UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
SEMI-ANNUAL REPORT
PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933
For the six-month
period ended June 30, 2017
HC GOVERNMENT REALTY TRUST, INC.
(Exact
name of issuer as specified in its charter)
I.R.S.
Employment Identification Number: 51-1867397
Maryland
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32-0467957
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
No.)
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1819 Main Street, Suite 212Sarasota, FL
(Address
of principal executive offices)
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20036
(Zip
Code)
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(941) 955-7900
Issuer’s
telephone number, including area code
Common Shares
(Title of each class of securities issued pursuant to Regulation
A)
In this semi-annual report,
references to the
“Company,” “we,” “us” or
“our” or similar terms refer to HC Government
Realty Trust, Inc. a Maryland
corporation, together with its consolidated subsidiaries, including
HC Government Realty Holdings, L.P., a Delaware limited
partnership, which we refer to as our Operating Partnership.
We refer to
Holmwood Capital, LLC, a Delaware limited liability company, as
Holmwood or our predecessor, and Holmwood Capital Advisors, LLC, a
Delaware limited liability company, as our Manager. As used in this
Semi-Annual Report, an affiliate of,
or person affiliated with, a specified person,
is a person that directly, or indirectly through one or
more intermediaries, controls or is controlled by, or is under
common control with,
the person specified.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We
make statements in this semi-annual report on Form 1-SA that are
forward-looking statements within the meaning of the federal
securities laws. The words “believe,”
“estimate,” “expect,”
“anticipate,” “intend,” “plan,”
“seek,” “may,” and similar expressions or
statements regarding future periods are intended to identify
forward-looking statements. These forward-looking statements
involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from any
predictions of future results, performance or achievements that we
express or imply in this annual report or in the information
incorporated by reference in this semi-annual report.
The
forward-looking statements included in this semi-annual report on
Form 1-SA are based upon our current expectations, plans,
estimates, assumptions and beliefs that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions,
all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the
expectations reflected in such forward-looking statements are based
on reasonable assumptions, our actual results and performance could
differ materially from those set forth in the forward-looking
statements. Factors which could have a material adverse effect on
our operations and future prospects include, but are not limited
to:
●
our ability to
effectively deploy the proceeds raised in our securities
offering,
●
changes in
economic conditions generally and in the real estate and securities
markets, specifically,
●
the ability of our
manager to source, originate and acquire suitable investment
opportunities,
●
our expectation
that there will be opportunities to acquire additional properties
leased to the United States of America,
●
our expectations
regarding demand for leased space by the federal
government,
●
that our tenants
will renew or extend their leases and not exercise early
termination options pursuant to their leases or that we will be
successful in finding replacement tenants,
●
the impact of
changes in real estate needs and financial conditions of federal,
state and local governments,
●
acts of terrorism
and other disasters that are beyond our control,
●
legislative or
regulatory changes impacting our business or our assets (including
changes to the laws governing the taxation of real estate
investment trusts (“REITs”) and SEC guidance related to
Regulation A or the JOBS Act),
●
our ability to
raise equity or debt capital,
●
our compliance
with applicable local, state and federal laws, including the
Investment Advisers Act of 1940, as amended (the “Advisers
Act”), the Investment Company Act of 1940, as amended, and
other laws; and
●
changes to
generally accepted account principles, or GAAP.
Any
of the assumptions underlying forward-looking statements could be
inaccurate. You are cautioned not to place undue reliance on any
forward-looking statements included in this semi-annual report. All
forward-looking statements are made as of the date of this
semi-annual report on Form 1-SA and the risk that actual results
will differ materially from the expectations expressed in this
semi-annual report on Form 1-SA will increase with the passage of
time. Except as otherwise required by the federal securities laws,
we undertake no obligation to publicly update or revise any
forward-looking statements after the date of this semi-annual
report on Form 1-SA, whether as a result of new information, future
events, changed circumstances or any other reason. In light of the
significant uncertainties inherent in the forward-looking
statements included in this semi-annual report on Form 1-SA, the
inclusion of such forward-looking statements should not be regarded
as a representation by us or any other person that the objectives
and plans set forth in this semi-annual report on Form 1-SA will be
achieved.
Item 1. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Overview
We are an externally-managed real estate company
formed to grow our business of acquiring, developing, financing,
owning and managing properties leased primarily to the United
States of America, acting either through the GSA or directly
through the federal government agencies or departments occupying
such properties, including such properties owned by special purpose
entities contributed to our operating partnership by Holmwood, our
accounting predecessor. We invest primarily in GSA Properties
across secondary and smaller markets, within size ranges of
5,000-50,000 rentable square feet, and in their first term after
construction or retrofit to post-9/11 standards. We further
emphasize GSA Properties that fulfill mission critical or direct
citizen service functions. We intend to grow our
portfolio primarily through acquisitions of single-tenanted,
federal government-leased properties in such markets; although, at
some point in the future we may elect to develop, or joint venture
with others in the development of, competitively bid,
build-to-suit, single-tenant, federal government-leased properties,
or buy facilities that are leased to credit-worthy state or
municipal tenants.
As
of June 30, 2017, the Company owned 11 operating properties,
containing 208,203 rentable square feet located in seven states.
The properties are 100% leased to the United States of America and
occupied by federal government agencies. Based on net operating
income of each property, the properties have a weighted average
remaining lease term of 9.7 years if none of the early termination
rights are exercised and 6.7 years if the early termination right
are exercised.
Our
operating partnership holds substantially all of our assets and
conducts substantially all of our business. As of June 30, 2017, we
owned approximately 48% of the aggregate common limited partnership
interests in our operating partnership, or common units, on a fully
diluted basis. We were formed in 2016
as a Maryland corporation, and we intend to elect to be taxed as a
REIT for federal income tax purposes beginning with our taxable
year ending December 31, 2017.
Our Predecessor
Generally.
The term “our predecessor”
refers to Holmwood and its consolidated subsidiaries, each of which
subsidiaries holds all of the fee interests in three of the
facilities that were a part of our predecessor’s seven
property portfolio.
Contribution
of Our Predecessor; Consideration Therefor, Etc.
Pursuant to the contribution
agreement, as amended between our predecessor and our operating
partnership (the “contribution agreement”), all of the
membership interests in four of our predecessor’s
subsidiaries were contributed to our operating partnership in
exchange for common units of our operating partnership (the
“OP Units”). Also, in connection with the same
contribution transaction in exchange for all of the profits,
losses, any distributed cash flow and all of the other benefits and
burdens of ownership for federal income taxes of three such
subsidiaries our operating partnership issued to our
predecessor the number of OP Units it
would have issued had the
membership interests of such subsidiaries also been contributed to
our operating partnership at the closing in exchange for OP
Units.
The number of OP Units issued in connection with
these contributions was calculated based upon the agreed value of
our predecessor’s equity, plus principal amortization
paid by our predecessor from January 1, 2016 to and including the
date the contribution was made (May 26, 2017), divided by $10 per op unit. Under our operating
partnership’s limited partnership agreement, the OP Units
issued incident to the contribution under certain circumstances can
be redeemed in exchange for shares of our common stock on a
1:1 basis.
Also, incident to the contribution transactions,
our operating partnership assumed the outstanding mortgage
indebtedness associated with each of the underlying properties,
owned by our predecessor’s subsidiaries, aggregating
$22,585,285, as well as notes payable aggregating $1,132,038, both
as of the contribution date. The notes were repaid by our operating
partnership on the contribution date.
Our
predecessor is our attorney-in-fact for the administration of the
membership interests in the three retained subsidiaries, and under
the contribution agreement, as amended, with our predecessor, upon
the occurrence of certain events, including receipt of lender
approvals for the transfer of the membership interests, then the
membership interests shall transfer to, and be vested in, our
operating partnership.
Tax
Protection. Incident to the
closing of the contribution transactions our predecessor entered
into a tax protection agreement with our operating partnership,
whereby our operating partnership has agreed in certain
circumstances to indemnify our predecessor from and against any tax
liability that may result from actions or non-actions that our
operating partnership may take with respect to the contributed
assets during the ten years following the date of closing of the
contribution transactions.
Acquired Properties.
Shortly
after its formation our operating partnership purchased three
properties in June 2016, a 19,241 rentable square foot facility in
Lakewood, Colorado, occupied by the Department of Transportation
(our “Lakewood facility”), a 17,058 rentable square
foot facility in Moore, Oklahoma, occupied by the Social Security
Administration (SSA) (our “Moore facility”), and a
9,298 rentable square foot facility in Lawton, Oklahoma, occupied
by the SSA (our “Lawton facility”). These properties
(collectively, the “initial properties”) were
financed with $3,612,500 of proceeds
from our 7.00% Series A Cumulative Convertible Preferred Stock
offering, or our Series A Preferred Stock, $2,019,789 of seller
financing (the “Standridge indebtedness”) and a
$7,225,000 bank loan secured by the properties.
On
March 31, 2017, our operating partnership acquired a 53,917
rentable square foot building in Norfolk, Virginia, that is leased
to the United States of America and occupied by the SSA. The
purchase price for the building was $14,500,000, excluding
acquisition costs. The acquisition was financed by first mortgage
debt of $10,875,000 and the proceeds from unsecured loans to our
operating partnership from two principals of our predecessor and a
third- party aggregating $3,400,000 (the “unsecured
debt”).
Operating Results
For the six-month period ended June 30, 2017
As of
June 30, 2017, our 11 operating properties were 100% leased with a
weighted average annualized lease income per leased square foot of
$29.63 and a weighted average building age of approximately 13.3
years.
Contributed
Portfolio. For the period from May 26, 2017 to June 30,
2017, the properties underlying our predecessor’s
contribution delivered total revenues
from operations of $348,468; operating costs, excluding
depreciation and amortization, interest expense and asset
management fees, of $127,510 and net operating income of $220,958.
After deducting depreciation and amortization, interest expense and
asset management fees, our operating partnership’s net income
from such underlying properties for the six-month period was
($3,196).
Acquired
Properties. For the six-months ended June 30, 2017, the
initial properties delivered total
revenues from operations of $650,248; operating costs, excluding
depreciation and amortization, interest expense and asset
management fees, aggregating $181,343 and net operating income of
$468,905. After deducting depreciation and amortization, interest
expense and asset management fees associated with these three
facilities, our net income for the six-month period was
$41,193.
For the
period from March 31, 2017 to June 30, 2017, the Norfolk, Virginia
property delivered total revenues from
operations of $339,608; operating costs, excluding depreciation and
amortization, interest and asset management fees, aggregating
$92,239 and net operating income from the property for the
six-month period was $247,369. After deducting depreciation and
amortization, interest expense and asset management fees, our net
income from the property for the six-month period was
$78,182.
Corporate
Costs. For the six-month period
ended June 30, 2017, we incurred corporate costs for legal
representation, annual audits, tax returns, directors’ and
officers’ liability insurance, vesting of long term incentive
plans and other corporate related costs of $419,795. In addition,
for the six-month period ended June 30, 2017, we incurred $40,127
for asset management fees and $211,060 for interest expense
associated with the unsecured indebtedness incurred by our
operating partnership and used to purchase our Norfolk, Virginia
SSA facility. Corporate expenses totaled $670,982 for the
period.
For the period of March 11, 2016 (inception) and June 30,
2016
On June 10, 2016, our operating partnership
purchased the initial properties.
Total costs for the initial properties were $11,050,596, and
financed with $3,612,500 of proceeds from our Series A Preferred
Stock, $2,019,789 of seller financing and a $7,225,000 bank loan.
[For the period beginning March 11, 2016 (inception) and ending
June 30, 2016,] these properties delivered total revenues from
operations of $76,599 and incurred operating costs, excluding
depreciation, amortization, interest expense and asset management
fees, of $38,655, resulting in net operating income for the period
of $37,944. After deducting depreciation and amortization, interest
expense and asset management fees, our net loss was
($28,087).
Calculating Net Operating Income
We
believe that our net operating income, or NOI, a non-GAAP measure,
is a useful measure of our operating performance. We define NOI as
total property revenues less total property operating expenses,
excluding depreciation and amortization, interest expense and asset
management fees. Other REITs may use different methodologies for
calculating NOI, and accordingly, our NOI may not be comparable to
the NOI of other REITs. We believe that NOI, as we calculate it,
provides an operating perspective not immediately apparent from
GAAP operating income or net income. We use NOI to evaluate our
performance on a property-by-property basis, because NOI more
meaningfully reflects the core operations of our properties as well
as their performance by excluding items not related to property
operating performance and by capturing trends in property operating
expenses. However, NOI should only be used as an alternative
measure of our financial performance.
