Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BUSINESS AND ORGANIZATION
Modiv Inc. (the “Company”) was incorporated on May 15, 2015 as a Maryland corporation. The Company has the authority to issue 450,000,000 shares of stock, consisting of 50,000,000 shares of preferred stock, $0.001 par value per share, of which 2,000,000 shares are designated as 7.375% Series A cumulative redeemable perpetual preferred stock (“Series A Preferred Stock”), 300,000,000 shares of Class C common stock, $0.001 par value per share, and 100,000,000 shares of Class S common stock, $0.001 par value per share. The Company's five-year emerging growth company registration with the Securities and Exchange Commission (the “SEC”) ended on December 31, 2021 and the Company continues to report with the SEC as a smaller reporting company under Rule 12b-2 of the Securities Exchange Act of 1934, as amended. The Company's Series A Preferred Stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol MDV.PA and has been trading since September 17, 2021. The Company's Class C common stock is listed on the NYSE under the symbol “MDV” and has been trading since February 11, 2022. Prior to that date, there was no public trading market for the Company's Class C common stock. In connection with and upon listing on the NYSE, each share of the Company's Class S common stock converted into Class C common stock (see details of the initial listed offering (the “Listed Offering”) below).
The Company has been internally managed since its December 31, 2019 acquisition of the business of BrixInvest, LLC, a Delaware limited liability company and the Company’s former sponsor (“BrixInvest”), and the Company’s merger with Rich Uncles Real Estate Investment Trust I (“REIT I”) on December 31, 2019.
The Company holds its investments in real property primarily through special purpose limited liability companies which are wholly-owned subsidiaries of Modiv Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”). The Operating Partnership was formed on January 28, 2016. The Company is the sole general partner of, and owned an approximately 73% and 83% partnership interest in, the Operating Partnership as of September 30, 2022 and December 31, 2021, respectively. The Operating Partnership's limited partners include holders of several classes of units with various vesting and enhancement terms as further described in Note 12.
As of September 30, 2022, the Company's portfolio of approximately 3.2 million square feet of aggregate leasable space consisted of investments in 47 real estate properties, comprised of: 26 industrial properties, including an approximate 72.7% tenant-in-common interest in a Santa Clara, California property (the “TIC Interest”), which represent approximately 54% of the portfolio, 13 retail properties, which represent approximately 19% of the portfolio, and eight office properties, which represent approximately 27% of the portfolio (expressed as a percentage of annual base rent (“ABR”) as of September 30, 2022).
Common Stock Offerings
Since the Company’s initial registered offering of common stock was declared effective by the SEC in 2016, the Company has raised an aggregate of $211,463,370 pursuant to non-listed offerings of common stock registered with the SEC (collectively, the “Registered Offering”), offerings of common stock exempt from registration pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), distribution reinvestment plan (“DRP”) offerings of common stock registered with the SEC, a private offering of common stock pursuant to Regulation D under the Securities Act, a qualified offering of common stock pursuant to Regulation A under the Securities Act and an offering of common stock listed on the NYSE.
On January 22, 2021, the Company filed a Registration Statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000 in share value of Class C common stock to be issued pursuant to its DRP (the “Registered DRP Offering”). The Company commenced offering shares of Class C common stock pursuant to the Registered DRP Offering upon termination of the Registered Offering.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
On December 8, 2021, the Company filed with the SEC a Registration Statement on Form S-11 (File No. 333-261529), and, on February 9, 2022, the Company filed with the SEC Amendment No. 1 to the Registration Statement on Form S-11, in connection with the Listed Offering of the Company’s Class C common stock, which became effective on February 10, 2022. In connection with and upon listing on the NYSE, each share of the Company's Class S common stock converted into a share of Class C common stock. The Listed Offering of the Company's Class C common stock closed on February 15, 2022. In connection with the Listed Offering, the Company sold 40,000 shares of its Class C common stock at $25.00 per share to a major stockholder who was formerly a related party (see Note 9 for additional information).
On March 30, 2022, the Company filed a Registration Statement on Form S-3 (File No. 333-263985), and on May 27, 2022, the Company filed Amendment No. 1 to the Registration Statement on Form S-3, to issue and sell from time to time, together or separately, the following securities at an aggregate public offering price that will not exceed $200,000,000: Class C common stock, preferred stock, warrants, rights and units. The Form S-3, as amended, became effective on June 2, 2022 and the Company filed a prospectus supplement for the Company's at-the-market offering of up to $50,000,000 of its Class C common stock (the “ATM Offering”) on June 6, 2022. As of September 30, 2022, no shares have been issued in connection with the Company's ATM Offering.
Preferred Stock Offering
On September 17, 2021, the Company and the Operating Partnership completed the issuance and sale of 2,000,000 shares of the Company’s Series A Preferred Stock in an underwritten public offering (the “Preferred Offering”) at a price per share of $25.00 (see Note 9 for additional information).
Distribution Reinvestment Plan
On February 15, 2022, the Company's board of directors amended and restated the DRP (the “Second Amended and Restated DRP”) with respect to the Class C common stock to change the purchase price at which the Class C common stock is issued to stockholders who elect to participate in the DRP. The purpose of this change was to reflect the fact that the Company's Class C common stock is now listed on the NYSE and no longer priced based on net asset value (“NAV”) per share. As more fully described in the Second Amended and Restated DRP, the purchase price for the Class C common stock under the DRP depends on whether the Company issues new shares to DRP participants or the Company or any third-party administrator obtains shares to be issued to DRP participants by purchasing them in the open market or in privately negotiated transactions. The purchase price for the Class C common stock issued directly by the Company is 97%, reflecting a 3% discount (or such other discount as may then be in effect) of the Market Price (as defined in the Second Amended and Restated DRP) of the Class C common stock. This discount is subject to change from time to time, in the Company’s sole discretion, but will be between 0% to 5% of the Market Price. The purchase price for the Class C common stock that the Company or any third-party administrator purchases from parties other than the Company, either in the open market or in privately negotiated transactions, will be 100% of the “average price per share” (as described in the Second Amended and Restated DRP) actually paid for such shares of Class C common stock, excluding any processing fees. The Second Amended and Restated DRP also reflects the $0.05 per share processing fee that will be paid to the Company's transfer agent by DRP participants for each share of Class C common stock purchased through the DRP. The Second Amended and Restated DRP was effective beginning with distributions paid in February 2022. From February 2022 through September 30, 2022, the Company issued 152,606 shares of Class C common stock under the DRP.
Share Repurchase Program
On February 15, 2022, the Company's board of directors authorized up to $20,000,000 in repurchases of the Company's outstanding shares of common stock through December 31, 2022. Repurchases made pursuant to the program will be made from time-to-time in the open market, in privately negotiated transactions or in any other manner as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time.
From February 15, 2022 through September 30, 2022, the Company repurchased a total of 233,145 shares of its common stock for a total of $3,957,752 and an average cost of $16.98 per share under this share repurchase program and these shares are held as treasury stock. Our last share repurchases during the quarter ended September 30, 2022 were made on August 24, 2022.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial statements as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Such unaudited condensed consolidated financial statements and accompanying notes are the representations of the Company’s management, which is responsible for their integrity and objectivity. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2022.
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which are normal and recurring, necessary to fairly state the Company's financial position, results of operations and cash flows. All significant intercompany balances and transactions are eliminated in consolidation. The unaudited condensed consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements.
Variable Interest Entities
The FASB provides guidance for determining whether an entity is a variable interest entity (a “VIE”). VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance; and (ii) has the obligation to absorb losses, or the right to receive benefits, of the VIE that could potentially be significant to the VIE.
As of June 30, 2022, the Company held an interest in a VIE, which was incorporated under a qualified exchange accommodation arrangement to temporarily hold replacement real estate properties, for which the Company was determined to be the primary beneficiary. As a result, the Company has consolidated this entity. As of June 30, 2022, the Company's investment related to this VIE aggregated $31,406,864, or 7.3% of total assets, and no liabilities which related to four real estate properties the VIE held as of that date. As of September 30, 2022, the Company has completed the exchange transaction related to the four real estate properties held by the VIE as of June 30, 2022, and the entity is now a wholly-owned subsidiary of the Company.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements and the accompanying notes thereto in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. These estimates are based on historical experience and, in some cases, assumptions based on current and future market experience. Actual results may differ from those estimates.
Noncontrolling Interests in the Operating Partnership
The Company accounts for the noncontrolling interests in its Operating Partnership in accordance with the related accounting guidance. Due to the Company's control of the Operating Partnership through its general partnership interest therein and the limited rights of the limited partners, the Operating Partnership, including its wholly-owned subsidiaries, are consolidated with the Company, and the limited partner interests not held by the Company are reflected as noncontrolling interests in the accompanying unaudited condensed consolidated balance sheets and statements of equity. Other than the noncontrolling interests related to an “UPREIT” transaction as discussed in Note 12, all other noncontrolling interests currently represent non-voting, non-distribution accruing interests with no allocation of profits or losses, but have various conversion rights to obtain future rights to distributions and allocation of profits and losses as discussed in Note 12.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Business Combinations
The Company accounts for business combinations in accordance with FASB ASC 805, Business Combinations (“ASC 805”), and applicable Accounting Standards Updates (each, an “ASU”), whereby the total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to any non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired in a business combination.
ASC 805 defines a business as an integrated set of activities and assets (collectively, a “set”) that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. To be considered a business, the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. ASC 805 provides a practical screen to determine when a set would not be considered a business. If the screen is not met and further assessment determines that the set is not a business, then the set is an asset acquisition. The primary difference between a business combination and an asset acquisition is that an asset acquisition requires cost accumulation and allocation at relative fair value whereas in a business combination the total consideration transferred is allocated among the fair value of the identifiable tangible and intangible assets and liabilities assumed. Acquisition costs are capitalized for an asset acquisition and expensed for a business combination.
Revenue Recognition
The Company accounts for revenue in accordance with FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), which includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at the Company’s properties. Such revenues are recognized when the services are provided and the performance obligations are satisfied. Tenant reimbursements, consisting of amounts due from tenants for common area maintenance, property taxes and other recoverable costs, are recognized in rental income subsequent to the adoption of Topic 842, as discussed below, in the period the recoverable costs are incurred. Tenant reimbursements, for which the Company pays the associated costs directly to third-party vendors and is reimbursed by the tenants, are recognized and recorded on a gross basis.
The Company accounts for leases in accordance with FASB ASU No. 2016-02, Leases (“Topic 842”), and the related FASB ASU Nos. 2018-10, 2018-11, 2018-20 and 2019-01, which provide practical expedients, technical corrections and improvements for certain aspects of ASU No. 2016-02 (collectively “Topic 842”). Topic 842 established a single comprehensive model for entities to use in accounting for leases. Topic 842 applies to all entities that enter into leases. Lessees are required to report assets and liabilities that arise from leases. Lessor accounting has largely remained unchanged; however, certain refinements were made to conform with revenue recognition guidance, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Topic 842 impacts the Company's accounting for leases primarily as a lessor. Topic 842 also impacts the Company's accounting as a lessee; however, such impact is considered not material.
As a lessor, the Company's leases with tenants generally provide for the lease of real estate properties, as well as common area maintenance, property taxes and other recoverable costs. To reflect recognition as one lease component, rental income and tenant reimbursements and other lease related property income that meet the requirements of the practical expedient provided by ASU No. 2018-11 have been combined under rental income in the Company's unaudited condensed consolidated statements of operations. For the three months ended September 30, 2022 and 2021, tenant reimbursements included in rental income amounted to $1,620,758 and $1,477,240, respectively, and for the nine months ended September 30, 2022 and 2021, tenant reimbursements included in rental income amounted to $5,071,557 and $4,545,412, respectively.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Company recognizes rental income from tenants under operating leases on a straight-line basis over the noncancelable term of the lease when collectability of such amounts is reasonably assured. Recognition of rental income on a straight-line basis includes the effects of rental abatements, lease incentives and fixed and determinable increases in lease payments over the lease term. If the lease provides for tenant improvements, management of the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by the Company.
When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that the tenant can take in the form of cash or a credit against its rent) that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
•whether the lease stipulates how a tenant improvement allowance may be spent;
•whether the amount of a tenant improvement allowance is in excess of market rates;
•whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
•whether the tenant improvements are unique to the tenant or general-purpose in nature; and
•whether the tenant improvements are expected to have any residual value at the end of the lease.
Tenant reimbursements of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred and presented gross if the Company is the primary obligor and, with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk. In instances where the operating lease agreement has an early termination option, the termination penalty is based on a predetermined termination fee or based on the unamortized tenant improvements and leasing commissions.
