UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT
ANNUAL REPORT PURSUANT TO REGULATION A OF
THE SECURITIES ACT OF
1933
For the fiscal year ended December 31, 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 212 Sarasota, FL
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20036
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(Address of principal executive offices)
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(Zip Code)
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(941) 955-7900
Issuer’s
telephone number, including area code
Common Stock
(Title of each class of securities issued pursuant to Regulation
A)
Part II.
In this 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, and Holmwood Capital Advisors, LLC, a Delaware limited
liability company, as our Manager. As used in this annual report on
Form 1-K, an affiliate of,
or person affiliated with, a specified person,
is a person, who or which, directly or indirectly through one
or more intermediaries, controls, is controlled by, or is under
common control with,
the person specified.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We make
statements in this annual report on Form 1-K or this annual report,
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 annual report.
The
forward-looking statements included in this annual report are based
upon our current expectations, plans, estimates, assumptions and
beliefs that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve, among other things, judgments
with respect to 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 that 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 by the federal government for leased
space,
●
the GSA (acting for
the United States as Tenant) renewing or extending one or more of
the leases for one or more of our GSA Properties (as defined
below), whether pursuant to early termination options or at
lease-end, and if not renewed or extended that we will be
successful in re-leasing the space.
●
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 trust (“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 (the “40
Act”) and other laws, or
●
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 annual report. All
forward-looking statements are made as of the date of this annual
report and the risk that actual results will differ materially from
the expectations expressed in this annual report 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 annual
report, 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 annual report, 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 annual report will be
achieved.
Item 1. Business
The Company
We were formed in 2016 as a Maryland corporation,
and incident to filing our federal income tax return for, and
commencing with, our fiscal year ended December 31, 2017, we will
elect to be taxed as a REIT for federal income tax purposes.
We were
formed primarily to source, acquire, own and manage built-to-suit
or improved-to-suit, single-tenant properties leased by the United
States of America and administered by the U.S General Services
Administration or directly by the occupying agency, both of which
are referred to as GSA Properties. We invest primarily in GSA Properties across
secondary and smaller markets with sizes ranging from 5,000-50,000
rentable square feet, and in their listed lease term after
construction or improvement to post-9/11 standards. We further
emphasize GSA Properties that fulfill mission critical or citizen
service functions. Leases associated with the GSA Properties in
which our company invests are full faith and credit obligations of
the United States of America.
We
are currently offering up to $30,000,000 of our common stock for
$10.00 per share (the “Initial Offering”) pursuant to a
qualified offering statement on Form 1-A (File No.: 024-10563) and
a Final Offering Circular dated December 18, 2017, as
supplemented.
Our
principal objective is the creation of value for stockholders by
utilizing our relationships and knowledge of GSA Properties,
specifically, the acquisition, management and disposition of GSA
Properties. On December 31, 2017, our portfolio consisted of (i)
our Initial Owned Properties, acquired by our company on June 10,
2016, for a purchase price of $11,050,596, financed with proceeds
from the issuance of our 7.00% Series A Cumulative Convertible
Redeemable Preferred Stock or Series A Preferred Stock, secured
mortgage financing in the original principal amount of $7,225,00,
unsecured seller financing in the original principal amount of
$2,019,789 and $1,000,000 in original principal amount of our
unsecured loan from Holmwood; (ii) our GSA Property acquired by our
company on March 31, 2017, for a purchase price of $14,717,937,
financed with proceeds from senior mortgage debt in the original
principal amount of $10,875,000 and $3,842,937 in original
aggregate principal amount of unsecured debt from two of our
directors; (iii) seven properties contributed to us as of the
initial closing by Holmwood, including three properties for which
we received all of the rights to the profits, losses, any
distributed cash flow and all of the other benefits and burdens of
ownership for federal income tax purposes rather than a fee simple
interest, each pursuant to the Contribution Agreement; (iv) our GSA
Property acquired by our company on July 25, 2017, for a purchase
price of $4,797,072, financed with secured mortgage financing in
the original principal amount of $3,530,00, and proceeds from our
Initial Offering of $1,179,458; and (v) our GSA Property acquired
by our company on November 21, 2017, for a purchase price of
$8,273,349, financed by secured mortgage debt in original principal
amount of $6,991,250 and proceeds from our Initial Offering of
$1,282,099.
A description of our portfolio of GSA Properties
and the terms of their acquisition by us or contribution to us is
incorporated by reference herein from the Final Offering Circular
located at: https://www.sec.gov/Archives/edgar/data/1670010/000165495417011730/hcgr_253g2.htm
under the caption
“DESCRIPTION OF OUR
PROPERTIES.”
The GSA-leased, real estate asset class
has a number of attributes that we believe will offer our
stockholders significant benefits, including a highly creditworthy
and very stable tenant base, long-term lease structures and low
risk of tenant turnover. GSA leases are backed by the full faith
and credit of the United States, and the GSA has never experienced
a financial default. Payment of rents under GSA leases are
funded through the Federal Buildings Fund and are not subject to
direct federal appropriations, which can fluctuate with federal
budget and political priorities. In addition to presenting reduced
risk of default, GSA leases typically have long initial terms of
ten to 20 years with renewal leases having terms of five to ten
years, which limit operational risk. Upon renewal of a GSA lease,
base rent typically is reset based on a number of factors at the
time of renewal, including inflation and the replacement cost of
the building, that generally we expect will increase over the life
of the lease.
GSA-leased
properties generally provide attractive investment opportunities
but require specialized knowledge and expertise. Each U.S.
Government agency has its own customs, procedures, culture, needs
and mission, which results in different requirements for its leased
space. Furthermore, the GSA-leased sector is highly fragmented with
a significant amount of non-institutional owners, who lack our
infrastructure and experience with GSA-leased properties. Moreover,
while there are a number of national real estate brokers that hold
themselves out as having GSA-leased property expertise, there are
no national or regional clearing houses for GSA-leased properties.
We believe this fragmentation can be ascribed particularly to the
U.S. Government’s – including GSA’s –
procurement policies, including policies of preference for small,
female and minority owned businesses. As of August 2015, the
largest owner of GSA-leased properties owned approximately 3.5% of
the GSA-leased properties on a rent per square foot (RSF) basis,
and the ten largest owners of GSA-leased properties collectively
owned approximately 17% of the GSA-leased properties by
RSF.1 Long-term relationships and
specialized institutional knowledge regarding the agencies, their
space needs and the hierarchy and importance of a property to its
tenant agency are crucial to understanding which agencies and
properties present the greatest likelihood of long-term agency
occupancy, and, therefore, to identifying and acquiring attractive
GSA-leased properties. Our
portfolio is diversified among occupancy agencies, including a
number of the largest and most essential agencies, such as the Drug
Enforcement Administration, the Federal Bureau of Investigation,
the Social Security Administration and the Department of
Transportation.
We
operate as an “UPREIT”, which means we own our
GSA-leased properties through single-purpose entities that are
wholly owned by our Operating Partnership. While we focus on
investments in GSA Properties, in the future we also may invest in
state and local government, mission critical single tenant
properties or properties previously (but not exclusively) leased to
the United States, the GSA or one or more occupying agencies. We
are externally managed and advised by Holmwood Capital Advisors,
LLC, a Delaware limited liability company. Our Manager will make
all investment decisions for us. Our Manager is owned equally by
Robert R. Kaplan and Robert R. Kaplan, Jr., individually, Stanton
Holdings, LLC, which is controlled by Edwin M. Stanton, and by
Baker Hill Holding LLC, which is controlled by Philip and Vickie
Kurlander. The officers of our Manager are Messrs. Edwin M.
Stanton, President, Robert R. Kaplan, Jr., Vice President, Philip
Kurlander, Treasurer, and Robert R. Kaplan, Secretary. Our Manager will be overseen by our board of
directors. For more information on our executive officers and
directors please see "Item 3. Directors and Executive
Officers”
below.
We
believe the extensive knowledge of U.S. Government properties and
lease structures of each of our Manager, its principals and
executive officers, allows us to execute transactions efficiently.
Additionally, we believe that our ability to identify and implement
building improvements increases the likelihood of lease renewal and
enhances the value of our portfolio. Our Manager’s
experienced team brings specialized insight into the mission and
hierarchy of occupying agencies, so that we are able to gain a deep
understanding of the U.S. Government’s long-term strategy for
a particular agency and its resulting space needs. This allows us
to target properties used by agencies that will have enduring
criticality and the highest likelihood of lease renewal. Lease
duration and the likelihood of renewal are further increased as
properties are tailored to meet the specific needs of individual
agencies, such as specialized environmental and security
upgrades.
Our
Manager and its principals and executive officers have a network of
relationships with real estate owners, investors, operators and
developers of all sizes and investment formats, across the United
States and especially in relation to GSA Properties. We believe
these relationships provide us with a competitive advantage,
greater access to off-market transactions and flexibility in our
investment choices to source and acquire GSA
Properties.
We
believe in the long-term there will be a consistent flow of GSA
Properties in our target markets for purposes of acquisition,
leasing and managing, which we expect will enable us to continue
our platform into the foreseeable future. We acquire GSA Properties
located across secondary and smaller markets throughout the United
States. We do not anticipate making acquisitions outside of the
United States or its territories.
We
primarily make direct acquisitions of GSA Properties, but we may
also invest in GSA Properties through indirect investments, such as
joint ventures which may or may not be managed or affiliated
with our Manager or its affiliates, and whereby we may own less
than a 100% of the beneficial interest therein; provided, that in
such event, we will acquire
at least 50 percent of the outstanding voting securities in the
investment, or otherwise comply with SEC staff guidance regarding
majority-owned subsidiaries so that the investment meets the
definition of “majority-owned subsidiary” under the 40
Act. While our Manager does not intend for these types of
investments to be a primary focus, we may make such investments in
our Manager’s sole discretion.
Our Competitive Strengths and Strategic Opportunities
We
believe the experience of our Manager, its affiliates, principals
and executive officers, as well as our investment strategies,
distinguish us from other real estate companies. We believe that we
will be benefitted by the alignment of the following competitive
strengths and strategic opportunities:
High Quality Portfolio Leased to Mission-Critical U.S. Government
Agencies
●
We own a portfolio
of 13 GSA Properties, comprised of ten GSA Properties we own in fee
simple and three additional GSA Properties for which we have all of
the rights to the profits, losses, any
distributed cash flow and all of the other benefits and burdens of
ownership included for federal income tax purposes, each of which
is leased to the United States. As of the date of this
annual report, based upon net operating income, the weighted
average age of our portfolio was approximately 10 years, and the
weighted average remaining lease term is approximately 9.3 years if
none of the early termination rights are exercised and 5.9 years,
if all of the early termination rights are exercised.
●
All of our GSA
Properties are occupied by agencies that serve mission-critical or
citizen service functions.
●
Our GSA Properties
generally meet our investment criteria, which target GSA Properties
across secondary or smaller markets with sizes ranging between
5,000-50,000 rentable square feet and in their first term after
construction or improvement to post-9/11 standards.
Aligned Management Team
●
Upon completion of
our Initial Offering, assuming we sell the maximum amount, our
senior management team will own beneficially approximately 31.20%
of our common stock on a fully diluted basis, which will help to
align their interests with those of our stockholders. This amount
does not include equity issuable to our Manager in payment of
acquisition fees, which will equal 1% of acquisition costs for each
property we acquire.
●
A significant
portion of our Manager’s fees will be accrued and eventually
paid in stock, which will be issued upon the earlier of listing on
a national securities exchange or March 31, 2020, which will also
align the interests of our Manager with those of our
stockholders.
Asset Management
●
Considerable
experience in developing, financing, owning, managing, and leasing
real properties, including GSA Properties across the U.S.
(transactions involving approximately $3 billion of GSA Properties
and other government leased assets).
●
Relationships with
real estate owners, developers, brokers and lenders should allow
our company to source off-market or limited-competitive acquisition
opportunities at attractive cap rates.
●
In-depth knowledge
of the GSA procurement process, GSA requirements, and GSA
organizational dynamics. The GSA build-to-suit lease process is
detailed and requires significant process-specific expertise as
well as extensive knowledge of GSA building requirements and
leases.
●
Strong network of
professional and advisory relationships, including BB&T Capital
Markets, financial advisor to our Manager.
Property Management
●
Significant
experience in property management and oversight of third party
property managers, focusing on the day-to-day management of our
portfolio, including cleaning, repairs, landscaping, collecting
rents, handling compliance with zoning and
regulations.
Credit Quality of Tenant
●
Leases are full
faith and credit obligations of the United States and, as such,
are not subject to the risk of
annual appropriations.
●
High lease renewal
rates for GSA Properties in first term (average of 93% for
single-tenant properties, 95% for single-tenant, built-to-suit
properties).2
●
Based on 2014 GSA
statistics, since 2001 average duration of occupancy for federal
agencies in the same leased building is 25 years. From 2001
through 2010, the GSA exercised the right to terminate prior to the
end of the full lease term at a rate of 1.73%, according to
Colliers International research.3
●
Leases typically
include inflation-linked rent increases associated with certain
property operating costs, which the Company believes will mitigate
expense variability.
Fragmented Market for Assets Within Company Acquisition
Strategy
●
Our Manager has
observed that the market of owners and developers of targeted
assets appears highly fragmented with the majority of ownership
distributed among small regional owners and
developers.