The
following table reflects property contributions to combined NOI
together with a reconciliation of NOI to net income (loss) as
computed in accordance with GAAP for the six-month period ended
June 30, 2017.
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HC Government Realty Trust, Inc.
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Revenues
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$348,468
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$339,608
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$650,248
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$-
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$1,338,324
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Less:
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Operating
expenses
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77,620
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87,560
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162,349
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419,795
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747,324
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Property
management fees
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49,890
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4,679
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18,994
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73,563
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127,510
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92,239
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181,343
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419,795
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820,887
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Net
Operating Income
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220,958
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247,369
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468,905
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(419,795)
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517,437
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Less:
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Asset
management fees
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-
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-
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-
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40,127
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40,127
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Depreciation
and amortization
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125,994
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97,253
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270,630
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-
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493,877
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Interest
expense
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98,160
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71,934
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157,082
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211,060
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538,236
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224,154
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169,187
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427,712
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251,187
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1,072,240
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Net
income (loss)
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$(3,196)
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$78,182
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$41,193
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$(670,982)
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$(554,803)
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Liquidity and Capital Resources
As
of June 30, 2017, there was cash on hand of
$1,716,644.
Our
business model is intended to drive growth through acquisitions.
Access to the capital markets is an important factor for our
continued success. We expect to continue to issue equity in our
Company with proceeds being used to acquire other single-tenant
properties, leased to the United States of America or facilities
that are leased to credit-worthy state or municipal
tenants.
Our
liquidity needs are primarily to fund (i) operating expenses and
cash dividends; (ii) property acquisitions; (iii) deposits and fees
associated with long-term debt financing for our properties; (iv)
recurring capital expenditures; (v) debt repayments; (vi) payment
of principal of, and interest on, outstanding indebtedness; (vii)
corporate and administrative costs; and (viii) other investments,
consonant with our investment guidelines and policies.
On
November 7, 2016, the Securities and Exchange Commission (SEC)
qualified our offering of common stock pursuant to Tier II of
Regulation A under the Securities Act of 1933, as amended (our
“offering”). Our offering required that a minimum of
300,000 shares of our common stock at $10 per share be subscribed
for and the subscription price paid into escrow before we were
permitted to close any part of the offering. This minimum was
achieved and on May 18, 2017, we issued 317,120 shares and received
initial proceeds, net of issuance costs totaling $2,894,580. The
offering also contemplates that up to a total of 3,000,000 shares
can be issued in the offering at $10 per share. The Offering
continues and unless earlier terminated, which we reserve the right
to do, will terminate on the first to occur of the issuance of a
total of 3,000,000 shares for gross proceeds of $30,000,000, or
November 7, 2018. During the period from May 18, 2017 to June 30,
2017, we issued 407,922 shares of common stock (which includes the
317,120 shares issued on May 18, 2017) and received total proceeds,
net of issuance costs, of $3,711,448, pursuant to the
Offering.
As
the Offering continues, incremental shares are issued and
additional net proceeds are received, those net proceeds for among
other purposes will be used to curtail debt, fund acquisitions,
provide working capital, and otherwise improve our capital
structure, which we expect will enable us to further implement our
acquisition strategy, and increase cash flows. It also is possible
that our Board may decide to use net proceeds to fund a portion of
our targeted dividend if funds from operations are insufficient for
such purpose.
Except
as described in our offering circular for the Offering and with
respect to first mortgage debt incurred to finance or refinance
newly acquired or owned facilities, neither have we identified, nor
have we committed to any additional material internal or external
sources of liquidity
The
Standridge indebtedness bears interest at a fixed annum rate of
7.0% and debt service payments are based on a blended 20-year
amortization of principal and interest. As of June 30, 2017, the
outstanding principal balance of the Standridge indebtedness was
$1,967,552. The
Standridge indebtedness will mature on the earlier of December 10,
2017, the date on which we complete a public securities offering,
or the date on which our initial properties are sold or refinanced
by us.
The unsecured debt incurred by our operating
partnership to finance a portion of the purchase price for our
Norfolk, Virginia property accrues interest only at a fixed
annum rate of 12.0%, with principal due at maturity on March 31, 2018, but may
be prepaid in whole or in part at any time and from time to time
without premium or penalty.
We
expect to pay off the Standridge indebtedness and unsecured
indebtedness of our operating partnership incurred to complete the
purchase of our Norfolk, Virginia property, as well as meet our
other short-term liquidity requirements primarily through cash
provided from operations and from the net proceeds of the
Offering.
Trend Information
Through
our operating partnership, our Company is engaged primarily in the
acquisition, leasing and disposition of single-tenanted, mission
critical or customer facing properties, leased to the United States
of America and that are situated in secondary and tertiary markets
throughout the country. As full faith and credit obligations of the
United States these leases offer risk-adjusted returns, which are
attractive, inasmuch as there continues to be no appreciable yield
of comparable credit quality in the marketplace. Conversely, these
market dynamics have caused upward pressure on sales prices, offset
by management’s deep knowledge and contacts in the sector and
the paucity of buyers which will consider smaller properties in
smaller markets, frequently enabling our Company to lock-up
transactions directly with sellers, avoiding brokerage commissions
to either party. There is some indication that short-term interest
rates may rise, but while any increase in interest rates will tend
to result in some downward pressure on sales prices, if they become
sustained, conversely, if long-term interest rates rise, our cost
of capital to fund acquisitions can be expected to rise as well,
increasing our operating costs and decreasing net
income.
With
the completion of our Offering’s initial and subsequent
closings we have been successful in acquiring one additional
property and placed two others under contract in accordance with
our business plan. While there can be no assurances that additional
funds will be raised, continuing success of our offering should
enable us to accelerate acquisition plans, provide liquidity to
support growth and enhance purchasing power for goods and services
in connection with the operation of our properties.
Item 2. Other Information
None.
Item 3. Financial
Statements
HC Government Realty Trust, Inc.
Consolidated Financial Statements – as of June 30, 2017
(unaudited) and December 31, 2016 (audited) and for the six-month
period ended June 30, 2017 (unaudited) and the period from March
11, 2016 (date of inception) to June 30, 2016
(unaudited)
HC Government Realty Trust, Inc.
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Consolidated Balance Sheet
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As of June 30, 2017 (unaudited) and December 31, 2016
(audited)
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ASSETS
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Investment
in real estate, net:
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$56,771,654
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$10,435,991
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Cash
and cash equivalents
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1,716,644
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247,137
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Deposits
in escrow
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192,202
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51,656
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Rent
and other tenant accounts receivables, net
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519,100
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126,590
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Related
parties receivables
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109,536
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525,397
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Prepaids
and other assets
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675,033
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182,376
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Leasehold
intangibles, net
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2,797,169
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326,279
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Total Assets
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$62,781,338
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$11,895,426
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-
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LIABIILTIES
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Mortgages
payable, net of unamortized debt costs
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$40,241,084
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$7,068,067
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Notes
payable
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5,367,552
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1,992,140
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Other
note payable
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37,719
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111,821
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Accrued
interest payable
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151,755
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35,379
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Other
liabilities
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1,085,245
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378,684
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Total Liabilities
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46,883,355
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9,586,091
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STOCKHOLDERS' EQUITY
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Preferred
stock ($0.001 par value, 750,000,000 shares authorized
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and
144,500 shares issued and outstanding)
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3,612,500
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3,612,500
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Common
stock ($0.001 par value, 250,000,000
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shares
authorized, 618,978 and 200,000 common shares issued,
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and
outstanding, respectively)
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3,824,008
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2,000
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Offering
costs
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(1,410,764)
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(1,074,485)
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Accumulated
deficit
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(949,079)
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(230,680)
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Total Stockholders' Equity
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5,076,665
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2,309,335
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Noncontrolling
interests
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10,821,318
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-
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Total Equity
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15,897,983
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2,309,335
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Total Liabilities and Stockholders' Equity
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$62,781,338
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$11,895,426
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The accompanying notes are an integral part of the financial
statements.
HC GOVERNMENT REALTY TRUST, INC.
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Consolidated Satement of Operations
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For the
six-month period ended June 30, 2017 (unaudited) and for the period
from March 11, 2016 (date of inception) to June 30,
2016
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Revenues:
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Rental
revenues
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$1,319,748
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$73,769
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Real
estate tax reimbursments and other revenues
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18,576
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2,830
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Total
Revenues
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1,338,324
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76,599
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Other
Property Operations
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Repairs
and maintenance
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48,739
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1,750
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Utilities
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72,069
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4,305
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Real
estate and other taxes
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120,158
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5,221
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Depreciation
and amortization
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493,877
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30,613
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Other
operating expense
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69,735
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2,777
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Management
fees
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73,563
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9,593
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Professional
expenses
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184,647
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5,856
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Insurance
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16,828
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1,176
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Amortization
of stock compensation
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110,560
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-
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General
and administrative
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164,715
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7,977
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Total
Operating Expenses
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1,354,891
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69,268
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Interest
expense
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538,236
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35,418
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Net
loss
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(554,803)
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(28,087)
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Less:
Net income attributable to nonconrolling interests
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37,157
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-
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Net
loss attributable to HC Government Realty Trust, Inc.
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(591,960)
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(28,087)
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Less:
Preferred stock dividends
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(126,439)
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-
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Net
loss attributable to common shareholders
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$(718,398)
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$(28,087)
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|
Net
loss per basic and dilutive common shares
|
$(0.88)
|
$(0.46)
|
|
|
|
Weighted
average number of basic and diluted
|
|
|
common
shares outstanding
|
814,464
|
60,822
|
The accompanying notes are an integral part of the financial
statements. In the opinion of management, all adjustments necessary
in order to make the interim financial statements not misleading
have been included.
HC GOVERNMENT REALTY TRUST, INC.
|
Consolidated Statement of Changes in Stockholders'
Equity
|
For the six-month period ended June 30, 2017
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
144,500
|
$3,612,500
|
200,000
|
$2,000
|
$(1,074,485)
|
$(230,680)
|
$2,309,335
|
-
|
$-
|
$2,309,335
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuing common
|
|
|
|
|
|
|
|
|
|
|
shares,
net of issuance costs
|
-
|
-
|
407,922
|
3,711,448
|
-
|
-
|
3,711,448
|
-
|
-
|
3,711,448
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
investments
|
-
|
-
|
|
-
|
-
|
-
|
-
|
1,078,416
|
10,784,161
|
10,784,161
|
|
|
|
|
|
|
|
|
|
|
|
Vesting
of longterm incentive
|
|
|
|
|
|
|
|
|
|
|
plans
|
-
|
-
|
11,056
|
110,560
|
-
|
-
|
110,560
|
-
|
-
|
110,560
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
-
|
-
|
|
-
|
-
|
(126,439)
|
(126,439)
|
-
|
-
|
(126,439)
|
|
|
|
|
|
|
|
|
|
|
|
Offering
costs
|
-
|
-
|
|
-
|
(336,279)
|
-
|
(336,279)
|
-
|
-
|
(336,279)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
-
|
-
|
|
-
|
-
|
(591,960)
|
(591,960)
|
-
|
37,157
|
(554,803)
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2017
|
144,500
|
$3,612,500
|
618,978
|
$3,824,008
|
$(1,410,764)
|
$(949,079)
|
$5,076,665
|
1,078,416
|
$10,821,318
|
$15,897,983
|
The accompanying notes are an integral part of the financial
statements.
