $ | (5,349,909 | ) | |||||
Accumulated amortization | (3,635,150 | ) | (72,886 | ) | 1,813,983 | |||||||
Net amount | $ | 9,071,084 | $ | 799,522 | $ | (3,535,926 | ) |
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The intangible assets and liabilities acquired in connection with these acquisitions have a weighted average amortization period of approximately 9.4 years as of June 30, 2018. Amortization of intangible assets over the next five years is expected to be as follows:
Tenant Origination and Absorption Costs | Above-Market Leases | Below-Market Leases | ||||||||||
July through December 2018 | $ | 773,800 | $ | 17,660 | $ | (430,082 | ) | |||||
2019 | 1,547,600 | 35,320 | (860,165 | ) | ||||||||
2020 | 1,547,601 | 35,320 | (860,165 | ) | ||||||||
2021 | 1,300,482 | 35,320 | (667,541 | ) | ||||||||
2022 | 1,219,908 | 35,320 | (201,982 | ) | ||||||||
2023 | 914,283 | 35,320 | (113,651 | ) | ||||||||
Thereafter | 1,767,410 | 605,262 | (402,340 | ) | ||||||||
Total | $ | 9,071,084 | $ | 799,522 | $ | (3,535,926 | ) | |||||
Weighted average remaining amortization period | 8.2 years | 35.4 years | 5.1 years |
NOTE 5. SALE OF INTEREST IN REAL ESTATE INVESTMENT PROPERTY
In March 2016, the Company entered into a tenancy-in-common agreement related to and sold an undivided 29.86% interest in the Chevron Gas Station located in Roseville, CA for $1,000,000. The purchaser has the right to require the Company to repurchase their interest in the property during the period from March 1, 2018 through March 1, 2019. Therefore, the sale does not qualify for sales recognition under ASC 360 for financial reporting purposes and the transaction is accounted for as a financing transaction. The proceeds received from the purchaser were recorded as a sales deposit liability and the payments to the purchaser for their share of the property’s operations were recorded as interest expense. As of June 30, 2018 and December 31, 2017, sales deposit liability amounted to $1,000,000 at both balance sheet dates. The interest expense recorded as a result of this transaction was $13,751 for each of the three months ended June 30, 2018 and 2017 and $27,501 for each of the six months ended June 30, 2018 and 2017 (see Note 7). The sale will qualify as a sale for financial reporting if the right to require the Company to repurchase the 29.86% interest in the property expires without being exercised.
NOTE 6. SALE OF REAL ESTATE INVESTMENT PROPERTY
On April 27, 2017, the Company sold the Chevron Gas Station property in Rancho Cordova, CA to a third party for $3,434,000 which was paid in cash. The sale resulted in a gain of $747,957 for financial reporting purposes, which was net of the $103,020 disposition fee the Advisor earned in connection with this transaction (see Note 9). The Company entered into a 1031 exchange to defer the taxable gain of approximately $900,000 on the transaction. The 1031 exchange was completed when the Company purchased the Walgreens property on June 29, 2017.
Pending Sale of Property Terminated
On May 4, 2018, the Company entered into a purchase agreement with a potential buyer for the sale of the Company’s investment in the Chevron Gas Station located at 623 S Winchester Blvd. in San Jose, CA. Under this agreement, the Company had agreed to sell the Chevron Gas Station property for $3,800,000. The potential sale was subject to standard due diligence including the buyer’s satisfaction with title, physical condition of the property, compliance with state and local laws regarding energy conservation and safety, tenant financial condition, likelihood of continued occupancy of the property, right of first refusal waiver from Chevron Corporation, receipt of an estoppel certificate from tenant and final approval of our board of trust managers for the sale of the property. Subject to satisfactory completion of the buyer’s due diligence, the closing was scheduled to occur sometime in June 2018 or July 2018. In June 2018, the purchase agreement expired, and the potential sale was terminated. The property was removed from the market on June 25, 2018.
13 |
RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 7. DEBT
Mortgage Notes Payable
As of June 30, 2018, the Company’s mortgage notes payable consisted of the following:
Collateral | Principal Amount | Deferred Financing Costs | Net Balance | Contractual Interest Rate (1) | Effective Interest Rate (1) | Loan Maturity | ||||||||||||||
Chase Bank and Great Clips | $ | 1,869,536 | $ | (16,383 | ) | $ | 1,853,153 | 4.37% fixed | 4.37 | % | 2/5/2019 | |||||||||
Levins | 2,147,903 | (30,348 | ) | 2,117,555 | One-month LIBOR + 1.93% | 3.74 | % | 1/5/2021 | ||||||||||||
Island Pacific Supermarket | 1,953,160 | (32,046 | ) | 1,921,114 | One-month LIBOR + 1.93% | 3.74 | % | 1/5/2021 | ||||||||||||
Dollar General | 2,404,195 | (49,174 | ) | 2,355,021 | One-month LIBOR + 1.48% | 3.38 | % | 3/5/2021 | ||||||||||||
Rite Aid | 3,786,488 | (92,242 | ) | 3,694,246 | One-month LIBOR + 1.50% | 3.25 | % | 5/5/2021 | ||||||||||||
PMI Preclinical | 4,260,114 | (112,875 | ) | 4,147,239 | One-month LIBOR + 1.48% | 3.38 | % | 3/5/2021 | ||||||||||||
EcoThrift | 2,734,415 | (74,566 | ) | 2,659,849 | One-month LIBOR + 1.21% | 2.96 | % | 7/5/2021 | ||||||||||||
GSA (MSHA) | 1,860,436 | (60,100 | ) | 1,800,336 | One-month LIBOR + 1.25% | 3.00 | % | 8/5/2021 | ||||||||||||
PreK San Antonio | 5,286,633 | (141,832 | ) | 5,144,801 | 4.25% fixed | 4.25 | % | 12/1/2021 | ||||||||||||
Dinan Cars | 2,791,017 | (70,446 | ) | 2,720,571 | One-month LIBOR + 2.27% | 4.02 | % | 1/5/2022 | ||||||||||||
Solar Turbines, Amec Foster, ITW Rippey | 9,751,836 | (245,640 | ) | 9,506,196 | 3.35% fixed | 3.35 | % | 11/1/2026 | ||||||||||||
Dollar General Big Spring | 626,755 | (26,005 | ) | 600,750 | 4.69% fixed | 4.69 | % | 3/13/2022 | ||||||||||||
Gap | 3,748,808 | (87,779 | ) | 3,661,029 | 4.15% fixed | 4.15 | % | 8/1/2023 | ||||||||||||
L-3 Communications | 5,425,745 | (118,573 | ) | 5,307,172 | 4.50% fixed | 4.50 | % | 4/1/2022 | ||||||||||||
Sutter Health | 14,541,406 | (191,386 | ) | 14,350,020 | 4.50% fixed | 4.50 | % | 3/9/2024 | ||||||||||||
Total | $ | 63,188,447 | $ | (1,349,395 | ) | $ | 61,839,052 |
(1) | Contractual interest rate represents the interest rate in effect under the mortgage notes payable as of June 30, 2018. Effective interest rate is calculated as the actual interest rate in effect as of June 30, 2018 (consisting of the contractual interest rate and the effect of the interest rate swap, if applicable) (see Note 8 for information regarding the Company’s derivative instruments). |
The mortgage notes payable provide for monthly payments of principal and interest. The mortgage loans payable have balloon payments that are due at loan maturity. Pursuant to the terms of the mortgage notes payable agreements, the Company is subject to certain financial loan covenants. The Company is in compliance with all terms and conditions of the mortgage loan agreements, with the exception of the Chase Bank and Great Clips loan (Antioch, California) for which the Company did not make the August 5, 2018 mortgage payment.
As discussed in Note 4, during the three months ended June 30, 2018, the Company recorded an impairment charge of $862,190 related to its investment in the property in Antioch, California due to the expiration of the Chase Bank lease term at December 31, 2017 and subsequent difficulties encountered by the Company during the second quarter in its efforts to re-lease the property at acceptable rent rates and without incurring substantial potential tenant improvement costs. The book value of the Antioch property after the impairment charge is less than 2.0% of the Company’s total investments in real estate property.
On July 13, 2018, the Company’s special purpose subsidiary that owns the Antioch, California property initiated discussions with the mortgage lender regarding the potential restructuring of the mortgage loan on the property which had a balance of $1,869,536 as of June 30, 2018 and matures on February 5, 2019, or the potential to repay the loan at a discount. Given that potential rent rates for prospective tenants of the property are significantly less than the rent previously received from Chase Bank and the significant investment in tenant improvements that would be required to attract new tenants, the Company’s special purpose subsidiary informed the lender that it would need to reach an agreement to either pay the loan off at a significant discount or restructure the loan with terms that would be economically viable to the Company’s special purpose subsidiary under current market conditions.
Since no agreement had been reached on how to restructure this loan as of August 9, 2018, the Company’s special purpose subsidiary notified the lender that it had defaulted on the Antioch, California property loan and would not make the past due mortgage payment that was payable on August 5, 2018 or any future payments on the loan. The Company’s special purpose subsidiary further stated that the Antioch, California property will be surrendered to the lender unless an acceptable restructuring agreement is reached. The loan in default is non-recourse to the Company and, while eight of the Company’s other special purpose property owner subsidiaries have mortgage loans with this lender, none of those loans are cross-collateralized with the Antioch, California property loan and the Company’s special purpose subsidiary default on that loan does not cross-default any of these other loans.
14 |
RICH UNCLES REAL ESTATE INVESTMENT TRUST I
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, 2018 | December 31, 2017 | |||||||||||||||||||||
Face value | Carrying value | Fair value | Face Value | Carrying Value | Fair Value | |||||||||||||||||
$ | 63,188,447 | $ | 61,839,052 | $ | 60,962,368 | $ | 63,799,677 | $ | 62,277,387 | $ | 62,258,532 |
Disclosures of the fair values of financial instruments are based on pertinent information available to the Company as of June 30, 2018 and December 31, 2017 and require a significant amount of judgment. Low levels of transaction volume for certain financial instruments have made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different. The actual value could be materially different from the Company’s estimate of value.
The following summarizes the future principal payments on the Company’s mortgage notes payable as of June 30, 2018:
July through December 2018 (1) | $ | 2,470,690 | ||
2019 | 1,242,162 | |||
2020 | 1,286,884 | |||
2021 | 23,879,472 | |||
2022 | 8,888,986 | |||
2023 | 3,965,196 | |||
Thereafter | 21,455,057 | |||
Total principal | $ | 63,188,447 |
(1) | Reflects potential acceleration of Chase Bank and Great Clips loan given the default described above. |
Interest Expense
The following is a reconciliation of the components of interest expense for the three and six months ended June 30, 2018 and 2017:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Mortgage notes payable | ||||||||||||||||
Interest expense incurred (1) | $ | 618,793 | $ | 615,443 | $ | 1,233,684 | $ | 1,080,559 | ||||||||
Amortization of deferred financing costs | 86,448 | 77,517 | 172,896 | 145,776 | ||||||||||||
Unrealized (gain) loss on interest rate swaps (see Note 8) |
(87,154 | ) | 55,032 | (317,370 | ) | (30,892 | ) | |||||||||
Sales deposit liability (see Note 5) | 13,751 | 13,751 | 27,501 | 27,501 | ||||||||||||
Total interest expense | $ | 631,838 | $ | 761,743 | $ | 1,116,711 | $ | 1,222,944 |
(1) | Includes $(11,999) and $39,054 for the three months ended June 30, 2018 and 2017, respectively and $(5,795) and $83,395 for the six months ended June 30, 2018 and 2017, respectively, of monthly (reductions) payments to settle the Company’s interest rate swaps. Accrued interest receivable (payable) includes $6,175 and $(3,913) at June 30, 2018 and December 31, 2017, respectively, representing the unsettled portion of the interest rate swap valuation from the most recent settlement date through June 30, 2018 and December 31, 2017, respectively. |
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 8. INTEREST RATE SWAP DERIVATIVES
The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.
The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate mortgage notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero.
The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of June 30, 2018 and December 31, 2017. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks:
June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||||
Derivative Instruments | Number of Instru- ments | Notional Amount (1) | Reference Rate | Weighted Average Fixed pay rate | Weighted Average Remaining Term | Number of Instru- ments | Notional Amount (1) | Reference Rate | Weighted Average Fixed pay rate | Weighted Average Remaining Term | ||||||||||||||||||
Interest Rate Swap Derivatives | 8 | $ | 21,937,728 | One-month LIBOR/Fixed at 1.21%-2.27% | 3.42% | 2.85 years | 8 | $ | 22,170,310 | One-month LIBOR/Fixed at 1.21%-2.28% | 3.42% | 3.35 years | ||||||||||||||||
(1) | The notional amount of the Company’s swaps decreases each month to correspond to the outstanding principal balance on the related mortgage. The maximum notional amount is shown above. The minimum notional amount (outstanding principal balance at the maturity date) is $20,552,875 as of June 30, 2018. |
The following table sets forth the fair value of the Company’s derivative instruments (Level 2 measurement), as well as their classification in the consolidated balance sheets:
June 30, 2018 | December 31, 2017 | |||||||||||||||||
Derivative Instrument | Balance Sheet Location | Number
of Instruments | Fair Value | Number
of Instruments | Fair Value | |||||||||||||
Interest Rate Swaps | Asset - Interest rate swap derivatives, at fair value | 8 | $ | 619,823 | 7 | $ | 321,450 | |||||||||||
Interest Rate Swaps | Liability – Interest rate swap derivatives, at fair value | — | $ | — | 1 | $ | (18,998 | ) |
The change in fair value of a derivative instrument that is not designated as a cash flow hedge for financial accounting purposes is recorded as interest expense in the condensed consolidated statements of operations. None of the Company’s derivatives at June 30, 2018 nor December 31, 2017 were designated as hedging instruments, therefore the net unrealized (gain) loss recognized on interest rate swaps of $(87,154) and $55,032 was recorded as a (decrease) increase in interest expense for the three months ended June 30, 2018 and 2017, respectively, and $(317,370) and $(30,892) was recorded as a decrease in interest expense for the six months ended June 30, 2018 and 2017, respectively.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 9. RELATED PARTY TRANSACTIONS
The costs incurred by the Company pursuant to the Advisory Agreement for the three and six months ended June 30, 2018 and 2017, as well as the related amounts of payable or receivable as of June 30, 2018 and December 31, 2017 are included in the table below. The amounts payable or receivable are presented in the unaudited condensed consolidated balance sheets as “Due to Affiliates” and “Due from Affiliates.”