●
Based on our
research, newly constructed, first-generation, GSA Properties
currently trade at an average cap rate of 6.75% compared to 4.5% -
5.5% for all investment grade-rated, single tenant, triple net
lease properties4 and less than 2.5% for 10-year U.S.
Treasury bonds.5
Large Inventory of Targeted Assets
●
Over 1,300 GSA
Properties in our targeted size are spread throughout
U.S.6
●
Company strategy of
mitigating lease renewal risk by owning specialized, mission
critical and customer service GSA Properties, plus portfolio
diversification by agency and location and through careful
acquisition of staggered lease expirations.
Investment Strategy
We
believe there is a significant opportunity to acquire and build a
portfolio consisting of high-quality GSA Properties at attractive
risk-adjusted returns. We seek primarily to acquire “citizen
service” GSA Properties, or GSA Properties that are
“mission critical” to an agency’s function.
Further, we primarily target GSA Properties located in secondary or
smaller markets, with sizes ranging from 5,000 to 50,000 rentable
square feet, and in their first term after construction or to
post-9/11 standards.
We
target GSA Properties that are LEED® certified or energy star
rated. Of our portfolio of 13 GSA Properties, six are LEED®
certified and another GSA Property is in the LEED®
certification process.
We
believe the subset of GSA Properties on which we focus is highly
fragmented and often overlooked by larger investors, which can
provide opportunities for us to buy at more attractive pricing
compared to other properties within the asset class. We also
believe selection based on agency function, building use and
location in these smaller markets will help to mitigate risk of
non-renewal. While we intend to focus on this subset of GSA
Properties, we are not limited in the properties in which we may
invest. We have the flexibility to expand our investment focus as
market conditions may dictate and, as determined in the sole
discretion of our Manager, subject to broad investment guidelines
or our Investment Guidelines, and investment policies or our
Investment Policies, adopted by our board of directors, as either
may be amended by the board of directors from time to
time.
Our
Investment Policies are more specifically described in
“Policies with Respect to Certain Activities - Investment
Policies.” Our Investment Policies provide our Manager with
substantial discretion with respect to the selection, acquisition
and management of specific investments, subject to the limitations
in the Management Agreement. Our Manager may revise our Investment
Policies without the approval of our board of directors or
stockholders; provided, however, that our Manager may not acquire
properties falling outside our Investment Guidelines without the
approval of our board of directors. Our board also may adjust our
Investment Policies and will review them at least annually to
determine whether the policies are in the best interests of our
stockholders.
Growth Strategy
Value-Enhancing Asset Management
●
Our management team
focuses on the efficient management of our GSA Properties and on
improvements to our GSA Properties that enhance their value for our
occupancy agency and improve the likelihood of lease
renewal.
●
We also seek to
reduce operating costs at all of our GSA Properties, often by
implementing energy efficiency programs that help the U.S.
Government achieve its conservation and efficiency
goals.
●
Our asset
management team also conducts frequent audits of each of our GSA
Properties in concert with the GSA and the occupying agency in
order to keep each facility in optimal condition, allowing the
agency to better perform its stated mission and helping to position
us as a “GSA partner of choice.”
Renew Existing Leases at Positive Spreads
●
We intend to renew
leases of GSA Properties at positive spreads.
●
Upon lease renewal,
GSA rental rates typically are reset based on a number of factors,
including inflation, the replacement cost of the building at the
time of renewal and enhancements to the property since the date of
the prior lease.
●
During the term of
a GSA lease, we work in close partnership with the GSA to implement
improvements at our GSA Properties to enhance the occupying
agency’s ability to perform its stated mission, thereby
increasing the importance of the building to the occupying agency
and the probability of an increase in rent at lease
renewal.
Reduce Property-Level Operating Expenses
●
We manage our GSA
Properties to increase our income by continuing to reduce
property-level operating costs.
●
We manage our GSA
Properties in a cost-efficient manner so as to eliminate any excess
spending and streamline our operating costs.
●
When we acquire a
GSA Property, we review all property-level operating expenditures
to determine whether and how the GSA Property can be managed more
efficiently.
Item 2. 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, in sizes that range from
5,000-50,000 rentable square feet, these are their first term after
construction or improvement 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 April 27, 2018, the Company owned 13
GSA Properties, comprised of ten GSA Properties that we own in fee
simple and three additional GSA Properties for which we have all of
the rights to the profits, losses, any
distributed cash flow and all of the other benefits and burdens of
ownership including for federal income tax purposes, each of which
is leased to the United States. Our portfolio of GSA
Properties, or our portfolio, contains approximately 263,045 rentable square feet located in nine
states with three additional GSA Properties under contract for an
additional 56,121 rentable square feet, or our pipeline. As of
April 27, 2018 our portfolio and pipeline properties are 100%
leased to the United States of America and occupied, or to be
occupied on completion, by federal government agencies. Based on
net operating income of each property, the properties have a
weighted average remaining lease term of 9.3 years if none of the
early termination rights are exercised and 5.9 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 April 27, 2018,
on a fully diluted basis, we owned approximately 53.73% of the
aggregate common limited partnership interests in our Operating
Partnership. We were formed in 2016 as a Maryland corporation
and incident to filing our federal income tax return and commencing
with our fiscal year ended December 31, 2017, we will elect to be
taxed as a REIT for federal income tax purposes.
Our Predecessor
The
term, “our predecessor”, refers to Holmwood and its
three, remaining, consolidated, single purpose, wholly owned
subsidiaries. Each such remaining subsidiary holds the fee interest
in a GSA Property, the rights to the profits from, the leases for,
any distributed cash flow from, and all of the benefits and burdens
of ownership, including for federal income tax purposes, of which
were contributed to our Operating Partnership by
Holmwood.
Operating Results – HC Government Realty Trust,
Inc.
For the year ended December 31, 2017
At December 31, 2017, we owned ten properties and
all of the rights to the profits, losses, any distributed cash flow
and all of the other benefits and burdens of ownership including
for federal income tax purposes for three other properties. Our
portfolio of properties at December 31, 2017 consisted of the
following: (i) three GSA Properties, or our Initial Owned
Properties, acquired by our company on June 10, 2016, for a
purchase price of $11,050,596, financed with proceeds from the
issuance of our 7.00% Series A Cumulative Convertible Redeemable
Preferred Stock or Series A Preferred Stock, secured mortgage
financing in the original principal amount of $7,225,00, unsecured
seller financing in the original principal amount of $2,019,789 and
$1,000,000 in original principal amount of our unsecured loan from
Holmwood; (ii) our GSA Property acquired by our company on March
31, 2017, for a purchase price of $14,717,937, financed with
proceeds from senior mortgage debt in the original principal amount
of $10,875,000 and $3,842,937 in original aggregate principal
amount of unsecured debt from two of our directors; (iii) seven
properties contributed to us as of the initial closing by Holmwood,
including three properties for which we received
all of the rights to the profits, losses, any distributed cash flow
and all of the other benefits and burdens of ownership
for federal income tax purposes rather than a fee simple interest,
each pursuant to the Contribution Agreement; (iv) our GSA Property
acquired by our company on July 25, 2017, for a purchase price of
$4,797,072, financed with secured mortgage financing in the
original principal amount of $3,530,00, and proceeds from our
Initial Offering of $1,179,458; and (v) our GSA Property acquired
by our company on November 21, 2017, for a purchase price of
$8,273,349, financed by secured mortgage debt in original principal
amount of $6,991,250 and proceeds from our Initial Offering of
$1,282,099. The portfolio contains 263,045 square feet located in
nine states and is 100% leased to the United States and either
administered by the GSA or occupying department or
agency.
Our
operating activity includes the operating activity of the seven
properties contributed to us from the period May 26, 2017 though
December 31, 2017.
We
earned revenues of $4,764,562 and incurred operating costs,
excluding depreciation and amortization, of $2,558,399 for the year
ended December 31, 2017. Our net operating income was $2,206,163
and after deducting depreciation and amortization of $1,675,079,
interest expense of $1,990,858 and Series A Preferred Stock
dividends of $316,095, our net loss attributed to our common
shareholders was $1,531,025.
For the period from of March 11, 2016 (date of inception) to
December 31, 2016
On
June 10, 2016, the company acquired three properties containing
43,984 square feet located in two states. The properties are 100%
leased to the United States, administered by the GSA and occupied
by the Social Security Administration in the instance of two of the
properties and by the Department of Transportation in the instance
of the third property. Total costs for the properties were
$11,050,596 and were financed with $1,805,807 of proceeds from our
Series A Preferred Stock, $2,019,789 of seller financing and a
$7,225,000 bank loan. For the period from March 11, 2016 (date of
inception) to December 31, 2016, we earned revenues from operations
of $747,477 and incurred operating costs, excluding depreciation
and amortization, of $314,866. Our net operating income was
$432,611 and after deducting depreciation and amortization of
$302,484, interest expense of $256,171 and Series A Preferred Stock
dividends of $104,636, our net loss attributed to our common
shareholders was $230,680. The aforementioned activity represents
the financial results of our Initial Owned Properties.
Operating Results – Predecessor
For the period from January 1, 2017 to May 26, 2017.
Immediately
prior to our predecessor contributing its portfolio of properties
to us on May 26, 2017, our predecessor owned seven properties,
containing 110,352 square feet located in five states. All of our
predecessor’s properties are 100% leased to the United States
of America, six of them are administered by the GSA, the seventh
being administered by the occupying agency. For the period from
January 1, 2017 to May 26, 2017 our predecessor earned revenues of
$1,433,437 from its property portfolio. Operating costs, excluding
depreciation and amortization, totaled $503,390 and net operating
income was $930,047 for the period from January 1, 2017 to May 26,
2017. After deducting depreciation and amortization of
$478,377 and interest expense of $474,471 from our operating
income, our predecessor incurred a net loss of $22,801 for the
period from January 1, 2017 to May 26, 2017.
For the year ended December 31, 2016
At
December 31, 2016, our predecessor owned seven properties,
containing 110,352 square feet located in five states. All of our
predecessor’s properties are 100% leased to the United States
of America, six of them are administered by the GSA, the seventh
being administered by the occupying agency. In this period from its
property portfolio our predecessor earned revenues of $3,711,168.
Operating costs, excluding depreciation and amortization, totaled
$1,166,623 and net operating income was $2,544,545 for the year
ended December 31, 2016. After deducting depreciation
and amortization of $1,228,064 and interest expense of $1,224,717
from our predecessor’s operating income, our
predecessor’s net income was $91,764 for the year ended
December 31, 2016.
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 and interest expense. 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 GSA Property contributions to combined NOI
together with a reconciliation of NOI to net income (loss) as
computed in accordance with GAAP for the periods
presented.
|
HC Gov Realty Trust, Inc.
|
|
|
For the year ended December 31, 2017
|
March 11, 2016 (date of inception) to December 31,
2016
|
January 1, 2017to May 26, 2017
|
For the year ended December 31, 2016
|
|
|
|
|
|
Revenues
|
$4,764,562
|
$747,477
|
$1,433,437
|
$3,711,168
|
Less:
|
|
|
|
|
Operating
expenses
|
2,254,917
|
257,557
|
424,385
|
973,971
|
Management
fee
|
303,482
|
57,309
|
79,005
|
192,652
|
Total
expenses
|
2,558,399
|
314,866
|
503,390
|
1,166,623
|
|
|
|
|
|
Net
operating income
|
2,206,163
|
432,611
|
930,047
|
2,544,545
|
Less:
|
|
|
|
|
Depreciation
and amortization
|
1,675,079
|
302,484
|
478,377
|
1,228,064
|
Interest
expense
|
1,990,858
|
256,171
|
474,471
|
1,224,717
|
Net
loss
|
(1,459,774)
|
(126,044)
|
$(22,801)
|
$91,764
|
Less:
Net loss attributable to noncontrolling interest
|
(244,844)
|
-
|
|
|
Net
loss loss attributed to HC Gov Realty Trust, Inc.
|
(1,214,930)
|
(126,044)
|
|
|
Less:
Preferred stock dividends
|
(316,095)
|
(104,636)
|
|
|
Net
(loss) income attributed to HC Gov Realty Trust, Inc.
|
|
|
|
|
available
to common shareholders
|
$(1,531,025)
|
$(230,680)
|
|
|
Liquidity and Capital Resources
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 tenanted
properties leased to the United States of America or buy facilities
that are leased to credit-worthy state or municipal
tenants.
Liquidity General.
Our need for liquidity will be primarily to fund (i)
operating expenses and cash dividends; (ii) property acquisitions;
(iii) deposits and fees associated with long-term debt financing
for our GSA Properties; (iv) capital expenditures; (v) payment of
principal of, and interest on, outstanding indebtedness; and (vi)
other investments, consonant with our Investment Guidelines and
Investment Policies.
We
currently have three GSA Properties under contract for $21,655,000,
which will require funding through a combination of secured debt
financing and equity.
Capital Resources
As
of April 27, 2018, the Company has sold 859,591 cumulative shares
for net proceeds of $7,886,332 in the Initial Offering. We have
used, and will continue to use, net proceeds from the Initial
Offering to pay down debt, fund acquisitions, provide working
capital, fund a portion of our targeted dividend and otherwise
improve our capital structure, enabling us to further implement our
acquisition strategy, and increase cash flows.