HC Government Realty Trust, Inc.
|
|
|
Consolidated
Statement of Cash Flows
|
|
|
For the
six-month period ended June 30, 2017 (unaudited) and for the period
from March 11, 2016 (date of inception) to June 30, 2016
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
Net
loss
|
$(554,803)
|
$(28,087)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
operating
activities:
|
|
|
Depreciation
|
388,561
|
24,944
|
Amortization
of acquired lease-up costs
|
55,751
|
2,453
|
Amortization
of in-place leases
|
49,566
|
4,210
|
Amortization
of above/below-market leases
|
(7,669)
|
(994)
|
Amortization
of debt issuance costs
|
29,720
|
7,334
|
Amortization
of stock based compensation
|
110,560
|
-
|
Change
in assets and liabilities
|
|
|
Increase
in rent and other tenant accounts receivables, net
|
(392,510)
|
(43,613)
|
Increase
in prepaid expense and other assets
|
(492,657)
|
(1,418,513)
|
Increase
in deposits in escrow
|
(140,546)
|
(163,386)
|
Increase
in accounts payable and other accrued expenses
|
703,758
|
21,395
|
Increase
in accrued interest payable
|
116,376
|
24,418
|
(Increase)decrease
in related party receivables
|
415,861
|
-
|
Net
cash provided(used) in operating activities
|
281,967
|
(1,569,839)
|
|
|
|
Cash flows from investing activities:
|
|
|
Investment
property acquisitions
|
(14,788,473)
|
(11,050,596)
|
Net
cash used in investing activities
|
(14,788,473)
|
(11,050,596)
|
|
|
|
Cash flows from financing activities:
|
|
|
Issuance
of common stock, net of underwriter's discount
|
3,711,448
|
2,000
|
Issuance
of preferred stock
|
-
|
2,800,000
|
Offering
costs
|
(336,279)
|
(217,710)
|
Mortgage
proceeds
|
10,875,000
|
7,225,000
|
Mortgage
principal payments
|
(165,496)
|
-
|
Proceeds
from seller note payable
|
-
|
2,019,789
|
Proceeds
from other note payable
|
3,400,000
|
1,000,000
|
Assumed
notes from contribution properties repaid
|
(1,132,038)
|
-
|
Notes
principal repayments
|
(98,690)
|
-
|
Debt
issuance costs
|
(151,493)
|
(105,072)
|
Dividends
paid
|
(126,439)
|
-
|
Net
cash from financing activities
|
15,976,013
|
12,724,007
|
|
|
|
Net
increase in cash and cash equivalents
|
1,469,507
|
103,572
|
Cash
and cash equivalents, beginning of period
|
247,137
|
-
|
Cash
and cash equivalents, end of period
|
$1,716,644
|
$103,572
|
The accompanying notes are an integral part of the financial
statements.
Notes to the Consolidated Financial Statements
HC Government Realty Trust, Inc. (the
“REIT” or the “Company), a Maryland corporation,
was formed on March 11, 2016 to primarily source,
acquire, own and manage built-to-suit and improved-to-suit,
single-tenant properties leased by the United States of America
through the U.S General Services Administration (“GSA
Properties”). The Company
focuses primarily on GSA Properties across secondary and smaller
markets, within size ranges of 5,000-50,000 rentable square feet,
and in their first term after construction or retrofit to post-9/11
standards. Further, the Company selects GSA Properties that fulfill
mission critical or citizen service functions. Leases associated
with the GSA Properties are full faith and credit obligations of
the United States of America and are administered by the U.S.
General Services Administration or directly through the occupying
federal agencies, or collectively the GSA.
The Company owns its properties through the
Company’s subsidiary, HC Government Realty Holdings, L.P., a
Delaware limited partnership (“Operating Partnership”).
The Operating Partnership invests
through wholly-owned special purpose limited liability companies,
or special purpose entities (“SPE”), primarily in
properties across secondary or smaller markets.
The consolidated financial statements include the
accounts of its Operating Partnership subsidiary and related SPEs
and the accounts of the REIT. As of June 30, 2017, the financial
statements reflect the operations of 11 properties representing
208,203 rentable square feet located in seven states. There were 3
properties purchased in June, 2016 representing 43,984 rentable
square feet located in two states. The properties are 100% leased
to the United States of America and, based on aggregate net
operating income of each property, have a weighted average
remaining lease term of 9.7 years and 9.4 years if none of the
early termination rights are exercised and 6.7 years and 6.2 years
if all of the early termination rights are exercised as of June 30,
2017 and June 30, 2016, respectively. The Company and its assets
are managed externally by Holmwood Capital Advisors, LLC and its
subsidiary Holmwood Capital Management, LLC (collectively
“HCA” or “Asset Manager”). The
Company operates as an UPREIT and plans to elect to be treated as a
real estate investment trust, or REIT, for federal income tax
purposes under the Internal Revenue Code of 1986, as amended, or
the Code, beginning with the taxable year ended December 31,
2017.
2.
Significant Accounting Policies
Basis of Accounting and Consolidation
Basis - The
accompanying consolidated financial statements include the accounts
of the subsidiary and eleven SPEs as of June 30, 2017 including
transactions whereby the Company has been determined to have
majority voting interest, or has both control and is the primary
beneficiary in accordance with the Financial Accounting Standards
Board (“FASB”) guidance. All other significant
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates
and assumptions.
Cash and Cash Equivalents - Cash and cash equivalents include all
cash and liquid investments with an initial maturity of three
months or less when purchased. At times, the Company’s cash
and cash equivalents balance deposited with financial institutions
may exceed federally insurable limits. The Company mitigates this
risk by depositing funds with major financial institutions. The
Company has not experienced any losses in connection with such
deposits.
Organizational, Offering and Related Costs
- Organizational and offering costs of the Company include
expenses paid by the Company in connection with the formation of
the Company and the qualification of the Offering, and the
marketing and distribution of shares, including, without
limitation, expenses for printing, and amending offering statements
or supplementing offering circulars, mailing and distributing
costs, advertising and marketing expenses, charges of experts and
fees, expenses and taxes related to the filing, registration and
qualification of the sale of shares under federal and state laws,
including taxes and fees and accountants’ and
attorneys’ fees. As of June 30, 2017 and December 31, 2016,
organizational and offering costs totaled $1,410,764 and $1,074,485
respectively.
Deposits in Escrow – As of June 30, 2017 and December
31, 2016, deposits in escrow represent cash held by a lender which
are restricted for real estate tax and insurance
expenses.
Purchase Accounting for Acquisitions of Real
Estate Subject to a Lease - In accordance with the FASB
guidance on business combinations, the Company determines the fair
value of the real estate assets acquired on an “as if
vacant” basis. The difference between the purchase price and
the fair value of the real estate assets on an “as if
vacant” basis is first allocated to the fair value of above-
and below-market leases, and then allocated to in-place leases and
lease-up costs.
Management
estimates the “as if vacant” value considering a
variety of factors, including the physical condition and quality of
the buildings, estimated rental and absorption rates, estimated
future cash flows, and valuation assumptions consistent with
current market conditions. The “as if vacant” fair
value is allocated to land and buildings and improvements based on
relevant information obtained in connection with the acquisition of
the property, including appraisals and property tax assessments.
Above-market and below-market lease values are determined on a
lease-by-lease basis based on the present value (using an interest
rate that reflects the risk associated with the leases acquired) of
the difference between (a) the contractual amounts to be paid under
the lease and (b) management’s estimate of the fair market
lease rate for the corresponding space over the remaining
non-cancelable terms of the related leases. Above (below) market
lease values are recorded as leasehold intangibles and are
recognized as an increase or decrease in rental income over the
remaining non-cancelable term of the lease.
Additionally,
in-place leases are valued in consideration of the net rents earned
that would have been foregone during an assumed lease-up period;
and lease-up costs are valued based upon avoided brokerage fees.
The Company has not recognized any value attributable to customer
relationships. The difference between the total of the calculated
values described above, and the actual purchase price plus
acquisition costs, is allocated pro-ratably to each component of
calculated value. In-place leases and lease-up costs are amortized
over the remaining non-cancelable term of the leases. Real estate
values were determined by independent accredited
appraisers.
Building assets are
depreciated over a 40-year period, tenant improvements and the
leasehold intangibles are amortized over the remaining
non-cancelable term of the lease. In the event that a tenant
terminates its lease, the unamortized portion of the in-place lease
and lease-up costs are charged to expense immediately.
The
Company’s real estate is leased to tenants on a modified
gross lease basis. The leases provide for a minimum rent which
normally is flat during the firm term of the lease. The minimum
rent payment may include payments to pay for lessee requests for
tenant improvement or to cover the cost for extra security. The
tenant is required to pay increases in property taxes over the
first year and an increase in operating costs based on the consumer
price index of the lease’s base year operating expenses.
Operating costs includes repairs and maintenance, cleaning,
utilities and other related costs. Generally, the leases provide
the tenant with renewal options, subject to generally the same
terms and conditions of the base term of the lease. The Company
accounts for its leases using the operating method. Such method is
described below:
Operating method – Properties
with leases accounted for using the operating method are recorded
at the cost of the real estate. Revenue is recognized as rentals
are earned and expenses (including depreciation and amortization)
are charged to operations as incurred. Buildings are depreciated on
the straight-line method over their estimated useful lives.
Leasehold interests are amortized on the straight-line method over
the terms of their respective leases. When scheduled rentals vary
during the lease term, income is recognized on a straight-line
basis so as to produce a constant periodic rent over the term of
the lease.
Construction
expenditures for tenant improvements, leasehold improvements and
leasing commissions are capitalized and amortized over the
remaining terms of each specific lease. Maintenance and repairs are
charged to expense during the financial period in which they are
incurred. Expenditures for improvements that extend the useful life
of the real estate investment are capitalized. Upon sale or
disposition of the investment in real estate, the cost and related
accumulated depreciation and amortization are removed from the
accounts with the resulting gain or loss included as a component of
net income (loss) during the period in which the disposition
occurred.
Impairment – Real Estate - The Company reviews
investments in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not
be recoverable. To determine if impairment may exist, the Company
reviews its properties and identifies those that have had either an
event of change or an event of circumstances warranting further
assessment of recoverability (such as a decrease in occupancy). If
further assessment of recoverability is needed, the Company
estimates the future net cash flows expected to result from the use
of the property and its eventual disposition, on an individual
property basis. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the
carrying amount of the property on an individual property basis,
the Company will recognize an impairment loss based upon the
estimated fair value of such property. As of June 30, 2017,
the Company has not recorded any impairment charges.
Tenant Improvements - As part of the leasing process, the
Company may provide the lessee with an allowance for the
construction of leasehold improvements. These leasehold
improvements are capitalized and recorded as tenant improvements,
and depreciated over the shorter of the useful life of the
improvements or the remaining lease term. If the allowance
represents a payment for a purpose other than funding leasehold
improvements, or in the event the Company is not considered the
owner of the improvements, the allowance is considered to be a
lease incentive and is recognized over the lease term as a
reduction of minimum rent revenue. Factors considered during this
evaluation include, among other things, who holds legal title to
the improvements as well as other controlling rights provided by
the lease agreement and provisions for substantiation of such costs
(e.g. unilateral control of the tenant space during the build-out
process). Determination of the appropriate accounting for the
payment of a tenant allowance is made on a lease-by-lease basis,
considering the facts and circumstances of the individual tenant
lease. No tenant allowances were provided year-to-date June 30,
2017 and during the period from March 11, 2016 (inception) to June
30, 2016.
Revenue Recognition - Minimum rents are recognized when due
from tenants; however, minimum rent revenues under leases which
provide for varying rents over their terms, if any, are straight
lined over the term of the leases. In the case of expense
reimbursements due from tenants, the revenue is recognized in the
period in which the related expense is incurred.
Rents and Other Tenant Accounts Receivables,
net - Rents and other tenant accounts receivables represent
amounts billed and due from tenants. When a portion of the
tenants’ receivable is estimated to be uncollectible, an
allowance for doubtful accounts is recorded. Due to the high credit
worthiness of the tenant, there were no allowances as of June 30,
2017 and December 31, 2016, respectively.
Income Taxes – The Company
accounts for income taxes using the asset and liability approach
for the recognition of deferred tax assets and liabilities for the
expected future tax consequences attributable to differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
statutory tax rates applicable to the future years in which the
deferred amounts are expected to be settled or realized. The effect
of changes in tax rates is recognized in the provision for income
tax in the period the change in rates is enacted. Significant
judgment is required in determining income tax provisions and
evaluating tax provisions under the accounting guidance for income
taxes.
Management
determines whether a tax position of the Company is more likely
than not to be sustained upon examination, including resolution of
any related appeals or litigation processes, based on the technical
merits of the position. For tax positions meeting the more likely
than not threshold, the tax amount recognized in the consolidated
financial statements is reduced by the largest benefit that has a
greater than fifty percent likelihood of being realized upon
ultimate settlement with the relevant taxing authority. As of June
30, 2017 and June 30, 2016, the Company has not identified any
uncertain tax positions requiring an
accrual.
Noncontrolling Interests -
Noncontrolling interests represents the portion of equity
in the Company’s Operating Partnership not attributable to
the REIT. Accordingly, noncontrolling interests are included in the
equity section of the consolidated balance sheets but separate from
the Company’s equity. On the consolidated statements of
operations, the subsidiaries are reported at the consolidated
amount, including both the amount attributable to the Company and
noncontrolling interests. Consolidated statements of changes in
equity include beginning balances, activity for the period and
ending balances for shareholders’ equity, noncontrolling
interests and total equity.