The Company evaluates the collectability of rents and other receivables on a regular basis based on factors including, among others, payment history, credit rating, the asset type, and current economic conditions. If the Company’s evaluation of these factors indicates it may not recover the full value of the receivable, it provides an allowance against the portion of the receivable that it estimates may not be recovered. This analysis requires the Company to determine whether there are factors indicating a receivable may not be fully collectible and to estimate the amount of the receivable that may not be collected.
Bad Debts and Allowances for Tenant and Deferred Rent Receivables
The Company's determination of the adequacy of its allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. In addition, for tenant and deferred rent receivables deemed probable of collection, the Company also may record an allowance under other authoritative GAAP depending upon the Company's evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income in the Company's unaudited condensed consolidated statements of operations.
With respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt allowance for the tenant’s receivable balance and generally will not recognize subsequent rental income until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Gain or Loss on Sale of Real Estate Investments
The Company recognizes gain or loss on sale of real estate property when the Company has executed a contract for sale of the property, transferred controlling financial interest in the property to the buyer and determined that it is probable that the Company will collect substantially all of the consideration for the property. The Company's real estate property sale transactions during the three and nine months ended September 30, 2022 and 2021 met these criteria at closing. When properties are sold, operating results of the properties remain in continuing operations, and any associated gain or loss from the disposition is included in gain or loss on sale of real estate investments in the Company’s accompanying unaudited condensed consolidated statements of operations.
Impairment of Investment in Real Estate Properties
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of and eventual disposition of the property. If, based on the analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company records an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset.
Treasury Stock
Effective on the date of the Listed Offering, the Company accounts for repurchased shares of its Class C common stock as treasury stock. Treasury shares are recorded at cost and are included as a component of equity in the Company's unaudited condensed consolidated balance sheet as of September 30, 2022.
Per Share Data
The Company reports a dual presentation of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS excludes dilution and is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted EPS uses the treasury stock method or the if-converted method, where applicable, to compute for the potential dilution that would occur if dilutive securities or commitments to issue common stock were exercised. For the three and nine months ended September 30, 2022 and 2021, the Company presented both Basic EPS and Diluted EPS reflecting its reported net income (loss) attributable to common stockholders for each period (see Note 13 for additional information).
As discussed in Note 1, in connection with and upon listing on the NYSE, each share of the Company's Class S common stock converted into a share of Class C common stock. Prior to the conversion of the Company's Class S common stock into Class C common stock, application of the two-class method for allocating net loss attributable to common stockholders in accordance with the provisions of ASC 260, Earnings per Share, would have resulted in basic net income attributable to common stockholders of $0.47 per share for both Class C common stock and Class S common stock for the three months ended September 30, 2021, and diluted net income attributable to common stockholders of $0.40 per share of Class C common stock and $0.47 per share of Class S common stock for the three months ended September 30, 2021.
The two-class method would have resulted in basic net income attributable to common stockholders of $0.21 per share of Class C common stock and $0.20 per share of Class S common stock for the nine months ended September 30, 2021, and diluted net income attributable to common stockholders of $0.18 per share of Class C common stock and $0.20 per share of Class S common stock for the nine months ended September 30, 2021.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Fair Value Disclosures
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an existing price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy, which is based on three levels of inputs, the first two of which are considered observable and the last unobservable, that may be used to measure fair value, is as follows:
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instrument for which it is practicable to estimate the fair value:
Cash and cash equivalents, restricted cash, receivable from early termination of lease, tenant receivables, prepaid expenses and other assets and accounts payable, accrued and other liabilities: These balances approximate their fair values due to their short maturities.
Derivative Instruments: The Company’s derivative instruments are presented at fair value in the accompanying unaudited condensed consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.
Goodwill: The fair value measurement of goodwill is considered a Level 3 nonrecurring fair value measurement. For goodwill, fair value measurement involves the determination of fair value of a reporting unit.
Credit facilities: The fair values of the Company’s credit facilities approximate their carrying values as their interest rates and other terms are comparable to those available in the marketplace for similar credit facilities.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Mortgage notes payable: The fair values of the Company’s mortgage notes payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities 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.
Related party transactions: The Company has concluded that it is not practical to determine the estimated fair value of related party transactions. Disclosure rules for fair value measurements require that for financial instruments for which it is not practicable to estimate fair value, information pertinent to those instruments be disclosed. Further information as to these financial transactions with related parties is included in Note 10.
Restricted Cash
Restricted cash as of December 31, 2021 amounted to $2,441,970 for the mortgages related to properties discussed below and other lender reserves. There were no restricted cash balances as of September 30, 2022.
Under the terms of the Company’s June 2021 refinancing of mortgages on its properties leased to Northrop Grumman and L3Harris Technologies, Inc. (“L3Harris”) with Banc of California as described in Note 7, the Company established restricted cash accounts at Banc of California with $1,400,000 and $1,000,000 held for the Northrop Grumman and L3Harris properties, respectively, to fund building improvements, tenant improvements and leasing commissions. Subsequent to the origination of the loans, $128,538 was released to fund a leasing commission, resulting in $2,271,462 remaining as aggregate restricted cash as of December 31, 2021. Pursuant to the refinancing of the Northrop Grumman and L3Harris mortgages on January 18, 2022 as further discussed in Note 7, these funds became unrestricted. Additional restricted cash balances of $170,508 as of December 31, 2021 were also released during the first three months of 2022 due to refinancing.
Real Estate Investments Held for Sale
The Company generally considers a real estate investment to be “held for sale” when all of the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value, (iv) the sale of the property within one year is considered probable and (v) significant changes to the plan to sell are not expected. Real estate that is held for sale and its related assets are classified as “real estate investments held for sale, net” and “assets related to real estate investments held for sale,” respectively, in the accompanying unaudited condensed consolidated balance sheets. Mortgage notes payable and other liabilities related to real estate investments held for sale are classified as “mortgage notes payable related to real estate investments held for sale, net” and “liabilities related to real estate investments held for sale,” respectively, in the accompanying unaudited condensed consolidated balance sheets. Real estate investments classified as held for sale are no longer depreciated and are reported at the lower of their carrying value or their estimated fair value less estimated costs to sell. Operating results of properties that were classified as held for sale in the ordinary course of business are included in continuing operations in the Company’s accompanying unaudited condensed consolidated statements of operations.
Goodwill
The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. The Company evaluates goodwill and other intangible assets for possible impairment in accordance with ASC 350, Intangibles–Goodwill and Other, on an annual basis, or more frequently when events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit has declined below its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
In assessing goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of a reporting unit is less than its carrying amount. The Company’s qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of the Company’s financial performance; or (iv) a sustained decrease in the Company’s market capitalization below its net book value. If, after assessing the totality of events or circumstances, the Company determines it is unlikely that the fair value of such reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary. However, if the Company concludes otherwise, or if it elects to bypass the qualitative analysis, then it is required to perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit.
Derivative Instruments
The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates on its variable rate debt. The Company does not enter into derivatives for speculative purposes. The Company records these derivative instruments at fair value on the accompanying unaudited condensed consolidated balance sheets. The change in fair value of the derivative instrument related to the Company's $150,000,000 Term Loan (defined in Note 7) as of September 30, 2022 was designated as a cash flow hedge effective July 1, 2022 for financial accounting purposes and was recorded as unrealized holding gain on interest rate swap designated as a cash flow hedge in the accompanying unaudited condensed consolidated statements of comprehensive income (loss). The Company’s derivative instruments related to mortgage notes payable as of December 31, 2021 did not meet the hedge accounting criteria and therefore the changes in the fair value were recorded as gains or losses on derivative instruments in the accompanying unaudited condensed consolidated statements of operations under interest expense.
The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate 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.
Restricted Stock and Restricted Stock Unit Awards
The fair values of the Operating Partnership's units or restricted stock unit awards issued or granted by the Company are based on an estimated NAV per share of the Company’s common stock on the date of issuance or grant, adjusted for an illiquidity discount due to the illiquid nature of the underlying equity prior to the listing of the Company's Class C common stock on the NYSE. The fair value of future grants of the Operating Partnership's units or restricted stock unit awards will be determined based on the NYSE's market closing price of the Company's Class C common stock on the date of grant. Operating Partnership units issued as purchase consideration in connection with the Self-Management Transaction and UPREIT Transaction (each as defined and discussed in Note 12) are recorded in equity under noncontrolling interests in the Operating Partnership in the Company's unaudited condensed consolidated balance sheets and statements of equity. For units granted to employees of the Company that are not included in the purchase consideration, the fair value of the award is amortized using the straight-line method over the requisite service period of the award, which is generally the vesting period (see Note 12). The Company has elected to record forfeitures as they occur.
The Company determines the accounting classification of equity instruments (e.g. restricted stock units) that are issued as purchase consideration or part of the purchase consideration in a business combination, as either liability or equity, by first assessing whether the equity instruments meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”), and then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“ASC 815-40”). Under ASC 480-10, equity instruments are classified as liabilities if the equity instruments are mandatorily redeemable, obligate the issuer to settle the equity instruments or the underlying shares by paying cash or other assets, or must or may require an unconditional obligation that must be settled by issuing a variable number of shares.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
If equity instruments do not meet liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the equity instruments do not require liability classification under ASC 815-40, in order to conclude equity classification, the Company assesses whether the equity instruments are indexed to its common stock and whether the equity instruments are classified as equity under ASC 815-40 or other applicable GAAP guidance. After all relevant assessments are made, the Company concludes whether the equity instruments are classified as liability or equity. Liability classified equity instruments are required to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded in the statements of operations as a gain or loss. Equity classified equity instruments are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date.
Reclassifications
Certain prior year balance sheet, statement of operations and statement of cash flows accounts have been reclassified to conform with the current year presentation. The reclassifications did not affect net loss in the prior year unaudited condensed consolidated statement of operations.
Recent Accounting Pronouncements
New Accounting Standards Recently Issued and Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 eases the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discounted because of reference rate reform.
Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate, and the modification would be considered “minor” so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company implemented ASU 2020-04 effective January 1, 2022 and the impact of such implementation was not material to the Company’s consolidated financial statements. On January 18, 2022, the Company repaid the four remaining loans existing as of December 31, 2021 which had LIBOR reference rates.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. REAL ESTATE INVESTMENTS, NET
As of September 30, 2022, the Company’s real estate investment portfolio consisted of 47 operating properties located in 17 states comprised of: 26 industrial properties (including the TIC Interest in an industrial property not reflected in the table below but discussed in Note 4), 13 retail properties and eight office properties, and one parcel of land, which currently serves as an easement to one of the Company’s office properties.