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
June 30, 2018 | June 30, 2018 | June 30, 2017 | December 31,2017 | |||||||||||||||||||||||||||||
Incurred | Incurred | Receivable | Payable | Incurred | Incurred | Receivable | Payable | |||||||||||||||||||||||||
Expensed: | ||||||||||||||||||||||||||||||||
Asset management fees | $ | 201,996 | $ | 403,965 | $ | — | $ | 67,349 | $ | 193,391 | $ | 355,592 | $ | — | $ | 3,513 | ||||||||||||||||
Other operating expense reimbursement | — | — | — | — | — | — | — | 47,948 | ||||||||||||||||||||||||
Reimbursable operating expense | 97,949 | 181,515 | — | 12,406 | — | — | — | — | ||||||||||||||||||||||||
Fees to affiliates | 299,945 | 585,480 | — | — | 193,391 | 355,592 | — | — | ||||||||||||||||||||||||
Property management fees* | 24,518 | 48,907 | — | — | 24,776 | 42,642 | — | — | ||||||||||||||||||||||||
Disposition fees** | — | — | — | — | 103,020 | 103,020 | — | — | ||||||||||||||||||||||||
Reimbursable organizational and offering expenses | 31,211 | 63,765 | — | — | 32,462 | 65,241 | — | 57 | ||||||||||||||||||||||||
Capitalized: | ||||||||||||||||||||||||||||||||
Acquisition fees | — | — | — | — | 102,314 | 642,314 | — | — | ||||||||||||||||||||||||
Financing coordination fees | — | — | — | — | — | 100,156 | — | — | ||||||||||||||||||||||||
Other: | ||||||||||||||||||||||||||||||||
Due to advisor for costs advanced | — | 16,634 | — | — | — | 15,000 | — | — | ||||||||||||||||||||||||
$ | — | $ | 79,755 | $ | — | $ | 51,518 |
* | Property management fees are included in “property expenses” in the accompanying condensed consolidated statements of operations. |
** | Disposition fees for the three and six months ended June 30, 2017 are presented as a reduction of gain on sale of real estate investment property (see Note 6). |
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Organizational and Offering Expenses
During the Company’s offering of its common stock which was terminated in July 2016, the Company was obligated to reimburse the Advisor or its affiliates for organizational and offering expenses paid by the Advisor on behalf of the Company. The Company reimburses the Advisor for organizational and offering expenses up to 3.0% of gross offering proceeds. As of June 30, 2018, the Advisor had incurred organizational and offering expenses of $2,796,198, which amount was in excess of 3.0% of the gross offering proceeds received by the Company. To the extent the Company receives more gross offering proceeds from future sales of its shares of common stock, including sales pursuant to its dividend reinvestment plan (the “Plan”), the Company will be obligated to reimburse the Advisor for these excess organization and offering expenses. As the amount of future gross offering proceeds under the Plan is uncertain, the amount the Company is obligated to reimburse to the Advisor is also uncertain.
Through June 30, 2018 and December 31, 2017, the Company has reimbursed the Advisor $2,751,172 and $2,687,407, respectively, for organizational and offering expenses. The Company’s maximum liability for organizational and offering costs through June 30, 2018 and December 31, 2017 was $2,751,172 and $2,687,350, respectively, of which $0 and $57 remained payable at June 30, 2018 and December 31, 2017, respectively.
Acquisition Fees
The Company pays the Advisor an acquisition fee in an amount equal 3.0% of Company’s contract purchase price of its properties. The total of all acquisition fees and acquisition costs must be reasonable and not exceed 6.0% of the contract price of the properties. However, a majority of the trust managers (including a majority of the independent trust managers) not otherwise interested in an acquisition transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to the Company.
Asset Management Fee
The Company pays the Advisor as compensation for the advisory services rendered, a monthly fee in an amount equal to 0.05% of the Company’s Average Invested Assets, as defined (the “Asset Management Fee”), as of the end of the preceding month. The Asset Management Fee is payable monthly on the last day of such month, or the first business day following the last day of such month. The Asset Management Fee, which must be reasonable in the determination of the Company’s independent trust managers at least annually, may or may not be taken, in whole or in part as to any year, in the sole discretion of the Advisor. All or any portion of the Asset Management Fee not paid as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine.
Financing Coordination Fee
Other than with respect to any mortgage or other financing related to a property that is concurrent with its acquisition, if the Advisor or an affiliate provides a substantial amount of the services (as determined by a majority of the Company’s independent trust managers) in connection with the post-acquisition financing or refinancing of any debt that the Company obtains relative to a property, then the Company will pay to the Advisor or such affiliate a financing coordination fee equal to 1.0% of the amount of such financing.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Property Management Fees
If the Advisor or any of its affiliates provides a substantial amount of the property management services (as determined by a majority of the Company’s independent trust managers) for the Company’s properties, then the Company pays the Advisor or such affiliate a property management fee equal to 1.5% of gross revenues from the properties managed. The Company also will reimburse the Advisor and any of its affiliates for property-level expenses that such person pays or incurs on behalf of the Company, including salaries, bonuses and benefits of persons employed by such person, except for the salaries, bonuses and benefits of persons who also serve as one of the Company’s executive officers or as an executive officer of such person. The Advisor or its affiliate may subcontract the performance of its property management duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracts for these services.
Disposition Fees
For substantial assistance in connection with the sale of properties, the Company pays the Advisor or one of its affiliates 3.0% of the contract sales price, as defined, of each property sold; provided, however, that if, in connection with such disposition, commissions are paid to third parties unaffiliated with the Company’s Advisor or its affiliates, the disposition fees paid to its Advisor, its affiliates and unaffiliated third parties may not exceed the lesser of the competitive real estate commission or 6% of the contract sales price.
Leasing Commission Fees
If the Advisor or any of its affiliates provides a substantial amount of the services (as determined by a majority of the Company’s independent trust managers) in connection with the Company’s leasing of its properties to unaffiliated third parties, then the Company shall pay to the Advisor or such affiliate leasing commissions equal to 6.0% of the rents due pursuant to such lease for the first ten years of the lease term; provided, however (i) if the term of the lease is less than ten years, such commission percentage will apply to the full term of the lease and (ii) any rents due under a renewal of a lease of an existing tenant upon expiration of the initial lease agreement (including any extensions provided for thereunder) shall accrue a commission of 3.0% in lieu of the aforementioned 6.0% commission.
Operating Expense Reimbursement
Total operating expenses of the Company are limited to the greater of 2% of average invested assets or 25% of net income for the four most recently completed fiscal quarters (the “2%/25% Limitation”). If the Company exceeds the 2%/25% Limitation, the Advisor must reimburse the Company the amount by which the aggregate total operating expenses exceeds the limitation, or the Company must obtain a waiver from the Company’s conflicts committee, which is comprised of its independent trust managers. For purposes of determining the 2%/25% Limitation amount, “average invested assets” means the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, reserves for bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company, as determined by GAAP, that are in any way related to the Company’s operation including Asset Management Fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based upon increases in net asset value (“NAV”) per share; (f) acquisition fees and acquisition expenses (including expenses, relating to potential investments that the Company does not close); and (h) disposition fees on the sale of real property and other expenses connected with the acquisition, disposition and ownership of real estate interests or other property (other than disposition fees on the sale of assets other than real property), including the costs of insurance premiums, legal services, maintenance, repair and improvement of real property.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 10. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company depends on the Advisor for certain services that are essential to the Company, including the sale of the identification, evaluation, negotiation, origination, acquisition and disposition of real estate property investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event the Advisor is unable to provide the respective services, the Company would be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the property could result in future environmental liabilities.
Tenant Improvements
Pursuant to lease agreements, the Company has an obligation to pay for an aggregate of $328,992 in tenant improvements at June 30, 2018. At June 30, 2018 and December 31, 2017, the Company had $462,140 of restricted cash held by a lender on both balance sheet dates to fund tenant improvements for one property.
Legal Matters
From time to time, the Company may become party to legal proceedings that arise in the ordinary course of its business. The Company is not a party to any legal proceeding, nor is the Company aware of any pending or threatened litigation that could have a material adverse effect on the Company’s business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably.
The SEC is conducting an investigation related to the advertising and sale of securities by the Company and its affiliated REITs in connection with their respective stock offerings. The investigation is a non-public fact-finding inquiry. It is neither an allegation of wrongdoing nor a finding that violations of law have occurred. In connection with the investigation, the Company and certain affiliates have received and responded to subpoenas from the SEC requesting documents and other information related to these offerings. The SEC’s investigation is ongoing, and the Company has cooperated and intends to continue to cooperate with the SEC in this matter. The Company is unable to predict the likely outcome of the investigation or determine its potential impact, if any, on the Company.
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RICH UNCLES REAL ESTATE INVESTMENT TRUST I
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 11. SUBSEQUENT EVENTS
The Company evaluates subsequent events up until the date the unaudited condensed consolidated financial statements are issued.
On August 3, 2018, the Company’s independent trust managers and the board of trust managers approved an increase in the Company’s maximum leverage ratio from 45% to 50%. Factors considered in approving the leverage ratio increase included the moderate level of 50% leverage, current economic and market conditions, the relative cost of debt and equity capital, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors.
Mortgage Loan Default
In August 2018, one of the Company’s special purpose subsidiaries defaulted on the Antioch, California property loan which had a balance of $1,869,536 as of June 30, 2018, as further described in Note 7. The loan in default is non-recourse to the Company and, while eight of the Company’s other special purpose property owner subsidiaries have mortgage loans with this lender, none of those loans are cross-collateralized with the Antioch, California property loan and the default on that loan does not cross-default any of these other loans. The book value of the Antioch property after the impairment charge is less than 2.0% of the Company’s total investments in real estate property.
Dividends
On July 23, 2018, the Company’s board of trust managers declared dividends based on daily record dates for the period April 1, 2018 through June 30, 2018 at a rate of $0.00206044 per share per day, or $1,573,766, on the outstanding shares of the Company’s common stock, which the Company paid on July 25, 2018. Of the $1,573,766 dividend, $1,061,580 was reinvested through the Company’s Plan.
Repurchase of Common Stock
For the period from July 1, 2018 through August 10, 2018, the Company repurchased 141,316 shares for $1,406,420.
21 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition, results of operations and cash flows together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2017 included in our Annual Report on Form 10-K filed the U.S. Securities and Exchange Commission (the “SEC”) on April 2, 2018. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. See “Forward-Looking Statements” above.
Management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates which are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed on March 7, 2012 as an unincorporated real estate investment trust, under the laws of the State of California. We have invested primarily in single tenant income-producing corporate properties which are leased to creditworthy tenants under long-term net leases. Although we are not limited as to the form our investments may take, our investments in real estate were generally made by acquiring fee title or interests in entities that own and operate real estate. We have made acquisitions of our real estate investments directly or indirectly through limited liability companies or limited partnerships, including through other REITs, or through investments in joint ventures, partnerships, tenants in common, co-tenancies or other co-ownership arrangements with other owners of properties, affiliates of our advisor or other persons.
We elected to be taxed as a REIT for U.S. for federal income tax purposes under Section 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with our taxable year ended December 31, 2014. As a REIT, we generally will not be subject to federal income tax on the income that we distribute to our shareholders each year. If we fail to qualify for taxation as a REIT in any year after electing REIT status, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Such an event could materially and adversely affect our net income and cash available for distribution to our shareholders. However, we believe that we will be organized and will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes and we intend to continue to operate so as to remain qualified as a REIT for federal income tax purposes thereafter.
Subject to certain restrictions and limitations, our business is externally managed by our advisor pursuant to an Advisory Agreement with BrixInvest, LLC (our “Advisor”), formerly known as Rich Uncles, LLC, which manages our operations and manages our portfolio of core real estate properties and real estate related assets. Our Advisor is paid certain fees as set forth in Note 9 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Through August 10, 2018, we had sold 9,270,823 shares of common stock, including 1,071,202 shares of common stock sold under our dividend reinvestment plan, for gross offering proceeds of $92,905,754.
We have invested primarily in single tenant income-producing corporate properties which are leased to creditworthy tenants under long-term net leases. We diversified our portfolio by geography, investment size, and investment risk with the goal of owning a portfolio of income-producing real estate investments that provides attractive and stable returns to our shareholders.
Our investment objectives and policies may be amended or changed at any time by our board of trust managers. Although we have no plans at this time to change any of our investment objectives, our board of trust managers may change any and all such investment objectives, including our focus on single tenant properties, if our board of trust managers believes such changes are in the best interest of our shareholders.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Our Advisor made recommendations on all investments to our board of trust managers. All proposed real estate investments must be approved by at least a majority of our board of trust managers subject to guidelines established by our board of trust managers which, if a proposed investment fits within such guidelines, specific board approval would not be needed.
As of June 30, 2018, we owned 21 properties in three states consisting of retail, office and industrial properties. The net book value of these properties was $127,870,774 at June 30, 2018.
The Company
We are a publicly registered, non-exchange traded company dedicated to providing shareholders with dependable quarterly dividends. We believe we are qualified and operate as a real estate investment trust, or REIT, which requires us to annually distribute at least 90% of our taxable income (excluding net capital gains) in the form of dividends to our shareholders. Our quarterly dividends are supported by the cash flow generated from real estate we owned under long-term, net lease agreements with local, regional, and national commercial tenants.
At June 30, 2018, we owned a diversified portfolio of 21 properties as described below:
· | Eleven properties are retail properties which represent 33% of the portfolio, four properties are office properties which represent 34% of the portfolio, and six properties are industrial properties which represent 33% of the portfolio (expressed as a percentage of base rental revenue); | |
· | Fully leased, except for the Antioch, California property, with an occupancy rate of 99% based on square footage; | |
· | Leased to 21 different commercial tenants doing business in three separate property types; | |
· | Located in three states, primarily California; | |
· | With approximately 615,000 square feet of aggregate leasable space, of which approximately 185,000 square feet is retail property, approximately 184,000 square feet is office property, and 246,000 square feet is industrial property; | |
· | With an average leasable space per property of approximately 29,300 square feet; and | |
· | With a balance of outstanding debt of approximately $61,839,052. |
Of the 21 properties in the portfolio, 20 properties, or 97%, by base rental revenue, are single-tenant properties. At June 30, 2018, all 21 properties were leased (although only 1,348 square feet of the 7,008 square foot Antioch, California property is leased) with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 6.6 years based on square footage. The Walgreens Santa Maria, California property has a remaining lease term of 43.0 years, provided the tenant does not exercise any of its eight early termination options.
Investment Strategy
Our investment strategy is to primarily own single-tenant retail, office, and industrial real estate leased to creditworthy tenants on long-term leases. Our ideal portfolio is comprised of a mix of office, industrial and retail property types, with greater than 50% of our real estate leased to investment grade tenants as determined by one of the big three credit rating agencies (Standard & Poor’s, Moody’s or Fitch Group). We generally seek to acquire real estate that has the following characteristics:
· | Properties that are freestanding, and commercially zoned with a single tenant; | |
· | Properties that are located in significant markets, which markets are identified and ranked based on several key demographic and real estate specific metrics such as population growth, income, unemployment, job growth, GDP growth, rent growth, and vacancy rates; | |
· | No more than 20% of the properties to be located outside of California; | |
· | Properties that are located in strategic locations critical to generating revenue for the tenants that occupy them (i.e., the tenants need the properties in which they operate in order to conduct their businesses); | |
· | Properties that are located within attractive demographic areas relative to the business of our tenants and are generally fungible and have good visibility and easy access to major thoroughfares; | |
· | Properties with rental or lease payments that approximate or are lower than market rents; and | |
· | Properties that can be purchased with the simultaneous execution or assumption of long-term, net lease agreements, offering both current income and the potential for future rent increases. |
See Note 1 to our condensed consolidated financial statements for further information on our business and organization.