On
March 31, 2017, the Company borrowed an aggregate amount of
$3,400,000 pursuant to multiple promissory notes payable. The notes
are unsecured, require monthly interest-only payments payable in
arrears at an interest rate of 12% per annum. By agreement with the
holders of these notes, the maturity date of such notes has been
extended to May 1, 2019. The notes are pre-payable without penalty.
Of these notes, $3,070,000 in aggregate principal were loaned by a
director of the Company and by an affiliate of another Company
director, all of whom or which also are affiliates of the Asset
Manager and the Company’s predecessor. As of December 31,
2017, the outstanding principal balance of these notes was
$3,400,000.
On
December 11, 2017, our company borrowed $330,000 from an affiliated
entity of our Company’s CEO. The loan accrues interest at
3.25% per annum and both principal and accrued interest is payable
on demand. This note was paid in full on February 26,
2018.
On
December 11, 2017, the Company borrowed $1,500,000 in aggregate
principal amount pursuant to multiple promissory notes payable to
accredited investors. The notes are unsecured, require monthly
interest-only payments payable in arrears at an interest rate of 8%
per annum. By agreement with the holders of these notes, the
maturity date of such notes has been extended to May 1, 2019. With
respect to these notes, $500,000 in principal amount was loaned by
an affiliate of a director of the Company, the Asset Manager and
the Company’s predecessor, and $250,000 was loaned by a
member of the Company’s predecessor. As of December 31, 2017,
the outstanding principal balance of these notes was
$1,500,000.
On
November 30, 2017, our Company incurred indebtedness of $124,000 to
finance certain insurance premiums. The loan bears interest at a
fixed annum rate of 4.98% and requires 10 payments, including
principal and interest, of $12,685. As of December 31, 2017, the
outstanding balance was $99,609.
Trend Information
Our
company, through our operating partnership 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 that 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. Short-term interest rates
are rising, 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.
To
date our company has been capital constrained, which has affected
liquidity adversely from an operating perspective and the ability
of our company to manage several viable acquisition opportunities
at the same time. While there can be no assurance, completion of
our offering should enable management to accelerate acquisition
plans, provide liquidity to recruit and retain qualified personnel
to support growth and enhance purchasing power for goods and
services in connection with the operation of our
properties.
Item 3. Directors and
Officers
Information
regarding our directors and officers is incorporated herein by
reference to the Final Offering Circular located at:
https://www.sec.gov/Archives/edgar/data/1670010/000165495417011730/hcgr_253g2.htm
under the captions
“DIRECTORS, EXECUTIVE OFFICERS,
AND SIGNIFICANT EMPLOYEES” and “COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS.”
The
following officers and/or directors ages have changed since the
date of the Final Offering Circular:
Robert
R. Kaplan, Jr. – 47
Philip
Kurlander – 54
Robert
R. Kaplan – 71
Scott
Musil – 50
William
Robert Fields – 68
Leo
Kiely – 71
On
January 25, 2018, Elizabeth Watson, who served as our Chief
Financial Officer and both our principal financial and accounting
officer for purposes of Regulation A, Tier II reporting
requirements, and the Company agreed that she would be resigning
from the foregoing positions effective as of January 31,
2018.
On
January 31, 2018, our Manager hired Jason D. Post as our Vice
President of Finance and Corporate Controller. The following
disclosure should be read in conjunction with “DIRECTORS,
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES” and any other
relevant section contained in the Offering Circular or any
supplement to the Offering Circular.
Name
|
|
Position
|
|
Age
|
|
Term of Office
|
|
Hours/Year
|
Jason
D. Post
|
|
Vice
President of Finance and Corporate Controller, Principal Accounting
Officer
|
|
43
|
|
January
2018 - Present
|
|
N/A
|
Mr. Post is responsible for our company’s financial
management, including corporate accounting, regulatory and
financial reporting, budgeting, as well as internal control
policies, particularly as they relate to financial risk
management.
Prior to joining the
Company, Mr. Post was the
Principal Financial Officer of As Seen On TV, Inc. (OTCBB: ASTV), a
direct marketing company. Before that he operated Jason D. Post
CPA, PA, a consulting firm offering financial and controller
services for pre-IPO and listed companies. Previously he was CFO of
Amacore Group (OTCCQB: ACGI), a marketer of health, life and dental
insurance plans, and Zurvita (OTCQB: ZRVT), a distributor of health
and wellness products. Mr. Post began his career at Deloitte &
Touche, an international accounting and auditing firm and then was
associated with Cherry, Bekaert & Holland, a southeast regional
accounting and auditing firm, and prior thereto at Arthur Anderson,
at the time an international accounting and auditing firm. He is a
Certified Public Accountant as well as a Certified Fraud Examiner
and holds a Bachelor of Science degree, cum laude, from the
University of South Florida.
Item 4. Security Ownership of Management and Certain Security
Holders
The
table below sets forth, as of April 27, 2018, certain information
regarding the beneficial ownership of our stock for (1) each person
who is expected to be the beneficial owner of 10% or more of our
outstanding shares of any class of voting stock and (2) each of our
directors and named executive officers, if together such group
would be expected to be the beneficial owners of 10% or more of our
outstanding shares of any class of voting stock. Each person named
in the table has sole voting and investment power with respect to
all of the shares of common stock shown as beneficially owned by
such person.
The
SEC has defined “beneficial ownership” of a security to
mean the possession, directly or indirectly, of voting power and/or
investment power over such security. A stockholder is also deemed
to be, as of any date, the beneficial owner of all securities that
such stockholder has the right to acquire within 60 days after that
date through (1) the exercise of any option, warrant or right, (2)
the conversion of a security, (3) the power to revoke a trust,
discretionary account or similar arrangement or (4) the automatic
termination of a trust, discretionary account or similar
arrangement. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, our shares
of common stock subject to options or other rights (as set forth
above) held by that person that are exercisable as of the
completion of this offering or will become exercisable within 60
days thereafter, are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing
percentage ownership of any other person.
Title of Class
|
|
Name and Address of Beneficial Owner
|
|
Amount and Nature of Beneficial Ownership
|
|
Amount and Nature of Beneficial Ownership Acquirable
|
|
|
Percent
of Class
|
|
Common
Stock
|
|
All
Executive Officers and Directors1
|
|
216,000
Shares
|
|
N/A
|
|
|
20.10
|
%
|
Series
A Preferred Stock
|
|
All
Executive Officers and Directors1
|
|
44,000
Shares2
|
|
N/A
|
|
|
30.45
|
%2
|
Series
A Preferred Stock
|
|
Philip
Kurlander1
|
|
26,000
Shares
|
|
N/A
|
|
|
17.99
|
%
|
1 The address of each beneficial owner is 1819 Main Street,
Suite 212, Sarasota, Florida 34236.
2 Includes the 26,000 shares owned by Philip Kurlander
disclosed in the table.
3 Address of beneficial owner is 191 Fox Lane, Northport,
New York 11763.
Item 5. Interest of Management and Others in Certain
Transactions
On
March 31, 2017, the Company borrowed an aggregate amount of
$3,400,000 pursuant to multiple promissory notes payable. The notes
are unsecured, require monthly interest-only payments payable in
arrears at an interest rate of 12% per annum. By agreement with the
holders of these notes, the maturity date of such notes has been
extended to May 1, 2019. The notes are pre-payable without penalty.
Of these notes, $3,070,000 in aggregate principal was loaned by a
director of the Company and by an affiliate of another Company
director, all of whom or which also are affiliates of the Asset
Manager and the Company’s predecessor. As of December 31,
2017, the outstanding principal balance of these notes was
$3,400,000.
On
December 11, 2017, our company borrowed $330,000 from an affiliated
entity of our Company’s CEO. The loan accrues interest at
3.25% per annum and both principal and accrued interest is payable
on demand. This note was paid in full on February 26,
2018.
On
December 11, 2017, the Company borrowed $1,500,000 in aggregate
principal amount pursuant to multiple promissory notes payable to
accredited investors. The notes are unsecured, require monthly
interest-only payments payable in arrears at an interest rate of 8%
per annum. By agreement with the holders of these notes, the
maturity date of such notes has been extended to May 1, 2019. With
respect to these notes, $500,000 in principal amount was loaned by
an affiliate of a director of the Company, the Asset Manager and
the Company’s predecessor, and $250,000 was loaned by a
member of the Company’s predecessor. As of December 31, 2017,
the outstanding principal balance of these notes was
$1,500,000.
The
information contained in the Final Offering Circular located at:
https://www.sec.gov/Archives/edgar/data/1670010/000165495417011730/hcgr_253g2.htm
under the caption
“INTEREST OF MANAGEMENT AND
OTHERS IN CERTAIN TRANSACTIONS” is incorporated herein by
reference.
Item 6. Other Information
None
Item 7. Financial Statements
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Stockholders
HC Government Realty Trust, Inc.
Sarasota, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of HC
Government Reality Trust, Inc. and subsidiaries (collectively,
“the Company”) as of December 31, 2017 and 2016, the
related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year ended December
31, 2017 and for the period from March 11, 2016 (date of inception)
to December 31, 2016, and the related notes (collectively referred
to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of their operations and
their cash flows for the year ended December 31, 2017 and for the
period from March 11, 2016 (date of inception) to December 31, 2016
in conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB and in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Cherry
Bekaert LLP
We have served as the Company’s auditor since
2016.
Richmond, VA
April 27, 2018
HC Government Realty Trust, Inc.
Consolidated Balance Sheets
December 31, 2017 and 2016
|
|
|
|
|
|
ASSETS
|
|
|
Investment in real
estate, net
|
$61,922,635
|
$10,435,991
|
Cash and cash
equivalents
|
695,719
|
247,137
|
Restricted
cash
|
1,676,152
|
51,656
|
Rent and other
tenant receivables, net
|
757,752
|
126,590
|
Related parties
receivable, net
|
-
|
525,397
|
Leasehold
intangibles, net
|
5,635,435
|
743,010
|
Prepaid expenses
and other assets
|
365,840
|
182,376
|
Total
Assets
|
$71,053,533
|
$12,312,157
|
|
(8,272,194.6)
|
|
LIABIILTIES
|
|
|
Mortgages payable,
net of unamortized debt costs
|
$49,573,683
|
$7,068,067
|
Notes
payable
|
1,179,610
|
2,103,961
|
Notes payable -
related party
|
4,150,000
|
-
|
Declared dividends
and distributions
|
344,842
|
-
|
Accrued interest
payable
|
248,352
|
35,379
|
Accounts
payable
|
267,232
|
138,998
|
Accrued
expenses
|
357,981
|
239,686
|
Tenant improvement
obligation
|
1,315,366
|
-
|
Acquisition fee
payable - related party
|
274,345
|
-
|
Below-market
leases, net
|
1,001,754
|
416,731
|
Related parties
payable, net
|
461,858
|
-
|
Total
Liabilities
|
59,175,023
|
10,002,822
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
Preferred stock
($0.001 par value, 750,000,000 shares authorized
|
|
|
and 144,500 shares
issued and outstanding)
|
144
|
144
|
Common stock
($0.001 par value, 250,000,000
|
|
|
shares authorized,
895,307 and 200,000 common shares issued
|
|
|
and outstanding at
December 31, 2017 and 2016, respectively)
|
895
|
200
|
Additional paid-in
capital
|
8,948,713
|
3,614,156
|
Offering
costs
|
(1,459,479)
|
(1,074,485)
|
Accumulated
deficit
|
(1,340,974)
|
(126,044)
|
Accumulated
dividends and distributions
|
(690,963)
|
(104,636)
|
Total
Stockholders' Equity
|
5,458,336
|
2,309,335
|
Noncontrolling
interest in operating partnership
|
6,420,174
|
-
|
Total
Equity
|
11,878,510
|
2,309,335
|
Total
Liabilities and Stockholders' Equity
|
$71,053,533
|
$12,312,157
|
The accompanying notes are an integral part of the consolidated
financial statements
17
HC Government Realty Trust, Inc.
Consolidated Balance Sheets (continued)
December 31, 2017 and 2016
The following table presents the assets and liabilities of the
Company's consolidated variable interest entities as of December
31, 2017 which are included on the consolidated balance sheet
above. The assets in the table below include those assets that can
only be used to settle obligations of the consolidated variable
interest entity. The Liabilities in the table below include
third-party liabilities of the consolidated variable interest
entity only, and for which creditors or beneficial interest holders
do not have recourse to the Company, and exclude intercompany
balances that eliminate in consolidation.
ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE
USED TO SETTLE THE OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST
ENTITIES:
|
|
|
Buildings
and improvements, net
|
$12,007,437
|
Intangible
assets, net
|
530,626
|
Prepaids
and other assets
|
457,096
|
Total
Assets
|
$12,995,159
|
LIABILITIES OF CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH
CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO
THE COMPANY.
|
|
|
Mortgages
payable
|
$9,796,972
|
Intangible
liabilities, net
|
168,733
|
Accounts
payable and accrued expenses
|
242,284
|
Total
liabilities
|
$10,207,989
|
The accompanying notes are an integral part of the consolidated
financial statements
18
HC Government Realty Trust, Inc.