The
noncontrolling interest of the Operating Partnership common unit
holders is calculated by multiplying the noncontrolling interest
ownership percentage at the balance sheet date by the Operating
Partnership’s net assets (total assets less total
liabilities). The noncontrolling interest percentage is calculated
at any point in time by dividing the number of units not owned by
the Company by the total number of units outstanding. The
noncontrolling interest ownership percentage will change as
additional units are issued or as units are exchanged for the
Company’s $0.001 par value per share common stock.
In accordance with GAAP, any changes in the value from period to
period are charged to additional paid-in capital.
Debt Costs – Mortgages Payable – Debt costs
incurred in connection with the Company’s mortgages payable
have been deferred and are being amortized over the term of the
respective loan agreements using the straight-line method, which
approximates the effective interest method and are recorded in
Mortgages payable on the Consolidated Balance Sheet. For the
six-month period ended June 30, 2017 and for the period from March
11, 2016 (date of inception) to June 30, 2016, the Company incurred
total gross debt issuance costs of $256,565 and $105,072,
respectively. The accumulated amortization related to these debt
issuance costs as of June 30, 2017 and December 31, 2016 was
$49,304 and $19,584, respectively.
Recent Accounting Pronouncements
- In May 2014, the FASB
issued ASU 2014-09, “Revenue from Contracts with
Customers,” which supersedes the revenue recognition
requirements of Accounting Standards Codification
(“ASC”) Topic 605, “Revenue Recognition”
and most industry-specific guidance on revenue recognition
throughout the ASC. The new standard is principles based and
provides a five step model to determine when and how revenue is
recognized. The core principle of the new standard is that revenue
should be recognized when a company transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. The new standard also requires disclosure of
qualitative and quantitative information surrounding the amount,
nature, timing and uncertainty of revenues and cash flows arising
from contracts with customers. The new standard will be effective
for the Company for the year ending December 31, 2019 and can be
applied either retrospectively to all periods presented or as a
cumulative-effect adjustment as of the date of adoption. Early
adoption is permitted beginning for the year ending December 31,
2017. The Company is currently evaluating the impact of adoption of
the new standard on its consolidated financial
statements.
In
February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)."
ASU 2016-02 is intended to improve financial reporting about
leasing transactions. The ASU will require organizations that
lease assets referred to as “Lessees” to recognize on
the balance sheet the assets and liabilities for the rights and
obligations created by those leases with lease terms of more than
12 months. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial statements. The leasing standard will be effective
for the year ended December 31, 2020.
Early
adoption will be permitted upon issuance of the standard and a
modified retrospective approach must be applied. See Note 7 for the
Company’s current lease commitments. The Company is currently
evaluating the impact of ASU 2016-02 on its financial
statements.
In
August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments.” ASU 2016-15 is intended to improve cash flow
statement classification guidance. The standard will be effective
for fiscal years beginning after December 15, 2018. The Company is
currently evaluating the impact of ASU 2016-15 on its financial
statements.
In
January 2017, the FASB issued ASU 2017-01, "Business Combinations
(Topic 805): Clarifying the Definition of a Business.” ASU
2017-01 is intended to help companies evaluate whether transactions
should be accounted for as acquisitions (or disposals) of assets or
businesses. The standard will be effective for fiscal years
beginning after December 15, 2018. The Company is currently
evaluating the impact of ASU 2017-01 on its financial
statements.
Other
accounting standards that have been issued or proposed by the FASB
or other standard-setting bodies are not currently applicable to
the Company or are not expected to have a significant impact on the
Company’s financial position, results of operations and cash
flows.
3.
Investment
in Real Estate
Pursuant to a
contribution agreement, as amended between our predecessor,
Holmwood Capital, LLC (“predecessor” or
“Holmwood”) and our Operating Partnership, all of the
membership interests in four of our predecessor’s
subsidiaries were contributed to our Operating Partnership in
exchange for common units (the “OP Units”). In
addition, in exchange for all of the profits, losses, any
distributed cash flow and all of the other benefits and burdens of
ownership for federal income taxes for three of our
predecessor’s subsidiaries, our Operating Partnership issued
OP Units as if the membership interests of such subsidiaries also
had been contributed to our Operating Partnership at the date of
closing.
The
number of OP Units issued in connection with this transaction was
calculated based upon the agreed value of our predecessor’s
equity, plus principal amortization paid by our predecessor from
January 1, 2016 to and including the date the contribution was made
(May 26, 2017), divided by $10 per OP Unit. The equity value for
the membership interests and the rights to the profits, losses,
distributed cash flow and all of the other benefits and burdens of
ownership, determined as of the date of the contribution, was
$10,974,023, which was reduced by an outstanding balance on an
advance of $189,862 by the REIT. The OP Units can be redeemed in
exchange for shares of our common stock on a 1:1
basis.
In
addition, as of the date of closing, our Operating Partnership
assumed the outstanding mortgage indebtedness associated with each
of the underlying properties, aggregating $22,585,285, as well as
notes payable aggregating $1,132,038. The notes were repaid by our
Operating Partnership on the contribution date. The Company entered
into a tax protection agreement indemnifying Holmwood for any taxes
resulting from a sale for a period of ten years after the date of
closing.
The
Company acquired a 53,917 rentable square foot building leased to
the United States of America on March 31, 2017 for a purchase price
of $14,500,000 excluding acquisition costs. The acquisition was
financed by first mortgage debt of $10,875,000 and the proceeds
from unsecured loans to our Operating Partnership from two
principals of our predecessor and a third-party aggregating
$3,400,000 (the “unsecured debt”) (see Note 5). The
Company’s initial acquisition included three properties
purchased in June 2016. The results of the property operations are
included in the consolidated financial statements from their date
of acquisition.
A
summary of the Company’s contributed and acquired properties
for the six-month period ended June 30, 2017 and for the period
from March 11, 2016 to June 30, 2016 is as follows:
|
Date
|
|
|
|
Acquired/
|
|
|
Contributed
|
|
|
2017 Contributed Properties
|
|
|
|
Lorain,
OH
|
May
2017
|
$3,764,784
|
$-
|
Jonesboro,
AR
|
May
2017
|
7,075,744
|
-
|
PSL
- Port Saint Lucie, FL
|
May
2017
|
5,107,182
|
-
|
Fort
Smith, AR
|
May
2017
|
3,512,142
|
-
|
Johnson
City, TN
|
May
2017
|
4,501,956
|
-
|
Cape
Canaveral, FL
|
May
2017
|
6,589,675
|
-
|
Silt,
CO
|
May
2017
|
3,950,000
|
-
|
|
34,501,483
|
-
|
2017 Acquisitions
|
|
|
|
Norfolk,
VA
|
March
2017
|
14,788,473
|
-
|
|
|
|
2016 Acquisitions
|
|
|
|
Lawton,
OK
|
June
2016
|
-
|
2,287,688
|
Moore,
OK
|
June
2016
|
-
|
5,015,422
|
Lakewood,
CO
|
June
2016
|
-
|
3,747,486
|
|
$49,289,956
|
$11,050,596
|
The
purchase price allocations for properties contributed and acquired
for the six-month period ended June 30, 2017 and acquired during
the period from March 11, 2016 and December 31, 2016 were based on
estimated fair values. A summary is as follows:
Land
|
$4,411,240
|
$841,155
|
Buildings
and improvements
|
40,858,415
|
8,420,511
|
Tenant
improvements
|
1,454,569
|
1,418,354
|
Acquired
in-place leases
|
1,238,310
|
366,167
|
Acquired
lease-up costs
|
1,427,077
|
268,127
|
Above(below)-market
leases
|
(99,656)
|
(263,718)
|
|
$49,289,956
|
$11,050,596
|
The
properties are 100% leased to the United States of America and
administered by General Services Administration (GSA) or occupying
agency. The average lease term is 10.1 years for the total lease
term and 7.1 years if GSA elects its’ early termination
right. Lease maturities range from 2021 to 2027.
The
expected future amortization of above (below)-market leases and
acquired in-place lease value and acquired lease-up costs (combined
intangible lease costs) totaled $2,797,169 as of June 30, 2017. A
summary of the components are as follows:
|
|
|
|
|
|
|
|
|
Year
ending June 30:
|
|
|
2018
|
$(75,282)
|
$474,909
|
2019
|
(74,753)
|
489,427
|
2020
|
(74,285)
|
484,043
|
2021
|
(67,367)
|
465,886
|
2022
|
(50,819)
|
324,391
|
Thereafter
|
3,766
|
897,253
|
|
$(338,740)
|
$3,135,909
|
Accretion of
above-market leases resulted in a net increase in rental revenues
of $7,669 for the six-month period ended June 30, 2017.
Amortization of below-market leases resulted in a decrease in
rental revenues of $994 for the period from March 11, 2016 (date of
inception) to June 30, 2016. Amortization of in-place leases and
lease-up costs was $105,316 for the six-month period ended June 30,
2017 and $6,663 for the period from March 11, 2016 (date of
inception) to June 30, 2016.
Summary of Investments - The following is a
summary of Investment in real estate, net as of June 30, 2017 and
December 31, 2016, respectively:
|
|
|
Land
|
$5,252,395
|
$841,155
|
Buildings
and improvements
|
49,278,926
|
8,420,511
|
Tenant
improvements
|
2,872,923
|
1,418,354
|
|
57,404,244
|
10,680,020
|
Accumulated
depreciation
|
(632,590)
|
(244,029)
|
Investments
in real estate, net
|
$56,771,654
|
$10,435,991
|
The
following is a summary of Leasehold intangibles, net:
Acquired
in-place leases
|
$1,604,477
|
$366,167
|
Acquired
lease-up costs
|
1,695,204
|
268,127
|
Acquired
above-(below) market lease
|
(363,373)
|
(263,718)
|
|
2,936,308
|
370,576
|
Accumulated
amortization
|
(139,139)
|
(44,297)
|
Leasehold
intangibles, net
|
$2,797,169
|
$326,279
|
Mortgages Payable - The Company’s mortgage notes
totaled $40,241,084 and $7,068,067, net of unamortized debt costs
of $207,261 and $85,488 as of June 30, 2017 and December 31, 2016,
respectively. The loans are collateralized by the Company’s
respective properties. Loans in the amount of $30,362,078 and
$7,225,000, bear interest as a fixed annum rate of 4.40% and 3.93%,
as of June 30, 2017 and December 31, 2016, respectively. The
variable rate loans of $10,086,268 as of June 30, 2017 averaged
3.61%. The average remaining loan term as of June 30, 2017 and
December 31, 2016 was 3.8 years and 2.4 years,
respectively.
The
following is a schedule of the principal payments of the
Company’s mortgages and notes payable as of June 30,
2017.
|
|
|
|
|
|
2018
|
$10,900,571
|
$5,405,271
|
2019
|
19,879,661
|
-
|
2020
|
216,501
|
-
|
2021
|
228,179
|
-
|
2022
|
240,487
|
-
|
Thereafter
|
8,982,946
|
-
|
|
$40,448,345
|
$5,405,271
|
On
March 31, 2017, the Operating Partnership entered into a note
payable agreement with two principals of our predecessor and a
third-party aggregating $3,400,000 in connection with the
Company’s 2017 property acquisition. The unsecured,
interest-only loan bears interest at a fixed annum rate of 12% and
matures on March 31, 2018. The note is pre-payable without penalty
prior to the maturity date after the note has been held for six
months.
On June
10, 2016, the Operating Partnership entered into a note payable
agreement in the amount of $2,019,789 with the seller
(“Seller” Note) of the Company’s 2016
acquisitions. The loan bears interest at a fixed annum rate of 7.0%
and debt service payments are based on monthly principal
amortization over 20 years. The note matures on the earlier of
December 10, 2017, or the date on which the Company has completed a
public securities offering (including its Tier II, Regulation A),
or the date on which the properties are conveyed or refinanced by
the Company. The note is pre-payable prior to the maturity date at
any time without penalty. For the six-month period ended June 30,
2017 and for the period of June 10, 2016 (the date when properties
were acquired) to June 30, 2016, principal repayments totaled
$24,588 and $0, respectively.
On
November 7, 2016, the REIT entered into a one-year fully amortizing
note payable in the amount of $124,000 to finance certain corporate
costs. The loan bears interest at a fixed annum rate of 4.8%. As of
June 30, 2017, the outstanding balance was $37,718.