23 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources
Our proceeds from shares sold have been, and will continue to be, primarily used for (i) property acquisitions; (ii) capital expenditures; and (iii) payment of principal on our outstanding mortgage indebtedness. Our cash needs for the purchase of real estate properties and other real estate investments will be funded primarily from the sale of our shares, asset sales or from debt proceeds.
At June 30, 2018, the outstanding principal balance of our mortgage notes payable was $63,188,447 (see Note 7 to our condensed consolidated financial statements regarding details of our outstanding indebtedness).
Portfolio Information
Our real estate investments were as follows:
As of | ||||||||||||
June 30, 2018 | December 31, 2017 | June 30, 2017 | ||||||||||
Number of Properties: | ||||||||||||
Retail | 11 | 11 | 11 | |||||||||
Office (1) | 4 | 4 | 7 | |||||||||
Industrial (1) | 6 | 6 | 3 | |||||||||
Total | 21 | 21 | 21 | |||||||||
Leasable Square Feet: | ||||||||||||
Retail | 184,388 | 184,388 | 184,388 | |||||||||
Office (1) | 183,752 | 183,752 | 326,715 | |||||||||
Industrial (1) | 246,259 | 246,259 | 103,296 | |||||||||
Total | 614,399 | 614,399 | 614,399 |
(1) | Certain properties have been reclassified between office and industrial to better reflect management’s view of the usage of the properties. |
Cash Flow Summary
The following table summarizes our cash flow activity for the six months ended June 30:
2018 | 2017 | |||||||
Net cash provided by operating activities | $ | 2,473,841 | $ | 2,547,555 | ||||
Net cash used in investing activities | $ | (423,631 | ) | $ | (28,964,021 | ) | ||
Net cash (used in) provided by financing activities | $ | (3,471,735 | ) | $ | 21,561,121 |
Cash Flows from Operating Activities
For the six months ended June 30, 2018 and 2017, net cash provided by operating activities was $2,473,841 and $2,547,555, respectively. The cash provided by operating activities during the six months ended June 30, 2018 primarily reflects net non-cash charges of $3,007,604, primarily related to depreciation and amortization, amortization of above-market leases, impairment of real estate investment property, common stock awarded for services and expensed organization and offering costs, partially offset by our net loss from operations, amortization of below-market leases, unrealized gain on interest rate swap valuations and straight-line rents. In addition, our positive cash flows from operations was partially offset by a decrease in accounts payable, accrued and other liabilities, partially offset by an increase in due to affiliates.
24 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The cash provided by operating activities during the six months ended June 30, 2017 reflects our net income from operations of $1,331,862 plus net non-cash charges of $1,380,445, primarily related to depreciation and amortization, partially offset by a gain on sale of real estate investment, amortization of below-market leases and straight-line rents. In addition, increases in accounts payable, accrued and other liabilities, offset by an increase in tenant receivables and a decrease in due to affiliates, contributed to the positive cash flows from operations for the six months ended June 30, 2017.
Cash Flows from Investing Activities
Net cash used in investing activities was $423,631 for the six months ended June 30, 2018 reflected the additions to our existing real estate investment properties.
Net cash used in investing activities was $28,964,021 for the six months ended June 30, 2017 and consisted of the following:
· | $30,664,507 for acquisitions of two real estate properties; |
· | $367,771 for additions to existing real estate property investments; |
· | $677,029 for payment of acquisition fees and costs; |
· | $250,000 for payment of seller holdback; and |
· | $250,000 for refundable purchase deposits; partially offset by |
· | $3,245,286 proceeds from sale of real estate investment property. |
Cash Flows from Financing Activities
Net cash used in financing activities was $3,471,735 for the six months ended June 30, 2018 and consisted primarily of the following:
· | $611,231 for repayments of mortgage notes payable; |
· | $1,783,511 for repurchases of common stock; |
· | $1,013,228 for dividends paid to common shareholders; and |
· | $63,765 for payments of offering costs. |
Net cash provided by financing activities was $21,561,121 for the six months ended June 30, 2017 and consisted primarily of the following:
· | $24,865,612 of proceeds from mortgage notes payable, partially offset by $523,514 of principal payments and deferred financing costs incurred of $545,958; and reduced by |
· | $1,142,010 for repurchases of common stock; |
· | $933,053 for cash dividends paid to common shareholders; |
· | $85,380 for payment of refundable loan deposits; and |
· | $74,576 for payment of organization and offering cost reimbursements to our Sponsor. |
Capital Resources
Generally, our cash requirements for property acquisitions, debt payments, capital expenditures, and other investments will be funded by our equity, borrowings from financial institutions and mortgage indebtedness on our properties, and to a lesser extent, by our internally generated funds. Our cash requirements for operating and interest expenses and dividend distributions will generally be funded by internally generated funds. Our cash requirements for repurchases of common stock will generally be funded by offering proceeds from the Company’s dividend reinvestment plan. If available, future sources of capital include secured or unsecured borrowings from banks or other lenders and proceeds from the sale of properties, as well as undistributed funds from operations.
25 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations
We owned 21 properties at June 30, 2018 and 2017. We expect our rental income, tenant reimbursements, depreciation and amortization expense, interest expense and asset management fees to affiliates to stay relatively flat or to slightly increase in 2018 due to the same number of properties owned by us.
Comparison of the Three Months Ended June 30, 2018 to the Three Months Ended June 30, 2017
Rental Income
Rental income for the three months ended June 30, 2018 and 2017 was $2,738,965 and $2,747,820, respectively. The decrease of $8,855 or 0.3% quarter-over-quarter was primarily due to the sale of one property in April 2017, the expiration of a tenant lease at the Antioch, California property in December 2017, which has not yet been replaced and lower lease payments negotiated by a tenant that went through a restructuring in the second quarter of 2018, offset by rental income from the acquisition of the Sutter Health property in March 2017.
Tenant Reimbursements
Tenant reimbursements for the three months ended June 30, 2018 and 2017 were $626,198 and $760,131, respectively. Pursuant to most of our lease agreements, tenants are required to pay all or a portion of the property operating expenses. The decrease of $133,933 or 17.6% in the current year quarter was primarily due to a decrease in common area maintenance.
Expense Reimbursements/Fees to Affiliate
Asset management fees to affiliate for the three months ended June 30, 2018 and 2017 were $201,996 and $193,391, respectively. The asset management fees are equal to 0.6% per annum of the Company’s Average Invested Assets.
Property management fees to affiliate for the three months ended June 30, 2018 and 2017 were $24,518 and $24,776, respectively.
Disposition fees to affiliate for the three months ended June 30, 2018 and 2017 were $0 and $103,020, respectively.
Subject to certain limitations, we reimburse our Advisor for costs incurred in connection with services provided to us, including, without limitation, our allocable share of the accounting personnel (and related employment) costs and overhead incurred by our Advisor or its affiliates. Operating expense reimbursements, which did not commence until January 1, 2018, were $97,949 for the three months ended June 30, 2018.
General and Administrative
General and administrative expenses for the three months ended June 30, 2018 and 2017 were $266,896 and $238,118, respectively. The $28,778 or 12.1% increase in the current year quarter primarily reflects higher costs incurred for legal fees, trust managers and officers’ insurance, and common stock compensation awards for services rendered in the current year quarter. The overall increase reflects no property due diligence costs incurred in the current year quarter compared to $22,283 in the prior year quarter related to acquisition of the Walgreens property.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended June 30, 2018 and 2017 was $1,409,093 and $1,452,354, respectively. The slight decrease in depreciation and amortization expense quarter-over quarter was primarily due to the full amortization of Chase Bank’s portion (Antioch, California property) of tenant improvements and in-place lease in December 2017. No equivalent depreciation and amortization expenses were incurred in the current year quarter. The purchase price of the acquired properties is allocated to tangible assets, identifiable intangibles and assumed liabilities. The tangible assets and identifiable intangibles are depreciated or amortized over their estimated useful lives.
26 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Interest Expense
Interest expense for the three months ended June 30, 2018 and 2017 was $631,838 and $761,743, respectively. The 17.1% decrease was primarily due to an unrealized gain on interest rate swap valuations of $87,154 in the second quarter of 2018 compared to an unrealized loss on interest rate swaps of $55,032 in the second quarter of 2017. Interest expense increased by $12,281 quarter-over-quarter excluding the effect of the interest rate swap valuations for both quarters (see Note 7 of our condensed consolidated financial statements for interest expense details).
Property Expenses
Property expenses for the three months ended June 30, 2018 and 2017 were $640,042 and $673,445, respectively. The $33,403 or 5.0% decrease was primarily due to the decrease in insurance expense and property taxes, generally offset by an increase in repairs and maintenance and provision for doubtful accounts, during the current year quarter.
Impairment of Investment in Real Estate Property
The charge of $862,190 for the three months ended June 30, 2018, which is less than 1% of our total investments in real estate property, relates to the impairment of our property in Antioch, California due to the expiration of the lease term at December 31, 2017 and our subsequent difficulties encountered during the second quarter in our efforts to re-lease the property at acceptable rent rates (see Note 4 of our condensed consolidated financial statements for impairment details and Note 7 for details about our special purpose subsidiary’s declared default on the mortgage loan for this property).
Comparison of the Six Months Ended June 30, 2018 to the Six Months Ended June 30, 2017
Rental Income
Rental income for the six months ended June 30, 2018 and 2017 was $5,481,525 and $5,117,947, respectively. The increase of $363,578 or 7.1% in the current year period was primarily due to the rental income from the acquisition of two properties (Sutter Health and Walgreens) in the first half of 2017, partially offset by the disposition of one real estate property (Chevron) in April 2017 and the expiration of the Chase Bank lease at the Antioch, California property in December 2017 which has not been re-leased.
Tenant Reimbursements
Tenant reimbursements for the six months ended June 30, 2018 and 2017 were $1,114,856 and $1,116,271, respectively. The decrease of $1,415 or 0.1% in the current year period was primarily due to the decrease in common area maintenance, repairs and maintenance and utilities, offset by an increase in property taxes.
Fees to Affiliate
Asset management fees to affiliate for the six months ended June 30, 2018 and 2017 were $403,965 and $355,592, respectively, respectively. The asset management fees are equal to 0.6% per annum of the Company’s Average Invested Assets.
Disposition fees to affiliate for the six months ended June 30, 2018 and 2017 were $0 and $103,020, respectively.
Property management fees to affiliate for the six months ended June 30, 2018 and 2017 were $48,907 and $42,642, respectively.
Operating expense reimbursements, which did not commence until January 1, 2018, were $181,515 for the six months ended June 30, 2018, reflecting reimbursements for insurance, bank fees, personnel and other overhead costs.
General and Administrative
General and administrative expenses for the six months ended June 30, 2018 and 2017 were $530,260 and $387,783, respectively. The $142,477 or 36.7% increase primarily reflects higher costs incurred for legal, audit and consulting fees, trust managers and officers’ insurance, business tax and licenses and common stock compensation awards for services rendered in the current year period compared to the prior year period. The overall increase reflects no property due diligence costs incurred in the current year period compared to $30,509 in the prior year period related to acquisition of the Walgreens property.
Depreciation and Amortization
Depreciation and amortization expense for the six months ended June 30, 2018 and 2017 was $2,857,337 and $2,670,428, respectively. The increase was primarily due to the depreciation on two investment properties acquired in the first half of 2017.
27 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Interest Expense
Interest expense for the six months ended June 30, 2018 and 2017 was $1,116,711 and $1,222,944, respectively. The $106,233 or 8.7% decrease was primarily due to an unrealized gain on interest rate swap valuations of $317,370 for the six months ended June 30, 2018 compared to $30,892 for the six months ended 2017. Interest expense increased by $180,245 period-over-period excluding the effect of the interest rate swap valuations for both periods.
Property Expenses
Property expenses for the six months ended June 30, 2018 and 2017 were $1,271,180 and $1,014,404, respectively. The $256,776 or 25.3% increase was primarily due to the increase in property taxes, provision for doubtful accounts, repairs and maintenance expense and insurance expense for the six months ended June 30, 2018 compared to the same prior year period.
Impairment of Investment in Real Estate Property
The charge of $862,190 for the six months ended June 30, 2018, which is less than 1% of our total investments in real estate property, relates to the impairment of our property in Antioch, California due to the expiration of the lease term at December 31, 2017 and our subsequent difficulties encountered during the second quarter in our efforts to re-lease the property at acceptable rent rates (see Note 4 of our condensed consolidated financial statements for impairment details and Note 7 for details about our special purpose subsidiary’s declared default on the mortgage loan for this property).
Organizational and Offering Costs
Our organizational and offering costs are paid by our Advisor on our behalf. Offering costs include all expenses incurred in connection with the offering. Other organizational and offering costs include all expenses incurred in connection with our formation, including, but not limited to legal fees, federal and state filing fees, and other costs to incorporate.
During the offering, we are obligated to reimburse our Advisor for organizational and offering costs related to the offering paid by them on our behalf provided such reimbursement would not exceed 3% of gross offering proceeds raised in the offering as of the date of the reimbursement.
As of June 30, 2018, we had not incurred any organizational and offering costs related to the offering as all such costs had been funded by our Advisor. As a result, these organizational and offering costs related to the offering are not recorded in our financial statements as of June 30, 2018 other than to the extent of 3% of the gross offering proceeds. Through June 30, 2018, our Advisor had incurred organizational and offering costs on our behalf in connection with our offering of $2,796,198. Through June 30, 2018, we had recorded $2,751,172 of organizational and offering costs, of which $0 was payable to the Advisor (see Note 9 to our condensed consolidated financial statements).