Consolidated Statements of Operations
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
|
For the year ended December 31, 2017
|
March 11, 2016 (date of inception) to December 31,
2016
|
Revenues
|
|
|
Rental
revenues
|
$4,595,560
|
$720,850
|
Real estate tax
reimbursments and other revenues
|
169,002
|
26,627
|
Total
revenues
|
4,764,562
|
747,477
|
|
|
|
Operating
expenses
|
|
|
Depreciation and
amortization
|
1,675,079
|
302,484
|
General and
administrative
|
405,824
|
71,522
|
Ground
lease
|
45,954
|
-
|
Insurance
|
58,373
|
32,510
|
Janitorial
|
208,618
|
27,298
|
Management
fees
|
303,482
|
57,309
|
Professional
expenses
|
482,070
|
3,864
|
Real estate and
other taxes
|
357,143
|
50,723
|
Repairs and
maintenance
|
248,900
|
36,373
|
Equity-based
compensation
|
181,031
|
-
|
Utilities
|
267,004
|
35,267
|
Total operating
expenses
|
4,233,478
|
617,350
|
Interest
expense
|
1,990,858
|
256,171
|
Net
loss
|
(1,459,774)
|
(126,044)
|
Less: Net loss
attributable to nonconrolling interest in operating
partnership
|
(244,844)
|
-
|
Net loss attributed
to HC Government Realty Trust, Inc.
|
(1,214,930)
|
(126,044)
|
Preferred
stock dividends
|
(316,095)
|
(104,636)
|
Net loss attributed
to HC Government Realty Trust, Inc. available to common
shareholders
|
$(1,531,025)
|
$(230,680)
|
|
|
|
Basic and diluted
loss per share
|
$(3.03)
|
$(1.44)
|
|
|
|
Basic and diluted
weighted-average common shares outstanding
|
504,486
|
160,000
|
The accompanying notes are an integral part of the consolidated
financial statements
19
HC Government Realty Trust, Inc.
Consolidated Statements of Changes in Stockholders’
Equity
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 11,
2016
|
-
|
$-
|
-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of stock
|
144,500
|
144
|
200,000
|
200
|
3,614,156
|
-
|
-
|
-
|
3,614,500
|
-
|
3,614,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering
costs
|
-
|
-
|
-
|
-
|
-
|
(1,074,485)
|
-
|
-
|
(1,074,485)
|
-
|
(1,074,485)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and
distributions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(104,636)
|
(104,636)
|
-
|
(104,636)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(126,044)
|
-
|
(126,044)
|
-
|
(126,044)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2016
|
144,500
|
144
|
200,000
|
200
|
3,614,156
|
(1,074,485)
|
(126,044)
|
(104,636)
|
2,309,335
|
-
|
2,309,335
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuing
common shares, net of issuances costs
|
-
|
-
|
679,307
|
679
|
6,141,247
|
-
|
-
|
-
|
6,141,926
|
-
|
6,141,926
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of
Holmwood Capital properties for common units
|
-
|
-
|
-
|
-
|
(1,316,740)
|
-
|
-
|
-
|
(1,316,740)
|
7,384,922
|
6,068,182
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant of restricted
stock
|
-
|
-
|
16,000
|
16
|
98,651
|
-
|
-
|
-
|
98,667
|
-
|
98,667
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant of long-term
incentive plan shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
82,364
|
82,364
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and
distributions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(586,327)
|
(586,327)
|
(390,869)
|
(977,196)
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering
costs
|
-
|
-
|
-
|
-
|
-
|
(384,994)
|
-
|
-
|
(384,994)
|
-
|
(384,994)
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of NCI in
operating partnership
|
-
|
-
|
-
|
-
|
411,399
|
-
|
-
|
-
|
411,399
|
(411,399)
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,214,930)
|
-
|
(1,214,930)
|
(244,844)
|
(1,459,774)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2017
|
144,500
|
$144
|
895,307
|
$895
|
$8,948,713
|
$(1,459,479)
|
$(1,340,974)
|
$(690,963)
|
$5,458,336
|
$6,420,174
|
$11,878,510
|
The accompanying notes are an integral part of the consolidated
financial statements
20
HC Government Realty Trust, Inc.
Consolidated Statements of Cash Flows
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
|
For the Year Ended December 31, 2017
|
March 11, 2016 (date of inception) to December 31,
2016
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$(1,459,774)
|
$(126,044)
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation
|
1,299,191
|
244,029
|
Amortization of
acquired lease-up costs
|
178,296
|
23,862
|
Amortization of
in-place leases
|
197,592
|
34,593
|
Amortization of
above/below-market leases
|
24,639
|
(14,158)
|
Amortization of
debt issuance costs
|
97,387
|
19,584
|
Amortization of
long-term incentive plan units
|
82,364
|
-
|
Amortization of
equity-based compensation
|
98,667
|
-
|
Change in assets
and liabilities
|
|
|
Restricted
cash
|
(174,271)
|
(51,656)
|
Rent and other
tenant receivables, net
|
(482,217)
|
(126,590)
|
Prepaid expense and
other assets
|
(130,470)
|
(182,376)
|
Related party
receivables, net
|
525,397
|
(525,397)
|
Accrued interest
payable
|
212,973
|
35,379
|
Accounts payable
and other accrued expenses
|
(90,454)
|
378,684
|
Related party
payable, net
|
461,858
|
-
|
Net cash provided
(used) in operating activities
|
841,178
|
(290,090)
|
|
|
|
Cash flows from investing activities:
|
|
|
Restricted
cash
|
(1,315,366)
|
-
|
Investment property
acquisitions
|
(26,207,142)
|
(11,050,596)
|
Net cash used in
investing activities
|
(27,522,508)
|
(11,050,596)
|
|
|
|
Cash flows from financing activities:
|
|
|
Debt issuance
costs
|
(372,317)
|
(105,072)
|
Dividends
paid
|
(632,354)
|
(104,636)
|
Mortgage principal
payments
|
(3,673,038)
|
(71,445)
|
Mortgage
proceeds
|
24,146,250
|
7,225,000
|
Notes
principal repayments
|
(136,211)
|
(39,828)
|
Offering
costs
|
(384,994)
|
(1,074,485)
|
Proceeds
from notes payable
|
1,204,000
|
124,000
|
Proceeds
from notes payable - related party
|
4,150,000
|
-
|
Proceeds from sale
of common stock, net of issuance costs
|
6,141,926
|
2,000
|
Proceeds from sale
of preferred stock
|
-
|
3,612,500
|
Proceeds from
seller note payable
|
-
|
2,019,789
|
Repayment
of assumed notes payable
|
(1,321,210)
|
-
|
Repayment of seller
note payable
|
(1,992,140)
|
-
|
Net cash provided
from financing activities
|
27,129,912
|
11,587,823
|
|
|
|
Net increase in
cash and cash equivalents
|
448,582
|
247,137
|
Cash and cash
equivalents, beginning of period
|
247,137
|
-
|
Cash and cash
equivalents, end of period
|
$695,719
|
$247,137
|
|
|
|
Supplemental
cash flow information:
|
|
|
Cash paid for
interest
|
$1,645,119
|
$201,208
|
Cash paid for
income taxes
|
$-
|
$-
|
Non
cash investing and financing activities:
|
|
|
Contributed assets
(See Note 3)
|
$30,738,651
|
$-
|
Assumed liabilities
(See Note 3)
|
$24,670,469
|
$-
|
Common units issued
in connection with contribution transaction
|
$6,068,182
|
$-
|
The accompanying notes are an integral part of the consolidated
financial statements
21
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
HC Government Realty Trust, Inc. (the
“REIT”), 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 REIT
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 REIT 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 REIT owns its properties through the
REIT’s subsidiary, HC Government Realty Holdings, L.P., a
Delaware limited partnership (“Operating Partnership”,
and together with the REIT, the “Company”). The
Operating Partnership invests through
wholly-owned special purpose limited liability companies, or
special purpose entities (“SPEs”), 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 Company. As of December 31, 2017, the
financial statements reflect the operations of 13 properties
representing 263,045 rentable square feet located in seven states.
The properties are 100% leased to the government of the United
States of America and based on net operating income, have a
weighted average remaining lease term of 9.5 years if none of the
early termination rights are exercised and 6.2 years if all of the
early termination rights are exercised as of December 31, 2017. 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 owners of HCA, or their respective
affiliates, principally own and control Holmwood Capital, LLC
(“predecessor” or “Holmwood”). Holmwood and
HCA collectively own 46% of the common shares of the Company
outstanding, on a fully diluted basis as of December 31, 2017. The
CEO of HCA and Holmwood serves as the CEO and board member of the
Company. In addition, two other beneficial owners of HCA and
Holmwood serve as board members of the Company. The Company
operates as an UPREIT and has 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 Operating Partnership and 13 SPEs as of December 31, 2017.
Of the SPEs, ten are wholly-owned entities that are consolidated
based upon the Company having a controlling financial interest, and
three SPEs are consolidated variable interest entities based upon
management’s determination that the Operating Partnership has
a variable interest in the entities and is the primary beneficiary.
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.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
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 maintains
separate cash balances at the operating partnership and SPE level.
At December 31, 2017 one account had a $318,919 balance in excess
of FDIC limits, all others were below the 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.
Restricted Cash – Restricted cash consists of
amounts escrowed for future real estate taxes, insurance, and
capital expenditures, as required by certain of the Company’s
mortgage debt agreements.
Purchase Accounting for Acquisitions of Real
Estate Subject to a Lease - In accordance with the Financial
Accounting Standards Board (“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.
Depreciation of an
asset begins when it is available for use and is calculated using
the straight-line method over its estimated useful life. Range of
useful lives for depreciable assets are as follows:
Category
|
|
|
Term
|
Buildings
|
|
|
40 years
|
Building improvements
|
|
|
5 - 40 years
|
Tenant improvements
|
|
|
Shorter of remaining life of the lease or useful life
|
Construction
expenditures for building improvements and tenant improvements are
capitalized and amortized over the terms of each specific
lease.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
Maintenance and
repair expenditures are charged to expense as incurred while
expenditures that extend the useful life of the real estate
investment are capitalized.
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.
Leases - 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 improvements 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.
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 experienced
either a change or an event or circumstance 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. For the year ended December 31, 2017 and
the period from March 11, 2016 to December 31, 2016, the Company
has not recorded any impairment charges.
Organizational, Offering and Related Costs
- Organizational and offering costs of the Company are
presented as a reduction of shareholders’ equity within the
consolidated balance sheets and statements of changes in
stockholders’ equity. Organizational and offering costs
represent expenses incurred in connection with the formation of the
Company and the filing of the Company’s securities offering
pursuant to Regulation A. As of December 31, 2017 and December 31,
2016, organizational and offering costs totaled $1,459,479 and
$1,074,485 respectively.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
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 Receivables net
- Rents and other tenant 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 tenants, there were
no allowances as of December 31, 2017 and December 31, 2016,
respectively.
Income Taxes – The Company will elect to be
taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code and applicable Treasury regulations relating to REIT
qualification for its fiscal year ending December 31, 2017. In
order to maintain this REIT status, the regulations require the
Company to distribute at least 90% of its taxable income
to shareholders and meet certain other asset and income tests, as
well as other requirements. If the Company fails to qualify as a
REIT, it will be subject to tax at regular corporate rates for the
years in which it fails to qualify. If the Company loses its REIT
status it could not elect to be taxed as a REIT
for five years unless the Company’s failure to
qualify was due to reasonable cause and certain other conditions
were satisfied.
Management analyzes its tax filing positions in
the U.S. federal, state and local jurisdictions where it is
required to file income tax returns for all open tax years. If,
based on this analysis, management determines that uncertainties in
tax positions exist, a liability is established along with an
estimate for interest and penalty. Management has
determined that there were no uncertain tax positions, and
accordingly no associated interest and penalties were required to
be accrued at December 31, 2017 and December 31, 2016,
respectively.
Noncontrolling Interest
- Noncontrolling
interest represents the portion of equity in the
Company’s Operating Partnership not attributable to the
Company. The value of the noncontrolling interest of the Operating
Partnership is calculated by multiplying the noncontrolling
interest ownership percentage at the balance sheet date by the
Operating Partnership’s equity. The noncontrolling interest
percentage is calculated by dividing the number of common units not
owned by the Company by the total number of common units
outstanding. The noncontrolling interest ownership percentage will
change as additional common units are issued or as common units are
exchanged for the Company’s common stock. Subsequent
changes in the noncontrolling interest value are recorded to
additional paid-in capital. Accordingly, the value of the
noncontrolling interest is included in the equity section of the
consolidated balance sheets but presented separately from the
Company’s equity.
Debt Issuance Costs – Debt
issuance 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 effective
interest method. As applicable, the unamortized balance of debt
issuance costs is presented under mortgages payable within the
consolidated balance sheet.
Earnings (Loss) Per Share
Basic
earnings (loss) per share is based on the weighted effect of all
common shares issued and outstanding and is calculated by dividing
net income (loss) available to common shareholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income
available to common shareholders by the weighted average number of
common shares used in the basic earnings per share calculation plus
the number of common shares, if any, that would be issued assuming
conversion of all potentially dilutive securities
outstanding.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
The
following securities were not included in the computation of the
Company’s diluted net loss per share as their effect would be
anti-dilutive.
|
|
|
|
|
Potentially dilutive securities outstanding at end of
period:
|
|
|
Convertible
common units
|
1,078,416
|
-
|
Convertible
long-term incentive plan units
|
74,450
|
-
|
Convertible
preferred stock
|
433,500
|
433,500
|
Unvested
restricted stock
|
16,000
|
-
|
Total
potential dilutive securities
|
1,602,366
|
433,500
|
Reclassifications – Certain prior
year amounts have been reclassified for consistency with the
current year presentation. Accordingly, $416,731 has been
reclassified from leasehold intangibles, net to below-market
leases, net, on the consolidated balance sheets as of December 31,
2016, in order to present the below-market lease intangibles
separately from the above-market lease intangibles. This
reclassification has no effect on the reported total
partners’ capital or results of operations as of and for the
period ended December 31, 2016.