The following table provides summary information regarding the Company’s operating properties as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property | | Location | | Acquisition Date | | Property Type | | Land, Buildings and Improvements | | Equipment | | Tenant Origination and Absorption Costs | | Accumulated Depreciation and Amortization | | Total Investment in Real Estate Property, Net |
| Dollar General | | Litchfield, ME | | 11/4/2016 | | Retail | | $ | 1,281,812 | | | $ | — | | | $ | 116,302 | | | $ | (236,432) | | | $ | 1,161,682 | |
| Dollar General | | Wilton, ME | | 11/4/2016 | | Retail | | 1,543,776 | | | — | | | 140,653 | | | (302,582) | | | 1,381,847 | |
| Dollar General | | Thompsontown, PA | | 11/4/2016 | | Retail | | 1,199,860 | | | — | | | 106,730 | | | (227,169) | | | 1,079,421 | |
| Dollar General | | Mt. Gilead, OH | | 11/4/2016 | | Retail | | 1,174,188 | | | — | | | 111,847 | | | (217,803) | | | 1,068,232 | |
| Dollar General | | Lakeside, OH | | 11/4/2016 | | Retail | | 1,112,872 | | | — | | | 100,856 | | | (223,534) | | | 990,194 | |
| Dollar General | | Castalia, OH | | 11/4/2016 | | Retail | | 1,102,086 | | | — | | | 86,408 | | | (217,186) | | | 971,308 | |
| Dollar General | | Bakersfield, CA | | 12/31/2019 | | Retail | | 4,899,714 | | | — | | | 261,630 | | | (404,614) | | | 4,756,730 | |
| Dollar General | | Big Spring, TX | | 12/31/2019 | | Retail | | 1,281,683 | | | — | | | 76,351 | | | (140,164) | | | 1,217,870 | |
| Dollar Tree | | Morrow, GA | | 12/31/2019 | | Retail | | 1,320,367 | | | — | | | 73,298 | | | (195,004) | | | 1,198,661 | |
| Northrop Grumman | | Melbourne, FL | | 3/7/2017 | | Office | | 13,608,084 | | | — | | | 1,469,737 | | | (3,895,365) | | | 11,182,456 | |
| Northrop Grumman Parcel | | Melbourne, FL | | 6/21/2018 | | Land | | 329,410 | | | — | | | — | | | — | | | 329,410 | |
| exp US Services | | Maitland, FL | | 3/27/2017 | | Office | | 6,114,695 | | | — | | | 388,248 | | | (1,225,741) | | | 5,277,202 | |
| Husqvarna | | Charlotte, NC | | 11/30/2017 | | Industrial | | 11,840,200 | | | — | | | 1,013,948 | | | (1,738,565) | | | 11,115,583 | |
| AvAir | | Chandler, AZ | | 12/28/2017 | | Industrial | | 27,357,899 | | | — | | | — | | | (3,325,761) | | | 24,032,138 | |
| 3M | | DeKalb, IL | | 3/29/2018 | | Industrial | | 14,762,819 | | | — | | | 3,037,057 | | | (5,481,404) | | | 12,318,472 | |
| Cummins | | Nashville, TN | | 4/4/2018 | | Office | | 14,538,528 | | | — | | | 1,566,997 | | | (3,558,448) | | | 12,547,077 | |
| Costco | | Issaquah, WA | | 12/20/2018 | | Office | | 27,548,522 | | | — | | | 2,765,136 | | | (4,938,715) | | | 25,374,943 | |
| Taylor Fresh Foods | | Yuma, AZ | | 10/24/2019 | | Industrial | | 34,194,369 | | | — | | | 2,894,017 | | | (3,909,950) | | | 33,178,436 | |
| Levins | | Sacramento, CA | | 12/31/2019 | | Industrial | | 4,429,390 | | | — | | | 221,927 | | | (606,673) | | | 4,044,644 | |
| Labcorp | | San Carlos, CA | | 12/31/2019 | | Industrial | | 9,672,174 | | | — | | | 408,225 | | | (561,882) | | | 9,518,517 | |
| GSA (MSHA) | | Vacaville, CA | | 12/31/2019 | | Office | | 3,112,076 | | | — | | | 243,307 | | | (380,916) | | | 2,974,467 | |
| PreK Education | | San Antonio, TX | | 12/31/2019 | | Retail | | 12,477,027 | | | — | | | 555,767 | | | (1,334,763) | | | 11,698,031 | |
| Solar Turbines | | San Diego, CA | | 12/31/2019 | | Office | | 7,145,941 | | | — | | | 284,026 | | | (720,093) | | | 6,709,874 | |
| Wood Group | | San Diego, CA | | 12/31/2019 | | Industrial | | 9,869,520 | | | — | | | 539,633 | | | (1,071,070) | | | 9,338,083 | |
| ITW Rippey | | El Dorado, CA | | 12/31/2019 | | Industrial | | 7,071,143 | | | — | | | 304,387 | | | (817,923) | | | 6,557,607 | |
| Gap | | Rocklin, CA | | 12/31/2019 | | Office | | 8,433,744 | | | — | | | 360,377 | | | (1,333,067) | | | 7,461,054 | |
| L3Harris | | San Diego, CA | | 12/31/2019 | | Industrial | | 11,690,952 | | | — | | | 662,101 | | | (1,227,393) | | | 11,125,660 | |
| Sutter Health | | Rancho Cordova, CA | | 12/31/2019 | | Office | | 29,587,023 | | | — | | | 1,616,610 | | | (2,977,488) | | | 28,226,145 | |
| Walgreens | | Santa Maria, CA | | 12/31/2019 | | Retail | | 5,223,442 | | | — | | | 335,945 | | | (365,642) | | | 5,193,745 | |
| Raising Cane's | | San Antonio, TX | | 7/26/2021 | | Retail | | 3,430,224 | | | — | | | 213,997 | | | (140,482) | | | 3,503,739 | |
| Arrow-TruLine | | Archbold, OH | | 12/3/2021 | | Industrial | | 11,518,084 | | | — | | | — | | | (328,134) | | | 11,189,950 | |
| KIA | | Carson, CA | | 1/18/2022 | | Retail | | 69,286,444 | | | — | | | 118,606 | | | (752,153) | | | 68,652,897 | |
| Kalera | | Saint Paul, MN | | 1/31/2022 | | Industrial | | 3,690,009 | | | 4,429,000 | | | — | | | (240,788) | | | 7,878,221 | |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Operating properties table continued) | | | | | | | | | | | | | | |
| Property | | Location | | Acquisition Date | | Property Type | | Land, Buildings and Improvements | | Equipment | | Tenant Origination and Absorption Costs | | Accumulated Depreciation and Amortization | | Total Investment in Real Estate Property, Net |
| Lindsay | | Colorado Springs 1, CO | | 4/19/2022 | | Industrial | | $ | 2,311,934 | | | $ | — | | | $ | — | | | $ | (26,731) | | | $ | 2,285,203 | |
| Lindsay | | Colorado Springs 2, CO | | 4/19/2022 | | Industrial | | 3,314,406 | | | — | | | — | | | (15,908) | | | 3,298,498 | |
| Lindsay | | Dacano, CO | | 4/19/2022 | | Industrial | | 6,068,788 | | | — | | | — | | | (38,565) | | | 6,030,223 | |
| Lindsay | | Alachua, FL | | 4/19/2022 | | Industrial | | 8,518,123 | | | — | | | — | | | (166,197) | | | 8,351,926 | |
| Lindsay | | Franklinton, NC | | 4/19/2022 | | Industrial | | 7,181,113 | | | — | | | — | | | (73,273) | | | 7,107,840 | |
| Lindsay | | Canal Fulton 1, OH | | 4/19/2022 | | Industrial | | 11,345,533 | | | — | | | — | | | (157,596) | | | 11,187,937 | |
| Lindsay | | Canal Fulton 2, OH | | 4/19/2022 | | Industrial | | 10,190,942 | | | — | | | — | | | (224,757) | | | 9,966,185 | |
| Lindsay | | Rock Hill, SC | | 4/19/2022 | | Industrial | | 6,555,983 | | | — | | | — | | | (77,112) | | | 6,478,871 | |
| Producto | | Endicott, NY | | 7/15/2022 | | Industrial | | 2,362,310 | | | — | | | — | | | (16,281) | | | 2,346,029 | |
| Producto | | Jamestown, NY | | 7/15/2022 | | Industrial | | 3,073,686 | | | — | | | — | | | (19,932) | | | 3,053,754 | |
| Valtir | | Centerville, UT | | 7/26/2022 | | Industrial | | 4,685,354 | | | — | | | — | | | (24,398) | | | 4,660,956 | |
| Valtir | | Orangeburg, SC | | 7/26/2022 | | Industrial | | 4,243,309 | | | — | | | — | | | (29,029) | | | 4,214,280 | |
| Valtir | | Fort Worth, TX | | 7/26/2022 | | Industrial | | 3,278,521 | | | — | | | — | | | (13,013) | | | 3,265,508 | |
| Valtir | | Lima, OH | | 8/4/2022 | | Industrial | | 9,921,943 | | | — | | | — | | | (46,219) | | | 9,875,724 | |
| | | | | | | | $ | 444,900,022 | | | $ | 4,429,000 | | | $ | 20,074,123 | | | $ | (44,025,915) | | | $ | 425,377,230 | |
Acquisitions
Nine Months Ended September 30, 2022
During the nine months ended September 30, 2022, the Company acquired the following real estate properties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and Location | | Acquisition Date | | Land | | Buildings and
Improvements | | Equipment | | Tenant
Origination
and
Absorption
Costs | | Above-
Market
Lease Intangibles | | Acquisition Price |
| KIA, Carson, CA | | 1/18/2022 | | $ | 32,741,781 | | | $ | 36,544,663 | | | $ | — | | | $ | 118,606 | | | $ | — | | | $ | 69,405,050 | |
| Kalera, St. Paul, MN | | 1/31/2022 | | 562,356 | | | 3,127,653 | | | 4,429,000 | | | — | | | — | | | 8,119,009 | |
| Lindsay, Colorado Springs 1, CO | | 4/19/2022 | | 1,195,178 | | | 1,116,756 | | | — | | | — | | | — | | | 2,311,934 | |
| Lindsay, Colorado Springs 2, CO | | 4/19/2022 | | 2,239,465 | | | 1,074,941 | | | — | | | — | | | — | | | 3,314,406 | |
| Lindsay, Dacono, CO (1) | | 4/19/2022 | | 2,263,982 | | | 3,804,806 | | | — | | | — | | | — | | | 6,068,788 | |
| Lindsay, Alachua, FL | | 4/19/2022 | | 966,192 | | | 7,551,931 | | | — | | | — | | | — | | | 8,518,123 | |
| Lindsay, Franklinton, NC | | 4/19/2022 | | 2,843,811 | | | 4,337,302 | | | — | | | — | | | — | | | 7,181,113 | |
| Lindsay, Fulton 1, OH | | 4/19/2022 | | 726,877 | | | 10,618,656 | | | — | | | — | | | — | | | 11,345,533 | |
| Lindsay, Fulton 2, OH | | 4/19/2022 | | 635,865 | | | 9,555,077 | | | — | | | — | | | — | | | 10,190,942 | |
| Lindsay, Rock Hill, SC | | 4/19/2022 | | 2,816,322 | | | 3,739,661 | | | — | | | — | | | — | | | 6,555,983 | |
| Producto, Endicott, NY | | 7/15/2022 | | 327,964 | | | 2,034,346 | | | — | | | — | | | — | | | 2,362,310 | |
| Producto, Jamestown, NY | | 7/15/2022 | | 919,332 | | | 2,154,354 | | | — | | | — | | | — | | | 3,073,686 | |
| Valtir, Centerville, UT | | 7/26/2022 | | 2,467,565 | | | 2,217,789 | | | — | | | — | | | — | | | 4,685,354 | |
| Valtir, Orangeburg, SC | | 7/26/2022 | | 1,678,818 | | | 2,564,491 | | | — | | | — | | | 1,356,961 | | | 5,600,270 | |
| Valtir, Fort Worth, TX | | 7/26/2022 | | 1,785,240 | | | 1,493,281 | | | — | | | — | | | — | | | 3,278,521 | |
| Valtir, Lima, OH | | 8/4/2022 | | 747,746 | | | 9,174,197 | | | — | | | — | | | — | | | 9,921,943 | |
| | | | $ | 54,918,494 | | | $ | 101,109,904 | | | $ | 4,429,000 | | | $ | 118,606 | | | $ | 1,356,961 | | | $ | 161,932,965 | |
(1) As of September 30, 2022, buildings and improvements exclude a non-refundable deposit of $820,614 for funding ongoing building construction at the Lindsay property in Dacono, Colorado. This deposit is included in prepaid expenses and other assets in the accompanying unaudited condensed consolidated balance sheets.
During the three and nine months ended September 30, 2022, the Company recognized $3,432,150 and $7,537,742, respectively, of total revenue related to the above-acquired properties.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The noncancellable lease terms of the properties acquired during the nine months ended September 30, 2022 are as follows:
| | | | | | | | |
| Property | | Lease Expiration |
| KIA of Carson | | 1/17/2047 |
| Kalera | | 2/28/2042 |
Lindsay, for all eight properties acquired | | 4/30/2047 |
Producto, for two properties acquired | | 7/31/2042 |
| Valtir, UT and TX | | 7/31/2037 |
| Valtir, SC and OH | | 8/31/2047 |
Nine Months Ended September 30, 2021
During the nine months ended September 30, 2021, the Company acquired the following real estate property:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and Location | | Acquisition Date | | Land | | Buildings and
Improvements | | Equipment | | Tenant
Origination
and
Absorption
Costs | | Acquisition Price |
| Raising Cane's, San Antonio, TX | | 07/26/2021 | | $ | 1,902,069 | | | $ | 1,528,155 | | | $ | — | | | $ | 213,997 | | | $ | 3,644,221 | |
During the three and nine months ended September 30, 2021, the Company recognized $47,004 of total revenue related to the above-acquired property.