Dividends
Dividends declared, dividends paid, and cash flow provided by operations were as follows:
Dividends Paid | ||||||||||||||||||||
Period (2) | Dividends Declared | Dividends Declared Per Share | Cash | Reinvested | Cash Flows Provided By Operating Activities (1) | |||||||||||||||
First Quarter 2017 | $ | 1,548,589 | $ | 0.1875 | $ | 455,958 | $ | 1,092,631 | $ | 1,771,735 | ||||||||||
Second Quarter 2017 | 1,569,284 | 0.1875 | 465,689 | 1,103,595 | 672,800 | |||||||||||||||
Third Quarter 2017 | 1,563,430 | 0.1875 | 458,938 | 1,104,492 | 1,464,563 | |||||||||||||||
Fourth Quarter 2017 | 1,566,932 | 0.1875 | 478,673 | 1,088,259 | 1,252,518 | |||||||||||||||
2017 Totals | $ | 6,248,235 | $ | 0.7500 | $ | 1,859,258 | $ | 4,388,977 | $ | 5,161,616 | ||||||||||
First Quarter 2018 | $ | 1,574,919 | $ | 0.1875 | $ | 534,554 | $ | 1,040,365 | $ | 1,566,444 | ||||||||||
Second Quarter 2018 | 1,566,934 | 0.1875 | 478,674 | 1,088,260 | 907,398 | |||||||||||||||
2018 Totals | $ | 3,141,853 | $ | 0.3750 | $ | 1,013,228 | $ | 2,128,625 | $ | 2,473,842 |
(1) | Since dividends are declared after the end of a quarter, the cash flows provided by operating activities in this column are for the quarter of the dividend period rather than the quarter for which dividends were declared. |
(2) | Dividends are paid on a quarterly basis. In general, dividends for record dates as of the end of a given quarter are paid on or about the 25th of the first month following the quarter. Dividends were declared and paid based on daily record dates at rates per share per day as follows: |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dividend Period | Rate Per Share Per Day | Declaration Date | Payment Date | ||||||
January 1 - March 31, 2017 | $ | 0.002083 | April 20, 2017 | April 20, 2017 | |||||
April 1 - June 30, 2017 | $ | 0.002060 | July 20, 2017 | July 20, 2017 | |||||
July 1 - September 30, 2017 | $ | 0.002038 | October 20, 2017 | October 20, 2017 | |||||
October 1 - December 31, 2017 | $ | 0.002038 | January 25, 2018 | January 25, 2018 | |||||
January 1 - March 31, 2018 | $ | 0.002083 | April 24, 2018 | April 25, 2018 | |||||
April 1 - June 30, 2018 | $ | 0.002060 | July 23, 2018 | July 25, 2018 |
Going forward, we expect our board of trust managers to continue to declare cash dividends based on daily record dates and to pay these dividends on a quarterly basis, and to continue to declare dividends based on a single declaration date after the end of the quarter. Cash dividends will be determined by our board of trust managers based on our financial condition and such other factors as our board of trust managers deems relevant. We have not established a minimum dividend or distribution level, and our charter does not require that we make dividends to our shareholders other than as necessary to meet REIT qualification requirements.
To date, the sources of cash used to pay our shareholder dividends have been primarily from net rental income received.
Properties
As of June 30, 2018, we owned 21 properties encompassing approximately 614,399 leasable square feet in three states. We were in the offering state of our life cycle through July 20, 2016. Acquisitions on all assets owned had been completed through June 2017. We have fully invested the offering proceeds (see Note 4 to our condensed consolidated financial statements).
Recent Market Conditions
Financial conditions affecting commercial real estate have been stable, as generally low treasury rates and increased lending from banks, insurance companies and commercial mortgage backed securities (“CMBS”) conduits have increased lending activity. Nevertheless, the debt market remains sensitive to the macro environment, such as Federal Reserve policy, market sentiment or regulatory factors affecting the banking and CMBS industries and recent indicators reflect a likelihood of interest rate increases. While we expect that financial conditions will remain favorable, if they were to deteriorate we may experience more stringent lending criteria, which may affect our ability to refinance any of our debt at maturity. Additionally, for properties for which we are able to obtain financing, the interest rates and other terms on such loans may be unacceptable to us. We expect to manage the current mortgage lending environment by considering alternative lending sources, including securitized debt, fixed rate loans, borrowings on a line of credit, short-term variable rate loans, assumed mortgage loans in connection with property acquisitions, interest rate locks or swap agreements, or any combination of the foregoing.
Commercial real estate fundamentals continue to remain favorable, as a moderate pace of job creation has supported gains in office absorption, retail sales and warehouse distribution. Although commercial property construction activity has increased, it remains near historic lows; as a result, incremental demand growth has helped to reduce vacancy rates and support modest rental growth. Improving fundamentals have resulted in gains in property values. However, future increases in interest rates could have a negative impact on property values.
Election to be Taxed as a REIT
We elected to be taxed as a REIT for U.S. federal income tax purposes under Section 856 through 860 of the Internal Revenue Code of 1986, as amended beginning with the taxable year ended December 31, 2014. To qualify and maintain our status as a REIT, we must meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our shareholders and recordkeeping. As a REIT, we generally would not be subject to federal income tax on taxable income that we distribute to our shareholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains).
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
If we fail to qualify as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct dividends paid to our shareholders in any year in which we fail to qualify as a REIT. We also will be disqualified for the four taxable years following the year during which qualification is lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to shareholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our condensed consolidated financial statements. We will be subject to certain state and local taxes related to the operations of properties in certain locations. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our condensed consolidated financial statements.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our December 31, 2017 audited consolidated financial statements included in our Annual Report on Form 10-K, filed with the SEC on April 2, 2018. There have been no significant changes to our policies during the three months ended June 30, 2018.
Commitments and Contingencies
We may be subject to certain commitments and contingencies with regard to certain transactions (see Note 10 to our condensed consolidated financial statements for commitment and contingencies).
Related-Party Transactions and Agreements
We have entered into an Advisory Agreement with our Advisor whereby we have agreed to pay certain fees to, or reimburse certain expenses of, our Advisor or our affiliates, such as acquisition fees and expenses, organization and offering costs, asset management fees, and reimbursement of certain operating costs (see Note 9 to our condensed consolidated financial statements and our Annual Report on Form 10-K, filed with the SEC on April 2, 2018 for additional details of the various related-party transactions and agreements).
Subsequent Events
See Note 7 to our condensed consolidated financial statements for information regarding a recent default on the mortgage loan on our property in Antioch, California and Note 11 for other events that occurred subsequent to June 30, 2018 through the filing date of this report.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements for further explanation.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that had or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, or capital resources as of June 30, 2018.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable as we are a Smaller Reporting Company.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our principal executive officer and principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is (i) processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) that occurred during the three months ended June 30, 2018 that have materially affected or are reasonably likely to affect our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that our objectives will be met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
Item 1. | Legal Proceedings |
The information disclosed under Legal Matters in Note 10 to condensed consolidated financial statements is incorporated herein by reference.
Item 1A. | Risk Factors |
Except for the following correction related to our share repurchase program, there have been no other material changes to the risk factors set forth under “Risk Factors” in Item 1A of our December 31, 2017 audited financial statements included in our Annual Report on Form 10-K, as amended, filed with the SEC on April 2, 2018.
Our shareholders may not be able to immediately sell their shares under our share repurchase program.
We do not expect that a secondary market for resale of our stock will develop, but we do provide a quarterly share repurchase program for shareholders who wish to sell their shares. Our share repurchase program is funded by, and limited to, proceeds realized from our sale of shares under our dividend reinvestment plan. There can be no assurance that we will have sufficient funds for our quarterly share repurchases. Share repurchase requests will be honored on a first-come, first serve basis. If we do not have sufficient funds available at the time when a redemption is requested, the redeeming shareholder may (i) withdraw their request for redemption or (ii) ask that we honor their request, if and when sufficient funds become available. Such pending requests will also be honored on a first-come, first-serve basis.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Unregistered Sales of Equity Securities
During the three months ended June 30, 2018, we did not sell or issue equity securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”), other than the 91,157 shares that were sold to our existing shareholders under the Plan and the 4,049 shares that were issued to our independent trust managers as part of the trust managers’ compensation plan.
Use of Proceeds from Registered Securities
We commenced the offering of our stock to California investors only on March 7, 2012 and terminated the Offering on July 20, 2016, except for shares continuing to be sold pursuant to the Plan. Through June 30, 2018, we had sold 9,171,537 shares of common stock in the offering for gross proceeds of $91,847,361, including 971,916 shares of common stock under the Plan for gross offering proceeds of $9,851,150 (see Note 9 to our condensed consolidated financial statements for information regarding certain reimbursements paid to our Advisor).
Net proceeds available for investment after the payment of the costs described above were approximately $89,028,271. A portion of these proceeds, along with proceeds from debt financings, were used to make approximately $140,708,285 of investments in real estate, including the purchase price of our investments, deposits paid for future acquisitions, acquisition fees and expenses, and costs of leveraging each real estate investment. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Dividends for a description of the sources that have been used to fund our dividend distributions.
Issuer Redemptions of Equity Securities
The following table summarizes our repurchase activity under our share repurchase program for our common stock for the three months ended June 30, 2018.
Total Number of Shares Repurchased During the Quarter |
Average Price Paid per Share |
Dollar Value of Shares Repurchased Under the Program |
|||||||||||
Second quarter 2018 (quarterly redemption) | 109,888 | $ | 10.66 | $ | 1,171,406 |
During the three months ended June 30, 2018, we fulfilled repurchase requests and repurchased shares pursuant to our share repurchase program as follows:
(1) | We generally repurchase shares approximately 15 days following the end of the applicable quarter in which requests were received. |
(2) | The share repurchase program is funded by and limited to proceeds realized from our sale of shares under the Plan. The maximum amount that may be repurchased is limited to 5% of the weighted average outstanding shares in the prior twelve months less the amounts repurchased during the same twelve-month period. The dollar value is as of the last day of the quarter presented. The dollar amount is calculated as (1) the maximum number of shares that can be repurchased (5% of the weighted average number of shares outstanding during the prior twelve months reduced by the number of shares already repurchased multiplied by (2) the per share price in cash equal to the lesser of (i) the net asset value per share, as calculated and published by our Advisor and (ii) the per share price paid for the shares by the redeeming shareholder. Furthermore, once we have published our NAV, the NAV per share is to be used in the calculation in place of the per share offering price. If we determine that sufficient funds are not available to fund the share repurchase program, we have the ability to repurchase the number of shares that we believe we have sufficient funds to repurchase. In addition, our board of trust managers may amend, suspend or terminate the share repurchase program without shareholder approval upon 30 days’ notice. Our board of trust managers may amend, suspend, or terminate the share repurchase program due to changes in law or regulation, or if the board of trust managers becomes aware of undisclosed material information that our board of trust managers believes should be publicly disclosed before shares are repurchased. |
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We currently determine our NAV and NAV per share annually in January of each year as of December 31 of the prior year, beginning in January 2018 and calculated as of December 31, 2017. In January 2018, our board of trust managers, including a majority of the independent trust managers, approved and established an estimated per share NAV of the Company’s common stock of $10.66 per share. This was the first time that the board of trust managers has determined an estimated per share NAV of the Company’s common stock. Going forward, the Company intends to publish an updated estimated per share NAV on at least an annual basis. More detail about the initial calculation of our NAV is set forth in our Annual Report on Form 10-K for the year ended December 31, 2017 under the heading “Part II, Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities—Determination of Estimated Per Share Value.”
Item 3. | Defaults Upon Senior Securities |
No events occurred during the six months ended June 30, 2018 that would require a response to this item; however, see Note 7 to our condensed consolidated financial statements for information regarding a recent default on the mortgage loan on our property in Antioch, California.
Item 6. | Exhibits |
The exhibits listed on the Exhibit Index are included herewith or incorporated herein by reference.
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EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit | Description | |
10.1 | Amendment No. 1 to Amended and Restated Advisory Agreement | |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * | |
101.INS | XBRL INSTANCE DOCUMENT | |
101.SCH | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT | |
101.CAL | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE | |
101.DEF | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE | |
101.LAB | XBRL TAXONOMY EXTENSION LABESL LINKBASE | |
101.PRE | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |
* | In accordance with Item 601 (b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purpose of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
34 |
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
Rich Uncles Real Estate Investment Trust I | ||
(Registrant) | ||
By: | /s/ HAROLD HOFER | |
Name: | Harold Hofer | |
Title: | Chief Executive Officer (principal executive officer) | |
By: | /s/ RAYMOND J. PACINI | |
Name: | Raymond J. Pacini | |
Title: | Chief Financial Officer (principal financial officer) |
Date: August 13, 2018
35 |
Exhibit 10.1
AMENDMENT NO. 1
TO
AMENDED AND RESTATED ADVISORY AGREEMENT
THIS AMENDMENT NO. 1 (this “Amendment”) is made as of August 3, 2018 to the Amended and Restated Advisory Agreement, dated as of March 8, 2012 (the “Agreement”), by and between Rich Uncles Real Estate Investment Trust I (the “Company”), and BrixInvest, LLC (the “Advisor”).
AMENDMENT
Paragraph (a) of Section 9 of the Agreement is hereby amended and restated in its entirety to read in full as follows:
“(a) Asset Management Fee. The Company shall pay to the Advisor as compensation for the advisory services rendered to the Company under Paragraph 3 above, a monthly fee in an amount equal to 0.05% of the Company’s Average Invested Assets (the “Asset Management Fee”), as of the end of the preceding month. The Asset Management Fee shall be payable monthly on the last business day of such month. The Asset Management Fee, which will not exceed fees which are competitive for similar services in the same geographic area, may or may not be taken, in whole or in part as to any year, in the sole discretion of the Advisor. All or any portion of the Asset Management Fee not taken as to any fiscal year shall be deferred without interest and may be taken in such other fiscal year as the Advisor shall determine.”
No other term or provision of the Agreement shall be deemed amended, changed or modified except as set forth above.
IN WITNESS WHEROF, the undersigned have executed this Amendment as of the date first set forth above.
Rich Uncles Real Estate Investment Trust I | BrixInvest, LLC | ||
By: |
/s/ RAYMOND J. PACINI |
By: |
/s/ HAROLD HOFER |
Raymond J. Pacini | Harold Hofer | ||
Chief Financial Officer | Manager |
1
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, | Harold Hofer, certify that: |
1. | I have reviewed this Quarterly Report on Form 10-Q of the registrant, Rich Uncles Real Estate Investment Trust I; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trust managers (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 13, 2018 | /s/ HAROLD HOFER | |
Name: | Harold Hofer | |
Title: | Chief Executive Officer | |
(Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, | Raymond J. Pacini, certify that: |
1. | I have reviewed this Quarterly Report on Form 10-Q of the registrant, Rich Uncles Real Estate Investment Trust I; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trust managers (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 13, 2018 | /s/ RAYMOND J. PACINI | |
Name: | Raymond J. Pacini | |
Title: | Chief Financial Officer | |
(Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. § 1350)
Each of the undersigned officers of Rich Uncles Real Estate Investment Trust I (the “Company”) hereby certifies, for purposes of Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge:
(i) | the accompanying Quarterly Report on Form 10-Q of the Company for the period ended June 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and |
(ii) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ HAROLD HOFER | |||
Name: | Harold Hofer | ||
Title: | Chief Executive Officer (Principal Executive Officer) | ||
/s/ RAYMOND J. PACINI | |||
Name: | Raymond J. Pacini | ||
Date: August 13, 2018 | Title: |
Chief Financial Officer (Principal Financial Officer) |
The foregoing certification is being furnished with the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018 pursuant to 18 U.S.C. § 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing, except to the extent the Company specifically incorporates this certification by reference.