Recent Accounting Pronouncements
- In May 2014, the FASB issued Accounting
Standards Update (“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
consolidated 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.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
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.
The
Company has adopted reporting standards and disclosure requirements
as a “smaller reporting company” as defined in
Securities Act rule 405, Exchange Act Rule 12b-2 and Item 10(f) of
Regulation S-K as amended September 13, 2017. This rule provides
scaled disclosure accommodations, the purpose of which is to
provide general regulatory relief to qualifying
entities.
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
On May 26, 2017, Holmwood and the Operating
Partnership closed on a transaction that resulted in Holmwood
contributing its entire membership interest in four SPEs to the
Operating Partnership and assigning to the Operating Partnership
all its rights, title and interest in and to any and all profits,
losses and distributed cash flow for three other SPEs as well as
all of the other benefits and burdens of ownership for federal
income tax purposes (the “Contribution Transaction”).
In exchange for the aforementioned, the Operating Partnership
issued 1,078,416 of its common units (“OP Units”). The
agreed upon value of the transaction between the parties was
$10,784,161. However, the Company recognized value of $6,068,182
with respect to the issuance of the OP Units based upon the
net identifiable assets received. This issuance was recorded as a
non-cash transaction in the consolidated statement of changes in
stockholders equity for the year ended December 31,
2017.
The
Contribution Transaction was accounted for as a commonly controlled
transaction whereby the contributed assets and assumed liabilities
are acquired at their historical book values, rather than at the
agreed upon value. The historical book value of the net
identifiable assets contributed was $6,068,182.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
A
summary of the Company’s contributed assets and assumed
liabilities as of May 26, 2017 is as follows:
Assets
contributed
|
|
Buildings
and improvements, net
|
$28,748,079
|
Intangible
assets, net
|
1,653,771
|
Prepaid
and other assets
|
336,801
|
Total
assets contributed, net
|
$30,738,651
|
|
|
Liabilities
assumed
|
|
Mortgages
payable
|
$22,307,335
|
Notes
payable
|
1,321,210
|
Intangible
liabilities, net
|
704,941
|
Accounts
payable and accrued expenses
|
336,983
|
Total
liabilities assumed
|
$24,670,469
|
|
|
Net
identifiable assets contributed
|
$6,068,182
|
As part
of the Contribution Transaction, the Company and Holmwood 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
the Contribution Transaction.
4.
Variable
Interest Entities
With
respect to the three SPEs where Holmwood assigned to the Operating Partnership all its
rights, title and interest in and to any and all profits, losses
and distributed cash flow, management determined these SPEs to be
variable interest entities (“VIE”) in which the
Operating Partnership has a variable interest and that Holmwood
equity holders lacked the characteristics of a controlling
financial interest. The Company determined in accordance with ASC
Topic 801 “Consolidation” to consolidate these
SPEs.
A
summary of the VIE’s assets and liabilities that are included
within the Company’s consolidated balance sheet at December
31, is as follows:
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
Assets:
|
|
Buildings
and improvements, net
|
$12,007,437
|
Intangible
assets, net
|
530,626
|
Prepaids
and other assets
|
457,096
|
Total
assets
|
$12,995,159
|
|
|
Liabilities:
|
|
Mortages
payable
|
$9,796,972
|
Intangible
liabilities, net
|
168,733
|
Accounts
payable and accrued expenses
|
242,284
|
Total
liabilities
|
$10,207,989
|
|
|
Net
identifiable assets
|
$2,787,170
|
5.
Investment
in Real Estate
The
following is a summary of the Company’s investment in real
estate, net as of December 31, 2017 and December 31, 2016,
respectively:
|
|
|
Land
|
$6,065,137
|
$841,155
|
Buildings
and improvements
|
52,699,106
|
8,420,511
|
Tenant
improvements
|
4,701,613
|
1,418,354
|
|
63,465,856
|
10,680,020
|
Accumulated
depreciation
|
(1,543,221)
|
(244,029)
|
Investments
in real estate, net
|
$61,922,635
|
$10,435,991
|
Depreciation
expense for the year ended December 31, 2017 and 2016 was
$1,299,192 and $244,029, respectively.
The
Company capitalized building improvements in the amount of $49,475
and $0 for the year ended December 31, 2017 and for the period
from March 11, 2016 (date of inception) to December 31, 2016,
respectively.
During
the year ended December 31, 2017 the Company acquired three
properties located in Virginia, Alabama and Texas with rentable
square footage of 53,917, 16,036 and 38,756 respectively. The
acquisitions were financed with a combination of cash and first
mortgage loans. All 3 properties were acquired with leases in place
with the United States of America with remaining firm terms between
4.3 and 9.5 years at the time of acquisition. A summary of the
allocated purchase price for each acquired property, based on
estimated fair values, is as follows:
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
|
|
|
|
|
2017
Acquisitions:
|
|
|
|
|
|
|
|
|
|
Land
|
$1,542,290
|
$549,664
|
$273,588
|
$2,365,542
|
Buildings
and improvements
|
11,115,690
|
2,751,204
|
5,968,136
|
19,835,030
|
Tenant
improvements
|
-
|
504,350
|
1,324,340
|
1,828,690
|
Acquired
In-place leases
|
418,856
|
174,905
|
394,907
|
988,668
|
Acquired
lease-up costs
|
562,611
|
167,501
|
193,487
|
923,599
|
Above
market leases
|
1,078,490
|
649,448
|
118,891
|
1,846,829
|
Tenant
improvement obligation
|
(1,315,366)
|
-
|
-
|
(1,315,366)
|
Acquisition
fees payable
|
(145,000)
|
(47,095)
|
(82,250)
|
(274,345)
|
Capitalized
costs, other
|
-
|
-
|
-
|
8,495
|
|
$13,257,571
|
$4,749,977
|
$8,191,099
|
$26,207,142
|
In
connection with the purchase of the Norfolk property and the
assumption of its related lease agreement, the Company assumed an
aggregate obligation in the amount of $1,315,366 relating to a
build-out allowance and a building specific capital allowance. At
closing, the seller provided the Company a credit of an equal
amount. The credit was received in cash and is held in escrow until
the capital projects begin. As of December 31, 2017, $1,315,366
remained in escrow and is classified as restricted cash on the
consolidated balance sheet.
The
Company during 2017 also capitalized certain costs in the amount of
$8,495 related to its Lakewood Co. property.
During
the period March 11, 2016 to December 31, 2016 the Company acquired
three properties, two in Oklahoma and one in Colorado with rentable
square footage of 15,445, 9,298 and 19,241 respectively. The
acquisitions were financed with a combination of cash and first
mortgage loans. All three properties were acquired with leases in
place with the United States of America with remaining firm terms
between 4.2 and 8.0 years at the time of acquisition. A summary of
the allocated purchase price for each acquired property, based on
estimated fair values, is as follows:
|
|
|
|
|
2016
Acquisitions:
|
|
|
|
|
|
|
|
|
|
Land
|
$259,130
|
$169,458
|
$412,567
|
$841,155
|
Buildings
and improvements
|
3,936,562
|
1,731,446
|
2,752,503
|
8,420,511
|
Tenant
improvements
|
382,588
|
276,317
|
759,449
|
1,418,354
|
Acquired
In-place leases
|
150,020
|
81,066
|
135,081
|
366,167
|
Acquired
lease-up costs
|
102,235
|
39,919
|
125,973
|
268,127
|
Above
market leases
|
184,887
|
-
|
-
|
184,887
|
Below
Market leases
|
-
|
(10,519)
|
(438,086)
|
(448,605)
|
|
$5,015,422
|
$2,287,687
|
$3,747,487
|
$11,050,596
|
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
6.
Leasehold
Intangibles, net
The
following is a summary of the Company’s leasehold intangibles
as of December 31, 2017 and December 31, 2016.
|
|
|
Acquired
in-place leases
|
$2,171,435
|
$366,167
|
Acquired
lease-up costs
|
2,022,123
|
268,127
|
Acquired
above-market leases
|
2,038,492
|
184,887
|
|
6,232,050
|
819,181
|
Accumulated
amortization
|
(596,615)
|
(76,171)
|
Leasehold
intangibles, net
|
$5,635,435
|
$743,010
|
Amortization of
in-place leases, lease-up costs and acquired above market leases
was $520,444 and $76,171 for the year ended December 31, 2017 and
for the period from March 11, 2016 (date of inception) to December
31, 2016, respectively.
Future
amortization of acquired in-place lease value, acquired lease-up
costs and acquired above market leases (collectively
“Intangible Lease Costs”) is as follows:
|
|
|
|
Year Ended
|
|
2018
|
$804,784
|
2019
|
804,784
|
2020
|
794,016
|
2021
|
743,345
|
2022
|
565,945
|
Thereafter
|
1,922,561
|
Total
|
$5,635,435
|
7.
Below-Market
Leases, net
The
Company’s intangible liabilities consist of acquired
below-market leases. The following is a summary of the
Company’s intangible liabilities, as of December 31, 2017 and
2016.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
|
|
|
Acquired
below-market leases
|
$1,153,546
|
$448,605
|
Accumulated
amortization
|
(151,792)
|
(31,874)
|
Below-market
leases, net
|
$1,001,754
|
$416,731
|
Amortization of
below-market leases resulted in an increase in rental revenue of
$119,918 and $31,874 for the year ended December 31, 2017 and for
the period from March 11, 2016 (date of inception) to December 31,
2016, respectively.
The
future amortization of acquired below market leases is as
follows:
|
|
|
|
Year Ended
|
|
2018
|
$163,305
|
2019
|
163,305
|
2020
|
162,356
|
2021
|
144,363
|
2022
|
104,499
|
Thereafter
|
263,926
|
Total
|
$1,001,754
|
The
following table outlines the mortgages payable as of December 31,
2017 and 2016:
|
|
|
|
|
Issuance Date
|
|
|
Maturity
|
|
|
August-2013
|
$10,700,000
|
5.27%
|
August-2023
|
$9,976,722
|
$-
|
April-2015
|
7,600,000
|
3.72%
|
March-2018
|
6,874,169
|
-
|
June-2016
|
9,675,000
|
3.93%
|
July-2019
|
9,343,234
|
7,153,556
|
July-2017
|
10,875,000
|
4.00%
|
August-2022
|
10,789,967
|
-
|
July-2017
|
3,530,000
|
4.00%
|
August-2022
|
3,502,398
|
-
|
September-2017
|
2,750,000
|
4.00%
|
August-2022
|
2,734,311
|
-
|
November-2017
|
6,991,250
|
4.25%
|
June-2019
|
6,991,250
|
-
|
Total
principal
|
|
|
|
50,212,051
|
7,153,556
|
Debt
issuance costs
|
|
|
|
(755,338)
|
(105,072)
|
Accumulated
amortization
|
|
|
|
116,970
|
19,583
|
Mortgage payable net of unamortized debt costs
|
|
|
$49,573,683
|
$7,068,067
|
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
At
December 31, 2017, and December 31, 2016, the Company had
unamortized debt issuance costs of $638,368 and $85,489 net of
$116,970, and $19,583 of accumulated amortization, respectively, in
connection with its various mortgage payables.
Mortgage loan
balances as of December 31, 2017 and 2016 totaled $50,212,051 and
$7,153,556, respectively. Fixed rate loans before unamortized debt
issuance costs totaled $43,337,882 and $7,153,556 as of December
31, 2017 and 2016, respectively. Variable rate loans before
unamortized debt issuance costs totaled $6,874,169 and $0 for the
same respective periods. The loans are payable to various financial
institutions and are collateralized by specific
properties.
The
mortgage loan issued in August 2013 bears interest at a fixed rate
of 5.27% per annum, has debt service payments based on principal
amortization over 30 years, and matures in August 2023. This
mortgage was assumed by the Company in connection with the
Contribution Agreement. Outstanding principal balance as of
December 31, 2017 was $9,976,722.
The
mortgage loan issued in April 2015 has a variable interest rate
equal to the one-month LIBOR rate plus 235 basis points. The
interest rate was 3.72% for the year ended December 31, 2017. This
mortgage was assumed by the Company in connection with the
Contribution Agreement. The loan has required debt service payments
based on principal amortization over 20 years and would have
matured on March 25, 2017 in the event the predecessor had not
exercised its option to extend the loan to March 25, 2018. The
predecessor paid an extension fee in the amount of $11,400. The
outstanding principal balance as of December 31, 2017 was
$6,874,169. On or about March 25, 2018, management secured a 90-day
extension to June 25, 2018 while negotiations were in process to
procure a long-term refinance agreement. As a result of those
negotiations, the Company entered into a loan modification
agreement on April 27, 2018 which, among other things, extended the
maturity date to April 27, 2020 (See Note 14 - Mortgage Payable for
further discussion).