The noncancellable lease term of the property acquired during the nine months ended September 30, 2021 is as follows:
| | | | | | | | |
| Property | | Lease Expiration |
| Raising Cane's | | 2/20/2028 |
Dispositions
The dispositions during the nine months ended September 30, 2022 and 2021 were as follows:
Nine Months Ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property | | Location | | Disposition Date | | Property Type | | Rentable Square Feet | | Contract Sale Price | | Gain on Sale |
| Bon Secours | | Richmond, VA | | 2/11/2022 | | Office | | 72,890 | | | $ | 10,200,000 | | | $ | 179,404 | |
| Omnicare | | Richmond, VA | | 2/11/2022 | | Flex | | 51,800 | | | 8,760,000 | | | 2,062,890 | |
| Texas Health | | Dallas, TX | | 2/11/2022 | | Office | | 38,794 | | | 7,040,000 | | | 160,377 | |
| Accredo | | Orlando, FL | | 2/24/2022 | | Office | | 63,000 | | | 14,000,000 | | | 4,998,106 | |
| EMCOR | | Cincinnati, OH | | 6/29/2022 | | Office | | 39,385 | | | 6,525,000 | | | 1,002,101 | |
| Williams Sonoma | | Summerlin, NV | | 8/26/2022 | | Office | | 35,867 | | | 9,300,000 | | | 1,703,616 | |
| Wyndham | | Summerlin, NV | | 9/16/2022 | | Office | | 41,390 | | | 12,900,000 | | | 2,967,668 | |
| | | | | | | | 343,126 | | | $ | 68,725,000 | | | $ | 13,074,162 | |
On February 11, 2022, the Company completed the sale of two medical office properties in Dallas, Texas and Richmond, Virginia leased to Texas Health and Bon Secours, respectively, and one flex property in Richmond, Virginia leased to Omnicare for an aggregate sales price of $26,000,000, which generated net proceeds of $11,892,305 after payment of commissions, closing costs and existing mortgages.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
On February 24, 2022, the Company completed the sale of a medical office property in Orlando, Florida leased to Accredo for a sales price of $14,000,000, which generated net proceeds of $5,012,724 after payment of commissions, closing costs and repayment of the existing mortgage.
On June 29, 2022, the Company completed the sale of an office property in Cincinnati, Ohio leased to EMCOR for a sales price of $6,525,000, which generated net proceeds of $6,345,642 after payment of commissions and closing costs.
On August 26, 2022, the Company completed the sale of an office property in Summerlin, Nevada leased to Williams Sonoma for a sales price of $9,300,000, which generated net proceeds of $8,964,252 after payment of commissions and closing costs.
On September 16, 2022, the Company completed the sale of an office property in Summerlin, Nevada leased to Wyndham for a sales price of $12,900,000, which generated net proceeds of $12,267,571 after payment of commissions and closing costs.
Nine Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property | | Location | | Disposition Date | | Property Type | | Rentable Square Feet | | Contract Sale Price | | Gain on Sale |
| Chevron Gas Station | | Roseville, CA | | 1/7/2021 | | Retail | | 3,300 | | | $ | 4,050,000 | | | $ | 228,769 | |
| EcoThrift | | Sacramento, CA | | 1/29/2021 | | Retail | | 38,536 | | | 5,375,300 | | | 51,415 | |
| Chevron Gas Station | | San Jose, CA | | 2/12/2021 | | Retail | | 1,060 | | | 4,288,888 | | | 9,458 | |
| Dana | | Cedar Park, TX | | 7/7/2021 | | Industrial | | 45,465 | | | 10,000,000 | | | 4,127,638 | |
| | | | | | | | 88,361 | | | $ | 23,714,188 | | | 4,417,280 | |
| 24 Hour Fitness Adjustment | | | | | | | | | | 115,133 | |
| Total | | | | | | | | | | | | $ | 4,532,413 | |
On January 7, 2021, the Company completed the sale of a retail property in Roseville, California, which was leased to the operator of a Chevron gas station, for $4,050,000, which generated net proceeds of $3,914,909 after payment of commissions and closing costs.
On January 29, 2021, the Company completed the sale of a retail property in Sacramento, California, which was leased to EcoThrift, for $5,375,300, which generated net proceeds of $2,684,225 after repayment of the existing mortgage, commissions and closing costs.
On February 12, 2021, the Company completed the sale of a retail property in San Jose, California, which was leased to the operator of a Chevron gas station, for $4,288,888, which generated net proceeds of $4,054,327 after payment of commissions and closing costs.
On July 7, 2021, the Company completed the sale of an industrial property in Cedar Park, Texas, which was leased to Dana Incorporated, but unoccupied, for $10,000,000, which generated net proceeds of $4,975,334 after repayment of the existing mortgage, commissions and closing costs. Upon the sale of the property, Dana Incorporated executed a promissory note payable to the Company for its obligation to continue to pay rent of $65,000 per month through July 2022 and pay its early termination fee of $1,381,767 no later than July 31, 2022. The unpaid amount of the Company's note receivable of $1,836,767 as of December 31, 2021 is presented as receivable from early termination of the lease in the Company's unaudited condensed consolidated balance sheet as of December 31, 2021. The note receivable monthly payments were received with full collection during the three months ended September 30, 2022.
On September 24, 2021, the Company received a notice of refund amounting to $115,133 related to the sale of a retail property in Las Vegas, Nevada on December 16, 2020, which was formerly leased to 24 Hour Fitness. The refund was recognized as an adjustment to the estimate of the amount which was expected to be received related to subsequent operations and improvements to the property and was included in gain on sale of real estate investments in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Asset Concentration
As of September 30, 2022, the Company’s real estate portfolio asset concentration (greater than 10% of total assets) was as follows:
| | | | | | | | | | | | | | |
| | September 30, 2022 |
| Property and Location | | Net Carrying Value | | Percentage of
Total Assets |
| KIA, Carson, CA | | $ | 68,652,897 | | | 14.9 | % |
Lindsay, eight properties acquired in Colorado (three), Ohio (two), North Carolina, South Carolina and Florida | | 54,706,683 | | | 11.8 | % |
| Total | | $ | 123,359,580 | | | 26.7 | % |
The Company held no real estate property with a net book value that was greater than 10% of its total assets as of December 31, 2021.
Rental Income Concentration
During the three and nine months ended September 30, 2022, the Company’s rental income concentration (greater than 10% of rental income) was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, 2022 | | Nine Months Ended
September 30, 2022 |
| Property and Location | | Rental Income | | Percentage of
Total Rental Income | | Rental Income | | Percentage of
Total Rental Income |
| KIA, Carson, CA | | $ | 1,507,833 | | | 14.8 | % | | $ | 4,232,839 | | | 14.0 | % |
Lindsay, eight properties acquired in Colorado (three), Ohio (two), North Carolina, South Carolina and Florida | | $ | 1,324,907 | | | 13.0 | % | | (1) | | (1) |
(1) The Lindsay properties represented the source of greater than 10% of total rental income during the three months ended September 30, 2022 but not the nine months ended September 30, 2022 since the Lindsay properties were acquired on April 19, 2022.
No tenant represented the source of 10% of total rental income during the three and nine months ended September 30, 2021.
Operating Leases
The Company’s real estate properties are primarily leased to tenants under net leases for which terms and expirations vary. The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies or lease guarantors) that are rated by nationally recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants (or their parent companies or lease guarantors), and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
During the nine months ended September 30, 2022, the Company executed lease extensions for three properties, including the properties leased to (i) Cummins in Nashville, Tennessee for an additional one year through February 28, 2024, (ii) ITW Rippey in El Dorado, California for an additional seven years through July 31, 2029 and (iii) Williams Sonoma in Summerlin, Nevada for an additional three years through October 31, 2025, which was sold on August 26, 2022. These three lease extensions resulted in an average increase in lease term of 3.7 years and an average annual increase in rents of 1.9% as of March 31, 2022, the end of the quarter during which they were all executed.
As discussed above, the Company also acquired 16 properties and sold seven properties during the nine months ended September 30, 2022.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
As of September 30, 2022, the future minimum contractual rent payments due to the Company under the Company’s non-cancellable operating leases, including lease amendments executed though the date of this report, if any, are as follows:
| | | | | | | | |
| October through December 2022 | | $ | 8,345,845 | |
| 2023 | | 33,033,061 | |
| 2024 | | 31,723,561 | |
| 2025 | | 30,350,230 | |
| 2026 | | 24,823,591 | |
| 2027 | | 23,134,874 | |
| Thereafter | | 312,446,877 | |
| | $ | 463,858,039 | |
Intangible Assets, Net Related to the Company's Real Estate
As of September 30, 2022 and December 31, 2021, intangible assets, net related to the Company's real estate were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Tenant Origination and Absorption Costs | | Above-Market Lease Intangibles | | Below-Market Lease Intangibles | | Tenant Origination and Absorption Costs | | Above-Market Lease Intangibles | | Below-Market Lease Intangibles |
| Cost | $ | 20,074,123 | | | $ | 2,485,509 | | | $ | (14,876,008) | | | $ | 21,504,210 | | | $ | 1,128,549 | | | $ | (15,097,132) | |
| Accumulated amortization | (11,849,139) | | | (546,204) | | | 4,965,728 | | | (11,009,997) | | | (437,530) | | | 3,994,192 | |
| Net | $ | 8,224,984 | | | $ | 1,939,305 | | | $ | (9,910,280) | | | $ | 10,494,213 | | | $ | 691,019 | | | $ | (11,102,940) | |
The intangible assets acquired in connection with the acquisitions have a weighted average amortization period of approximately 10.6 years as of September 30, 2022. As of September 30, 2022, the amortization of intangible assets for the remaining three months ending December 31, 2022 and for each of the next five years and thereafter is expected to be as follows:
| | | | | | | | | | | | | | | | | |
| Tenant Origination and Absorption Costs | | Above-Market Lease Intangibles | | Below-Market Lease Intangibles |
| October through December 2022 | $ | 478,035 | | | $ | 46,025 | | | $ | (231,174) | |
| 2023 | 1,565,477 | | | 181,452 | | | (906,522) | |
| 2024 | 1,428,190 | | | 176,822 | | | (903,104) | |
| 2025 | 1,181,158 | | | 170,274 | | | (903,104) | |
| 2026 | 620,589 | | | 132,836 | | | (897,701) | |
| 2027 | 343,917 | | | 76,550 | | | (887,789) | |
| Thereafter | 2,607,618 | | | 1,155,346 | | | (5,180,886) | |
| $ | 8,224,984 | | | $ | 1,939,305 | | | $ | (9,910,280) | |
| | | | | |
| Weighted-average remaining amortization period | 8.0 years | | 19.1 years | | 11.1 years |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Real Estate Investments Held For Sale
As of September 30, 2022, there were no properties classified as held for sale by the Company. As of December 31, 2021, the Company classified four healthcare related properties as held for sale and presented the properties in the Company’s unaudited condensed consolidated balance sheet as real estate investments held for sale. These properties were all sold in February 2022, as discussed above. These four healthcare related properties consisted of three office properties (the property leased to Accredo Health through December 31, 2024 located in Orlando, Florida; the property leased to Bon Secours Health through August 31, 2026 located in Richmond, Virginia; and the property leased to Texas Health through December 31, 2025 located in Dallas, Texas) and one flex property leased to Omnicare through May 31, 2026 located in Richmond, Virginia.
The following table summarizes the major components of assets and liabilities related to the four real estate investments held for sale as of December 31, 2021:
| | | | | | | | |
| | December 31,
2021 |
| Assets related to real estate investments held for sale: | | |
| Land, buildings and improvements | | $ | 34,507,485 | |
| Tenant origination and absorption costs | | 3,064,371 | |
| Accumulated depreciation and amortization | | (6,061,094) | |
| Real estate investments held for sale, net | | 31,510,762 | |
| Other assets, net | | 788,296 | |
| Total assets related to real estate investments held for sale: | | $ | 32,299,058 | |
| | |
| Liabilities related to real estate investments held for sale: | | |
| Mortgage notes payable, net | | $ | 21,699,912 | |
| Other liabilities, net | | 383,282 | |
| Total liabilities related to real estate investments held for sale: | | $ | 22,083,194 | |
NOTE 4. UNCONSOLIDATED INVESTMENT IN REAL ESTATE PROPERTY
The Company’s investment in unconsolidated entity as of September 30, 2022 and December 31, 2021 is as follows:
| | | | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 |
| The TIC Interest | | $ | 9,988,498 | | | $ | 9,941,338 | |
The Company’s income from investment in unconsolidated entity for the three and nine months ended September 30, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| The TIC Interest | | $ | 64,358 | | | $ | 75,403 | | | $ | 226,690 | | | $ | 222,705 | |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
TIC Interest
During 2017, the Company, through a wholly-owned subsidiary of the Operating Partnership, acquired an approximate 72.7% interest in a 91,740 square foot industrial property in Santa Clara, California. The remaining approximate 27.3% of undivided interest in the Santa Clara property is held by Hagg Lane II, LLC (an approximate 23.4% interest) and Hagg Lane III, LLC (an approximate 3.9% interest). The manager of both Hagg Lane II, LLC and Hagg Lane III, LLC was a member of the Company's board of directors from December 2019 to December 2021. The Santa Clara property does not qualify as a variable interest entity and consolidation is not required as the Company’s TIC Interest does not control the property. Therefore, the Company accounts for the TIC Interest using the equity method. The Company receives approximately 72.7% of the cash flow distributions and recognizes approximately 72.7% of the results of operations for this property.