Document And Entity Information - shares |
6 Months Ended | |
---|---|---|
Jun. 30, 2018 |
Aug. 10, 2018 |
|
Document Information [Line Items] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Jun. 30, 2018 | |
Document Fiscal Year Focus | 2018 | |
Document Fiscal Period Focus | Q2 | |
Entity Registrant Name | Rich Uncles Real Estate Investment Trust I | |
Entity Central Index Key | 0001672754 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 8,362,891 |
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Common Stock, Par or Stated Value Per Share | $ 0.01 | $ 0.01 |
Common Stock, Shares Authorized | 10,000,000 | 10,000,000 |
Common Stock, Shares, Issued | 8,395,239 | 8,358,254 |
Common Stock, Shares, Outstanding | 8,395,239 | 8,358,254 |
Condensed Consolidated Statements of Operations - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Revenues: | ||||
Rental income | $ 2,738,965 | $ 2,747,820 | $ 5,481,525 | $ 5,117,947 |
Tenant reimbursements | 626,198 | 760,131 | 1,114,856 | 1,116,271 |
Total revenue | 3,365,163 | 3,507,951 | 6,596,381 | 6,234,218 |
Expenses: | ||||
Fees to affiliates (Note 9) | 299,945 | 193,391 | 585,480 | 355,592 |
General and administrative | 266,896 | 238,118 | 530,260 | 387,783 |
Depreciation and amortization | 1,409,093 | 1,452,354 | 2,857,337 | 2,670,428 |
Interest expense | 631,838 | 761,743 | 1,116,711 | 1,222,944 |
Property expenses | 640,042 | 673,445 | 1,271,180 | 1,014,404 |
Impairment of real estate investment property (Note 4) | 862,190 | 0 | 862,190 | 0 |
Total expenses | 4,110,004 | 3,319,051 | 7,223,158 | 5,651,151 |
Other income: | ||||
Interest income | 0 | 557 | 0 | 838 |
Gain on sale of real estate investment property, net (Note 6) | 0 | 747,957 | 0 | 747,957 |
Total other income | 0 | 748,514 | 0 | 748,795 |
Net (loss) income | $ (744,841) | $ 937,414 | $ (626,777) | $ 1,331,862 |
Net (loss) income per share, basic and diluted | $ (0.09) | $ 0.11 | $ (0.07) | $ 0.16 |
Weighted-average number of common shares outstanding, basic and diluted | 8,412,457 | 8,381,613 | 8,410,840 | 8,348,625 |
Dividends declared per common share | $ 0.1875 | $ 0.1875 | $ 0.3750 | $ 0.3750 |
Condensed Consolidated Statement of Shareholders' Equity - 6 months ended Jun. 30, 2018 - USD ($) |
Total |
Common Stock [Member] |
Additional Paid -in- Capital [Member] |
Cumulative Distributions and Net Losses [Member] |
---|---|---|---|---|
Balance at Dec. 31, 2017 | $ 70,086,370 | $ 83,583 | $ 82,350,273 | $ (12,347,486) |
Balance (in shares) at Dec. 31, 2017 | 8,358,254 | |||
Issuance of common stock | 2,128,625 | $ 1,999 | 2,126,626 | 0 |
Issuance of common stock (in shares) | 199,983 | |||
Common stock awarded for services | 86,346 | $ 81 | 86,265 | 0 |
Common stock awarded for services (in shares) | 8,100 | |||
Reclassifications to redeemable common stock | (261,726) | $ 0 | (261,726) | 0 |
Repurchase of common stock | (1,783,511) | $ (1,711) | (1,781,800) | 0 |
Repurchase of common stock (in shares) | (171,098) | |||
Dividends declared | (3,141,853) | $ 0 | 0 | (3,141,853) |
Net loss | (626,777) | 0 | 0 | (626,777) |
Balance at Jun. 30, 2018 | $ 66,487,474 | $ 83,952 | $ 82,519,638 | $ (16,116,116) |
Balance (in shares) at Jun. 30, 2018 | 8,395,239 |
BUSINESS AND ORGANIZATION |
6 Months Ended | |
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Jun. 30, 2018 | ||
Accounting Policies [Abstract] | ||
Business Description and Basis of Presentation [Text Block] | NOTE 1. BUSINESS AND ORGANIZATION Rich Uncles Real Estate Investment Trust I (the “Company”) was formed on March 7, 2012. The Company is an unincorporated real estate investment trust (“REIT’) under the laws of the State of California. The Company elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with the year ended December 31, 2014. The Company was formed primarily to invest in single-tenant income-producing corporate properties located in California and that are leased to creditworthy tenants under long-term net leases, however, the Company may invest up to 20% of the net proceeds of its offering in properties located outside of California. 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 directly and/or through special purpose wholly-owned limited liability companies or other subsidiaries. The Company holds a 70.14% interest in one property subject to a tenancy-in-common agreement. The Company is externally managed by its advisor and sponsor, BrixInvest, LLC, formerly Rich Uncles LLC (the “Advisor” or the “Sponsor”) whose members include Harold Hofer and Ray Wirta, the Company’s Chief Executive Officer and President and Chairman of the Board of Trust Managers, respectively. The Advisor is a Delaware limited liability company registered to do business in California. The Company has entered into an agreement (the “Advisory Agreement”) with the Advisor. The current term of the Advisory Agreement is scheduled to expire on May 10, 2019. The Advisory Agreement may be renewed for an unlimited number of successive one-year periods upon the mutual consent of the Company and the Advisor. The Advisory Agreement is terminable by a majority of the Company’s independent trust managers or the Advisor on 60 days’ written notice with or without cause. Upon termination of the Advisory Agreement, the Advisor may be entitled to a termination fee. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
6 Months Ended | |
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Jun. 30, 2018 | ||
Accounting Policies [Abstract] | ||
Significant Accounting Policies [Text Block] | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying condensed consolidated financial statements are unaudited and 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 Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. 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, 2017 audited consolidated financial statements included in the Company’s Form 10-K filed with the SEC on April 2, 2018. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual 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, 2017 condensed consolidated 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 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. Fair Value Disclosures The fair value for certain financial instruments is derived using a combination of market quotes, pricing models, and other 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, other assets, accounts payable, accrued expenses and other liabilities, sales deposit liability, share repurchase payable, and due to affiliates: These balances approximate their fair values due to the short nature of these items.Derivative Instruments : The Company’s derivative instruments are presented at fair value in the accompanying 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 value 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.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. 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 tenant improvements. Other Comprehensive Income (Loss) For all periods presented, other comprehensive income (loss) is the same as net income (loss). Per Share Data Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock equals basic earnings per share of common stock as there were no potentially dilutive securities outstanding during the three and six months ended June 30, 2018 and 2017. Impairment of Investment in Real Estate Property 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 will record an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset. As more fully discussed in Note 4, the Company recorded an impairment charge of $862,190 related to its Antioch, California property during the three months ended June 30, 2018. The impairment charge is less than 1% of the Company’s investments in real estate property. Reclassifications Certain prior year 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 income. Recent Accounting Pronouncements New Accounting Standards Issued and Adopted In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09, as amended, requires an entity to use a five-step model to determine when to recognize revenue from customer contracts in an effort to increase consistency and comparability throughout global capital markets and across industries. ASU 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry specific guidance throughout the Industry Topics of the Codification. This ASU requires an entity to recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and to provide certain additional disclosures. The Company has evaluated each of its revenue streams and their related accounting policies under ASU 2014-09. Rental income and tenant reimbursements earned from leasing its real estate properties are excluded from ASU 2014-09 and are assessed with the adoption of the ASU for leases as discussed below. The Company adopted ASU 2014-09 beginning January 1, 2018 and utilized the modified retrospective basis. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements. However, future real estate sales contracts will qualify as sales to noncustomers. The Company will assess and implement any future recognition of gain or loss on sales of properties according to the provisions of ASU 2014-09. New Accounting Standards Recently Issued and Not Yet Adopted In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The amendments in ASU 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. Under ASU 2016-02, the accounting applied by a lessor is largely unchanged from that applied under Topic 840 leases. The large majority of operating leases shall remain classified as operating leases and lessors should continue to recognize rental income for those leases on a straight-line basis over the lease term. ASU 2016-02 may impact the timing, recognition, presentation and disclosures related to the Company’s tenant reimbursements earned from leasing its real estate properties, although the Company does not expect a significant impact. ASU 2016-02 is effective for the Company on January 1, 2019. The Company expects to adopt the practical expedients available for implementation under ASU 2016-02. By adopting the practical expedients, the Company will not be required to reassess (i) whether an expired or existing contract meets the definition of a lease and (ii) the lease classification at the adoption date for expired or existing leases. ASU 2016-02 will also require new disclosures within the notes to its consolidated financial statements. The Company does not expect the adoption of ASU 2016-02 will have a material impact on the Company’s consolidated financial position, results of operations or cash flows. |
CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS |
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Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Supplemental Balance Sheet Disclosures [Text Block] | NOTE 3. CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS Tenant Receivables, Net Tenant receivables, net consisted of the following:
Accounts Payable, Accrued and Other Liabilities Accounts payable, accrued and other liabilities were comprised of the following:
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REAL ESTATE INVESTMENTS |
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Real Estate [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real Estate Disclosure [Text Block] | NOTE 4. REAL ESTATE INVESTMENTS The following table provides summary information regarding the Company’s 21 real estate investments as of June 30, 2018:
Impairment charge During the second quarter of 2018, the Company learned that it was unlikely that a single tenant would be interested in leasing the 5,660 square feet of space at the Antioch, California property that was previously leased by Chase Bank. While the Company has had expressions of interest from potential tenants, they are all interested in smaller spaces at lower rental rates which would require the Company to invest in substantial tenant improvements to subdivide the space. The Company’s special purpose subsidiary that owns this property notified the lender that it is unwilling to make such additional improvements in the Antioch, California property unless it can restructure the existing mortgage which matures in February 2019, or payoff the mortgage at a discount, as discussed in Note 7. Having not reached any agreement with the lender when the August 2018 mortgage payment came due, the Company’s special purpose subsidiary notified the lender that it was defaulting on the mortgage loan which had a balance of $1,869,536 as of June 30, 2018, and that it intends to surrender the property to the lender unless an acceptable agreement can be reached. The book value of the Antioch property after the impairment charge is less than 2.0% of the Company’s total investments in real estate property. Given the decline in expected rental rates for the Antioch, California property, the Company concluded that it was necessary to record an impairment charge of $862,190, which is less than 1% of the Company’s total investments in real estate property, based on the estimated fair value of the property. This impairment charge has been reflected in the Company’s results of operations for the three months ended June 30, 2018.Current Year Acquisitions There were no acquisitions or dispositions during the six months ended June 30, 2018. Operating Leases The Company’s real estate properties are primarily leased to tenants under triple-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 new 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. As of June 30, 2018, the future minimum contractual rental income due under the Company’s non-cancelable operating leases, excluding any renewal periods, are as follows:
Revenue Concentration The Company’s revenue concentration for the three and six months ended June 30, 2018 is as follows:
Intangibles As of June 30, 2018, the Company’s intangibles were as follows:
The intangible assets and liabilities acquired in connection with these acquisitions have a weighted average amortization period of approximately 9.4 years as of June 30, 2018. Amortization of intangible assets over the next five years is expected to be as follows:
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SALE OF INTEREST IN REAL ESTATE INVESTMENT PROPERTY |
6 Months Ended | |
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Jun. 30, 2018 | ||
Real Estate [Abstract] | ||
Disposal Of Interest In Real Estate Property [Text Block] | NOTE 5. SALE OF INTEREST IN REAL ESTATE INVESTMENT PROPERTY In March 2016, the Company entered into a tenancy-in-common agreement related to and sold an undivided 29.86% interest in the Chevron Gas Station located in Roseville, CA for $1,000,000. The purchaser has the right to require the Company to repurchase their interest in the property during the period from March 1, 2018 through March 1, 2019. Therefore, the sale does not qualify for sales recognition under ASC 360 for financial reporting purposes and the transaction is accounted for as a financing transaction. The proceeds received from the purchaser were recorded as a sales deposit liability and the payments to the purchaser for their share of the property’s operations were recorded as interest expense. As of June 30, 2018 and December 31, 2017, sales deposit liability amounted to $1,000,000 at both balance sheet dates. The interest expense recorded as a result of this transaction was $13,751 for each of the three months ended June 30, 2018 and 2017 and $27,501 for each of the six months ended June 30, 2018 and 2017 (see Note 7). The sale will qualify as a sale for financial reporting if the right to require the Company to repurchase the 29.86% interest in the property expires without being exercised. |
SALE OF REAL ESTATE INVESTMENT PROPERTY |
6 Months Ended | |
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Jun. 30, 2018 | ||
Real Estate [Abstract] | ||
Disposal Of Real Estate Investment Property [Text Block] | NOTE 6. SALE OF REAL ESTATE INVESTMENT PROPERTY On April 27, 2017, the Company sold the Chevron Gas Station property in Rancho Cordova, CA to a third party for $3,434,000 which was paid in cash. The sale resulted in a gain of $747,957 for financial reporting purposes, which was net of the $103,020 disposition fee the Advisor earned in connection with this transaction (see Note 9). The Company entered into a 1031 exchange to defer the taxable gain of approximately $900,000 on the transaction. The 1031 exchange was completed when the Company purchased the Walgreens property on June 29, 2017. Pending Sale of Property Terminated On May 4, 2018, the Company entered into a purchase agreement with a potential buyer for the sale of the Company’s investment in the Chevron Gas Station located at 623 S Winchester Blvd. in San Jose, CA. Under this agreement, the Company had agreed to sell the Chevron Gas Station property for $3,800,000. The potential sale was subject to standard due diligence including the buyer’s satisfaction with title, physical condition of the property, compliance with state and local laws regarding energy conservation and safety, tenant financial condition, likelihood of continued occupancy of the property, right of first refusal waiver from Chevron Corporation, receipt of an estoppel certificate from tenant and final approval of our board of trust managers for the sale of the property. Subject to satisfactory completion of the buyer’s due diligence, the closing was scheduled to occur sometime in June 2018 or July 2018. In June 2018, the purchase agreement expired, and the potential sale was terminated. The property was removed from the market on June 25, 2018. |
DEBT |
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Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Disclosure [Text Block] | NOTE 7. DEBT Mortgage Notes Payable As of June 30, 2018, the Company’s mortgage notes payable consisted of the following:
The mortgage notes payable provide for monthly payments of principal and interest. The mortgage loans payable have balloon payments that are due at loan maturity. Pursuant to the terms of the mortgage notes payable agreements, the Company is subject to certain financial loan covenants. The Company is in compliance with all terms and conditions of the mortgage loan agreements, with the exception of the Chase Bank and Great Clips loan (Antioch, California) for which the Company did not make the August 5, 2018 mortgage payment. As discussed in Note 4, during the three months ended June 30, 2018, the Company recorded an impairment charge of $862,190 related to its investment in the property in Antioch, California due to the expiration of the Chase Bank lease term at December 31, 2017 and subsequent difficulties encountered by the Company during the second quarter in its efforts to re-lease the property at acceptable rent rates and without incurring substantial potential tenant improvement costs. The book value of the Antioch property after the impairment charge is less than 2.0% of the Company’s total investments in real estate property. On July 13, 2018, the Company’s special purpose subsidiary that owns the Antioch, California property initiated discussions with the mortgage lender regarding the potential restructuring of the mortgage loan on the property which had a balance of $1,869,536 as of June 30, 2018 and matures on February 5, 2019, or the potential to repay the loan at a discount. Given that potential rent rates for prospective tenants of the property are significantly less than the rent previously received from Chase Bank and the significant investment in tenant improvements that would be required to attract new tenants, the Company’s special purpose subsidiary informed the lender that it would need to reach an agreement to either pay the loan off at a significant discount or restructure the loan with terms that would be economically viable to the Company’s special purpose subsidiary under current market conditions. Since no agreement had been reached on how to restructure this loan as of August 9, 2018, the Company’s special purpose subsidiary notified the lender that it had defaulted on the Antioch, California property loan and would not make the past due mortgage payment that was payable on August 5, 2018 or any future payments on the loan. The Company’s special purpose subsidiary further stated that the Antioch, California property will be surrendered to the lender unless an acceptable restructuring agreement is reached. The loan in default is non-recourse to the Company and, while eight of the Company’s other special purpose property owner subsidiaries have mortgage loans with this lender, none of those loans are cross-collateralized with the Antioch, California property loan and the Company’s special purpose subsidiary default on that loan does not cross-default any of these other loans. The following were the face value, carrying amount and fair value of the Company’s mortgage notes payable (Level 3 measurement):
Disclosures of the fair values of financial instruments are based on pertinent information available to the Company as of June 30, 2018 and December 31, 2017 and require a significant amount of judgment. Low levels of transaction volume for certain financial instruments have made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different. The actual value could be materially different from the Company’s estimate of value. The following summarizes the future principal payments on the Company’s mortgage notes payable as of June 30, 2018:
Interest Expense The following is a reconciliation of the components of interest expense for the three and six months ended June 30, 2018 and 2017:
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INTEREST RATE SWAP DERIVATIVES |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments and Hedging Activities Disclosure [Text Block] | NOTE 8. INTEREST RATE SWAP DERIVATIVES The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes. The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate mortgage notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero. The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of June 30, 2018 and December 31, 2017. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks:
The following table sets forth the fair value of the Company’s derivative instruments (Level 2 measurement), as well as their classification in the consolidated balance sheets:
The change in fair value of a derivative instrument that is not designated as a cash flow hedge for financial accounting purposes is recorded as interest expense in the condensed consolidated statements of operations. None of the Company’s derivatives at June 30, 2018 nor December 31, 2017 were designated as hedging instruments, therefore the net unrealized (gain) loss recognized on interest rate swaps of $(87,154) and $55,032 was recorded as a (decrease) increase in interest expense for the three months ended June 30, 2018 and 2017, respectively, and $(317,370) and $(30,892) was recorded as a decrease in interest expense for the six months ended June 30, 2018 and 2017, respectively. |
RELATED PARTY TRANSACTIONS |
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Related Party Transactions [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Party Transactions Disclosure [Text Block] | NOTE 9. RELATED PARTY TRANSACTIONS The costs incurred by the Company pursuant to the Advisory Agreement for the three and six months ended June 30, 2018 and 2017, as well as the related amounts of payable or receivable as of June 30, 2018 and December 31, 2017 are included in the table below. The amounts payable or receivable are presented in the unaudited condensed consolidated balance sheets as “Due to Affiliates” and “Due from Affiliates.”