The
mortgage loans issued in June 2016 bear interest at a fixed rate of
3.93% per annum with debt service payments based on principal
amortization over 25 years and mature in July 2019. During the
period from March 11, 2016 (date of inception) to December 31,
2016, there were three separate properties included in this
financing, each with a separate mortgage payable. A fourth property
financed on the same day with the same institution and with the
same terms was acquired as a result of the Contribution
Transaction. The aggregate original issue for the 4 loans
outstanding at December 31, 2017, and the three loans outstanding
at December 31, 2016 was $9,675,000 and $7,225,000, respectively.
The outstanding principal balances were $9,343,234 and $7,153,566
as of December 31, 2017 and 2016, respectively.
The
mortgage loan issued in July 2017, for a newly acquired property in
Norfolk, VA., bears interest at a fixed rate of 4.00% per annum,
has debt service payments based on principal amortization over 25
years, and matures in August 2022. The outstanding principal
balance as of December 31, 2017 was $10,789,967.
The
mortgage loan issued in July 2017, for a newly acquired property in
Montgomery, AL., bears interest at a fixed rate of 4.00% per annum,
has debt service payments based on principal amortization over 25
years, and matures in August 2022. The outstanding principal
balance as of December 31, 2017 was $3,502,398.
The
mortgage loan issued in September 2017, was to refinance a property
acquired as a result of the Contribution Transaction. It bears
interest at a fixed rate of 4.00% per annum, has debt service
payments based on principal amortization over 25 years, and matures
in August 2022. The outstanding principal balance as of December
31, 2017 was $2,734,311.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
The
mortgage loan issued in November 2017, for a newly acquired
property in San Antonio, TX, is an interest only note that bears a
fixed rate of 4.25% per annum and matures in June 2019. The
outstanding principal balance as of December 31, 2017 was
$6,991,250.
The
carrying amount of the Company’s variable rate debt
approximates its fair value as of December 31, 2017.
The
following table outlines the notes payable as of December 31, 2017
and 2016:
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
Related Parties
|
|
|
|
|
|
March-2017
|
3,070,000
|
12.00%
|
March-2018
|
$3,070,000
|
$-
|
December-2017
|
330,000
|
3.25%
|
February-2018
|
330,000
|
-
|
December-2017
|
750,000
|
8.00%
|
June-2018
|
750,000
|
-
|
Total related parties notes payable
|
|
|
|
$4,150,000
|
$-
|
|
|
|
|
|
|
Third parties
|
|
|
|
|
|
June-2016
|
2,019,789
|
7.00%
|
December-2017
|
$-
|
$1,992,140
|
December-2016
|
124,000
|
4.78%
|
September-2017
|
-
|
111,821
|
March-2017
|
330,000
|
12.00%
|
March-2018
|
330,000
|
-
|
November-2017
|
124,000
|
4.98%
|
September-2018
|
99,610
|
-
|
December-2017
|
750,000
|
8.00%
|
June-2018
|
750,000
|
-
|
Total third party notes payable
|
|
|
|
$1,179,610
|
$2,103,961
|
|
|
|
|
|
|
Total related and third party notes
|
|
|
|
$5,329,610
|
$2,103,961
|
March Notes
On
March 31, 2017, the Company borrowed an aggregate amount of
$3,400,000 pursuant to multiple promissory notes payable. The notes
are unsecured, require monthly interest-only payments payable in
arrears at an interest rate of 12% per annum. By agreement with the
holders of these notes, the maturity date of such notes has been
extended to May 1, 2019. The notes are pre-payable without penalty.
Of these notes, $3,070,000 in aggregate principal were loaned by a
director of the Company and by an affiliate of another Company
director, all of whom or which also are affiliates of the Asset
Manager and the Company’s predecessor. As of December 31,
2017, the outstanding principal balance of these notes was
$3,400,000.
December Notes
On
December 11, 2017, our company borrowed $330,000 from an affiliated
entity of our Company’s CEO. The loan accrues interest at
3.25% per annum and both principal and accrued interest is payable
on demand. This note was paid in full on February 26,
2018.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
On
December 11, 2017, the Company borrowed $1,500,000 in aggregate
principal amount pursuant to multiple promissory notes payable to
accredited investors. The notes are unsecured, require monthly
interest-only payments payable in arrears at an interest rate of 8%
per annum. By agreement with the holders of these notes, the
maturity date of such notes has been extended to May 1, 2019. With
respect to these notes, $500,000 in principal amount was loaned by
an affiliate of a director of the Company, the Asset Manager and
the Company’s predecessor, and $250,000 was loaned by a
member of the Company’s predecessor. As of December 31, 2017,
the outstanding principal balance of these notes was
$1,500,000.
Seller-Finance Note
On
June 10, 2016, the Company entered into a note payable agreement in
the amount of $2,019,789 with the seller of the Company’s
2016 acquired properties. The loan bears interest at a fixed annum
rate of 7.0% and payments are based on monthly principal
amortization over 20 years. The note matured on December 10, 2017.
During December 2017, the Company paid the outstanding principal
balance of the note plus accrued interest through the date of
payment. The outstanding principal balance as of December 31, 2017
and 2016 was $0 and $1,992,140, respectively.
Premium Finance Agreement
On
November 30, 2017, the Company entered into a note payable in the
amount of $124,000 to finance certain insurance premiums. The loan
bears interest at a fixed annum rate of 4.98% and requires ten
payments, including principal and interest, of $12,685. As of
December 31, 2017, the outstanding balance was
$99,610.
On
December 7, 2016, the Company entered into a note payable in the
amount of $124,000 to finance certain insurance premiums. The loan
bore interest at a fixed annum rate of 4.78% and required ten
payments, including principal and interest, of $12,673. As of
December 31, 2017 and 2016, the outstanding balance was $0 and
$111,821, respectively.
Receivables/Payables
At
December 31, 2017, the Company had a related party payable of
$461,858 which consisted of a payable to Holmwood of $371,984, a
payable to HCA of $74,874, and a payable to the Company’s CEO
of $15,000. Subsequent to December 31, 2017, the Company has repaid
$267,000 to Holmwood, $74,807 to HCA and $15,000 to the
CEO.
During
the period from March 11, 2016 (date of inception) to December 31,
2016, the Company advanced to Holmwood $410,861 and advanced
$114,536 to the Asset Manager. At December 31, 2016, the unpaid
balance of the advance to Holmwood and the advance to the Asset
Manager was $410,861 and $114,536, respectively.
Management fees
The
Asset Manager provides asset management, property management,
acquisition and leasing services for the Company.
The
Company pays the Asset Manager an asset management fee equal to
1.5% of the stockholders’ equity payable, subject to certain
adjustments, in arrears and on a quarterly basis. The asset
management fee incurred for the year ended December 31, 2017 and
for the period March 11, 2016 to December 31, 2016 was $178,621 and
$35,948, respectively. Accrued asset management fees at December
31, 2017 and 2016 were $74,807 and $0, respectively.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
The
Company pays a property management fee to the Asset Manager with
respect to all properties. The property management fee is payable
on a monthly basis and in arrears. The Company incurred property
management fees of $124,861 and $21,361 for the year ended December
31, 2017 and for the period from March 11, 2016 (date of inception)
to December 31, 2016, respectively.
The
Company owes the Asset Manager 1% of the acquisition cost
(“Acquisition Fee”) of each real estate investment made
on behalf of the Company for services with respect to the
identification of an investment, arrangement of the purchase, and
coordination of closing. The Acquisition Fee shall be paid in
common stock or other equity securities of the Company. The
Acquisition Fee shall be accrued and unpaid until the earlier of
the date on which the Company’s common stock is initially
listed with a national securities exchange or on March 31, 2020.
Unpaid acquisition fees as of December 31, 2017 and 2016 were
$274,345 and $0, respectively.
The
Company owes the Asset Manager a leasing fee for services in
connection with leasing the Company’s real estate investments
equal to 2.0% of all gross rent for any new lease or lease renewal
entered into, excluding reimbursements by the tenant for operating
expenses and taxes and similar pass-through obligations paid by the
tenant. There were no leasing fees paid during the year ended
December 31, 2017 nor during the period from March 11, 2016 (date
of inception) to December 31, 2016. There were no leasing fees
accrued at December 31, 2017 and 2016.
Notes payable
During
the year ended December 31, 2017, the Company entered into various
promissory notes with related parties (See Note 9 for further
discussion). As of December 31, 2017, the unpaid principal balance
of related party notes payable was $4,150,000. There were no
related party notes payable issued during the period from March 11,
2016 (date of inception) to December 31, 2016 nor were there any
outstanding as of December 31, 2016.
Our
rental properties are subject to generally non-cancelable operating
leases generating future minimum contractual rent payments due from
tenants. Occupancy of the operating properties was at 98.1% for the
year ended December 31, 2017 and for the period from March 11, 2016
(date of inception) to December 31, 2016. Lease terms range from 3
to 12 years as of December 31, 2017. The future minimum rents for
existing leases as of December 31, 2017 are as
follows:
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
|
|
|
|
|
|
2018
|
$7,580,715
|
2019
|
7,580,715
|
2020
|
7,404,384
|
2021
|
6,942,197
|
2022
|
5,097,601
|
Thereafter
|
16,559,369
|
Total
|
$51,164,980
|
The
properties are 100% leased to the United States of America
and administered by either the GSA or
occupying agency. At December 31, 2017 the weighted average
firm lease term is 6.2 years if GSA elects its early termination
right and the total remaining weighted average contractual lease
term including renewal options is 9.5 years. Lease maturities range
from 2020 to 2029.
Preferred Stock
During
the period March 11, 2016 (date of inception) to December 31, 2016,
the Company issued 144,500 shares of its 7.00% Series A Cumulative
Convertible Preferred Stock (“the Series A Preferred
Stock”) to various investors in exchange for a total of
$3,612,500, or $25 per share. The Series A Preferred Stock is
convertible, at shareholders’ request, on the earlier of (1)
the Company’s listing on a national securities exchange or
(2) on March 31, 2020. The shares are convertible into common
shares at a 3:1 ratio.
Common Stock
On
March 14, 2016, the Company issued 50,000 shares (200,000 shares,
collectively) of common stock at a price of $0.01 per 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.
On
November 7, 2016, the Company’s offering statement (the
“Offering”) filed pursuant to Regulation A was
qualified by the SEC. The Offering’s minimum and maximum
offering amounts are $3,000,000 and $30,000,000, respectively, at
an offering price of $10 per share. The initial purchase of common
stock with respect to the Offering occurred on May 18, 2017. During
the year ended December 31, 2017, the Company sold 679,307 shares
in connection with the Offering for net proceeds of
$6,141,926.
Restricted Common Stock Issuance
Compensation for
each independent board member includes an initial share grant of
4,000 restricted common shares with a one-year vesting term. On May
18, 2017, the Company issued 16,000 shares to its four independent
board members, collectively. The shares, valued at $10 share, pay
dividends on the number of shares issued without regard to the
number of shares vested. For the year ended December 31, 2017, the
Company recognized $98,667 related to equity-based
compensation.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
OP Units Issued
On May
26, 2017, in connection with the closing on the Contribution
Transaction, the Operating Partnership issued 1,078,416 OP Units to
the Company’s predecessor. The recorded value of the OP Units
was based upon the book value of the net identifiable assets
contributed which was $6,068,182. After one year, the OP Units are
exchangeable into the REIT’s common stock at a ratio of 1:1
or redeemable for cash, at the REIT’s
discretion.
Long-Term Incentive Plan Shares
During
the year ended December 31, 2017, the Operating Partnership issued
the Asset Manager 74,450 long-term incentive plan shares
(“LTIPs”) that vest over five-years. Each LTIP is
convertible into OP Units at 1:1 which can then be further
exchanged into the REIT’s common stock at 1:1. Pursuant to an
agreement, the shares are issued concurrent with each sale of the
REIT’s common stock. The vesting will accelerate if the
Company terminates its management agreement with the Asset Manager.
The LTIPs result in the Asset Manager consistently and beneficially
owning 3% of the REIT’s issued and outstanding shares on a
fully diluted basis. For the year ended December 31, 2017, the
Company recognized $82,364 of equity-based compensation
expense.
Dividends and Distributions
During
the year ended December 31, 2017 and the period from March 11, 2016
(date of inception) to December 31, 2016, the REIT declared
dividends on its Series A Preferred Stock of $316,095 and $104,636,
respectively. As of December 31, 2017 and 2016, accrued, unpaid
preferred stock dividends were $63,219 and $0,
respectively.
During
the year ended December 31, 2017 and the period from March 11, 2016
to December 31, 2016, the REIT declared dividends on its common
stock of $270,232 and $0, respectively. As of December 31, 2017 and
2016, accrued, unpaid common stock dividends were $123,104 and $0,
respectively.
During
the year ended December 31, 2017, the Operating Partnership
declared distributions of $390,869 with respect to its outstanding
common units and LTIPs. As of December 31, 2017, accrued, unpaid
distributions were $158,519.
13.
Commitments
and Contingencies
In
connection with the contributed properties in 2017, the property,
located in Port Canaveral, Florida, was purchased subject to ground
leases. 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 $43,903 during the year ended December 31, 2017. The
future minimum rent payments for the ground lease as of December
31, 2017 are as follows:
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
|
|
|
|
Year
Ended
|
|
2018*
|
$73,568
|
2019
|
73,568
|
2020
|
73,568
|
2021
|
73,568
|
2022
|
73,568
|
Thereafter
|
1,692,057
|
Total
|
$2,059,897
|
The
Company can be party to or otherwise be involved in legal
proceedings arising in the normal and ordinary course of business.