Related party receivables – The
Company advanced funds of $410,861 to Holmwood primarily related to
its refinancing of a certain property, which balance had been
reduced to $189,862 immediately prior to the closing of the
transactions contemplated in the Contribution Agreement. The
balance was subsequently repaid entirely in connection with the
closing of the transactions contemplated in the Contribution
Agreement. In May, 2017, in connection with the contribution
transaction (see Note 3), this amount was repaid. In addition, the
Company advanced the Asset Manager funds to cover certain working
capital needs. As of June 30, 2017 and December 31, 2016, the net
funds advanced to the asset manager totaled $109,536 and $114,536,
respectively.
Related party management fees - The
Asset Manager provides acquisition, asset management, property
management and leasing services for the Company. For acquisition
services, the Company will pay the Asset Manager 1% of the gross
purchase price of properties acquired following the initial closing
of the Company’s escrow related to its offering (see Note 9).
The fees will be accrued and paid by issuance of the
Company’s stock simultaneously with the initial listing of
the Company’s stock on a national securities exchange or on
March 31, 2020, whichever occurs, first. For the six-month period
ended June 30, 2017 and for the period March 11, 2016 (date of
inception) to June 30, 2016, deferred acquisition fees totaled
$145,000 and $0, respectively.
The
Company pays the Asset Manager an asset management fee equal to
1.5% of the stockholders’ equity adjusted as defined in the
offering circular, payable, in arrears, on a quarterly basis. In
connection with this agreement, Asset Manager’s fees were
$40,127 and $7,295 as of June 30, 2017 and June 30, 2016,
respectively. In addition, for some properties, the Company pays
property management fees, payable on a monthly basis, in arrears,
at market-standard rates. In connection with this agreement, the
Company paid the Asset Manager’s property management fees of
$33,436 and $2,297, for the six-month period ended June 30, 2017
and for the period from March 11, 2016 (date of inception) to June
30, 2016, respectively.
The
Company agrees to pay the Asset Manager a leasing fee equal to 2.0%
of all gross rent due during the term of the lease or lease
renewal, excluding reimbursements by the tenant for operating
expenses and taxes and similar pass-through obligations paid by the
tenant for any new lease or lease renewal entered into or exercised
during the term of the Management Agreement. No leasing fees were
paid for the six-month period ended June 30, 2017 or for the period
from March 11, 2016 (date of inception) to June 30,
2016.
Occupancy of the
operating properties was 100% for the six-month period ended June
30, 2017 and for the period from March 11, 2016 (date of inception)
to June 30, 2016. Lease terms range from four to twelve years as of
June 30, 2017. The future minimum rents for existing leases as of
June 30, 2017 are as follows:
|
|
|
|
|
|
2018
|
$6,147,748
|
2019
|
6,147,748
|
2020
|
6,147,748
|
2021
|
5,653,233
|
2022
|
5,271,077
|
Thereafter
|
11,784,659
|
Total
|
$41,152,213
|
Net
losses for the six-month period ended June 30, 2017 and for the
period from March 11, 2016 (date of inception) to June 30, 2016
differs from taxable losses due to temporary differences primarily
relating to different methods utilized to account for depreciation
and amortization.
The
Company is required to provide a reserve against deferred tax
assets when it is likely that deferred tax assets will not be
realized. The Company recorded a valuation allowance of $46,368 at
December 31, 2016 due to uncertainty surrounding the utilization of
the tax assets. The tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and
liabilities as of June 30, 2017 is presented below, assuming an
effective combined U.S. federal and state statutory tax rate of
37.7 percent.
|
|
Deferred
tax assets
|
|
Book
over tax depreciation fixed assets
|
$263,277
|
Total
deferred tax assets
|
263,277
|
|
|
Deferred
tax liabilities
|
|
Tax
over book amortization intangibles
|
216,909
|
Valuation
allowance
|
46,368
|
Total
deferred tax liabilities
|
263,277
|
|
|
Deferred
tax, net
|
$-
|
The
Company plans to elect to be treated as a real estate investment
trust, or REIT, for federal income tax purposes under the Internal
Revenue Code of 1986, as amended, or the Code, beginning with the
taxable year ended December 31, 2017. Therefore, no additional
reserve was estimated as of June 30, 2017.
Between
March 11, 2016 (date of inception) and June 30, 2016, the Company
issued 144,500 shares of its 7.00% Series A Cumulative Convertible
Preferred Stock, or the Series A Preferred Stock, to various
investors in exchange for a total of $3,612,500, or $25 per share
of Series A Preferred Stock. The Series A Preferred Stock is
convertible upon the Company’s listing on a national
securities exchange or can be exchanged at the end of four years or
March 31, 2020, at the owners’ request whichever comes first.
The shares are convertible into common shares at a 3:1
ratio.
The
Company paid quarterly dividends totaling $126,438 during the
six-month period ending June 30, 2017. No dividends were paid
during the period March 11, 2016 (date of inception) to June 30,
2016 to holders of the Series A Preferred Stock. The Company paid
dividends in the amount of $63,219 for holders of record of the
Series A Preferred Stock as of June 30, 2017 on July 14,
2017.
On
March 14, 2016, the Company issued 50,000 shares (200,000 shares,
collectively) of common stock at a price of $0.01 a share to each
of Messrs. Robert R. Kaplan, Robert R. Kaplan, Jr., Edwin M.
Stanton and Philip Kurlander, founders of the Company. Total
consideration was $500 per person.
In
connection with the Company’s offering under the Securities
and Exchange Commission (“SEC”) guidelines (the
“Offering”), the Company offers a minimum of 300,000
and a maximum of 3,000,000 shares of our common stock at an
offering price of $10 per share, for a minimum offering amount of
$3,000,000 and a maximum offering amount of $30,000,000. The
Offering was qualified by the SEC on November 7, 2016. The Company
reached its minimum offering and completed its initial closing on
May 18, 2017. Simultaneously to the initial closing, Robert R.
Kaplan, Jr., resigned as a member of the board of directors and the
remaining directors increased the board seats to seven members and
appointed four independent directors to fill the expansion
seats.
During
the period from May 18, 2017 to June 30, 2017, the Company issued
407,922 shares of common stock for $3,711,448, net of issuance
costs, in connection with its offering.
On May
26, 2017, in connection with the closing on the contribution (see
Note 3), the Company’s Operating Partnership issued 1,078,416
OP Units in exchange for all of the membership interests in four
single-member limited liability companies and the rights to all of
the profits, losses, any distributed cash flow and all of the
benefits and burdens of ownership for three properties. The number
of units issued represents the agreed value of the equity in the
contribution properties as of the date of closing of the
contribution, divided by $10. The OP Units can be exchanged into
the common shares of the REIT on a 1:1 basis.
Compensation to an
independent board member includes an initial share grant of 4,000
restricted common shares with a one-year vesting schedule. The
Company issued 16,000 shares on May 18, 2017, the date of their
appointment to the board, to its 4 independent board members,
collectively. The shares, valued at $10 per share, pay dividends on
the number of shares issued without regard to the number of shares
vested. For the six-month period ended June 30, 2017, the Company
recognized $106,667 related to stock based
compensation.
In
addition, HC Government Realty Holdings LP issued the
Company’s asset manager, 66,056 long term incentive plan
shares (“LTIPs”) that vest over five-years. The LTIPs
are issued concurrent with each closing where the Company issues
common stock. The vesting will accelerate if the Company terminates
is management agreement with its asset manager. The asset manager
is entitled to hold 3% of the Company’s issued and
outstanding shares on a fully diluted basis. Dividends are paid on
the number of LTIPs issued. For the six-month period ended June 30,
2017, the Company recognized $3,893 as stock based
compensation.
On July
14, 2017, the Company paid dividends of $63,219 on issued and
outstanding preferred shares and paid dividends of $40,536 on
issued and outstanding common shares to owners of record as of June
30, 2017. Simultaneously, the Operating Partnership made common
units distributions of $70,065 to Holmwood, the holder of the
operating partnership units and paid dividends of $4,292 to HCA for
its outstanding LTIPs issued under the LTIPs program as of June 30,
2017.
10.
Commitments
and Contingencies
In the
normal course of business, the Company can be involved in legal
actions arising from the ownership of its properties. In the
Company’s opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have
a materially adverse effect on the financial position, operations
or liquidity of the Company.
On July
25, 2017, the Company acquired a 21,116 rentable square foot
building located in montgomery, Alabama and leased to the United
States of America and occupied by United States Customs and
Immigration Administration for a purchase price of $4,709,458
excluding acquisition costs. The acquisition was financed by senior
debt financing and equity. The Company incurred an acquisition fee
of $47,095 payable to its asset manager upon listing on a national
exchange or March 31, 2020, whichever comes first.
The
Company has entered into separate purchase and sale agreements to
acquire two properties leased to the United States of America and
occupied by United States Immigration and Customs Enforcement and
United States Department of Agriculture, respectively. The contract
purchase prices are $8,175,000 and $11,000,000, respectively, and
are expected to close in November 2017 and February 2018,
respectively. Each acquisition will be financed by senior debt
financing and equity. The Company has acquisition deposits
outstanding in the amount of $150,000 as of June 30,
2017.
The
Company refinanced an existing loan in the amount of $10,875,000 on
July 11, 2017. The new loan bears interest at a fixed annual rate
of 4%, debt service payments are based on principal amortization
over 25 years and the loan matures in July 2022. The loan is
pre-payable without penalty and collateralized by the property.
Debt issuance costs of $189,732 were incurred and will be amortized
over five years, the term of the new loan. Unamortized debt
issuance costs of $134,285, related to the property’s retired
loan, were expensed.
The
Company refinanced its maturing loan with a principal balance of
$3,069,733 in September 2017 with a loan in the amount of
$2,750,000. The new loan bears interest as a fixed annual rate of
4%, debt service payments are based on principal amortization over
25 years and the loan matures in five years from the date of the
loan closing. The loan is pre-payable without penalty and
collateralized by the property.
The
Company issued 148,796 additional shares of common stock under its
offering for approximately
$1,368,533, net of issuance costs through the date of filing this
report.
The
Company evaluated subsequent events through the date of filing this
report. The Company concluded no additional material events
subsequent to June 30, 2017 were required to be reflected in the
Company’s consolidated financial statements or notes as
required by standards for accounting disclosures of subsequent
events.
Holmwood
Capital, LLC
Consolidated Financial Statements – as of May 26, 2017
(unaudited) and December 31, 2016 (unaudited) and for the period
from January 1, 2017 to May 26, 2017 (date of contribution)
(unaudited) and for the six-month period ended June 30, 2016
(unaudited)
HOLMWOOD CAPITAL, LLC
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
May 26, 2017 (unaudited) and December 31, 2016
(audited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Investment
in real estate, net:
|
$-
|
$29,107,886
|
|
|
|
Cash
and cash equivalents
|
170,217
|
258,840
|
Deposits
in escrow
|
-
|
239,221
|
Rent
and other tenant accounts receivables, net
|
-
|
336,464
|
Prepaids
and other assets
|
69,965
|
52,579
|
Investment
in HC Government Realty Holdings, LP
|
10,784,161
|
-
|
Leasehold
intangibles, net
|
-
|
1,019,970
|
Total Assets
|
$11,024,343
|
$31,014,960
|
|
|
|
LIABILITIES
|
|
|
Mortgages
payable, net of unamortized debt costs
|
$-
|
$22,455,942
|
Notes
payable
|
-
|
1,387,901
|
Accrued
interest payable
|
-
|
94,942
|
Related
party payable
|
-
|
410,861
|
Other
liabilities
|
102,391
|
405,801
|
Total Liabilities
|
102,391
|
24,755,447
|
|
|
|
PARTNERS' CAPITAL
|
|
|
Partners'
capital, net
|
6,804,872
|
6,804,872
|
Accumulated
deficit
|
4,117,080
|
(545,359)
|
Total Partners' Capital
|
10,921,952
|
6,259,513
|
Total Liabilities and Partners' Capital
|
$11,024,343
|
$31,014,960
|
The accompanying notes are an integral part of the financial
statements.