During the three months ended September 30, 2022 and 2021, the Company received $32,378 and $85,962 in cash distributions, respectively, and $179,531 and $247,929 during the nine months ended September 30, 2022 and 2021, respectively.
The following is summarized financial information for the Santa Clara property as of September 30, 2022 and December 31, 2021 and for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 |
| Assets: | | | | |
| Real estate investments, net | | $ | 29,574,593 | | | $ | 29,403,232 | |
| Cash and cash equivalents | | 468,996 | | | 690,470 | |
| Other assets | | 62,350 | | | 134,049 | |
| Total assets | | $ | 30,105,939 | | | $ | 30,227,751 | |
| Liabilities: | | | | |
| Mortgage note payable, net | | $ | 13,008,884 | | | $ | 13,218,883 | |
| Below-market lease, net | | 2,550,796 | | | 2,660,586 | |
| Other liabilities | | 502,326 | | | 369,209 | |
| Total liabilities | | 16,062,006 | | | 16,248,678 | |
| Total equity | | 14,043,933 | | | 13,979,073 | |
| Total liabilities and equity | | $ | 30,105,939 | | | $ | 30,227,751 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Total revenues | | $ | 679,500 | | | $ | 683,160 | | | $ | 2,071,258 | | | $ | 2,034,072 | |
| Expenses: | | | | | | | | |
| Interest expense | | 135,640 | | | 138,616 | | | 404,902 | | | 414,258 | |
| Depreciation and amortization | | 264,820 | | | 250,754 | | | 788,732 | | | 750,784 | |
| Other expenses | | 190,527 | | | 190,086 | | | 565,851 | | | 562,738 | |
| Total expenses | | 590,987 | | | 579,456 | | | 1,759,485 | | | 1,727,780 | |
| Net income | | $ | 88,513 | | | $ | 103,704 | | | $ | 311,773 | | | $ | 306,292 | |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 5. GOODWILL, NET
The carrying values of goodwill as of September 30, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 |
| Carrying value, beginning | | $ | 17,320,857 | | | $ | 17,320,857 | |
| Impairment of goodwill | | (17,320,857) | | | — | |
| Carrying value, ending | | $ | — | | | $ | 17,320,857 | |
The Company conducted its annual impairment analysis as of December 31, 2021 using qualitative factors and concluded that no impairment to goodwill was necessary. For the quarter ended March 31, 2022, management considered the decline of the trading price of the Company’s Class C common stock following its listing on the NYSE in February 2022, causing the Company's market capitalization to be below the book value of the Company’s equity as of March 31, 2022, to be a triggering event. Management performed a quantitative impairment assessment considering expected future cash flows, market conditions and expectations of increases in interest rates and concluded that there was an impairment of goodwill that was not expected to be temporary as of March 31, 2022. Events subsequent to March 31, 2022 and prior to the Company's filing of its Quarterly Report on Form 10-Q for the three months ended March 31, 2022, including rising inflation and interest rates, and declining office occupancy rates affecting owners of real estate properties, further supported such conclusion. Based on the quantitative analysis, the value of goodwill was written off, resulting in a non-cash expense of $17,320,857 for the three months ended March 31, 2022.
NOTE 6. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS DETAILS
Tenant Receivables, Net
As of September 30, 2022 and December 31, 2021, tenant receivables consisted of the following:
| | | | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 |
| Straight-line rent | | $ | 5,990,676 | | | $ | 4,417,065 | |
| Tenant rent and billed reimbursements | | 269,309 | | | 81,079 | |
| Unbilled tenant reimbursements | | 2,173,910 | | | 1,498,775 | |
| Total | | $ | 8,433,895 | | | $ | 5,996,919 | |
Prepaid Expenses and Other Assets
As of September 30, 2022 and December 31, 2021, prepaid expenses and other assets were comprised of the following:
| | | | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 |
| Deferred tenant allowance | | $ | 2,653,557 | | | $ | 2,400,811 | |
| Miscellaneous receivables | | 150,441 | | | 681,369 | |
| Prepaid expenses | | 1,487,251 | | | 1,253,751 | |
| Deposits | | 1,338,528 | | | 1,420,244 | |
| Deferred financing costs on credit facility revolver | | 757,468 | | | 100,080 | |
Total | | $ | 6,387,245 | | | $ | 5,856,255 | |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Accounts Payable, Accrued and Other Liabilities
As of September 30, 2022 and December 31, 2021, accounts payable, accrued and other liabilities were comprised of the following:
| | | | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 |
| Accounts payable | | $ | 797,012 | | | $ | 1,767,657 | |
| Accrued expenses | | 3,770,912 | | | 3,864,222 | |
| Accrued distributions | | 1,763,509 | | | 1,795,303 | |
| Accrued interest payable | | 727,721 | | | 548,564 | |
| Unearned rent | | 1,989,436 | | | 1,735,440 | |
| Lease incentive obligation | | 609,788 | | | 2,133,695 | |
| Total | | $ | 9,658,378 | | | $ | 11,844,881 | |
NOTE 7. DEBT
Mortgage Notes Payable, Net
As of September 30, 2022 and December 31, 2021, the Company’s mortgage notes payable consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Collateral | | 2022 Principal
Amount | | 2021 Principal
Amount | | Contractual Interest
Rate (1) | | Effective
Interest Rate (2) | | Loan
Maturity |
| Costco property | | $ | 18,850,000 | | | $ | 18,850,000 | | | 4.85% | | 4.85% | | 01/01/30 |
| Taylor Fresh Foods | | 12,350,000 | | | 12,350,000 | | | 3.85% | | 3.85% | | 11/01/29 |
| Sutter Health property | | 13,390,536 | | | 13,597,120 | | | 4.50% | | 4.50% | | 03/09/24 |
| Six Dollar General properties | | — | | | 3,674,327 | | | — | | 4.69% | | (3) |
| Dollar General, Bakersfield property | | — | | | 2,224,418 | | | — | | 3.65% | | (3) |
| Dollar General, Big Spring property | | — | | | 587,961 | | | — | | 4.69% | | (3) |
| Northrop Grumman property | | — | | | 6,925,915 | | | — | | 3.35% | | (3) |
| exp US Services property | | — | | | 3,255,313 | | | — | | 4.25% | | (3) |
| Wyndham property | | — | | | 5,493,000 | | | — | | 4.34% | | (3) |
| Williams Sonoma property | | — | | | 4,344,000 | | | — | | 4.05% | | (3) |
| EMCOR property | | — | | | 2,757,943 | | | — | | 4.36% | | (3) |
| Husqvarna property | | — | | | 6,379,182 | | | — | | 4.60% | | (3) |
| AvAir property | | — | | | 19,950,000 | | | — | | 3.80% | | (3) |
| 3M property | | — | | | 8,025,200 | | | — | | 5.09% | | (3) |
| Cummins property | | — | | | 8,188,800 | | | — | | 5.16% | | (3) |
| Levins property | | — | | | 2,654,405 | | | — | | 3.75% | | (3) |
| Labcorp property | | — | | | 5,308,810 | | | — | | 3.75% | | (3) |
| GSA (MSHA) property | | — | | | 1,713,196 | | | — | | 3.65% | | (3) |
| PreK Education property | | — | | | 4,930,217 | | | — | | 4.25% | | (3) |
| Solar Turbines, Amec Foster, ITW Rippey properties | | — | | | 8,986,222 | | | — | | 3.35% | | (3) |
| Gap property | | — | | | 3,492,775 | | | — | | 4.15% | | (3) |
| L3Harris property | | — | | | 6,219,524 | | | — | | 3.35% | | (3) |
| Walgreens property | | — | | | 3,067,109 | | | — | | 4.25% | | (3) |
| Total mortgage notes payable | | 44,590,536 | | | 152,975,437 | | | | | | | |
| Plus unamortized mortgage premium, net (4) | | 145,527 | | | 204,281 | | | | | | | |
| Less unamortized deferred financing costs | | (205,933) | | | (956,139) | | | | | | | |
| Mortgage notes payable, net | | $ | 44,530,130 | | | $ | 152,223,579 | | | | | | | |
(1)Contractual interest rate represents the interest rate in effect under the mortgage note payable as of September 30, 2022 for the three mortgages that were not refinanced through a drawdown from the Credit Facility (defined and discussed below) with KeyBank National Association (“KeyBank”) given their prepayment penalties.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
(2)Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2022 consisting of the contractual interest rate, and as of December 31, 2021, consisting of the contractual interest rate and the effect of the interest rate swap, if applicable (see Note 8 for further information regarding the Company’s derivative instruments as of December 31, 2021).
(3)The loan was fully repaid on January 18, 2022 through a drawdown from the Credit Facility.
(4)Represents unamortized net mortgage premium acquired through the merger with REIT I.
The following summarizes the face value, carrying amount and fair value of the Company’s mortgage notes payable (Level 3 measurement) as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | Face Value | | Carrying
Value | | Fair Value | | Face value | | Carrying
Value | | Fair Value |
| Mortgage notes payable | | $ | 44,590,536 | | | $ | 44,530,130 | | | $ | 39,876,470 | | | $ | 152,975,437 | | | $ | 152,223,579 | | | $ | 159,241,815 | |
| Less: full repayments of mortgages on January 18, 2022 | | | | | | | | (108,178,317) | | | (107,429,721) | | | * |
| | | | | | | | $ | 44,797,120 | | | $ | 44,793,858 | | | $ | 46,296,445 | |
* The payoff values of the loans refinanced on January 18, 2022 approximate their face values as of December 31, 2021.
Disclosures of the fair values of financial instruments are based on pertinent information available to the Company as of the period end and require a significant amount of judgment. The actual value could be materially different from the Company’s estimate of fair value.
Mortgage Notes Payable Related to Real Estate Investments Held For Sale, Net
As discussed in detail in Note 3, the Company classified four properties as real estate held for sale as of December 31, 2021, which were collateral for mortgage notes payable. No property was classified as held for sale as of September 30, 2022. The following table summarizes the Company's mortgage notes payable related to real estate investments held for sale as of December 31, 2021:
| | | | | | | | |
| Collateral | | December 31,
2021 |
| Accredo property | | $ | 8,538,000 | |
| Omnicare property | | 4,109,167 | |
| Texas Health property | | 4,284,335 | |
| Bon Secours property | | 5,104,817 | |
| Total | | 22,036,319 | |
| Less deferred financing costs | | (336,407) | |
| Mortgage notes payable, net | | $ | 21,699,912 | |
Credit Facility, Net
On January 18, 2022, the Company's Operating Partnership entered into a $250,000,000 credit agreement (‘‘Credit Agreement’’) providing for a $100,000,000 four-year revolving line of credit, which may be extended by up to 12 months subject to certain conditions (the ‘‘Revolver’’), and a $150,000,000 five-year term loan (the ‘‘Term Loan’’ and together with the ‘‘Revolver,’’ the ‘‘Credit Facility’’) with KeyBank and the other lending institutions party thereto (collectively, the ‘‘Lenders’’), including KeyBank as Agent for the Lenders (in such capacity, the ‘‘Agent’’), BMO Capital Markets, Truist Bank and The Huntington National Bank as Co-Syndication Agents (the “Co-Syndication Agents”) and KeyBanc Capital Markets Inc., BMO Capital Markets, Inc., Truist Securities, Inc. and The Huntington National Bank as Joint-Lead Arrangers (the “Lead Arrangers”). The Credit Facility is available for general corporate purposes, including, but not limited to, acquisitions, repayment of existing indebtedness and capital expenditures. On October 21, 2022, the Company exercised the accordion feature of its Credit Agreement and increased the Credit Facility from $250,000,000 to $400,000,000 as further described in Note 14.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The Credit Facility is priced on a leverage-based grid that fluctuates based on the Company’s actual leverage ratio at the end of the prior quarter. With the Company's leverage ratio at 38% as of June 30, 2022, the spread over the Secured Overnight Financing Rate (‘‘SOFR’’), including a 10-basis point credit adjustment, is 165 basis points and the interest rate on the Revolver was 4.65% as of September 30, 2022. Following the Federal Reserve Bank’s November 2, 2022 increase in the target range for federal funds by 75 basis points, the interest rate on the Revolver is approximately 5.46%. The Company also pays an annual unused fee of up to 25 basis points on the Revolver, depending on the daily amount of the unused commitment, and paid total unused fees of $47,543 and $119,823 for the three and nine months ended September 30, 2022, respectively. On May 10, 2022, the Company entered into a swap agreement, effective May 31, 2022, to fix SOFR at 2.258% with respect to its original $150,000,000 Term Loan as described in Note 8, which resulted in a fixed interest rate on the Term Loan of 3.858% based on the Company's leverage ratio as of September 30, 2022. On October 26, 2022, the Company entered into a swap agreement, effective November 30, 2022, to fix SOFR at 3.44% with respect to its expanded Term Loan as described in Note 14, which would result in a fixed interest rate of 5.04% on the next $100,000,000 to be borrowed under the Term Loan based on the Company's leverage ratio as of September 30, 2022.