We are not aware of any proceeding, threatened or pending, against
us which, if determined adversely, would have a material effect on
our business, results of operations, cash flows or financial
position.
The
Company evaluates events that have occurred after the balance sheet
date but before the financial statements are issued. Based upon the
evaluation, the Company did not identify any recognized or
non-recognized subsequent events that would have required
adjustment or disclosure in the consolidated financial statements,
other than listed below.
Dividends and Distributions
On
January 1, 2018, the Company and Operating Partnership paid the
accrued dividends and distributions of $186,323 and $158,519,
respectively.
On
March 28, 2018, the Company declared a dividend on its Series A
Preferred Stock and common stock of $0.4375 and $0.1375 per share
for shareholders of record on March 31, 2018. The aggregate
dividend of $200,364 was paid on April 5, 2018.
On
March 28, 2018, the Operating Partnership declared an aggregate
distribution of $158,954 with respect to its OP Units and LTIPs,
representing $0.1375 per share for holders of record on March 31,
2018.
Securities Issuances
Through
April 27, 2018 the REIT had sold and issued 180,284 additional
shares of common stock under its Offering for $1,690,488, net of
issuance costs during fiscal 2018.
Through
April 27, 2018, the Operating Partnership had issued 5,576 LTIPs to
the Asset Manager in connection with the above common stock sold in
fiscal 2018. The value of the LTIPs issued were estimated at
$55,760 and vest over 5 years.
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017 and from
March 11, 2016 (date of inception) to December 31,
2016
Notes Payable
On
February 26, 2018, the Company satisfied the note payable to an
affiliated entity of the Company’s Chief Executive Officer in
the amount of $332,263, which included accrued interest of
$2,263.
Effective April 16,
2018, the Company and investors agreed to extend the maturity date
of the $3,400,000 notes payable issued March 31, 2017 to May 1,
2019.
Effective April 16,
2018, the Company and investors agreed to extend the maturity date
of the $1,500,000 notes payable issued December 11, 2017 to May 1,
2019.
Mortgage Payable
On
April 17, 2018, the Company received a commitment from a lending
institution to modify the variable rate mortgage that was
previously extended to June 25, 2018. The terms of the commitment
specify interest is based on the one-month LIBOR plus 235 basis
points, principal payments are based on a 17 year amortization
period and matures two years from date of closing. The financing
contains other terms and conditions customarily associated with
mortgage lending. On April 27, 2018, the Company entered into a
loan modification agreement substantially upon the terms of the
commitment.
Future Acquisitions
The
Company has entered into separate purchase and sale agreements to
acquire three properties currently leased to the United States of
America for the combined price of $21,655,000, excluding
acquisition costs. The acquisitions will be financed by senior debt
financing and equity. The Company has acquisition deposits
outstanding in the amount of $150,000. The properties are expected
to close between late April, 2018 and late July
2018.
Report of Independent Registered Public Accounting
Firm
To the Management of
Holmwood Capital, LLC
Sarasota, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Holmwood Capital, LLC and subsidiaries (collectively,
“Holmwood Capital) as of May 26, 2017 and December 31, 2016,
the related consolidated statements of operations, changes in
Partners’ capital, and cash flows for the period from January
1, 2017 to May 26, 2017 and the year ended December 31, 2016, and
the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all
material respects, the financial position of Holmwood Capital as of
May 26, 2017 and December 31, 2016, and the results of their
operations and their cash flows for the period from January 1, 2017
to May 26, 2017 and the year ended Decemer 31, 2016 in conformity
with accounting principles generally accepted in the United States
of America.
Basis for Opinion
These consolidated financial statements are the responsibility of
Holmwood Capital's management. Our responsibility is to express an
opinion on Holmwood Capital's consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB and in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/
Cherry Bekart LLP
We have served as Holmwood Capital’s auditor since
2016.
Richmond, Virginia
April 27, 2018
Holmwood Capital, LLC
Consolidated Balance Sheets
May 26, 2017 and December 31, 2016
|
|
|
ASSETS
|
|
|
Investment
in real estate, net
|
$28,748,106
|
$29,107,886
|
Cash
and cash equivalents
|
186,005
|
258,840
|
Restricted
cash
|
134,865
|
239,221
|
Rent
and other tenant receivables, net
|
166,264
|
336,464
|
Leasehold
intangibles, net
|
1,653,770
|
1,766,835
|
Prepaids
and other assets
|
75,944
|
52,579
|
Total Assets
|
$30,964,954
|
$31,761,825
|
|
|
|
LIABILITIES
|
|
|
Mortgages
payable, net of unamortized issuance costs
|
$22,307,340
|
$22,455,942
|
Notes
payable, net of unamortized issuance costs
|
1,120,718
|
1,387,901
|
Accrued
interest payable
|
91,616
|
94,942
|
Accounts
payable
|
127,651
|
160,596
|
Accrued
expenses
|
254,128
|
245,205
|
Below-market
leases, net
|
704,941
|
746,865
|
Related
party payable
|
121,848
|
410,861
|
Total Liabilities
|
24,728,242
|
25,502,312
|
|
|
|
PARTNERS' CAPITAL
|
|
|
Partners'
contributions, net
|
6,804,872
|
6,804,872
|
Accumulated
deficit
|
(568,160)
|
(545,359)
|
Total Partners' Capital
|
6,236,712
|
6,259,513
|
Total Liabilities and Partners' Capital
|
$30,964,954
|
$31,761,825
|
The accompanying notes are an integral part of the consolidated
financial statements
42
Holmwood Capital, LLC
Consolidated Statements of Operations
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
|
Period
from January 1, 2017 to May 26, 2017
|
For
the Year Ended December 31, 2016
|
Revenues
|
|
|
Rental
revenues
|
$1,430,291
|
$3,564,278
|
Real estate tax
reimbursments and other revenues
|
3,146
|
146,890
|
Total
revenues
|
1,433,437
|
3,711,168
|
|
|
|
Operating
expenses
|
|
|
Depreciation and
amortization
|
478,377
|
1,228,064
|
General and
administrative
|
9,379
|
15,731
|
Ground
lease
|
27,924
|
71,094
|
Insurance
|
22,530
|
54,149
|
Janitorial
|
67,144
|
169,172
|
Management
fees
|
79,005
|
192,652
|
Professional
expenses
|
16,392
|
54,125
|
Real estate and
other taxes
|
125,279
|
237,959
|
Repairs and
maintenance
|
88,502
|
210,693
|
Utilities
|
67,235
|
161,048
|
Total operating
expenses
|
981,767
|
2,394,687
|
|
|
|
Other
expense
|
|
|
Interest
expense
|
474,471
|
1,224,717
|
|
|
|
Net (loss) income
|
$(22,801)
|
$91,764
|
The accompanying notes are an integral part of the consolidated
financial statements
43
Holmwood Capital, LLC
Consolidated Statements of Changes in Partners’
Capital
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2015
|
$7,179,761
|
$(637,123)
|
$6,542,638
|
|
|
|
|
Distributions
|
(374,889)
|
-
|
(374,889)
|
|
|
|
|
Net
income
|
-
|
91,764
|
91,764
|
Balance,
December 31, 2016
|
6,804,872
|
(545,359)
|
6,259,513
|
|
|
|
|
Distributions
|
-
|
-
|
-
|
|
|
|
|
Net
loss
|
-
|
(22,801)
|
(22,801)
|
Balance,
May 26, 2017
|
$6,804,872
|
$(568,160)
|
$6,236,712
|
The accompanying notes are an integral part of the consolidated
financial statements
44
Holmwood Capital, LLC
Consolidated Statements of Cash Flows
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
|
Period from January 1, 2017 to May 26, 2017
|
For the Year Ended December 31, 2016
|
Cash
flows from operating activities:
|
|
|
Net (loss)
income
|
$(22,801)
|
$91,764
|
Adjustments to
reconcile net (loss) income to net cash provided by
|
|
|
operating
activities:
|
|
|
Depreciation
|
365,850
|
946,751
|
Amortization of
acquired lease-up costs
|
54,495
|
136,234
|
Amortization of
in-place leases
|
58,032
|
145,079
|
Amortization of
above/below-market leases
|
(41,386)
|
(103,429)
|
Amortization of
debt costs
|
35,980
|
138,095
|
Change in assets
and liabilities
|
|
|
Restricted
cash
|
104,356
|
(116,370)
|
Rent and other
tenant receivables, net
|
170,200
|
(90,837)
|
Prepaid expense and
other assets
|
(23,365)
|
113,770
|
Accounts payable
and accrued expenses
|
(24,022)
|
16,297
|
Accrued interest
payable
|
(3,326)
|
13,664
|
Related party
payable
|
(289,013)
|
410,861
|
Net cash provided
by operating activities
|
385,000
|
1,701,879
|
|
|
|
Cash
flows from investing activities:
|
|
|
Improvements to
investment properties
|
(6,070)
|
(13,745)
|
Net cash provided
(used) in investing activities
|
(6,070)
|
(13,745)
|
|
|
|
Cash
flows from financing activities:
|
|
|
Distributions to
partners
|
-
|
(374,889)
|
Notes payable
proceeds
|
-
|
1,000,000
|
Mortgage
proceeds
|
-
|
2,450,000
|
Mortgage principal
payments
|
(184,582)
|
(4,198,676)
|
Notes payable
principal repayments
|
(267,183)
|
(465,036)
|
Debt issuance
costs
|
-
|
(132,793)
|
Net cash used in
financing activities
|
(451,765)
|
(1,721,394)
|
|
|
|
Net decrease in
cash and cash equivalents
|
(72,835)
|
(33,260)
|
Cash and cash
equivalents, beginning of year
|
258,840
|
292,100
|
Cash and cash
equivalents, end of period for May 26, 2017 and end of year
2016
|
$186,005
|
$258,840
|
|
|
|
Supplemental
cash flow information:
|
|
|
Interest
paid
|
$430,417
|
$1,084,704
|
The accompanying notes are an integral part of the consolidated
financial statements
45
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
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.
There
were seven (7) SPEs as of May 26, 2017 representing 110,352
rentable square feet located in five states. The properties are
100% leased to the United States of America. Since 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.
On
May 26, 2017, Holmwood and HC Government Realty Holdings, LP
(“HC Gov Realty”) closed on a transaction (the
“Contribution Transaction”) whereby all of the
membership interests in four of the Company’s subsidiaries
were contributed to HC Gov Realty in exchange for common units
(“OP Units”). Additionally, in exchange for all the
profits, losses, and distributed cash flow and all of the other
benefits and burdens of ownership for federal income tax purposes
for three of the Company’s SPEs, HC Gov Realty issued OP
units. `The Contribution Transaction resulted in the contribution
of all of Holmwood’s property-related operations, assets and
liabilities to HC Gov Realty.
Holmwood’s
consolidated balance sheet as of May 26, 2017 and the related
consolidated statement of operations, consolidated statement of
changes in partners’ capital and consolidated statements of
cash flows for the period from January 1, 2017 to May 26, 2017 have
been presented immediately prior to the effects of the Contribution
Transaction.
3.
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.
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
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.
Restricted Cash – Restricted cash consists of
amounts escrowed for future real estate taxes, insurance and
repairs, as required by certain of the Company’s mortgage
debt agreements.
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.
Depreciation of an
asset begins when it is available for use and is calculated using
the straight-line method over its estimated useful life. Range of
useful lives for depreciable assets are as follows:
Category
|
|
|
Term
|
Buildings
|
|
|
40 years
|
Building improvements
|
|
|
5 - 40 years
|
Tenant improvements
|
|
|
Shorter of remaining life of the lease or useful life
|
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
Construction
expenditures for building improvements and tenant improvements are
capitalized and amortized over the terms of each specific
lease.
Maintenance and
repair expenditures are charged to expense as incurred while
expenditures that extend the useful life of the real estate
investment are capitalized.
Leases - 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 rents 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
intangibles are amortized on the straight-line method over the
terms of their respective leases. When scheduled rents 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.
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. For the period from January
1, 2017 to May 26, 2017 and for the year ended December 31, 2016,
the Company has not recorded any impairment charges.
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 $5,997 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.
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
Debt Issuance Costs – Debt
issuance costs incurred in connection with Holmwood’s
mortgages payable and note payable were deferred and amortized as
interest expense over the term of the respective loan agreement
using the effective interest method. As applicable, the unamortized
balance of debt issuance costs is presented within in mortgages
payable and notes payable within the consolidated balance
sheets.
Reclassifications – Certain prior
year amounts have been reclassified for consistency with the
current year presentation. Accordingly, $746,865 has been
reclassified from leasehold intangibles, net to below-market
leases, net, on the consolidated balance sheets as of December 31,
2016, in order to present the below-market lease intangibles
separately from the above-market lease intangibles. This
reclassification has no effect on the reported total
partners’ capital or results of operations as of and for the
year ended December 31, 2016.
Recent Accounting Pronouncements
- In May 2014, the FASB issued Accounting Standards
Update (“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 has determined that there will be no impact in
adopting the new standard on its consolidated financial statements
since there will be no future revenue after May 26,
2017.
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 consolidated 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 consolidated
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 consolidated 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.
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
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.
4.