Organizational and Offering Expenses During the Company’s offering of its common stock which was terminated in July 2016, the Company was obligated to reimburse the Advisor or its affiliates for organizational and offering expenses paid by the Advisor on behalf of the Company. The Company reimburses the Advisor for organizational and offering expenses up to 3.0% of gross offering proceeds. As of June 30, 2018, the Advisor had incurred organizational and offering expenses of $2,796,198, which amount was in excess of 3.0% of the gross offering proceeds received by the Company. To the extent the Company receives more gross offering proceeds from future sales of its shares of common stock, including sales pursuant to its dividend reinvestment plan (the “Plan”), the Company will be obligated to reimburse the Advisor for these excess organization and offering expenses. As the amount of future gross offering proceeds under the Plan is uncertain, the amount the Company is obligated to reimburse to the Advisor is also uncertain. Through June 30, 2018 and December 31, 2017, the Company has reimbursed the Advisor $2,751,172 and $2,687,407, respectively, for organizational and offering expenses. The Company’s maximum liability for organizational and offering costs through June 30, 2018 and December 31, 2017 was $2,751,172 and $2,687,350, respectively, of which $0 and $57 remained payable at June 30, 2018 and December 31, 2017, respectively. Acquisition Fees The Company pays the Advisor an acquisition fee in an amount equal 3.0% of Company’s contract purchase price of its properties. The total of all acquisition fees and acquisition costs must be reasonable and not exceed 6.0% of the contract price of the properties. However, a majority of the trust managers (including a majority of the independent trust managers) not otherwise interested in an acquisition transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to the Company. Asset Management Fee The Company pays the Advisor as compensation for the advisory services rendered, a monthly fee in an amount equal to 0.05% of the Company’s Average Invested Assets, as defined (the “Asset Management Fee”), as of the end of the preceding month. The Asset Management Fee is payable monthly on the last day of such month, or the first business day following the last day of such month. The Asset Management Fee, which must be reasonable in the determination of the Company’s independent trust managers at least annually, may or may not be taken, in whole or in part as to any year, in the sole discretion of the Advisor. All or any portion of the Asset Management Fee not paid as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine. Financing Coordination Fee Other than with respect to any mortgage or other financing related to a property that is concurrent with its acquisition, if the Advisor or an affiliate provides a substantial amount of the services (as determined by a majority of the Company’s independent trust managers) in connection with the post-acquisition financing or refinancing of any debt that the Company obtains relative to a property, then the Company will pay to the Advisor or such affiliate a financing coordination fee equal to 1.0% of the amount of such financing. Property Management Fees If the Advisor or any of its affiliates provides a substantial amount of the property management services (as determined by a majority of the Company’s independent trust managers) for the Company’s properties, then the Company pays the Advisor or such affiliate a property management fee equal to 1.5% of gross revenues from the properties managed. The Company also will reimburse the Advisor and any of its affiliates for property-level expenses that such person pays or incurs on behalf of the Company, including salaries, bonuses and benefits of persons employed by such person, except for the salaries, bonuses and benefits of persons who also serve as one of the Company’s executive officers or as an executive officer of such person. The Advisor or its affiliate may subcontract the performance of its property management duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracts for these services. Disposition Fees For substantial assistance in connection with the sale of properties, the Company pays the Advisor or one of its affiliates 3.0% of the contract sales price, as defined, of each property sold; provided, however, that if, in connection with such disposition, commissions are paid to third parties unaffiliated with the Company’s Advisor or its affiliates, the disposition fees paid to its Advisor, its affiliates and unaffiliated third parties may not exceed the lesser of the competitive real estate commission or 6% of the contract sales price. Leasing Commission Fees If the Advisor or any of its affiliates provides a substantial amount of the services (as determined by a majority of the Company’s independent trust managers) in connection with the Company’s leasing of its properties to unaffiliated third parties, then the Company shall pay to the Advisor or such affiliate leasing commissions equal to 6.0% of the rents due pursuant to such lease for the first ten years of the lease term; provided, however (i) if the term of the lease is less than ten years, such commission percentage will apply to the full term of the lease and (ii) any rents due under a renewal of a lease of an existing tenant upon expiration of the initial lease agreement (including any extensions provided for thereunder) shall accrue a commission of 3.0% in lieu of the aforementioned 6.0% commission. Operating Expense Reimbursement Total operating expenses of the Company are limited to the greater of 2% of average invested assets or 25% of net income for the four most recently completed fiscal quarters (the “2%/25% Limitation”). If the Company exceeds the 2%/25% Limitation, the Advisor must reimburse the Company the amount by which the aggregate total operating expenses exceeds the limitation, or the Company must obtain a waiver from the Company’s conflicts committee, which is comprised of its independent trust managers. For purposes of determining the 2%/25% Limitation amount, “average invested assets” means the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, reserves for bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company, as determined by GAAP, that are in any way related to the Company’s operation including Asset Management Fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based upon increases in net asset value (“NAV”) per share; (f) acquisition fees and acquisition expenses (including expenses, relating to potential investments that the Company does not close); and (h) disposition fees on the sale of real property and other expenses connected with the acquisition, disposition and ownership of real estate interests or other property (other than disposition fees on the sale of assets other than real property), including the costs of insurance premiums, legal services, maintenance, repair and improvement of real property. |
COMMITMENTS AND CONTINGENCIES |
6 Months Ended | |
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Jun. 30, 2018 | ||
Commitments and Contingencies Disclosure [Abstract] | ||
Commitments and Contingencies Disclosure [Text Block] | NOTE 10. COMMITMENTS AND CONTINGENCIES Economic Dependency The Company depends on the Advisor for certain services that are essential to the Company, including the sale of the identification, evaluation, negotiation, origination, acquisition and disposition of real estate property investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event the Advisor is unable to provide the respective services, the Company would be required to obtain such services from other sources. Environmental As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the property could result in future environmental liabilities. Tenant Improvements Pursuant to lease agreements, the Company has an obligation to pay for an aggregate of $328,992 in tenant improvements at June 30, 2018. At June 30, 2018 and December 31, 2017, the Company had $462,140 of restricted cash held by a lender on both balance sheet dates to fund tenant improvements for one property. Legal Matters From time to time, the Company may become party to legal proceedings that arise in the ordinary course of its business. The Company is not a party to any legal proceeding, nor is the Company aware of any pending or threatened litigation that could have a material adverse effect on the Company’s business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably. The SEC is conducting an investigation related to the advertising and sale of securities by the Company and its affiliated REITs in connection with their respective stock offerings. The investigation is a non-public fact-finding inquiry. It is neither an allegation of wrongdoing nor a finding that violations of law have occurred. In connection with the investigation, the Company and certain affiliates have received and responded to subpoenas from the SEC requesting documents and other information related to these offerings. The SEC’s investigation is ongoing, and the Company has cooperated and intends to continue to cooperate with the SEC in this matter. The Company is unable to predict the likely outcome of the investigation or determine its potential impact, if any, on the Company. |
SUBSEQUENT EVENTS |
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Jun. 30, 2018 | ||
Subsequent Events [Abstract] | ||
Subsequent Events [Text Block] | NOTE 11. SUBSEQUENT EVENTS The Company evaluates subsequent events up until the date the unaudited condensed consolidated financial statements are issued. On August 3, 2018, the Company’s independent trust managers and the board of trust managers approved an increase in the Company’s maximum leverage ratio from 45% to 50%. Factors considered in approving the leverage ratio increase included the moderate level of 50% leverage, current economic and market conditions, the relative cost of debt and equity capital, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors. Mortgage Loan Default In August 2018, one of the Company’s special purpose subsidiaries defaulted on the Antioch, California property loan which had a balance of $1,869,536 as of June 30, 2018, as further described in Note 7. The loan in default is non-recourse to the Company and, while eight of the Company’s other special purpose property owner subsidiaries have mortgage loans with this lender, none of those loans are cross-collateralized with the Antioch, California property loan and the default on that loan does not cross-default any of these other loans. The book value of the Antioch property after the impairment charge is less than 2.0% of the Company’s total investments in real estate property. Dividends On July 23, 2018, the Company’s board of trust managers declared dividends based on daily record dates for the period April 1, 2018 through June 30, 2018 at a rate of $0.00206044 per share per day, or $1,573,766, on the outstanding shares of the Company’s common stock, which the Company paid on July 25, 2018. Of the $1,573,766 dividend, $1,061,580 was reinvested through the Company’s Plan. Repurchase of Common Stock For the period from July 1, 2018 through August 10, 2018, the Company repurchased 141,316 shares for $1,406,420. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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Jun. 30, 2018 | ||
Accounting Policies [Abstract] | ||
Consolidation, Policy [Policy Text Block] | Basis of Presentation and Principles of Consolidation The accompanying condensed consolidated financial statements are unaudited and 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 Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. 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, 2017 audited consolidated financial statements included in the Company’s Form 10-K filed with the SEC on April 2, 2018. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual 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, 2017 condensed consolidated 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. |
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Use of Estimates, Policy [Policy Text Block] | Use of Estimates The preparation of the condensed consolidated financial statements and 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. |
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Fair Value of Financial Instruments, Policy [Policy Text Block] | Fair Value Disclosures The fair value for certain financial instruments is derived using a combination of market quotes, pricing models, and other 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, other assets, accounts payable, accrued expenses and other liabilities, sales deposit liability, share repurchase payable, and due to affiliates: These balances approximate their fair values due to the short nature of these items.Derivative Instruments : The Company’s derivative instruments are presented at fair value in the accompanying 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 value 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.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. 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. |
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Restricted Cash and Cash Equivalents, Policy [Policy Text Block] | Restricted Cash Restricted cash is comprised of funds which are restricted for tenant improvements. |
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Comprehensive Income, Policy [Policy Text Block] | Other Comprehensive Income (Loss) For all periods presented, other comprehensive income (loss) is the same as net income (loss). |
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Earnings Per Share, Policy [Policy Text Block] | Per Share Data Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock equals basic earnings per share of common stock as there were no potentially dilutive securities outstanding during the three and six months ended June 30, 2018 and 2017. |
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Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block] | Impairment of Investment in Real Estate Property 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 will record an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset. As more fully discussed in Note 4, the Company recorded an impairment charge of $862,190 related to its Antioch, California property during the three months ended June 30, 2018. The impairment charge is less than 1% of the Company’s investments in real estate property. |
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Reclassification, Policy [Policy Text Block] | Reclassifications Certain prior year 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 income. |
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New Accounting Pronouncements, Policy [Policy Text Block] | Recent Accounting Pronouncements New Accounting Standards Issued and Adopted In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09, as amended, requires an entity to use a five-step model to determine when to recognize revenue from customer contracts in an effort to increase consistency and comparability throughout global capital markets and across industries. ASU 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry specific guidance throughout the Industry Topics of the Codification. This ASU requires an entity to recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and to provide certain additional disclosures. The Company has evaluated each of its revenue streams and their related accounting policies under ASU 2014-09. Rental income and tenant reimbursements earned from leasing its real estate properties are excluded from ASU 2014-09 and are assessed with the adoption of the ASU for leases as discussed below. The Company adopted ASU 2014-09 beginning January 1, 2018 and utilized the modified retrospective basis. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements. However, future real estate sales contracts will qualify as sales to noncustomers. The Company will assess and implement any future recognition of gain or loss on sales of properties according to the provisions of ASU 2014-09. New Accounting Standards Recently Issued and Not Yet Adopted In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The amendments in ASU 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. Under ASU 2016-02, the accounting applied by a lessor is largely unchanged from that applied under Topic 840 leases. The large majority of operating leases shall remain classified as operating leases and lessors should continue to recognize rental income for those leases on a straight-line basis over the lease term. ASU 2016-02 may impact the timing, recognition, presentation and disclosures related to the Company’s tenant reimbursements earned from leasing its real estate properties, although the Company does not expect a significant impact. ASU 2016-02 is effective for the Company on January 1, 2019. The Company expects to adopt the practical expedients available for implementation under ASU 2016-02. By adopting the practical expedients, the Company will not be required to reassess (i) whether an expired or existing contract meets the definition of a lease and (ii) the lease classification at the adoption date for expired or existing leases. ASU 2016-02 will also require new disclosures within the notes to its consolidated financial statements. The Company does not expect the adoption of ASU 2016-02 will have a material impact on the Company’s consolidated financial position, results of operations or cash flows. |
CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS (Tables) |
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Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Tenant Receivables [Table Text Block] |
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Schedule of Accounts Payable and Accrued Liabilities [Table Text Block] |
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REAL ESTATE INVESTMENTS (Tables) |
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Real Estate [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Real Estate Properties [Table Text Block] | The following table provides summary information regarding the Company’s 21 real estate investments as of June 30, 2018:
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Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block] | As of June 30, 2018, the future minimum contractual rental income due under the Company’s non-cancelable operating leases, excluding any renewal periods, are as follows:
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Schedule of Revenue by Major Customers by Reporting Segments [Table Text Block] | The Company’s revenue concentration for the three and six months ended June 30, 2018 is as follows:
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Schedule of Finite-Lived Intangible Assets [Table Text Block] | As of June 30, 2018, the Company’s intangibles were as follows:
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Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block] | The intangible assets and liabilities acquired in connection with these acquisitions have a weighted average amortization period of approximately 9.4 years as of June 30, 2018. Amortization of intangible assets over the next five years is expected to be as follows:
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DEBT (Tables) |
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Schedule of Long-term Debt Instruments [Table Text Block] | As of June 30, 2018, the Company’s mortgage notes payable consisted of the following:
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Fair Value, by Balance Sheet Grouping [Table Text Block] | The following were the face value, carrying amount and fair value of the Company’s mortgage notes payable (Level 3 measurement):
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Schedule of Maturities of Long-term Debt [Table Text Block] | The following summarizes the future principal payments on the Company’s mortgage notes payable as of June 30, 2018:
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Schedule Of Interest Expenses Reconciliation [Table Text Block] | The following is a reconciliation of the components of interest expense for the three and six months ended June 30, 2018 and 2017:
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INTEREST RATE SWAP DERIVATIVES (Tables) |
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Schedule of Derivative Instruments [Table Text Block] | The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of June 30, 2018 and December 31, 2017. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks:
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Schedule of Derivative Instruments in Statement of Financial Position, Fair Value [Table Text Block] | The following table sets forth the fair value of the Company’s derivative instruments (Level 2 measurement), as well as their classification in the consolidated balance sheets:
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RELATED PARTY TRANSACTIONS (Tables) |
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Jun. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Party Transactions [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Related Party Transactions [Table Text Block] | The costs incurred by the Company pursuant to the Advisory Agreement for the three and six months ended June 30, 2018 and 2017, as well as the related amounts of payable or receivable as of June 30, 2018 and December 31, 2017 are included in the table below. The amounts payable or receivable are presented in the unaudited condensed consolidated balance sheets as “Due to Affiliates” and “Due from Affiliates.”