The Credit Facility includes customary representations, warranties and covenants, including covenants regarding minimum fixed charge coverage of 1.50x, minimum tangible net worth of $208,629,727 plus 85% of net offering proceeds and maximum leverage of 60% of the Company's borrowing base. The Company was in compliance with these covenants as of September 30, 2022. The Credit Facility is secured by a pledge of all of the Operating Partnership’s equity interests in certain of the single-purpose, property-owning entities (the ‘‘Subsidiary Guarantors’’) that are indirectly owned by the Company, and various cash collateral owned by the Operating Partnership and the Subsidiary Guarantors. In connection with the Credit Facility, the Company and each of the Subsidiary Guarantors entered into an Unconditional Guaranty of Payment and Performance in favor of the Agent, pursuant to which the Company and each of the Subsidiary Guarantors agreed to guarantee the full and prompt payment of the Operating Partnership’s obligations under the Credit Agreement.
While the Credit Facility allows for borrowings of up to 60% of the Company's borrowing base, the Company is targeting leverage of 40% or lower over the long-term once it achieves scale; however, the Company will consider higher leverage in the near-term if it identifies attractive acquisition opportunities in advance of completing dispositions or raising additional equity. The amendment to the Credit Agreement on October 21, 2022 described in Note 14, provided the Company the right to increase the Credit Facility to a maximum of $750,000,000, subject to customary conditions, including the receipt of new commitments from the Lenders.
Credit Facility Drawdown and Repayments
On January 18, 2022, the Company borrowed $155,775,000 from its Credit Facility consisting of $100,000,000 under the Term Loan and $55,775,000 under the Revolver. The Company used a portion of the proceeds from the Credit Facility to pay total commitment and arrangement fees of $2,020,000 to the Agent, the Lenders, the Lead Arrangers and Co-Syndication Agents.
The Company used a portion of the proceeds from the Credit Facility to repay 20 property mortgages, and related interest aggregating $153,428,764, including the $36,465,449 mortgage on the KIA auto dealership property which was acquired on January 18, 2022, as discussed above, and the Company's prior line of credit outstanding balance of $8,022,000. The 20 mortgages that were paid off were for the following 27 properties: eight Dollar Generals, Northrop Grumman, exp Maitland, Wyndham, Williams Sonoma, EMCOR, Husqvarna, AvAir, 3M, Cummins, Levins, Labcorp, GSA (MHSA), PreK Education, ITW Rippey, Solar Turbines, Wood Group, Gap, L3Harris and Walgreens. After the 20 property mortgages were paid-off, seven property mortgages as of December 31, 2021 remained outstanding, including four property mortgages related to assets held for sale. Those four mortgages were paid-off pursuant to sales of the properties in February 2022 as discussed above.
On March 8, 2022, the Company prepaid $35,000,000 of the outstanding balance on the Revolver with cash on hand in order to reduce interest expense, and on April 19, 2022, the Company drew $44,000,000 on the Revolver to fund the acquisition of the Lindsay properties. On April 25, 2022, the Company drew the remaining $50,000,000 on the Term Loan for a partial repayment of the Revolver and the Company also repaid $8,000,000 on the Revolver on June 22, 2022. The Company borrowed and repaid $28,000,000 during the three months ended September 30, 2022 in connection with acquisitions completed in July and August 2022 and dispositions completed in August and September 2022. As of October 31, 2022, the Company had availability under the Credit Facility of approximately $98,000,000 which can be drawn for general corporate purposes, including future acquisitions.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The details of the Company's Term Loan as of September 30, 2022 follow:
| | | | | | | | |
| | September 30,
2022 |
| Term loan | | $ | 150,000,000 | |
| Less unamortized deferred financing costs | | (1,086,650) | |
| Net term loan | | $ | 148,913,350 | |
Prior Credit Facility
On March 29, 2021, the Company entered into a credit facility with Banc of California (the “Prior Credit Facility”) for an aggregate line of credit of $22,000,000 with a maturity date of March 30, 2023. Under the terms of the Prior Credit Facility, the Company paid a variable rate of interest on outstanding amounts equal to one percentage point over the prime rate published in The Wall Street Journal, provided that the interest rate in effect on any one day was not less than 4.75% per annum. The Company paid Banc of California origination fees of $77,000 in connection with the Prior Credit Facility in March 2021 and paid an unused commitment fee of 0.15% per annum of the unused portion of the Prior Credit Facility, charged quarterly in arrears based on the average unused commitment available under the Prior Credit Facility.
The Revolver's and Prior Credit Facility's unamortized deferred financing costs of $757,468 and $110,697 as of September 30, 2022 and December 31, 2021, respectively, are presented as a component of prepaid and other assets in the Company's unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
Compliance with All Debt Agreements
Pursuant to the terms of mortgage notes payable on certain of the Company’s properties and the Credit Facility, the Company and/or the subsidiary borrowers are subject to certain financial loan covenants. The Company and/or the subsidiary borrowers were in compliance with such financial loan covenants as of September 30, 2022.
The following summarizes the future principal repayments of the Company’s mortgage notes payable and Credit Facility as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Mortgage Notes | | Credit Facility | | |
| | Payable | | Revolver | | Term Loan | | Total |
| October through December 2022 | | $ | 81,938 | | | $ | — | | | $ | — | | | $ | 81,938 | |
| 2023 | | 317,575 | | | — | | | — | | | 317,575 | |
| 2024 | | 12,991,023 | | | — | | | — | | | 12,991,023 | |
| 2025 | | — | | | — | | | — | | | — | |
| 2026 | | — | | | 6,775,000 | | | — | | | 6,775,000 | |
| 2027 | | — | | | — | | | 150,000,000 | | | 150,000,000 | |
| Thereafter | | 31,200,000 | | | — | | | — | | | 31,200,000 | |
| Total principal | | 44,590,536 | | | 6,775,000 | | | 150,000,000 | | | 201,365,536 | |
| Plus unamortized mortgage premium, net of unamortized discount | | 145,527 | | | — | | | — | | | 145,527 | |
| Less deferred financing costs | | (205,933) | | | — | | | (1,086,650) | | | (1,292,583) | |
| Net principal | | $ | 44,530,130 | | | $ | 6,775,000 | | | $ | 148,913,350 | | | $ | 200,218,480 | |
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Interest Expense
The following is a reconciliation of the components of interest expense for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Mortgage notes payable: | | | | | | | | |
| Interest expense | | $ | 488,773 | | | $ | 1,812,254 | | | $ | 1,762,378 | | | $ | 5,736,165 | |
| Amortization of deferred financing costs | | 7,235 | | | 141,235 | | | 21,694 | | | 355,661 | |
| Swap termination costs | | — | | | — | | | — | | | 23,900 | |
| Unrealized gain on interest rate swap valuation (1) | | — | | | (166,539) | | | — | | | (684,057) | |
| Credit facility: | | | | | | | | |
| Interest expense | | 1,783,899 | | | 27,486 | | | 3,472,564 | | | 169,571 | |
| Amortization of deferred financing costs | | 120,829 | | | 16,605 | | | 342,349 | | | 60,468 | |
| Amortization of interest rate swap valuation asset | | 59,000 | | | — | | | 59,000 | | | — | |
| Unrealized gain on interest rate swap valuation (2) | | — | | | — | | | (589,997) | | | — | |
| Other | | 55,102 | | | 504 | | | 212,179 | | | 49,622 | |
| Total interest expense | | $ | 2,514,838 | | | $ | 1,831,545 | | | $ | 5,280,167 | | | $ | 5,711,330 | |
(1) Includes unrealized gain on interest rate swaps of $166,338 and $684,057 for the three and nine months ended September 30, 2021 (see Note 8 for more details). Accrued interest receivable of $54,980 as of December 31, 2021 represented the unsettled portion of the interest rate swaps for the period from origination of the interest rate swap through the balance sheet date.
(2) The Company entered into a swap transaction for its Credit Facility Term Loan effective May 31, 2022 which is further described in Note 8.
NOTE 8. INTEREST RATE SWAP DERIVATIVES
The Company, through its Operating Partnership, entered into a five-year swap agreement to fix SOFR at 2.258% related to its variable interest rate Term Loan effective May 31, 2022. The Company designated the pay-fixed, receive-floating interest rate swap with the terms described in the table below as of July 1, 2022. The swap agreement matures on January 15, 2027 and the financial institution counterparty has a one-time option to cancel the swap on December 31, 2024.
In prior years, the Company, through its limited liability company subsidiaries, entered into interest rate swap agreements with amortizing notional amounts relating to four of its mortgage notes payable. These swap agreements, which were in place as of December 31, 2021, were terminated during the three months ended March 31, 2022 in connection with refinancings discussed in Note 7. 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. During the three months ended March 31, 2022, the Company terminated the swap agreements related to mortgages on the 3M, Cummins, Wyndham and Williams Sonoma properties at aggregate costs of $733,000 and during the three months ended March 31, 2021, the Company terminated the swap agreements related to mortgages on the GSA and Eco-Thrift properties at aggregate costs of $23,900.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
Derivative
Instruments | | Number of Instruments | | Notional
Amount (i) | | Reference
Rate (ii) | | Fixed Pay Rate (iii) | | Remaining Non-Cancellable Term | | Number of Instruments | | Notional
Amount (i) | | Reference
Rate (iv) | | Weighted Average Fixed Pay Rate | | Weighted
Average
Remaining Term |
| Interest Rate Swap Derivatives | | 1 | | $ | 150,000,000 | | | Indexed to USD - SOFR - COMPOUND | | 3.858 | % | | 2.3 years | | 4 | | $ | 26,051,000 | | | One-month LIBOR + applicable spread/Fixed at 4.05%-5.16% | | 4.51 | % | | 2.0 years |
(i)The notional amount of the Company’s swaps decreased each month to correspond to the outstanding principal balance on the related debt. The minimum notional amounts (outstanding principal balance at the maturity date) as of September 30, 2022 and December 31, 2021 were $150,000,000 and $24,935,999, respectively.
(ii)The reference rate was as of September 30, 2022.
(iii)Based on the terms of the Credit Facility, the fixed pay rate increases if the Company's leverage ratio increases above 40%.
(iv)The reference rate was as of December 31, 2021.
The following table sets forth the fair value of the Company’s derivative instruments (Level 2 measurement), as well as their classification in the unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2022 | | December 31, 2021 |
| Derivative Instrument | | Balance Sheet Location | | Number of
Instruments | | Fair Value (1) | | Number of
Instruments | | Fair Value |
| Interest Rate Swaps | | Asset - Interest rate swap derivatives, at fair value | | 1 | | $ | 4,845,903 | | | — | | $ | — | |
| Interest Rate Swaps | | Liability - Interest rate swap derivatives, at fair value | | — | | $ | — | | | 4 | | $ | (788,016) | |
(1) The unaudited condensed consolidated balance sheet reflects the fair value of the derivative, net of accumulated amortization of the unrealized gain on interest rate swap valuation as of June 30, 2022 discussed below.
The interest rate swap derivative was designated as a cash flow hedge for financial accounting purposes beginning July 1, 2022 and therefore the change in fair value of $4,255,906 for the three months ended September 30, 2022 was recorded as unrealized holding gain on interest rate swap designated as a cash flow hedge in the Company's unaudited condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2022.
The change in fair value of the derivative instrument of $589,997 for the period from May 31, 2022 to June 30, 2022 that was not designated as a cash flow hedge for financial accounting purposes was recorded as an unrealized gain on interest rate swap valuation as of June 30, 2022 and a reduction to interest expense in the unaudited condensed consolidated statement of operations. Beginning July 1, 2022 through December 31, 2024, the related interest rate swap derivative asset will be amortized to interest expense. The amortization of interest rate swap derivative asset for the three months ended September 30, 2022 was $59,000.
The changes in fair value of the derivative instruments as of December 31, 2021 that were not designated as cash flow hedges for financial accounting purposes were recorded as interest expense in the unaudited condensed consolidated statement of operations. None of the Company’s derivatives as of December 31, 2021 were designated as hedging instruments; therefore, the net gains recognized were recorded as reductions in the loss on early extinguishment of debt for the three months ended March 31, 2022 and the net unrealized gain recognized on interest rate swaps of $166,338 and $684,057 were recorded as decreases in interest expense for the three and nine months ended September 30, 2021, respectively. The loss on early extinguishment of debt for the three months ended March 31, 2022 includes the actual cost of terminating the interest rate swap derivatives in January 2022 of $733,000, which was offset by a corresponding reversal of the liability of $788,016 for interest rate swap derivatives as of December 31, 2021.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 9. PREFERRED STOCK AND COMMON STOCK
Preferred Stock
The Company is authorized to issue up to 50,000,000 shares of preferred stock. In connection with an underwritten public offering in September 2021 (discussed below in detail), the Company classified and designated 2,000,000 shares of its authorized preferred stock as authorized shares of Series A Preferred Stock. As of September 30, 2022 and December 31, 2021, 2,000,000 shares of authorized Series A Preferred Stock were issued and outstanding.