HOLMWOOD CAPITAL, LLC
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
For the period from January 1, 2017 to May 26, 2017
(date of contribution) (unaudited) and for the six-month period
ended June 30, 2016 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
Rental
revenues
|
$1,397,471
|
$1,729,629
|
Real
estate tax reimbursments and other revenues
|
45,322
|
53,763
|
Total
Revenues
|
1,442,793
|
1,783,392
|
|
|
|
Other Property Operations:
|
|
|
Repairs
and maintenance
|
51,480
|
73,664
|
Utilities
|
69,701
|
77,371
|
Real
estate and other taxes
|
121,449
|
167,599
|
Depreciation
and amortization
|
505,641
|
543,246
|
Other
operating expense
|
83,011
|
86,609
|
Management
fees
|
82,161
|
90,154
|
Ground
lease
|
29,550
|
35,450
|
Professional
expenses
|
21,814
|
18,600
|
Insurance
|
16,695
|
26,479
|
General
and administrative
|
3,860
|
12,222
|
Total
Operating Expenses
|
985,362
|
1,131,394
|
|
|
|
Interest
expense
|
489,040
|
588,332
|
Net
income (loss) before extraordinary items
|
(31,609)
|
63,666
|
Gain
on exchange of membership interests for
|
|
|
operating
partnership units
|
4,694,049
|
-
|
Net income
|
$4,662,440
|
$63,666
|
The accompanying notes are an integral part of the financial
statements. In the opinion of management, all adjustments necessary
in order to make the interim financial statements not misleading
have been included.
HOLMWOOD CAPITAL, LLC
|
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
|
|
|
|
|
|
|
For the period from January 1, 2017 to May 26, 2017
(date of contribution) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
$6,804,872
|
$(545,359)
|
$6,259,513
|
|
|
|
|
Net
income
|
-
|
4,662,440
|
4,662,440
|
Balance,
May 26, 2017
|
$6,804,872
|
$4,117,080
|
$10,921,953
|
The accompanying notes are an integral part of the financial
statements.
HOLMWOOD CAPITAL, LLC
|
|
|
|
CONSOLIDATED STATEMENTS OF CASHFLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
period from January 1, 2017 to May 26, 2017 (date of contribution)
(unaudited) and for the six-month period ended June 30, 2016
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
$4,662,440
|
$63,666
|
Less: Gain from extraordinary items
|
(4,694,049)
|
|
Net income(loss) from operations
|
(31,609)
|
63,666
|
Adjustments to reconcile net income(loss) to net cash provided
by
|
|
|
|
|
|
Depreciation
|
388,426
|
454,577
|
Amortization of acquired lease-up costs
|
56,765
|
67,986
|
Amortization of in-place leases
|
60,450
|
72,420
|
Amortization of above/below-market leases
|
(43,110)
|
(51,738)
|
Amortization of debt costs
|
38,472
|
64,894
|
Change in assets and liabilities
|
|
|
Rent and other tenant accounts receivables, net
|
139,473
|
(89,216)
|
Prepaid expense and other assets
|
(33,203)
|
121,312
|
|
104,357
|
(56,745)
|
Accounts payable and other accrued expenses
|
(61,829)
|
235,910
|
|
(220,999)
|
-
|
|
6,444
|
(833)
|
Net cash provided by operating activities
|
403,636
|
882,233
|
|
|
|
Cash flows from investing activities:
|
|
|
Improvements to investment properties
|
(23,680)
|
(20,102)
|
Net cash used in investing activities
|
(23,680)
|
(20,102)
|
|
|
|
Cash flows from financing activities:
|
|
|
Contributions from partners
|
-
|
(5,406)
|
|
-
|
1,000,000
|
|
-
|
2,450,000
|
|
-
|
(3,700,000)
|
Mortgage principal payments
|
(185,223)
|
(230,870)
|
Notes payable principal repayments
|
(271,955)
|
(150,056)
|
|
(11,400)
|
(118,659)
|
Net cash from financing activities
|
(468,578)
|
(754,991)
|
|
|
|
Net increase(decrease) in cash and cash equivalents
|
(88,623)
|
107,140
|
Cash and cash equivalents, beginning of year
|
258,840
|
292,100
|
Cash and cash equivalents, end of year
|
$170,217
|
$399,240
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
Notes to the Consolidated Financial Statements
Holmwood Capital,
LLC ("Holmwood" or the "Company"), a Delaware limited liability
company, was organized for the primary purpose of acquiring,
owning, leasing and disposing of commercial real estate properties
leased by the United States of America and administered by General
Services Administration ("GSA") or occupying agency. The Company
invests through wholly-owned, special purpose limited liability
companies, or special purpose entities (“SPE”),
primarily in properties across secondary or smaller
markets.
Pursuant to a
contribution agreement, as amended between our Company and HC
Government Realty Holdings, LP, ("HC Government Realty" or the
"Operating Partnership"), a subsidiary of HC Government Realty
Trust, Inc ("HC Government Realty Trust" or "REIT"), the Company
exchanged its membership interests in four of its single-member
limited liability companies and assigned all of the profits,
losses, any distributed cash flows and all of the other benefits
and burdens of ownership for federal income taxes for three of the
Company’s subsidiaries for common units in the Operating
Partnership ("OP Units"). HC Government Realty Trust, a real estate
investment trust, was formed in 2016 to acquire and own
government-leased assets. The REIT is currently offering up to
$30,000,000 of common stock for $10.00 per share pursuant to a
Final Offering Circular dated November 7, 2016. (See Note 3
Contribution Transaction).
The
consolidated financial statements as of December 31, 2016 include
the accounts of each SPE and the accounts of Holmwood. As of May
26, 2017, the Company no longer owned or consolidated the seven
limited liability companies. The Consolidated Statement of
Operations reflects the operating results from owning properties
from January 1, 2017 to May 26, 2017, the date the properties were
exchanged for operating partnership units. The results of
operations in 2017 are compared to the results of operations for
the seven properties for the six-month period ended June 30, 2016.
The seven (7) SPEs for the reporting periods represented 110,352
rentable square feet located in five states. The properties were
100% leased to the United States of America.
Beginning in 2015,
the Company and its assets have been managed externally by Holmwood
Capital Advisors, LLC and its subsidiary, Holmwood Capital
Management, LLC, (collectively “HCA” or “Asset
Manager”). The principal owners of HCA or their
respective affiliates are also the majority owners of Holmwood as
well as the founding owners of HC Government Realty
Trust.
2.
Significant Accounting Policies
Basis of Accounting and Consolidation
- The accompanying
consolidated financial statements include the accounts of the
subsidiary and the seven wholly-owned SPEs including transactions
whereby the Company has been determined to have majority voting
interest, control and is the primary beneficiary in accordance with
the Financial Accounting Standards Board (“FASB”)
guidance. All other significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates - The preparation of consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates and assumptions.
Cash and Cash Equivalents - Cash and cash equivalents include all
cash and liquid investments with an initial maturity of three
months or less when purchased. At times, the Company’s cash
and cash equivalents balance deposited with financial institutions
may exceed federally insurable limits. The Company mitigates this
risk by depositing funds with major financial institutions. The
Company has not experienced any losses in connection with such
deposits.
Deposits in Escrow – There were no deposits in escrow
as of May 26, 2017. Deposits in escrow represented cash held by a
lender which are restricted for leasing and repair expenditures, as
well as real estate tax and insurance expenses. As of December 31,
2016, deposits in escrow totaled $239,221.
Real
Estate and Related Intangible Assets
Purchase Accounting for Acquisitions of Real
Estate Subject to a Lease - In accordance with the FASB
guidance on business combinations, Holmwood determines the fair
value of the real estate assets acquired on an “as if
vacant” basis. The difference between the purchase price and
the fair value of the real estate assets on an “as if
vacant” basis is first allocated to the fair value of above-
and below-market leases, and then allocated to in-place leases and
lease-up costs.
Management
estimates the “as if vacant” value considering a
variety of factors, including the physical condition and quality of
the buildings, estimated rental and absorption rates, estimated
future cash flows, and valuation assumptions consistent with
current market conditions. The “as if vacant” fair
value is allocated to land and buildings and improvements based on
relevant information obtained in connection with the acquisition of
the property, including appraisals and property tax assessments.
Above-market and below-market lease values are determined on a
lease-by-lease basis based on the present value (using an interest
rate that reflects the risk associated with the leases acquired) of
the difference between (a) the contractual amounts to be paid under
the lease and (b) management’s estimate of the fair market
lease rate for the corresponding space over the remaining
non-cancelable terms of the related leases. Above (below) market
lease values are recorded as leasehold intangibles and are
recognized as an increase or decrease in rental income over the
remaining non-cancelable term of the lease.
Additionally,
in-place leases are valued in consideration of the net rents earned
that would have been foregone during an assumed lease-up period;
and lease-up costs are valued based upon avoided brokerage fees.
Holmwood has not recognized any value attributable to customer
relationships. The difference between the total of the calculated
values described above, and the actual purchase price plus
acquisition costs, is allocated pro-ratably to each component of
calculated value. In-place leases and lease-up costs are amortized
over the remaining non-cancelable term of the leases. Real estate
values were determined by independent accredited
appraisers.
Building assets are
depreciated over a 40-year period, tenant improvements and the
leasehold intangibles are amortized over the remaining
non-cancelable term of the lease. In the event that a tenant
terminates its lease, the unamortized portion of the in-place lease
and lease-up costs is charged to expense immediately.
Holmwood’s
real estate is leased to tenants on a modified gross lease basis.
The leases provide for a minimum rent which normally is flat during
the firm term of the lease. The minimum rent payment may include
payments to pay for lessee requests for tenant improvement or to
cover the cost for extra security. The tenant is required to pay
increases in property taxes over the first year and an increase in
operating costs based on the consumer price index of the
lease’s base year operating expenses. Operating costs
includes repairs and maintenance, cleaning, utilities and other
related costs. Generally, the leases provide the tenant with
renewal options, subject to generally the same terms and conditions
of the base term of the lease. Holmwood accounts for its leases
using the operating method. Such method is described
below:
Operating method – Properties
with leases accounted for using the operating method are recorded
at the cost of the real estate. Revenue is recognized as rentals
are earned and expenses (including depreciation and amortization)
are charged to operations as incurred. Buildings are depreciated on
the straight-line method over their estimated useful lives.
Leasehold interests are amortized on the straight-line method over
the terms of their respective leases. When scheduled rentals vary
during the lease term, income is recognized on a straight-line
basis so as to produce a constant periodic rent over the term of
the lease.
Construction
expenditures for tenant improvements, leasehold improvements and
leasing commissions are capitalized and amortized over the terms of
each specific lease. Maintenance and repairs are charged to expense
during the financial period in which they are incurred.
Expenditures for improvements that extend the useful life of the
real estate investment are capitalized. Upon sale or disposition of
the investment in real estate, the cost and related accumulated
depreciation and amortization are removed from the accounts with
the resulting gain or loss included as a component of net income
during the period in which the disposition occurred.
Impairment – Real Estate - The Company reviews
investments in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not
be recoverable. To determine if impairment may exist, the Company
reviews its properties and identifies those that have had either an
event of change or an event of circumstances warranting further
assessment of recoverability (such as a decrease in occupancy). If
further assessment of recoverability is needed, the Company
estimates the future net cash flows expected to result from the use
of the property and its eventual disposition, on an individual
property basis. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the
carrying amount of the property on an individual property basis,
the Company will recognize an impairment loss based upon the
estimated fair value of such property. As of May 26, 2017 and
December 31, 2016, the Company has not recorded any impairment
charges.
Tenant Improvements - As part of the leasing process, the
Company may provide the lessee with an allowance for the
construction of leasehold improvements. These leasehold
improvements are capitalized and recorded as tenant improvements,
and depreciated over the shorter of the useful life of the
improvements or the remaining lease term. If the allowance
represents a payment for a purpose other than funding leasehold
improvements, or in the event the Company is not considered the
owner of the improvements, the allowance is considered to be a
lease incentive and is recognized over the lease term as a
reduction of minimum rent. Factors considered during this
evaluation include, among other things, who holds legal title to
the improvements as well as other controlling rights provided by
the lease agreement and provisions for substantiation of such costs
(e.g. unilateral control of the tenant space during the build-out
process). Determination of the appropriate accounting for the
payment of a tenant allowance is made on a lease-by-lease basis,
considering the facts and circumstances of the individual tenant
lease. No tenant allowances were provided during the period from
January 1, 2017 to May 26, 2017 and for the six-month period ended
June 30, 2016.
Revenue Recognition - Minimum rents are recognized when due
from tenants; however, minimum rent revenues under leases which
provide for varying rents over their terms, if any, are straight
lined over the term of the leases. In the case of expense
reimbursements due from tenants, the revenue is recognized in the
period in which the related expense is incurred.
Rents and Other Tenant Accounts Receivables,
net - Rents and other tenant accounts receivables represent
amounts billed and due from tenants. When a portion of the
tenants’ receivable is estimated to be uncollectible, an
allowance for doubtful accounts is recorded. Due to the high
credited worthiness of the tenants, there were no allowances as of
May 26, 2017 and December 31, 2016.