Investment
in Real Estate, net
The
following is a summary of the Company’s investment in real
estate as of May 26, 2017 and December 31, 2016.
|
|
|
Land,
buidings and improvements
|
$29,555,372
|
$29,549,302
|
Tenant
improvements
|
2,278,862
|
2,278,862
|
|
31,834,234
|
31,828,164
|
Accumulated
depreciation
|
(3,086,128)
|
(2,720,278)
|
Investments
in real estate
|
$28,748,106
|
$29,107,886
|
Depreciation
expense for the period from January 1, 2017 to May 26, 2017 and for
the year ended December 31, 2016 was $365,850 and $946,751,
respectively.
The
Company capitalized building improvements in the amount of $6,070
and $13,745 for the period from January 1, 2017 to May 26, 2017 and
for the year ended December 31, 2016, respectively.
5.
Leasehold
Intangibles, net
The
following is a summary of the Company’s leasehold
intangibles, as of May 26, 2017 and December 31, 2016.
|
|
|
Acquired
in-place leases
|
$1,320,305
|
$1,320,305
|
|
1,285,251
|
1,285,251
|
Acqiured
above market leases
|
12,642
|
12,642
|
Accumulated
amortization
|
(964,428)
|
(851,363)
|
Leasehold
intangibles, net
|
$1,653,770
|
$1,766,835
|
Amortization of
in-place leases, lease-up costs and acquired above market leases
was $113,065 and $281,313 for the period from January 1, 2017 to
May 26, 2017 and for the year ended December 31, 2016,
respectively.
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
Future
amortization of acquired in-place lease value and acquired lease-up
costs (collectively “Intangible Lease Costs”) is as
follows:
|
|
|
|
|
|
2017*
|
$169,091
|
2018
|
282,156
|
2019
|
282,156
|
2020
|
282,156
|
2021
|
257,219
|
Thereafter
|
380,992
|
Total
|
$1,653,770
|
|
|
* Represents period from May 27, 2017 to December 31,
2017.
6.
Below-Market
Leases, net
The following is a summary of the
Company’s acquired below-market leases as of May 26, 2017 and
December 31, 2016.
|
|
|
Acquired
below-market leases
|
$1,070,051
|
$1,070,051
|
Accumulated
amortization
|
(365,110)
|
(323,186)
|
Below-market
leases, net
|
$704,941
|
$746,865
|
Amortization of
below-market leases resulted in an increase in rental revenue of
$41,924 for the period from January 1, 2017 to May 26, 2017 and
$103,429 for the year ended December 31, 2016,
respectively.
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
The
future amortization of acquired below-market leases is as
follows:
|
|
|
|
|
|
2017*
|
$(62,888)
|
2018
|
(104,812)
|
2019
|
(104,812)
|
2020
|
(104,812)
|
2021
|
(92,223)
|
Thereafter
|
(235,394)
|
Total
|
$(704,941)
|
|
|
* Represents period from May 27, 2017 to December 31,
2017.
7.
Mortgages
and Notes Payable
Mortgages Payable
The
following table outlines the mortgages payable as of May 26, 2017
and as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
Maturity
|
|
|
July
2013
|
$10,700,000
|
5.27%
|
August
2023
|
$10,082,759
|
$10,159,209
|
April
2015
|
7,600,000
|
3.84%
|
March
2018
|
7,031,647
|
7,115,152
|
December
2015
|
3,080,000
|
4.00%
|
June
2017
|
3,069,733
|
3,069,733
|
June
2016
|
2,450,000
|
3.93%
|
June
2019
|
2,401,146
|
2,425,773
|
Total
principal
|
|
|
|
22,585,285
|
22,769,867
|
Debt
issuance costs
|
|
|
|
(540,812)
|
(540,812)
|
Accumulated
amortization
|
|
|
|
262,867
|
226,887
|
Mortgage payable net of unamortized debt costs
|
|
|
$22,307,340
|
$22,455,942
|
At May
26, 2017 and December 31, 2016, the Company had unamortized debt
issuance costs of $277,945, and $313,925 net of $262,867, and
$226,887 of accumulated amortization, respectively in connection
with its various mortgage payables.
Gross
mortgage loan balances as of May 26, 2017 and as of December 31,
2016 totaled $22,585,285 and $22,769,867, respectively. Of these
amounts, fixed rate loans before unamortized debt issuance costs
totaled $12,483,905 and $12,584,982 as of May 26, 2017 and December
31, 2016, respectively. The remaining amounts comprise variable
rate loans before unamortized debt issuance costs totaled
$10,101,380 and $10,184,885 for the same respective periods. The
loans are payable to various financial institutions and are
collateralized by specific properties.
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
The
mortgage loan issued in July 2013 bears interest at a fixed annum
rate of 5.27%, has debt service payments based on principal
amortization over 30 years, and matures in August 2023. The
outstanding principal balance as of May 26, 2017 and December 31,
2016 was $10,082,759 and $10,159,209, respectively.
The
mortgage loan issued in April 2015 has a variable interest rate
equal to the one-month LIBOR rate plus 235 basis points. For the
period from January 1, 2017 to May 26, 2017, the average interest
rate was 3.84% and for the year ended December 31, 2016 the average
interest rate was 2.89%. The loan has required debt service
payments based on principal amortization over 20 years and would
have matured on March 27, 2017 in the event the Company had not
exercised its option to extend the loan for one year. The Company
paid an extension fee in the amount of $11,400. The outstanding
principal balance as of May 26, 2017 and December 31, 2016 was
$7,031,647 and $7,115,152, respectively.
The
mortgage loan issued in December 2015 bears a variable interest
rate of Prime or 4%, whichever is greater, and matures in June
2017. The outstanding principal balance as of May 26, 2017 and
December 31, 2016 was $3,069,733.
On June
10, 2016, the Company refinanced its $3.7 million mortgage payable.
The $3.7 million loan was replaced with a new mortgage loan. The
new mortgage loan bears interest as a fixed annum rate of 3.93%,
has debt service payments based on principal amortization over 25
years, and matures in June 2019. The outstanding principal balance
as of May 26, 2017 and December 31, 2016 was $2,401,146 and
$2,425,773, respectively.
The
carrying amount of the Company’s variable rate debt
approximates its fair value as of May 26, and as of December 31,
2016.
Notes Payable
The
following table summarizes the notes payable as of May 26, 2017 and
as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
Maturity Date
|
|
|
July
2013
|
$1,500,000
|
7.25%
|
August
2018
|
$428,864
|
$563,299
|
June
2016
|
338,091
|
5.50%
|
June
2019
|
338,091
|
338,091
|
June
2016
|
661,909
|
5.50%
|
June
2018
|
367,199
|
502,602
|
Total
outstanding principal
|
|
|
|
1,134,154
|
1,403,992
|
Debt
issuance costs
|
|
|
|
(19,750)
|
(19,750)
|
Accumulated
amortization
|
|
|
|
6,314
|
3,659
|
Notes payable net of unamortized debt costs
|
|
|
$1,120,718
|
$1,387,901
|
Notes
payable as of May 26, 2017 and December 31, 2016 were $1,134,154
and $1,403,992, respectively. The loans have fixed 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 year ended December 31, 2016 was 6.16% and 6.20%,
respectively.
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
On June 10, 2016, the Company received $1 million
in loan proceeds from a financial institution. The loan was
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. At May 26,
2017, the Company had unamortized debt issuance costs relating to
these loans of $13,436, net of $6,314 of accumulated
amortization.
In
July, 2013, the Company 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 mortgage loan. The promissory note’s outstanding
balance as of May 26, 2017 and December 31, 2016 was $428,864 and
$563,299, respectively. The promissory note 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 promissory
note is secured by the Company’s membership interests in
three of its properties. There were no debt issuance costs in
connection with this promissory note.
Future Principal Payments
The
following is a schedule of the future principal payments on the
Company’s mortgages and notes payable at May 26,
2017.
|
|
|
Year Ended
|
|
|
2017
|
$3,391,427
|
$522,409
|
2018
|
7,113,452
|
439,986
|
2019
|
2,512,561
|
171,759
|
2020
|
221,910
|
-
|
2021
|
233,879
|
-
|
Thereafter
|
9,112,056
|
-
|
|
$22,585,285
|
$1,134,154
|
* Represents period from May 27, 2017 to December 31,
2017.
HC
Government Realty has advanced Holmwood funds to meet certain
equity requirements needed for a property refinancing and to fund
other working capital needs. As of May 26, 2017 and December, 31,
2016, the net funds outstanding totaled $121,848 and $410,861.
During the period from January 1, 2017 and May 26, 2017, the
Company made payments totaling $289,013.
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 $41,924 during the period from January 1, 2017
to May 26, 2017 and $100,706 for the year ended December 31,
2016.
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 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 $37,081 during
the period from January 1, 2017 and May 26, 2017 and $91,946 for
the year ended December 31, 2016.
9.
Contributions
and Distributions
No
contributions were made by the Company’s owners during the
period from January 1, 2017 to May 26, 2017 and for the year ended
December 31, 2016.
The
Company made distributions during the period from January 1, 2017
to May 26, 2017 and for the year ended December 31, 2016 in the
aggregate of $0 and $374,889, respectively.
Our
rental properties are subject to generally non-cancelable operating
leases generating future minimum contractual rent payments due from
tenants. Occupancy of the operating properties was at 100% at May
26, 2017 and lease terms ranged from 3 to 12 years. As of May 26,
2017, the future minimum rents for existing leases are as
follows:
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
|
|
|
|
|
|
2017
|
$2,079,504
|
2018
|
3,465,839
|
2019
|
3,465,839
|
2020
|
3,465,839
|
2021
|
3,111,833
|
Thereafter
|
5,203,403
|
Total
|
$20,792,257
|
|
|
* Represents period from May 27, 2017 to December 31,
2017
On May
26, 2017, all operating leases were transferred to HC Gov Realty in
connection with the Contribution Transaction.
11.
Commitments
and Contingencies
In
connection with a property acquisition in 2015, the property,
located in Port Canaveral, Florida, 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 $27,923 during the period from January 1, 2017 to May
26, 2017 and $71,094 for the year ended December 31,
2016.
The
Company can be party to or otherwise be involved in legal
proceedings arising in the normal and ordinary course of business.
We are not aware of any proceeding, threatened or pending, against
us which, if determined adversely, would have a material effect on
our business, results of operations, cash flows or financial
position.
Mortgage Payable
The
mortgages entered into in July 2013, June 2016 and April 2015 were
assumed by HC Gov Realty in connection with the Contribution
Transaction.
The
mortgage loan issued in December 2015 was assumed by HC Gov Realty
in connection with the Contribution Transaction and subsequently
refinanced with another bank.
The
mortgage loan issued in April 2015 with an original maturity date
of March 25, 2018, was assumed by HC Gov Realty in connection with
the Contribution Transaction and was subsequently extended to June
25, 2018. In addition, on April 17, 2018, HC Gov Realty received a
loan commitment from a lending institution to refinance this
mortgage loan. The terms of the commitment specify interest is
based on the 1-month LIBOR plus 235 basis points, principal
payments are based on a 17 year amortization period and matures 2
years from date of closing. The financing contains other terms and
conditions customarily associated with mortgage lending. The HC Gov
Realty refinancing is expected to close on or before April 27,
2018.
Holmwood Capital, LLC
Notes to the Consolidated Financial Statements
For the period from January 1, 2017 to May 26, 2017 and for the
year ended December 31, 2016
Notes Payable
Concurrent
with the May 26, 2017 closing of the Contribution Transaction all
outstanding notes payable were assumed by HC Gov Realty and paid
off.
Other
Since
May 26, 2017, the Company has received $366,628 of distributions
with respect to the OP Units received as part of the Contribution
Transaction.
The
Company evaluated subsequent events through April 26, 2018, the
date the consolidated financial statements were available to be
issued. The Company concluded no additional material events
subsequent to May 26, 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 8. Exhibits
The following exhibits are filed as part of this annual report on
Form 1-K:
Exhibit
Number
|
|
Description
|
|
|
|
|
|
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
|
|
|
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
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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
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Form of
Subscription Agreement, incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 1-U filed on December
21, 2017
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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First
Amendment to 2016 HC Government Realty Trust, Inc. Equity Incentive
Plan
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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
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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
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Assignment of Escrow Agreement by and among HC Government Realty
Trust, Inc., Branch Banking & Trust Company, Boustead
Securities, LLC and SANDLAPPER Securities, LLC, dated as of
December 20, 2017, incorporated by reference to Exhibit 8.1
to the Company’s Current Report on Form 1-U filed on December
21, 2017.
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SIGNATURES
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.
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HC GOVERNMENT REALTY TRUST, INC.
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By:
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/s/
Edwin
M. Stanton
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Edwin
M. Stanton
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Director
and Chief Executive Officer
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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
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Title
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Date
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/s/ Edwin M.
Staton
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Director
and Chief Executive Officer
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April
27, 2018
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Edwin
M. Stanton
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(principal
executive officer)
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/s/ Jason D.
Post
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Vice
President of Finance and Corporate Controller
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April
27, 2018
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Jason
D. Post
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(principal
accounting officer)
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/s/ Philip
Kurlander
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Director
and Treasurer
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April
27, 2018
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Philip
Kurlander
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(principal
financial officer)
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/s/ Rober R.
Kaplan
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Director
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April
27, 2018
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Robert
R. Kaplan
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/s/ Scott
Musil
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Director
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April
27, 2018
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Scott
Musil
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/s/ William Robert
Fields
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Director
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April
27, 2018
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William
Robert Fields
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