Underwritten Offering - Series A Preferred Stock
On September 14, 2021, the Company and the Operating Partnership entered into an underwriting agreement (the “Underwriting Agreement”) with B. Riley Securities, Inc., as representative of the underwriters listed on Schedule I thereto (collectively, the “Underwriters”), pursuant to which the Company agreed to issue and sell 1,800,000 shares of the Company’s Series A Preferred Stock, with a liquidation preference of $25.00 per share, in the Preferred Offering at a price per share of $25.00. In addition, the Company granted the Underwriters a 30-day option to purchase up to an additional 200,000 shares of the Series A Preferred Stock, which the Underwriters exercised in full on September 16, 2021.
In the Underwriting Agreement, the Company and the Operating Partnership made certain customary representations, warranties and covenants and agreed to indemnify the Underwriters against certain liabilities. The issuance and sale of the shares of Series A Preferred Stock, including the issuance and sale of 200,000 shares pursuant to the Underwriters’ full exercise of their option to purchase additional shares, closed and the Series A Preferred Stock began trading on the NYSE on September 17, 2021.
The gross proceeds from the Preferred Offering were $50,000,000 and the net proceeds were $47,607,309, after deducting the underwriting discount of $1,575,000 and other offering costs of $817,691.
The Company contributed $48,425,000 of the net proceeds from the Preferred Offering prior to other offering costs to the Operating Partnership in exchange for a new class of 7.375% Series A Cumulative Redeemable Perpetual Preferred Units of the Operating Partnership (the “Series A Preferred Units”), which have economic interests that are substantially similar to the designations, preferences and other rights of Series A Preferred Stock. The Company, acting through the Operating Partnership, used the net proceeds from such contribution for general corporate purposes, including purchases of additional properties and other real estate and real estate-related assets.
Series A Preferred Stock - Terms
Holders of Series A Preferred Stock are entitled to cumulative dividends in the amount of $1.84375 per share each year, which is equivalent to the rate of 7.375% of the $25.00 liquidation preference per share per annum. The Series A Preferred Stock has no stated maturity and will remain outstanding indefinitely unless redeemed, converted or otherwise repurchased. Except in limited circumstances relating to the Company's qualification as a REIT for U.S. federal income tax purposes, and as described in the articles supplementary governing the terms of the Series A Preferred Stock (the “Articles Supplementary”), the Series A Preferred Stock is not redeemable prior to September 17, 2026.
On and after September 17, 2026, at any time and from time to time, the Series A Preferred Stock will be redeemable in whole or in part, at the Company's option, at a cash redemption price of $25.00 per share, plus an amount equal to all dividends accrued and unpaid (whether or not authorized or declared), if any, to, but not including, the redemption date. In addition, upon the occurrence of a Delisting Event or a Change of Control (each as defined in the Articles Supplementary), the Company may, subject to certain conditions, at its option, redeem the Series A Preferred Stock, in whole or in part, (i) after the first date on which the Delisting Event occurred or (ii) on, or within 120 days after, the first date on which the Change of Control occurred, as applicable, by paying the liquidation preference of $25.00 per share, plus an amount equal to all dividends accrued and unpaid (whether or not authorized or declared), if any, to, but not including, the redemption date.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Upon the occurrence of a Change of Control during a continuing Delisting Event, unless the Company has elected to exercise its redemption right, holders of the Series A Preferred Stock will have certain rights to convert the Series A Preferred Stock into shares of the Company’s Class C common stock. In addition, upon the occurrence of a Delisting Event, the dividend rate will be increased on the day after the occurrence of the Delisting Event by 2.00% per annum to the rate of 9.375% of the $25.00 liquidation preference per share per annum (equivalent to $2.34375 per share each year) from and after the date of the Delisting Event. Following the cure of such Delisting Event, the dividend rate will revert to the rate of 7.375% of the $25.00 liquidation preference per share per annum. The necessary conditions to convert the Series A Preferred Stock into the Company's Class C common stock have not been met as of September 30, 2022.
The Series A Preferred Stock ranks senior to the Company's Class C common stock with respect to dividend rights and rights upon the Company’s voluntary or involuntary liquidation, dissolution or winding up.
Voting rights for holders of Series A Preferred Stock exist primarily with respect to the ability to elect two additional directors to the board of directors if six or more quarterly dividends (whether or not authorized or declared or consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to the Company’s charter (which includes the Articles Supplementary) that materially and adversely affect the rights of the Series A Preferred Stock or create additional classes or series of shares of the Company’s capital stock that are senior to the Series A Preferred Stock. Other than the limited circumstances described above and in the Articles Supplementary, holders of Series A Preferred Stock do not have any voting rights.
Series A Preferred Stock Dividend
Dividends on the Company's Series A Preferred Stock accrue in an amount equal to $1.84375 per share each year ($0.460938 per share per quarter) to holders of Series A Preferred Stock, which is equivalent to 7.375% of the $25.00 liquidation preference per share per annum. Dividends on the Series A Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year (or, if not a business day, the next succeeding business day) to holders of record on the applicable record date. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock become part of the liquidation preference thereof.
On November 11, 2021, the Company’s board of directors declared Series A Preferred Stock distributions payable of $1,065,278 for the fourth quarter of 2021, including the $143,403 of accrued dividends as of September 30, 2021, all of which were paid on January 18, 2022. On March 18, 2022 and June 15,2022, the Company’s board of directors declared Series A Preferred Stock dividends payable of $921,875 for each of the first and second quarters of 2022, which were paid on April 15, 2022 and July 15, 2022, respectively. On September 15, 2022, the Company’s board of directors declared Series A Preferred Stock dividends payable of $921,875 for the third quarter of 2022. This amount was accrued as of September 30, 2022 and paid on October 17, 2022 (see Note 14).
Common Stock Listed Offering
On February 10, 2022, the Company and the Operating Partnership entered into an underwriting agreement (the “Class C Common Stock Underwriting Agreement”) with B. Riley Securities, Inc., as the underwriter listed on Schedule I thereto, pursuant to which the Company agreed to issue and sell 40,000 shares of the Company’s Class C common stock in an underwritten Listed Offering at a price per share of $25.00. On February 15, 2022, the Company completed the Listed Offering of its Class C common stock, and in connection with the Listed Offering, the Company sold to Mr. Wirta, the Company’s former Chairman of the board of directors, all 40,000 shares of its Class C common stock at $25.00 per share for aggregate net proceeds of $114,500, after deducting the underwriting discount of $70,000, and other offering costs of $815,500. The primary purpose of the Listed Offering was to provide liquidity to the Company’s existing stockholders. The shares of Class C common stock began trading on the NYSE on February 11, 2022. In connection with the Listed Offering and upon the listing on the NYSE, each share of the Company's Class S common stock was converted into a share of Class C common stock.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 10. RELATED PARTY TRANSACTIONS
The Company pays the members of its board of directors who are not executive officers for services rendered through cash payments and by issuing shares of Class C common stock to them. Total fees incurred and paid or accrued for board services by the Company for the three and nine months ended September 30, 2022 and 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| Board of Directors Compensation | | 2022 | | 2021 | | 2022 | | 2021 |
| Payments for services rendered | | $ | 67,500 | | | $ | 25,000 | | | $ | 202,500 | | | $ | 85,000 | |
| Value of shares issued for services rendered | | 82,500 | | | 95,000 | | | 247,500 | | | 275,000 | |
| Total | | $ | 150,000 | | | $ | 120,000 | | | $ | 450,000 | | | $ | 360,000 | |
| | | | | | | | |
| Number of shares issued for services rendered | | 5,651 | | | 3,647 | | | 14,916 | | | 12,168 | |
Fees incurred for board services for the three months ended September 30, 2022 were paid in cash and shares were issued on September 30, 2022 based on the closing price of the Company’s Class C common stock on September 30, 2022. For the second quarter of 2022, fees incurred for board services were paid in cash and shares were issued on July 7, 2022 based on the closing price of the Company’s Class C common stock on June 30, 2022.
Transactions with Other Related Parties
As discussed in Note 3, on January 31, 2022, the Company acquired an industrial property in Saint Paul, Minnesota, which is leased to Kalera, Inc. The acquisition of the Kalera, Inc. property was introduced to the Company by Curtis B. McWilliams, one of the Company's independent directors. Since Mr. McWilliams was serving as the Interim Chief Executive Officer of Kalera, Inc. at the time of the transaction, all of the disinterested members of the Company's board of directors approved this transaction.
Related Party Transactions with Unconsolidated Investment in a Real Estate Property
The Company's taxable REIT subsidiary serves as the asset manager of the TIC Interest property and earned asset management fees of $65,992 and $65,993 for the three months ended September 30, 2022 and 2021, respectively, including the Company's share which was $47,983 for both quarters, and $197,978 and $197,979 for the nine months ended September 30, 2022 and 2021, respectively, including the Company's share which was $143,950 for both nine month periods.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the property could result in future environmental liabilities.
Tenant Improvements
Pursuant to lease agreements, as of September 30, 2022 and December 31, 2021, the Company had obligations to pay $609,788 and $189,136, respectively, for on-site and tenant improvements to be incurred by tenants. As of September 30, 2022 and December 31, 2021, the Company had no restricted cash and $2,271,462 of restricted cash, respectively, held to fund other building improvements and leasing commissions. Pursuant to the refinancing of the related mortgage notes payable on January 18, 2022 as discussed in Note 7, the restricted cash as of December 31, 2021 was released.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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, including its subsidiaries, is not a party to any legal proceeding, nor is the Company aware of any pending or threatened litigation that could have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
NOTE 12. OPERATING PARTNERSHIP UNITS
Class M OP Units
On September 19, 2019, the Company, the Operating Partnership, BrixInvest and Daisho OP Holdings, LLC, a formerly wholly owned subsidiary of BrixInvest (“Daisho”) which was spun off from BrixInvest on December 31, 2019, entered into the Contribution Agreement pursuant to which the Company agreed to acquire substantially all of the net assets of BrixInvest in exchange for 657,949.5 units of Class M limited partnership interest in the Operating Partnership (“Class M OP Units”) and assumed certain liabilities (the “Self-Management Transaction”). As a result of the Self-Management Transaction, the Company became self-managed and eliminated all fees for acquisitions, dispositions and management of its properties, which were previously paid to its former external advisor. The consideration transferred as of December 31, 2019 was determined to have a fair value of $50,603,000 based on a probability weighted analysis of achieving the requisite assets under management (“AUM”) and adjusted funds from operations (“AFFO”) hurdles.
The Class M OP Units were issued to Daisho on December 31, 2019 in connection with the Self-Management Transaction and are non-voting, non-dividend accruing, and were not able to be converted or exchanged prior to the one-year anniversary of the Self-Management Transaction. Investors holding units in BrixInvest received Daisho units in a ratio of 1:1 for an aggregate of 657,949.5 Daisho units. During 2020, Daisho distributed the Class M OP Units to its members. The Class M OP Units are convertible into units of Class C limited partnership interest in the Operating Partnership (“Class C OP Units”) at a conversion ratio of 1.6667 Class C OP Units for each one Class M OP Unit, subject to a reduction in the conversion ratio (which reduction will vary depending upon the amount of time held) if the exchange occurs prior to the four-year anniversary of the completion of the Self-Management Transaction.
In the event that the Class M OP Units are converted into Class C OP Units prior to December 31, 2023, such Class M OP Units shall be exchanged at the rate indicated below:
| | | | | | | | |
| Date of Exchange | | Early Conversion Rate |
| From December 31, 2020 to December 30, 2021 | | 50% of the Class M conversion ratio |
| From December 31, 2021 to December 30, 2022 | | 60% of the Class M conversion ratio |
| From December 31, 2022 to December 30, 2023 | | 70% of the Class M conversion ratio |
As of September 30, 2022, no Class M OP Units had been converted to Class C OP Units.