Income and Other Taxes - No provision for income taxes is made
because Holmwood and its operating subsidiaries are not subject to
income tax. Management has evaluated tax positions that could have
a significant effect on the financial statements and determined
that the Company has a franchise and excise state tax liability of
$3,723 to reflect its share of the annual costs for the period from
January 1, 2017 to May 26, 2017. The franchise and excise state tax
liability as of December 31, 2016 was $12,249.
Debt Costs – Mortgages Payable
– Debt costs incurred in connection with Holmwood’s
mortgages payable were deferred and amortized as interest expense
over the term of the respective loan agreement. The straight-line
method was used to determine the amount amortized which
approximates the effective interest method and recorded in
Mortgages payable in the Consolidated Balance Sheet dated December
31, 2016.
Debt Costs – Note Payable –
Debt costs incurred in connection with the issuance of notes
payable were deferred and amortized as interest expense over the
term of the respective debt obligation, using the effective
interest method and recorded as Note Payable on the Consolidated
Balance Sheet dated December 31, 2016.
Recent Accounting Pronouncements
- In May 2014, the FASB
issued ASU 2014-09, “Revenue from Contracts with
Customers,” which supersedes the revenue recognition
requirements of Accounting Standards Codification
(“ASC”) Topic 605, “Revenue Recognition”
and most industry-specific guidance on revenue recognition
throughout the ASC. The new standard is principles based and
provides a five step model to determine when and how revenue is
recognized. The core principle of the new standard is that revenue
should be recognized when a company transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. The new standard also requires disclosure of
qualitative and quantitative information surrounding the amount,
nature, timing and uncertainty of revenues and cash flows arising
from contracts with customers. The new standard will be effective
for the Company for the year ending December 31, 2019 and can be
applied either retrospectively to all periods presented or as a
cumulative-effect adjustment as of the date of adoption. Early
adoption is permitted beginning for the year ending December 31,
2017. The Company is currently evaluating the impact of adoption of
the new standard on its consolidated financial
statements.
In
February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)."
ASU 2016-02 is intended to improve financial reporting about
leasing transactions. The ASU will require organizations that
lease assets referred to as “Lessees” to recognize on
the balance sheet the assets and liabilities for the rights and
obligations created by those leases with lease terms of more than
12 months. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial Statements.
The
leasing standard will be effective for the year ended December 31,
2020. Early adoption will be permitted upon issuance of the
standard and a modified retrospective approach must be applied. The
Company is currently evaluating the impact of ASU 2016-02 on its
financial statements.
In
August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments.” ASU 2016-15 is intended to improve cash flow
statement classification guidance. The standard will be effective
for fiscal years beginning after December 15, 2018. The Company is
currently evaluating the impact of ASU 2016-15 on its financial
statements.
In
January 2017, the FASB issued ASU 2017-01, "Business Combinations
(Topic 805): Clarifying the Definition of a Business.” ASU
2017-01 is intended to help companies evaluate whether transactions
should be accounted for as acquisitions (or disposals) of assets or
businesses. The standard will be effective for fiscal years
beginning after December 15, 2018. The Company is currently
evaluating the impact of ASU 2017-01 on its financial
statements.
Other
accounting standards that have been issued or proposed by the FASB
or other standard-setting bodies are not currently applicable to
the Company or are not expected to have a significant impact on the
Company’s financial position, results of operations and cash
flows.
3.
Contribution
Transaction
Pursuant to a
contribution agreement (the "Contribution
Agreement"), as amended, between our Company and HC
Government Realty, all of the membership interests in four of our
Company’s subsidiaries were contributed to HC Government
Realty in exchange for OP Units. In addition, in exchange for all
of the profits, losses, any distributed cash flow and all of the
other benefits and burdens of ownership for federal income taxes
for three of our Company’s subsidiaries, our Company received
OP Units as if the membership interests of such subsidiaries also
had been contributed at the date of closing.
The
number of OP Units issued in connection with this transaction was
calculated based upon the agreed value of the Company’s
equity, plus principal amortization paid by the Company from
January 1, 2016 to and including the date the contribution was made
(May 26, 2017), divided by $10 per OP Unit less the repayment of
advances owed to the REIT. The equity value for the membership
interests of the four SPEs and the rights to the profits, losses,
distributed cash flow and all of the other benefits and burdens of
ownership of the three SPEs plus principal amortization payments,
determined as of the date of the contribution, was $10,974,023,
which amount was reduced by the balance owed on advances of
$189,862 under this arrangement. HC Government Realty advanced the
Company funds primarily related to the Company’s refinancing
of debt for one of its properties. The Company received 1,078,416
OP Units related to this transaction and the units can be exchanged
for shares of HC Government Realty Trust’s common stock on a
1:1 basis, subject to certain limitations.
In
addition, as of the date of closing, HC Government Realty assumed
the outstanding mortgage indebtedness associated with each of the
underlying properties, aggregating $22,585,285, as well as the
Company’s notes payable aggregating $1,132,038 plus accrued
interest as of the date of the contribution on the mortgages and
notes payable, respectively. The Company entered into a tax
protection agreement indemnifying the Company for any taxes
resulting from a sale of any of these interests for a period of ten
years after the closing.
On
November 7, 2016, the Securities and Exchange Commission ("SEC")
qualified HC Government Realty Trust’s offering of common
stock pursuant to Tier II of Regulation A under the Securities Act
of 1933. The offering contemplates that up to a total of 3,000,000
shares will be issued in the offering at an offering price of $10
per share. The offering, unless earlier terminated, will terminate
on the first to occur of the issuance of a total of 3,000,000
shares for gross proceeds of $30,000,000, or November 7,
2018.
The
Company realized a gain resulting from its exchange of its
members’ interests in the four SPEs and the assignment
of all of the profits, losses, any distributable cash flows and all
of the other benefits and burdens of ownership for federal income
taxes for three SPEs for OP Units and is determined as
follows:
Assets
contributed
|
|
Buildings
and improvements, net
|
$28,748,477
|
Intangible
assets, net
|
945,865
|
Total
assets contributed, net
|
29,694,342
|
|
|
Liabilities
assumed
|
|
Mortgages
payable
|
(22,585,285)
|
Notes
payable
|
(1,132,038)
|
Total
liabilities assumed
|
(23,717,323)
|
|
|
Equity,
net
|
5,977,019
|
|
|
Value
of OP Units issued for membership interest
|
10,974,023
|
Gain
on exchange of members'
|
|
for
operating partnership units before adjustments
|
$4,997,004
|
Less:
write-off of unamortized debt issuance costs
|
(302,955)
|
Gain,
net
|
$4,694,049
|
4.
Investment
in Real Estate
Summary of Investments - The following is a
summary of investment in real estate, net as of May 26, 2017,
immediately before the closing of the
transactions contemplated in the Contribution Agreement and
as of December 31, 2016:
|
|
|
|
|
|
Land,
building and improvements
|
$29,578,189
|
$29,549,302
|
Tenant
improvements
|
2,278,862
|
2,278,862
|
|
31,857,051
|
31,828,164
|
Accumulated
depreciation
|
(3,108,574)
|
(2,720,278)
|
Investments
in real estate, net
|
$28,748,477
|
$29,107,886
|
The
following is a summary of Leasehold intangibles, net, as of May 26,
2017, immediately before the closing of the
transactions contemplated in the Contribution Agreement and
as of December 31, 2016:
|
|
|
|
|
|
Acquired
in-place leases
|
$1,320,305
|
$1,320,305
|
Acquired
lease-up costs
|
1,285,251
|
1,285,251
|
Acquired
above-(below) market lease
|
(1,057,409)
|
(1,057,409)
|
|
1,548,147
|
1,548,147
|
Accumulated
amortization
|
(602,282)
|
(528,177)
|
Leasehold
intangibles, net
|
$945,865
|
$1,019,970
|
During
the period from January 1, 2017 to May 26, 2017 and for the
six-month period ended June 30, 2016, the Company made capital
improvements to the seven properties in the amount of $23,680 and
$20,102, respectively.
Accretion of
above-market leases and amortization of below-market leases
resulted in a net increase in rental revenue of $43,110 for the
period from January 1, 2017 to May 26, 2017 and $51,738 for the
six-month period ended June 30, 2016. Amortization of in-place
leases and lease-up costs was $117,215 and $140,406 for the same
respective periods.
Mortgages Payable – Mortgage loan balances as of May
26, 2017, immediately prior to the closing of the
transactions contemplated in the Contribution Agreement, and
as of December 31, 2016 totaled $22,585,285 and $22,769,867, and
unamortized debt issuance costs totaled $290,155 and $313,925,
respectively. The loans are payable to various financial
institutions and are collateralized by specific properties. Fixed
rate loans before unamortized debt costs totaled $12,482,906 and
$12,584,982 immediately prior to the closing of the
transactions contemplated in the Contribution Agreement and
as of December 31, 2016 and variable rate loans before unamortized
debt costs totaled $10,101,379 and $10,184,885 for the same
respective periods. Of the fixed rate loans, the $10,082,759 loan
outstanding as of May 26, 2017 before the closing of the
transactions contemplated in the Contribution Agreement bear
interest at a fixed annum rate of 5.265%, debt service payments are
based on principal amortization over 30 years and the loan matures
in August 2023. The fixed rate loan with a balance of $2,401,147 on
May 26, 2017, immediately prior to the closing of the
transactions contemplated in the Contribution Agreement,
bears interest as a fixed annum rate of 3.93%, debt service
payments are based on principal amortization over 25 years and the
loan matures in June 2019. In connection with the contribution
transaction, these outstanding loan balances were assumed by HC
Government Realty. The unamortized portion of debt issuance costs
related to the mortgage loans was written off in the amount of
$290,155. At December 31, 2016, Holmwood had total gross debt costs
of $540,812 and accumulated amortization related to these debt
costs of $226,886.
Of the
variable rate loans outstanding as of May 26, 2017, immediately
prior to the closing of the
transactions contemplated in the Contribution Agreement and
as of December 31, 2016, the $7,031,646 loan’s interest rate
is equal to the one-month LIBOR rate plus 235 basis points. For the
period from January 1, 2017 to May 26, 2017, the averaged interest
was 3.92% and for the six-month period ended June 30, 2016 the
average interest rate was 2.83%. Debt service payments were made
based on principal amortization over 20 years. The loan would have
matured on March 27, 2017; however, the Company exercised its
option to extend the loan for one year. The Company paid an
extension fee in the amount of $11,400. The terms of the variable
rate interest only loan with an outstanding balance of $3,69,733 as
of May 26, 2017, immediately prior to the closing of the
transactions contemplated in the Contribution Agreement,
bears interest at the prime rate; however, in no event could the
interest rate be less than 4%. The average interest rate paid for
the period from January 1, 2017 to May 26, 2017 was 4.03% and for
the six-month period ended June 30, 2016, the average interest rate
was 4.04%. The carrying amount of Holmwood’s variable rate
debt approximates its fair value as of May 26, immediately before
the closing of the
transactions contemplated in the Contribution Agreement and
as of December 31, 2016.
The
overall weighted average interest rate for the mortgage notes
outstanding during the period from January 1, 2017 to May 26, 2017
was 4.61% and 4.19% for the six-month period ended June 30, 2016.
The mortgage notes as of May 26, 2017 were assumed by HC Government
Realty in connection with the contribution
transaction.
The
following table outlines the mortgages payable as of May 26, 2017,
immediately prior to the closing of the
transactions contemplated in the Contribution Agreement, and
as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entered
|
|
|
Maturity
|
|
|
July
2013
|
$10,700,000
|
5.27%
|
August
2023
|
$10,082,759
|
$10,159,209
|
December
2014
|
3,700,000
|
3.93%
|
April
2016
|
-
|
-
|
June
2016
|
2,450,000
|
3.93%
|
June
2019
|
2,401,147
|
2,425,773
|
April
2015
|
7,600,000
|
3.92%
|
March
2018
|
7,031,646
|
7,115,152
|
December
2015
|
3,080,000
|
4.07%
|
June
2017
|
3,069,733
|
3,069,733
|
|
|
|
|
22,585,285
|
22,769,867
|
Debt
issuance costs
|
|
|
|
(552,212)
|
(540,812)
|
Accumulated
amortization
|
|
|
|
262,057
|
226,887
|
Debt issuance costs, net of accumulated amortization
|
|
(290,155)
|
(313,925)
|
|
|
|
|
|
|
Mortgage payable net of unamortized debt costs
|
|
$22,295,130
|
$22,455,942
|
Notes Payable – Notes
payable balances as of May 26, 2017, immediately prior to
the closing of the
transactions contemplated in the Contribution Agreement and
as of December 31, 2016 totaled $1,132,038 and $1,403,992, and
unamortized debt issuance costs totaled $12,800 and $16,091,
respectively. The loans are fixed rate with interest rates ranging
from 5.5% to 7.25% and mature during the period between June, 2018
and June, 2019. The weighted average interest rate on the notes
during the period from January 1, 2017 to May 26, 2017 and for the
six-month period ended June 30, 2016 was 6.20%.