|
BUSINESS AND ORGANIZATION (Details Textual) |
Jun. 30, 2018 |
---|---|
Noncontrolling Interest, Ownership Percentage by Parent | 70.14% |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Textual) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Impairment of Real Estate | $ 862,190 | $ 0 | $ 862,190 | $ 0 |
CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS (Details) - USD ($) |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Tenant receivables, net: | ||
Straight-line rent | $ 1,265,125 | $ 1,082,080 |
Tenant rent | 61,026 | 301,588 |
Unbilled tenant reimbursements | 273,580 | 93,420 |
Other | 26,298 | 76,178 |
Accounts Receivable, Gross | 1,626,029 | 1,553,266 |
Less allowance for doubtful accounts | 0 | (58,328) |
Net | 1,626,029 | 1,494,938 |
Accounts payable, accrued and other liabilities: | ||
Accounts payable | 30,179 | 45,029 |
Accrued expenses | 167,446 | 205,774 |
Accrued interest payable | 205,492 | 215,700 |
Unearned rent | 485,045 | 518,023 |
Tenant security deposits | 270,106 | 270,106 |
Total | $ 1,158,268 | $ 1,254,632 |
REAL ESTATE INVESTMENTS (Details 1) |
Jun. 30, 2018
USD ($)
|
---|---|
July through December 2018 | $ 4,928,964 |
2019 | 10,006,676 |
2020 | 10,195,232 |
2021 | 9,218,085 |
2022 | 7,672,402 |
2023 | 5,881,911 |
Thereafter | 27,895,682 |
Operating Leases, Future Minimum Payments Receivable | $ 75,798,952 |
REAL ESTATE INVESTMENTS (Details 2) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|
Revenue from Contract with Customer, Including Assessed Tax | $ 2,738,965 | $ 2,747,820 | $ 5,481,525 | $ 5,117,947 |
San Antonio, TX [Member] | PreK San Antonio [Member] | ||||
Revenue from Contract with Customer, Including Assessed Tax | $ 453,426 | $ 856,101 | ||
Concentration Risk, Percentage | 13.50% | 13.00% | ||
Rancho Cordova, CA [Member] | Sutter Health [Member] | ||||
Revenue from Contract with Customer, Including Assessed Tax | $ 717,183 | $ 1,375,645 | ||
Concentration Risk, Percentage | 21.30% | 20.90% | ||
El Dorado, CA [Member] | ITW Rippey [Member] | ||||
Revenue from Contract with Customer, Including Assessed Tax | $ 476,551 | $ 991,410 | ||
Concentration Risk, Percentage | 14.20% | 15.00% |
REAL ESTATE INVESTMENTS (Details 3) - USD ($) |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Below-Market Leases, Cost | $ (5,349,909) | |
Below-Market Leases, Accumulated amortization | 1,813,983 | |
Below-Market Leases, Net Amount | (3,535,926) | $ (3,966,008) |
Tenant Origination and Absorption Costs [Member] | ||
Finite-Lived Intangible Assets, Cost | 12,706,234 | |
Finite-Lived Intangible Assets, Accumulated Amortization | (3,635,150) | |
Finite-Lived Intangible Assets, Net Amount | 9,071,084 | |
Above-Market Leases [Member] | ||
Finite-Lived Intangible Assets, Cost | 872,408 | |
Finite-Lived Intangible Assets, Accumulated Amortization | (72,886) | |
Finite-Lived Intangible Assets, Net Amount | $ 799,522 |
REAL ESTATE INVESTMENTS (Details 4) - USD ($) |
6 Months Ended | |
---|---|---|
Jun. 30, 2018 |
Dec. 31, 2017 |
|
Weighted average remaining amortization period | 8 years 2 months 12 days | |
Below Market Lease, Net | $ (3,535,926) | $ (3,966,008) |
Tenant Origination and Absorption Costs [Member] | ||
July through December 2018 | 773,800 | |
2019 | 1,547,600 | |
2020 | 1,547,601 | |
2021 | 1,300,482 | |
2022 | 1,219,908 | |
2023 | 914,283 | |
Thereafter | 1,767,410 | |
Finite-Lived Intangible Assets, Net | 9,071,084 | |
Above-Market Leases [Member] | ||
July through December 2018 | 17,660 | |
2019 | 35,320 | |
2020 | 35,320 | |
2021 | 35,320 | |
2022 | 35,320 | |
2023 | 35,320 | |
Thereafter | 605,262 | |
Finite-Lived Intangible Assets, Net | $ 799,522 | |
Weighted average remaining amortization period | 35 years 4 months 24 days | |
Below-Market Leases [Member] | ||
Weighted average remaining amortization period | 5 years 1 month 6 days | |
July through December 2018 | $ (430,082) | |
2019 | (860,165) | |
2020 | (860,165) | |
2021 | (667,541) | |
2022 | (201,982) | |
2023 | (113,651) | |
Thereafter | (402,340) | |
Below Market Lease, Net | $ (3,535,926) |
REAL ESTATE INVESTMENTS (Details Textual) |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2018
USD ($)
ft²
|
Jun. 30, 2017
USD ($)
|
Jun. 30, 2018
USD ($)
ft²
|
Jun. 30, 2017
USD ($)
|
Dec. 31, 2017
USD ($)
|
|
Finite-Lived Intangible Asset, Useful Life | 9 years 4 months 24 days | ||||
Impairment of Real Estate | $ 862,190 | $ 0 | $ 862,190 | $ 0 | |
Long-term Debt, Gross | 63,188,447 | 63,188,447 | $ 62,277,387 | ||
Antioch [Member] | |||||
Impairment of Real Estate | 862,190 | ||||
Long-term Debt, Gross | $ 1,869,536 | $ 1,869,536 | |||
Area of Land | ft² | 5,660 | 5,660 | |||
Property Management Fee, Percent Fee | 1.00% |
SALE OF INTEREST IN REAL ESTATE INVESTMENT PROPERTY (Details Textual) - USD ($) |
1 Months Ended | 3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|---|
Mar. 31, 2016 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
|
Proceeds from Sale of Real Estate | $ 1,000,000 | |||||
Interest Expense, Customer Deposits | $ 13,751 | $ 13,751 | $ 27,501 | $ 27,501 | ||
Customer Advances and Deposits | $ 1,000,000 | $ 1,000,000 | $ 1,000,000 | |||
Chevron Gas Station [Member] | ||||||
Equity Method Investment, Ownership Percentage | 29.86% | 29.86% | 29.86% |
SALE OF REAL ESTATE INVESTMENT PROPERTY (Details Textual) - USD ($) |
1 Months Ended | 3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|---|
Apr. 27, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
May 04, 2018 |
|
Proceeds from Sale of Real Estate Held-for-investment | $ 0 | $ 3,245,286 | ||||
Gains (Losses) on Sales of Investment Real Estate | $ 0 | $ 747,957 | $ 0 | $ 747,957 | ||
Deferred Taxable Gain On Sale Of Real Estate | $ 900,000 | |||||
Chevron Gas Station [Member] | ||||||
Proceeds from Sale of Real Estate Held-for-investment | 3,434,000 | |||||
Disposal Group, Including Discontinued Operation, Consideration | $ 3,800,000 | |||||
Gains (Losses) on Sales of Investment Real Estate | 747,957 | |||||
Deferred Taxable Gain On Sale Of Real Estate | $ 103,020 |
DEBT (Details) - USD ($) |
6 Months Ended | ||||
---|---|---|---|---|---|
Jun. 30, 2018 |
Dec. 31, 2017 |
||||
Principal Amount | $ 63,188,447 | $ 62,277,387 | |||
Deferred Financing Costs | (1,349,395) | ||||
Net Balance | 61,839,052 | ||||
Mortgages [Member] | Chase Bank & Great Clips [Member] | |||||
Principal Amount | 1,869,536 | ||||
Deferred Financing Costs | (16,383) | ||||
Net Balance | $ 1,853,153 | ||||
Contractual Interest Rate | [1] | 4.37% fixed | |||
Effective Interest Rate | [1] | 4.37% | |||
Loan Maturity | Feb. 05, 2019 | ||||
Mortgages [Member] | Levins [Member] | |||||
Principal Amount | $ 2,147,903 | ||||
Deferred Financing Costs | (30,348) | ||||
Net Balance | $ 2,117,555 | ||||
Contractual Interest Rate | [1] | One-month LIBOR + 1.93% | |||
Effective Interest Rate | [1] | 3.74% | |||
Loan Maturity | Jan. 05, 2021 | ||||
Mortgages [Member] | Island Pacific Supermarket [Member] | |||||
Principal Amount | $ 1,953,160 | ||||
Deferred Financing Costs | (32,046) | ||||
Net Balance | $ 1,921,114 | ||||
Contractual Interest Rate | [1] | One-month LIBOR + 1.93% | |||
Effective Interest Rate | [1] | 3.74% | |||
Loan Maturity | Jan. 05, 2021 | ||||
Mortgages [Member] | Dollar General [Member] | |||||
Principal Amount | $ 2,404,195 | ||||
Deferred Financing Costs | (49,174) | ||||
Net Balance | $ 2,355,021 | ||||
Contractual Interest Rate | [1] | One-month LIBOR + 1.48% | |||
Effective Interest Rate | [1] | 3.38% | |||
Loan Maturity | Mar. 05, 2021 | ||||
Mortgages [Member] | Rite Aid [Member] | |||||
Principal Amount | $ 3,786,488 | ||||
Deferred Financing Costs | (92,242) | ||||
Net Balance | $ 3,694,246 | ||||
Contractual Interest Rate | [1] | One-month LIBOR + 1.50% | |||
Effective Interest Rate | [1] | 3.25% | |||
Loan Maturity | May 05, 2021 | ||||
Mortgages [Member] | PMI Preclinical [Member] | |||||
Principal Amount | $ 4,260,114 | ||||
Deferred Financing Costs | (112,875) | ||||
Net Balance | $ 4,147,239 | ||||
Contractual Interest Rate | [1] | One-month LIBOR + 1.48% | |||
Effective Interest Rate | [1] | 3.38% | |||
Loan Maturity | Mar. 05, 2021 | ||||
Mortgages [Member] | EcoThrift [Member] | |||||
Principal Amount | $ 2,734,415 | ||||
Deferred Financing Costs | (74,566) | ||||
Net Balance | $ 2,659,849 | ||||
Contractual Interest Rate | [1] | One-month LIBOR + 1.21% | |||
Effective Interest Rate | [1] | 2.96% | |||
Loan Maturity | Jul. 05, 2021 | ||||
Mortgages [Member] | PreK San Antonio [Member] | |||||
Principal Amount | $ 5,286,633 | ||||
Deferred Financing Costs | (141,832) | ||||
Net Balance | $ 5,144,801 | ||||
Contractual Interest Rate | [1] | 4.25% fixed | |||
Effective Interest Rate | [1] | 4.25% | |||
Loan Maturity | Dec. 01, 2021 | ||||
Mortgages [Member] | GSA (MSHA) [Member] | |||||
Principal Amount | $ 1,860,436 | ||||
Deferred Financing Costs | (60,100) | ||||
Net Balance | $ 1,800,336 | ||||
Contractual Interest Rate | [1] | One-month LIBOR + 1.25% | |||
Effective Interest Rate | [1] | 3.00% | |||
Loan Maturity | Aug. 05, 2021 | ||||
Mortgages [Member] | Dinan Cars [Member] | |||||
Principal Amount | $ 2,791,017 | ||||
Deferred Financing Costs | (70,446) | ||||
Net Balance | $ 2,720,571 | ||||
Contractual Interest Rate | [1] | One-month LIBOR + 2.27% | |||
Effective Interest Rate | [1] | 4.02% | |||
Loan Maturity | Jan. 05, 2022 | ||||
Mortgages [Member] | ITW Rippey, Solar Turbines, Amec Foster [Member] | |||||
Principal Amount | $ 9,751,836 | ||||
Deferred Financing Costs | (245,640) | ||||
Net Balance | $ 9,506,196 | ||||
Contractual Interest Rate | [1] | 3.35% fixed | |||
Effective Interest Rate | [1] | 3.35% | |||
Loan Maturity | Nov. 01, 2026 | ||||
Mortgages [Member] | Dollar General Big Spring [Member] | |||||
Principal Amount | $ 626,755 | ||||
Deferred Financing Costs | (26,005) | ||||
Net Balance | $ 600,750 | ||||
Contractual Interest Rate | [1] | 4.69% fixed | |||
Effective Interest Rate | [1] | 4.69% | |||
Loan Maturity | Mar. 13, 2022 | ||||
Mortgages [Member] | L-3 Communications [Member] | |||||
Principal Amount | $ 5,425,745 | ||||
Deferred Financing Costs | (118,573) | ||||
Net Balance | $ 5,307,172 | ||||
Contractual Interest Rate | [1] | 4.50% fixed | |||
Effective Interest Rate | [1] | 4.50% | |||
Loan Maturity | Apr. 01, 2022 | ||||
Mortgages [Member] | Sutter Health [Member] | |||||
Principal Amount | $ 14,541,406 | ||||
Deferred Financing Costs | (191,386) | ||||
Net Balance | $ 14,350,020 | ||||
Contractual Interest Rate | [1] | 4.50% fixed | |||
Effective Interest Rate | [1] | 4.50% | |||
Loan Maturity | Mar. 09, 2024 | ||||
Mortgages [Member] | Gap [Member] | |||||