The Class M OP Units are eligible for an increase in the conversion ratio (conversion ratio enhancement) if the Company achieves both of the targets for AUM and AFFO in a given year as set forth below:
| | | | | | | | | | | | | | | | | | | | |
| | Hurdles | | |
| | AUM | | AFFO | | Class M |
| | ($ in billions) | | Per Share ($) | | Conversion Ratio |
| Initial Conversion Ratio | | | | | | 1:1.6667 |
| Fiscal Year 2021 | | $ | 0.860 | | | $ | 1.77 | | | 1:1.9167 |
| Fiscal Year 2022 | | $ | 1.175 | | | $ | 1.95 | | | 1:2.5000 |
| Fiscal Year 2023 | | $ | 1.551 | | | $ | 2.10 | | | 1:3.0000 |
The AUM and AFFO per share hurdles for the Class M OP Units were not met for fiscal year 2021.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Based on the current conversion ratio of 1.6667 Class C OP Units for each one Class M OP Unit, if a Class M OP Unit is converted on or after December 31, 2023, and based on the NYSE closing share price of $14.60 as of September 30, 2022, a Class M OP Unit would be valued at $24.33. This value does not reflect the early conversion rate or the future conversion enhancement ratio of the Class M OP Units, as discussed above, and the units of Class P limited partnership interest in the Operating Partnership (“Class P OP Units”), as discussed below.
Class P OP Units
The Company issued the Class P OP Units described below in connection with the Self-Management Transaction. The Class P OP Units are intended to be treated as “profits interests” in the Operating Partnership, which are non-voting, non-dividend accruing, and are not able to be transferred or exchanged prior to the earlier of (1) March 31, 2024, (2) a change of control (as defined in the Third Amended and Restated Limited Partnership Agreement of the Operating Partnership (as amended, the “Operating Partnership Agreement”)), or (3) the date of the recipient's involuntary termination (as defined in the relevant award agreement for the Class P OP Units) (collectively, the “Lockup Period”). Following the expiration of the Lockup Period, the Class P OP Units are convertible into Class C OP Units at a conversion ratio of 1.6667 Class C OP Units for each one Class P OP Unit; provided, however, that the foregoing conversion ratio shall be subject to increase on generally the same terms and conditions as the Class M OP Units, as set forth above.
The AUM and AFFO per share hurdles for the Class P OP Units were not met for fiscal year 2021. The Company will adjust stock compensation expense prospectively if the future conversion enhancement ratio is achieved during fiscal 2022 or 2023.
The Company issued a total of 56,029 Class P OP Units to Aaron S. Halfacre, the Company’s Chief Executive Officer and President, and Raymond J. Pacini, the Company’s Chief Financial Officer, including 26,318 Class P OP Units issued in exchange for Messrs. Halfacre's and Pacini's agreements to forfeit a similar number of restricted units in BrixInvest in connection with the Self-Management Transaction. The remaining 29,711 Class P OP Units were issued to these executives as signing bonuses and as a portion of their incentive compensation for 2020 in connection with their entry into restrictive covenant agreements. The 29,711 Class P OP Units were valued based on the estimated NAV per share of $30.48 (unaudited) when issued on December 31, 2019 and the expected minimum conversion ratio of 1.6667 Class C OP Units for each one Class P OP Unit, which resulted in a valuation of $1,509,319. This amount is amortized on a straight-line basis over 51 months through March 31, 2024, the expected vesting date of the units, as a periodic charge to stock compensation expense. The Company concluded that as of each quarter end, including September 30, 2022, achieving the performance target for the Class P OP Units is not deemed probable and will adjust compensation expense prospectively if achieving the enhancement is deemed probable through the remainder of the vesting period.
During the three months ended September 30, 2022 and 2021, the Company amortized and charged $88,783 for both quarters to stock compensation expense and during the nine months ended September 30, 2022 and 2021, the Company amortized and charged $266,350 for both periods to stock compensation expense. The unamortized value of these units was $532,700 as of September 30, 2022.
Under the Operating Partnership Agreement, once the Class M OP Units or Class P OP Units are converted into Class C OP Units, they will be exchangeable for the Company’s shares of Class C common stock on a 1-for-1 basis, or for cash at the sole and absolute discretion of the Company. The Company recorded the ownership interests of the Class M OP Units and Class P OP Units as noncontrolling interests in the Operating Partnership, representing a combined total of approximately 13% of the equity in the Operating Partnership on December 31, 2019. As of September 30, 2022, these interests represent a combined total of approximately 11.6% of the equity in the Operating Partnership.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Class R OP Units
On January 25, 2021, the compensation committee of the Company's board of directors recommended, and the board of directors approved, the grant of 40,000 units of Class R limited partnership interest in the Operating Partnership (“Class R OP Units”) to Mr. Halfacre in recognition of his voluntary reduction in his 2020 compensation plus 170,667 Class R OP Units to Mr. Halfacre as equity incentive compensation for the next three years, and the grant of 33,333 Class R OP Units to Mr. Pacini as equity incentive compensation for the next three years. An additional 116,000 Class R OP Units were granted to the remainder of the employees of the Company for a total of 360,000 Class R OP Units granted. All Class R OP Units granted vest and are mandatorily convertible into Class C OP Units on March 31, 2024 at a conversion ratio of 1:1, which conversion ratio can increase to 1:2.5 Class C OP Units if the Company generates funds from operations of $1.05, or more, per weighted average fully-diluted share outstanding for the year ending December 31, 2023. The Company concluded that as of each quarter end, including September 30, 2022, achieving the performance target to trigger the increased conversion ratio for the Class R OP Units is not deemed probable. The Company will adjust compensation expense prospectively if achieving the enhancement is deemed probable through the remainder of the vesting period.
Stock compensation expense related to the Class R OP Units is based on the estimated value per share, including a discount for the illiquid nature of the underlying equity, and is being recognized over the vesting period. Of the 360,000 Class R OP Units granted, due to the departure of employees, 26,657 units were forfeited as of December 31, 2021 and an additional 12,667 units and 17,000 units were forfeited during the three and nine months ended September 30, 2022, respectively. The units, at the discretion of the board of directors, may be reallocated to existing or new employees. The cumulative number of units forfeited and not yet reallocated through September 30, 2022 aggregated 43,657 units.
During the three months ended September 30, 2022 and 2021, the Company amortized and charged to stock compensation expense $377,957 and $559,827, respectively, and during the nine months ended September 30, 2022 and 2021, the Company amortized and charged to stock compensation expense $1,227,002 and $1,573,991, respectively, for the Class R OP Units. The unamortized value of the remaining 316,343 units was $2,933,324 as of September 30, 2022.
Class C OP Units
On January 18, 2022, the Company completed the acquisition of a KIA auto dealership property in an “UPREIT” transaction pursuant to a contribution agreement whereby the seller received 1,312,382 Class C OP Units based on the terms of the Operating Partnership Agreement and an agreed upon value of $25.00 per unit, representing approximately 47% of the property’s value (the “UPREIT Transaction”). Following expiration of the lock-up period ending on August 11, 2022, the holder of the Class C OP Units may require the redemption of all or a portion of these units and the Company has the option to redeem the units for cash or shares of Class C common stock. The Class C OP Units received $377,298 and $1,006,136 in distributions during the three and nine months ended September 30, 2022, respectively, and were allocated $528,540 and $(1,180,275) of the net income (loss) for the three and nine months ended September 30, 2022, respectively.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 13. EARNINGS (LOSS) PER SHARE
The following table presents the computation of the Company's basic and diluted net income (loss) per share attributable to common stockholders for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Numerator - Basic: | | | | | | | | |
| Net income (loss) | | $ | 4,450,767 | | | $ | 3,648,455 | | | $ | (5,232,053) | | | $ | 1,742,964 | |
| Net (income) loss attributable to noncontrolling interest in Operating Partnership | | (528,540) | | | — | | | 1,180,275 | | | — | |
| Preferred stock dividends | | (921,875) | | | (143,403) | | | (2,765,625) | | | (143,403) | |
| Net income (loss) attributable to common stockholders | | $ | 3,000,352 | | | $ | 3,505,052 | | | $ | (6,817,403) | | | $ | 1,599,561 | |
| | | | | | | | |
| Numerator - Diluted: | | | | | | | | |
| Net income (loss) | | $ | 4,450,767 | | | $ | 3,648,455 | | | $ | (5,232,053) | | | $ | 1,742,964 | |
| Preferred stock dividends | | (921,875) | | | (143,403) | | | (2,765,625) | | | (143,403) | |
| Net income (loss) attributable to common stockholders | | $ | 3,528,892 | | | $ | 3,505,052 | | | $ | (7,997,678) | | | $ | 1,599,561 | |
| | | | | | | | |
| Denominator: | | | | | | | | |
| Weighted average shares outstanding - basic | | 7,449,968 | | | 7,531,559 | | | 7,486,945 | | | 7,575,013 | |
| Operating Partnership Units - Class C | | 1,312,382 | | | — | | | — | | | — | |
| Operating Partnership Units - Classes M, P and R | | 1,418,193 | | | 1,219,316 | | | — | | | 1,188,099 | |
| Weighted average shares outstanding - diluted | | 10,180,543 | | | 8,750,875 | | | 7,486,945 | | | 8,763,112 | |
| | | | | | | | |
| Earnings (loss) per share attributable to common stockholders: | | | | | | | | |
| Basic | | $ | 0.40 | | | $ | 0.47 | | | $ | (0.91) | | | $ | 0.21 | |
| Diluted | | $ | 0.35 | | | $ | 0.40 | | | $ | (0.91) | | | $ | 0.18 | |
During the nine months ended September 30, 2022, the weighted average dilutive effect of 2,730,416 shares related to units of limited partnership interest in the Operating Partnership as discussed in Notes 12 and 13 were excluded from the computation of Diluted EPS because their effect would be anti-dilutive. There were no other outstanding securities or commitments to issue common stock that would have a dilutive effect for the periods then ended.
NOTE 14. SUBSEQUENT EVENTS
The Company evaluates subsequent events until the date the unaudited condensed consolidated financial statements are issued. Significant subsequent events are described below:
Preferred Dividends
On October 17, 2022, the Company paid its Series A Preferred Stock dividends of $921,875 for the third quarter of 2022, which were declared by the Company’s board of directors on August 18, 2022.
On November 7, 2022, the Company’s board of directors declared Series A Preferred Stock dividends payable of $921,875 for the fourth quarter of 2022, which will be paid on January 17, 2023 to Series A Preferred Stockholders of record as of December 30, 2022.
MODIV INC.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Common Stock and Class C OP Unit Distributions
On June 15, 2022, the Company's board of directors authorized monthly distributions payable to common stockholders and the Class C OP Unit holders of record as of September 30, 2022, which were paid on October 25, 2022. The current monthly distribution amount of $0.09583 per share represents an annualized distribution rate of $1.15 per share of common stock.
On August 18, 2022, the Company’s board of directors authorized monthly distributions of $0.09583 per share payable to common stockholders and the Class C OP Unit holders of record as of October 31, 2022, November 30, 2022 and December 30, 2022, which will be paid on or about November 23, 2022, December 23, 2022 and January 25, 2022, respectively.
On November 7, 2022, the Company’s board of directors authorized monthly distributions of $0.09583 per share payable to common stockholders and the Class C OP Unit holders of record as of January 31, 2023, February 28, 2023 and March 31, 2023, which will be paid on or about February 24, 2023, March 24, 2023 and April 25, 2023, respectively.
Credit Facility
On October 21, 2022, the Company successfully exercised the accordion feature of its Credit Facility. The Credit Facility was increased to $400,000,000 and is now comprised of a $150,000,000 Revolver and a $250,000,000 Term Loan. The Credit Facility includes an updated accordion option that allows the Company to request additional Revolver and Term Loan lender commitments up to a total of $750,000,000. The maturities for the Company’s Revolver and Term Loan remain unchanged with the Revolver’s maturity in January 2026 with options to extend for a total of 12 months, and the Term Loan’s maturity in January 2027. The Company paid lender fees of $1,378,125 in connection with this expansion of its Credit Facility.
The Credit Facility is priced on a leverage-based grid that fluctuates based on the Company’s actual leverage ratio at the end of the prior quarter. Based on the Company’s leverage ratio of 38% as of the quarter ended September 30, 2022, the interest rate for the Revolver is SOFR plus 155 basis points plus a 10-basis point SOFR index adjustment and the interest rate on the Revolver was 4.7125% on October 31, 2022.
Interest Rate Swap
On October 26, 2022, the Company purchased a five-year swap to fix SOFR at 3.44% on an additional $100,000,000 of its Term Loan that will result in a fixed interest rate of 5.04% on additional draws under the expanded Term Loan when the Company’s leverage ratio is less than or equal to 40%. As part of this transaction, the Company sold a one-time option to terminate the swap on December 31, 2024, which reduced the swap rate. Under the Credit Facility, the interest rate will continue to vary based on the Company’s leverage ratio.