On June
10, 2016, the Company received $1 million in loan proceeds from a
financial institution in connection with the refinancing of its
$3.7 million maturing mortgage payable. The $3.7 million loan was
replaced with a new loan in the amount of $2,450,000. The loans
from the Company to an SPE were pursuant to two promissory notes,
one in the original principal amount of $338,091, and one in the
original principal amount of $661,909. The notes bear interest at
5.5% per annum. The $338,091 note matures in June 2019,
requires interest only payments for the first 24 months and then
monthly payments will increase in order to fully amortize the loan
over the remaining 12 months of its term. The $661,909
note’s debt service payment is based on principal
amortization over 2 years. Both notes have been repaid pursuant to
the terms of the Contribution Agreement. In connection with the
contribution transaction, the unamortized portion of debt issuance
costs was written off in the amount of $12,800. At December 31,
2016, Holmwood has gross debt costs of $19,750 and accumulated
amortization related to these debt costs of $3,659.
In
July, 2013, Holmwood entered into a $1.5 million promissory note
and related collateral pledge and security agreement to finance
certain reserves and closing costs related to closing a $10.7
million loan. The loan balance outstanding as of December 31, 2016
is $563,299. The loan bears interest at 7.25% and the monthly debt
service payment is $30,008 based on the principal fully amortizing
over a five-year term. The loan was secured by the Company’s
membership interests in three of its properties. There were no debt
issuance costs related to this loan. This loan was assumed by HC
Government Realty and repaid concurrent with the
closing of the transactions contemplated in the Contribution
Agreement.
The
following table outlines the notes payable as of May 26, 2017,
immediately prior to the closing of the
transactions contemplated in the Contribution Agreement and
as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entered
|
|
|
Maturity
|
|
|
June
2016
|
$338,091
|
5.50%
|
June
2019
|
$338,091
|
$338,091
|
June
2016
|
661,909
|
5.50%
|
June
2018
|
364,933
|
502,602
|
July
2013
|
1,500,000
|
7.25%
|
August
2018
|
429,014
|
563,299
|
|
|
|
|
1,132,038
|
1,403,992
|
Debt
issuance costs
|
|
|
|
(19,750)
|
(19,750)
|
Accumulated
amortization
|
|
|
|
6,950
|
3,659
|
Debt issuance costs, net of accumulated amortization
|
|
(12,800)
|
(16,091)
|
|
|
|
|
|
|
Notes payable net of unamortized debt costs
|
|
|
$1,119,238
|
$1,387,901
|
The
Operating Partnership advanced the Company funds to meet certain
equity requirements needed for a property refinancing and to fund
other working capital needs. As of December, 31, 2016, the net
funds outstanding totaled $410,861 including interest accrued on
outstanding amounts based on the monthly applicable federal funds
rate. During the period from January 1, 2017 and May 26, 2017, the
Company made payments totaling $220,999. The remaining outstanding
balance of $189,862 was repaid by the Company in the form of
reduced OP Units in connection with the contribution
transaction.
Property management
fees are charged by the Asset Manager to Holmwood through an
informal agreement between the two parties. Under the terms of the
property management agreements, Holmwood pays the Asset Manager a
monthly management fee of 3% of all gross receipts from each
property or $1,000 a month, whichever is greater. In connection
with this agreement, Holmwood paid the Asset Manager property
management fees of $40,598 during the period from January 1, 2017
to May 26, 2017 and $50,258 for the six-month period ended June 30,
2016.
Asset
management fees are charged by the Asset Manager to Holmwood
through an informal agreement between the two parties. Holmwood
pays the Asset Manager a monthly asset management fee equal to 2.4%
of each property’s gross revenues or $1,000 per month,
whichever is greater. Asset management fees totaled $41,563 during
the period from January 1, 2017 and May 26, 2017 and $45,980 for
the six-months ended June 30, 2016.
In
2016, the Company made distributions totaling $374,889 to its
owners.
8.
Commitments and Contingencies
In
connection with a property acquisition in 2015, the property
located in Port Canaveral, FL was purchased, subject to a ground
lease. The ground lease has an extended term of 30 years to 2045
with one 10-year renewal option. The Company made ground lease
payments of $29,550 during the period from January 1, 2017 to May
26, 2017 and $35,450 for the six-month period ended June 30,
2017.
In the
normal course of business, the Company can be involved in legal
actions arising from the ownership of its properties. In the
Company's opinion, the liabilities, if any, that may ultimately
result from such legal actions are not expected to have a material
adverse effect on the financial position, operations or liquidity
of the Company.
The
Company received on July 15, 2017 dividends on its OP Units in the
amount of $70,064.
The
Company evaluated subsequent events through the date of filing this
report. The Company concluded no additional material events
subsequent to June 30, 2017 were required to be reflected in the
Company’s consolidated financial statements or notes as
required by standards for accounting disclosures of subsequent
events.
Item 4. Exhibits
The following exhibits are filed as part of this semi-annual report
on Form 1-SA:
Exhibit
Number
|
|
Description
|
|
|
|
2.1
|
|
Articles
of Incorporation of HC Government Realty Trust, Inc., incorporated
by reference to Exhibit 2.1 to the Company’s Offering
Statement on Form 1-A filed on June 15, 2016
|
2.2
|
|
Articles
Supplementary of HC Government Realty Trust, Inc., incorporated by
reference to Exhibit 2.2 to the Company’s Offering Statement
on Form 1-A filed on June 15, 2016
|
2.3
|
|
Bylaws
of HC Government Realty Trust, Inc., incorporated by reference to
Exhibit 2.3 to the Company’s Offering Statement on Form 1-A
filed on June 15, 2016
|
4.1
|
|
Form of
Subscription Agreement, incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 1-U filed on April 25,
2017
|
6.1
|
|
Agreement
of Limited Partnership of HC Government Realty Holdings, L.P.,
incorporated by reference to Exhibit 6.1 to the Company’s
Offering Statement on Form 1-A filed on June 15, 2016
|
6.2
|
|
First
Amendment to the Agreement of Limited Partnership of HC Government
Realty Holdings, L.P., incorporated by reference to Exhibit 6.2 to
the Company’s Offering Statement on Form 1-A filed on June
15, 2016
|
6.3
|
|
Limited
Liability Company Agreement of Holmwood Portfolio Holdings, LLC,
incorporated by reference to Exhibit 6.3 to the Company’s
Offering Statement on Form 1-A filed on June 15, 2016
|
6.4
|
|
Contribution
Agreement by and between Holmwood Capital, LLC and HC Government
Realty Holdings, L.P., incorporated by reference to Exhibit 6.4 to
the Company’s Pre-Qualification Amendment No. 2 to its
Offering Statement on Form 1-A filed on September 16,
2016
|
6.5
|
|
Form of
Tax Protection Agreement by and between Holmwood Capital, LLC and
HC Government Realty Holdings, L.P., incorporated by reference to
Exhibit 6.5 to the Company’s Pre-Qualification Amendment No.
1 to its Offering Statement on Form 1-A filed on July 29,
2016
|
6.6
|
|
Form of
Registration Rights Agreement by and between Holmwood Capital, LLC
and HC Government Realty Trust, Inc., incorporated by reference to
Exhibit 6.6 to the Company’s Pre-Qualification Amendment No.
4 to its Offering Statement on Form 1-A filed on October 24,
2016
|
6.7
|
|
Form of
Registration Rights Agreement by and between Holmwood Capital
Advisors, LLC and HC Government Realty Trust, Inc., incorporated by
reference to Exhibit 6.7 to the Company’s Pre-Qualification
Amendment No. 4 to its Offering Statement on Form 1-A filed on
October 24, 2016
|
6.8
|
|
Management
Agreement by and among Holmwood Capital Advisors, LLC, HC
Government Realty Trust, Inc. and HC Government Realty Holdings,
L.P., incorporated by reference to Exhibit 6.8 to the
Company’s Offering Statement on Form 1-A filed on June 15,
2016
|
6.9
|
|
Form of
Independent Director Agreement, incorporated by reference to
Exhibit 6.9 to the Company’s Offering Statement on Form 1-A
filed on June 15, 2016
|
6.10
|
|
Form of
Independent Director Indemnification Agreement, incorporated by
reference to Exhibit 6.10 to the Company’s Offering Statement
on Form 1-A filed on June 15, 2016
|
6.11
|
|
Form of
Officer/Director Indemnification Agreement, incorporated by
reference to Exhibit 6.11 to the Company’s Pre-Qualification
Amendment No. 1 to its Offering Statement on Form 1-A filed on July
29, 2016
|
6.12
|
|
2016 HC
Government Realty Trust, Inc. Equity Incentive Plan, incorporated
by reference to Exhibit 6.12 to the Company’s
Pre-Qualification Amendment No. 4 to its Offering Statement on Form
1-A filed on October 24, 2016
|
6.13
|
|
First
Amendment to Contribution Agreement by and between Holmwood
Capital, LLC and HC Government Realty Holdings, L.P., dated as of
June 10, 2016, incorporated by reference to Exhibit 6.25 to the
Company’s Pre-Qualification Amendment No. 2 to its Offering
Statement on Form 1-A filed on September 16, 2016
|
6.14
|
|
Second
Amendment to Contribution Agreement by and between Holmwood
Capital, LLC and HC Government Realty Holdings, L.P., dated as of
May 26, 2017, incorporated by reference to Exhibit 6.1 to the
Company’s Current Report on Form 1-U filed on June 2,
2017
|
6.15
|
|
Purchase
and Sale Agreement by and between USAA Real Estate Company and HC
Government Realty Holdings, L.P., dated as of December 28, 2016,
incorporated by reference to Exhibit 6.1 to the Company’s
Current Report on Form 1-U filed on March 7, 2017
|
6.16
|
|
First
Amendment to Purchase and Sale Agreement by and between USAA Real
Estate Company and HC Government Realty Holdings, L.P., dated as of
January 19, 2017, incorporated by reference to Exhibit 6.2 to the
Company’s Current Report on Form 1-U filed on March 7,
2017
|
6.17
|
|
Second
Amendment to Purchase and Sale Agreement by and between USAA Real
Estate Company and HC Government Realty Holdings, L.P., dated as of
January 27, 2017, incorporated by reference to Exhibit 6.3 to the
Company’s Current Report on Form 1-U filed on March 7,
2017
|
6.18
|
|
Third
Amendment to Purchase and Sale Agreement by and between USAA Real
Estate Company and HC Government Realty Holdings, L.P., dated as of
February 8, 2017, incorporated by reference to Exhibit 6.4 to the
Company’s Current Report on Form 1-U filed on March 7,
2017
|
8.1
|
|
Form
of Escrow Agreement by and among Branch Banking & Trust
Company, HC Government Realty Trust, Inc., and Orchard Securities,
LLC, incorporated by reference to Exhibit 8.1 to the
Company’s Pre-Qualification Amendment No. 4 to its Offering
Statement on Form 1-A filed on October 24, 2016
|
8.2
|
|
Assignment
of Escrow Agreement by and among HC Government Realty Trust, Inc.,
Branch Banking & Trust Company, Orchard Securities, LLC and
SANDLAPPER Securities, LLC, dated as of April 10, 2017,
incorporated by reference to Exhibit 8.1 to the Company’s
Current Report on Form 1-U filed on April 25, 2017
|
|
|
|
SIGNATURES
|
HC
GOVERNMENT REALTY TRUST, INC.
|
|
|
|
|
|
|
By:
|
/s/
Edwin
M. Stanton
|
|
|
|
Edwin M.
Stanton
|
|
|
|
Director and Chief
Executive Officer
|
|
Pursuant to the requirements of Regulation A, the issuer has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pursuant to the requirements of Regulation A, this report has been
signed by the following persons in the capacities and on the dates
indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Edwin M. Stanton
|
|
Director
and Chief Executive Officer
|
|
September
28, 2017
|
Edwin
M. Stanton
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
/s/
Elizabeth L. Watson
|
|
Chief
Financial Officer
|
|
September
28, 2017
|
Elizabeth
L. Watson
|
|
(principal
financial officer and principal accounting officer)
|
|
|