Principal Amount | $ 3,748,808 | ||||
Deferred Financing Costs | (87,779) | ||||
Net Balance | $ 3,661,029 | ||||
Contractual Interest Rate | [1] | 4.15% fixed | |||
Effective Interest Rate | [1] | 4.15% | |||
Loan Maturity | Aug. 01, 2023 | ||||
|
DEBT (Details 1) - USD ($) |
Jun. 30, 2018 |
Dec. 31, 2017 |
||
---|---|---|---|---|
Total | $ 63,188,447 | $ 62,277,387 | ||
Secured Debt [Member] | ||||
July through December 2018 | [1] | 2,470,690 | ||
2019 | 1,242,162 | |||
2020 | 1,286,884 | |||
2021 | 23,879,472 | |||
2022 | 8,888,986 | |||
2023 | 3,965,196 | |||
Thereafter | 21,455,057 | |||
Total | $ 63,188,447 | |||
|
DEBT (Details 2) - USD ($) |
3 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
|||
Unrealized (gain) loss on interest rate swaps (see Note 8) | $ 317,371 | $ 30,892 | ||||
Sales deposit liability (see Note 5) | $ 13,751 | $ 13,751 | 27,501 | 27,501 | ||
Total interest expense | 631,838 | 761,743 | 1,116,711 | 1,222,944 | ||
Unsecured Debt [Member] | ||||||
Sales deposit liability (see Note 5) | 13,751 | 13,751 | 27,501 | 27,501 | ||
Total interest expense | 631,838 | 761,743 | 1,116,711 | 1,222,944 | ||
Secured Debt [Member] | ||||||
Interest expense incurred (1) | [1] | 618,793 | 615,443 | 1,233,684 | 1,080,559 | |
Amortization of deferred financing costs | 86,448 | 77,517 | 172,896 | 145,776 | ||
Unrealized (gain) loss on interest rate swaps (see Note 8) | $ (87,154) | $ 55,032 | $ (317,370) | $ (30,892) | ||
|
DEBT (Details 3) - USD ($) |
Jun. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Debt Instrument, Face Amount | $ 63,188,447 | $ 63,799,677 |
Long-term Debt, Gross | 63,188,447 | 62,277,387 |
Debt Instrument, Fair Value Disclosure | $ 60,962,368 | $ 62,258,532 |
DEBT (Details Textual) - USD ($) |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
|
Interest Expenses, Interest Rate Swap | $ 11,999 | $ 39,054 | $ 5,795 | $ 83,395 | |
Accrued interest receivable (payable) | 6,175 | 6,175 | $ (3,913) | ||
Impairment of Real Estate | 862,190 | $ 0 | 862,190 | $ 0 | |
Antioch, CA [Member] | |||||
Impairment of Real Estate | 862,190 | ||||
SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate | $ 1,869,536 | $ 1,869,536 |
INTEREST RATE SWAP DERIVATIVES (Details) - Interest Rate Swap Derivatives [Member] |
6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018
USD ($)
|
Dec. 31, 2017
USD ($)
|
|||
Derivative Instruments, Number of Instruments | 8 | 8 | ||
Derivative Instruments, Notional Amount | [1] | $ 21,937,728 | $ 22,170,310 | |
Derivative Instruments, Reference Rate | One-month LIBOR/Fixed at 1.21%-2.27% | One-month LIBOR/Fixed at 1.21%-2.28% | ||
Derivative Instruments, Weighted Average Fixed Pay Rate | 3.42% | 3.42% | ||
Derivative Instruments, Weighted Average Remaining Term | 2 years 10 months 6 days | 3 years 4 months 6 days | ||
|
INTEREST RATE SWAP DERIVATIVES (Details 1) |
6 Months Ended | |
---|---|---|
Jun. 30, 2018
USD ($)
|
Dec. 31, 2017
USD ($)
|
|
Derivative Instrument, Fair Value | $ 0 | $ 18,998 |
Interest Rate Swap [Member] | ||
Derivative Instruments, Number of Instruments | 8 | 8 |
Interest Rate Swap [Member] | Liability [Member] | ||
Derivative Instrument, Balance Sheet Location | Liability – Interest rate swap derivatives, at fair value | |
Derivative Instruments, Number of Instruments | 0 | 1 |
Derivative Instrument, Fair Value | $ 0 | $ (18,998) |
Interest Rate Swap [Member] | Assets [Member] | ||
Derivative Instrument, Balance Sheet Location | Asset - Interest rate swap derivatives, at fair value | |
Derivative Instruments, Number of Instruments | 8 | 7 |
Derivative Instrument, Fair Value | $ 619,823 | $ 321,450 |
INTEREST RATE SWAP DERIVATIVES (Details Textual) - USD ($) |
3 Months Ended | 6 Months Ended | |||||
---|---|---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
|||
Unrealized (Gain) Loss on Derivatives | $ 317,371 | $ 30,892 | |||||
Interest Rate Swap [Member] | |||||||
Derivative, Notional Amount | [1] | $ 21,937,728 | 21,937,728 | $ 22,170,310 | |||
Unrealized (Gain) Loss on Derivatives | (87,154) | $ 55,032 | (317,370) | $ (30,892) | |||
Minimum [Member] | Interest Rate Swap [Member] | |||||||
Derivative, Notional Amount | $ 20,552,875 | $ 20,552,875 | |||||
|
RELATED PARTY TRANSACTIONS (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
||||||
Due to Related Parties | $ 79,755 | $ 79,755 | $ 51,518 | |||||||
Due from Related Parties | 0 | 0 | 0 | |||||||
Advisor fees, Acquisition fees [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | 0 | $ 102,314 | 0 | $ 642,314 | ||||||
Due to Related Parties | 0 | 0 | 0 | |||||||
Due from Related Parties | 0 | 0 | 0 | |||||||
Advisor fees, Asset management fees [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | 201,996 | 193,391 | 403,965 | 355,592 | ||||||
Due to Related Parties | 67,349 | 67,349 | 3,513 | |||||||
Due from Related Parties | 0 | 0 | 0 | |||||||
Advisor fees, Property management fees [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | [1] | 24,518 | 24,776 | 48,907 | 42,642 | |||||
Due to Related Parties | [1] | 0 | 0 | 0 | ||||||
Due from Related Parties | [1] | 0 | 0 | 0 | ||||||
Other operating expense reimbursement [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | 0 | 0 | 0 | 0 | ||||||
Due to Related Parties | 0 | 0 | 47,948 | |||||||
Due from Related Parties | 0 | 0 | 0 | |||||||
Reimbursable organizational and offering expenses [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | 31,211 | 32,462 | 63,765 | 65,241 | ||||||
Due to Related Parties | 0 | 0 | 57 | |||||||
Due from Related Parties | 0 | 0 | 0 | |||||||
Fees To Affliates [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | 299,945 | 193,391 | 585,480 | 355,592 | ||||||
Due to Related Parties | 0 | 0 | 0 | |||||||
Due from Related Parties | 0 | 0 | 0 | |||||||
Financing Coordination Fees [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | 0 | 0 | 0 | 100,156 | ||||||
Due to Related Parties | 0 | 0 | 0 | |||||||
Due from Related Parties | 0 | 0 | 0 | |||||||
Due to other SSLFO [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | 0 | 0 | 16,634 | 15,000 | ||||||
Due to Related Parties | 0 | 0 | 0 | |||||||
Due from Related Parties | 0 | 0 | 0 | |||||||
Advisor Fees, Reimbursable operating expenses [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | 97,949 | 0 | 181,515 | 0 | ||||||
Due to Related Parties | 12,406 | 12,406 | 0 | |||||||
Due from Related Parties | 0 | 0 | 0 | |||||||
Advisor fees, Disposition fees [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | [2] | 0 | $ 103,020 | 0 | $ 103,020 | |||||
Due to Related Parties | [2] | 0 | 0 | 0 | ||||||
Due from Related Parties | [2] | $ 0 | $ 0 | $ 0 | ||||||
|
RELATED PARTY TRANSACTIONS (Details Textual) - USD ($) |
3 Months Ended | 6 Months Ended | 12 Months Ended | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2018 |
Jun. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
||||||
Due to Related Parties | $ 79,755 | $ 79,755 | $ 51,518 | |||||||
Organization and Offering Expenses | 2,796,198 | 2,796,198 | ||||||||
Organization and Offering Expenses [Member] | ||||||||||
Related Party Transaction, Expenses from Transactions with Related Party | 2,751,172 | 2,687,350 | ||||||||
Organization and Offering Expenses Payable | 0 | 0 | 57 | |||||||
Advisor fees, Acquisition fees [Member] | ||||||||||
Due to Related Parties | 0 | 0 | 0 | |||||||
Related Party Transaction, Expenses from Transactions with Related Party | 0 | $ 102,314 | $ 0 | $ 642,314 | ||||||
Related Party Transaction, Rate | 3.00% | |||||||||
Advisor fees, Acquisition fees [Member] | Maximum [Member] | ||||||||||
Related Party Transaction, Rate | 6.00% | |||||||||
Advisor fees, Asset management fees [Member] | ||||||||||
Due to Related Parties | 67,349 | $ 67,349 | 3,513 | |||||||
Related Party Transaction, Expenses from Transactions with Related Party | 201,996 | 193,391 | $ 403,965 | 355,592 | ||||||
Related Party Transaction, Rate | 0.05% | |||||||||
Advisor fees, Financing fee [Member] | ||||||||||
Related Party Transaction, Rate | 1.00% | |||||||||
Advisor fees, Property management fees [Member] | ||||||||||
Due to Related Parties | [1] | 0 | $ 0 | 0 | ||||||
Related Party Transaction, Expenses from Transactions with Related Party | [1] | 24,518 | 24,776 | $ 48,907 | 42,642 | |||||
Related Party Transaction, Rate | 1.50% | |||||||||
Advisor fees, Disposition fees [Member] | ||||||||||
Due to Related Parties | [2] | 0 | $ 0 | 0 | ||||||
Related Party Transaction, Expenses from Transactions with Related Party | [2] | $ 0 | $ 103,020 | $ 0 | $ 103,020 | |||||
Related Party Transaction, Rate | 6.00% | |||||||||
Leasing Commission Fees [Member] | ||||||||||
Related Party Transaction, Rate | 3.00% | |||||||||
Operating Expenses [Member] | ||||||||||
Related Party Transaction, Expense Reimbursement Percentage to Average Invested Assets | 2.00% | |||||||||
Related Party Transaction, Expense Reimbursement Percentage to Net Income | 25.00% | |||||||||
Rich Uncles, LLC [Member] | ||||||||||
Repayments of Related Party Debt | $ 2,751,172 | $ 2,687,407 | ||||||||
Advisor or Affiliates [Member] | Advisor fees, Disposition fees [Member] | ||||||||||
Related Party Transaction, Rate | 3.00% | |||||||||
Advisor or Affiliates [Member] | Leasing Commission Fees [Member] | ||||||||||
Related Party Transaction, Rate | 6.00% | |||||||||
|
COMMITMENTS AND CONTINGENCIES (Details Textual) - USD ($) |
6 Months Ended | |
---|---|---|
Jun. 30, 2018 |
Dec. 31, 2017 |
|
Payments for Tenant Improvements | $ 328,992 | |
Restricted Cash and Cash Equivalents | $ 462,140 | $ 462,140 |
SUBSEQUENT EVENTS (Details Textual) - USD ($) |
1 Months Ended | ||||
---|---|---|---|---|---|
Aug. 10, 2018 |
Jul. 23, 2018 |
Aug. 03, 2018 |
Jun. 30, 2018 |
Dec. 31, 2017 |
|
Share Repurchase Payable | $ 1,406,413 | $ 612,099 | |||
Long-term Debt, Gross | 63,188,447 | $ 62,277,387 | |||
Antioch, CA [Member] | |||||
Long-term Debt, Gross | $ 1,869,536 | ||||
Subsequent Event [Member] | |||||
Dividends Payable, Date Declared | Jul. 23, 2018 | ||||
Dividends Payable, Amount Per Share | $ 0.00206044 | ||||
Dividends Payable | $ 1,573,766 | ||||
Dividends Payable, Date to be Paid | Jul. 25, 2018 | ||||
Dividend Reinvested | $ 1,061,580 | ||||
Supplementary Leverage Ratio | 50.00% | ||||
Subsequent Event [Member] | Maximum [Member] | |||||
Tier One Leverage Capital to Average Assets | 50.00% | ||||
Subsequent Event [Member] | Minimum [Member] | |||||
Tier One Leverage Capital to Average Assets | 45.00% | ||||
Subsequent Event [Member] | Mortgages [Member] | |||||
Stock Repurchased During Period, Shares | 141,316 | ||||
Share Repurchase Payable | $ 1,406,420 |
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