UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
SEMI-ANNUAL REPORT
PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933
For the six-month
period ended June 30, 2018
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
(Address
of principal executive offices)
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20036
(Zip
Code)
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(941) 955-7900
Issuer’s
telephone number, including area code
Common Shares
(Title of each class of securities issued pursuant to Regulation
A)
In this semi-annual report,
references to the
“Company,” “we,” “us” or
“our” or similar terms refer to HC Government
Realty Trust, Inc. a Maryland
corporation, together with its consolidated subsidiaries, including
HC Government Realty Holdings, L.P., a Delaware limited
partnership, which we refer to as our Operating Partnership.
We refer to
Holmwood Capital, LLC, a Delaware limited liability company, as
Holmwood or our predecessor, and Holmwood Capital Advisors, LLC, a
Delaware limited liability company, as our Manager. As used in this
Semi-Annual Report, an affiliate of,
or person affiliated with, a specified person,
is a person that directly, or indirectly through one or
more intermediaries, controls or is controlled by, or is under
common control with,
the person specified.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We
make statements in this semi-annual report on Form 1-SA that are
forward-looking statements within the meaning of the federal
securities laws. The words “believe,”
“estimate,” “expect,”
“anticipate,” “intend,” “plan,”
“seek,” “may,” and similar expressions or
statements regarding future periods are intended to identify
forward-looking statements. These forward-looking statements
involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from any
predictions of future results, performance or achievements that we
express or imply in this annual report or in the information
incorporated by reference in this semi-annual report.
The
forward-looking statements included in this semi-annual report on
Form 1-SA are based upon our current expectations, plans,
estimates, assumptions and beliefs that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions,
all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the
expectations reflected in such forward-looking statements are based
on reasonable assumptions, our actual results and performance could
differ materially from those set forth in the forward-looking
statements. Factors which could have a material adverse effect on
our operations and future prospects include, but are not limited
to:
●
our
ability to effectively deploy the proceeds raised in our securities
offering,
●
changes
in economic conditions generally and in the real estate and
securities markets specifically,
●
the
ability of our Manager to source, originate and acquire suitable
investment opportunities,
●
our
expectation that there will be opportunities to acquire additional
properties leased to the United States of America,
●
our
expectations regarding demand by the federal government for leased
space,
●
the
General Services Administration ("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 semi-annual report. All
forward-looking statements are made as of the date of this
semi-annual report on Form 1-SA and the risk that actual results
will differ materially from the expectations expressed in this
semi-annual report on Form 1-SA will increase with the passage of
time. Except as otherwise required by the federal securities laws,
we undertake no obligation to publicly update or revise any
forward-looking statements after the date of this semi-annual
report on Form 1-SA, whether as a result of new information, future
events, changed circumstances or any other reason. In light of the
significant uncertainties inherent in the forward-looking
statements included in this semi-annual report on Form 1-SA, the
inclusion of such forward-looking statements should not be regarded
as a representation by us or any other person that the objectives
and plans set forth in this semi-annual report on Form 1-SA will be
achieved.
Item 1. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Overview
We are an externally-managed real estate company,
formed to grow our business of acquiring, developing, financing,
owning and managing properties leased primarily to the United
States of America, acting either through the GSA or directly
through the federal government agencies or departments occupying
such properties, including such properties owned by special purpose
entities contributed to our operating partnership by Holmwood, our
accounting predecessor. We invest primarily in GSA Properties
across secondary and smaller markets, in sizes that range from
5,000-50,000 rentable square feet that are in 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,
built-to-suit, single-tenant, federal government-leased properties,
or buy facilities that are leased to credit-worthy state or
municipal tenants.
As
of the filing of this report, the Company owns 15 GSA
Properties, comprised of 12 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 properties, which includes two properties acquired on
July 27 and August 30, 2018, respectively, contains
approximately 290,956 rentable square feet located in 11
states with two additional GSA Properties, or our pipeline
properties, under contract for an additional 49,334 rentable square
feet. 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 our portfolio properties, our portfolio has a weighted
average remaining lease term of 9.5 years if none of the early
termination rights are exercised and 6.3 years if all of the early
termination rights are exercised.
Our
operating partnership, through wholly-owned special purpose
entities or SPEs, holds substantially all of our assets and
conducts substantially all of our business. As of the filing date
of this report we owned approximately 44% of the aggregate common
limited partnership interests in our operating partnership, or
common units, on a fully diluted basis. We were formed in 2016 as a Maryland corporation,
and on or before October 15, 2018, the IRS filing deadline for Form
1120-REIT, we will elect to be taxed as a REIT for federal income
tax purposes, beginning with our taxable year ending December 31,
2017.
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 on May 26, 2017.
Operating Results
For the six-months ended June 30, 2018
At June 30, 2018, our portfolio contained 13
properties consisting of 268,429 rentable square feet located in
nine states and was 98% occupied. We also had four properties under
contract for an aggregate purchase price of $26,745,000 consisting
of 77,245 in rentable square feet. Subsequently, we have closed on
two of the four properties under contract, increasing our portfolio
by 27,911 rentable square feet. See
Note 14 to the unaudited, consolidated
financial statements in Item 3 of this semi-annual report for
further discussion on these property
acquisitions.
During
the six months ended June 30, 2018, we earned revenues of
$3,775,761 and incurred operating costs, excluding asset management
fees and depreciation and amortization, of $1,729,156. Our net
operating income for the period was $2,046,605; and, after
deducting asset management fees of $157,067, depreciation and
amortization of $1,423,466, interest expense of $1,444,494 and
after the recognition of a gain on an asset disposition of $57,530,
the Company’s net loss was $920,892 for the six months ended
June 30, 2018. Our net loss attributed to our common shareholders
was $858,616 after allocating $188,714 of the Company’s net
loss to the non-controlling interest in our operating partnership
and after the deduction of Series A Preferred Stock dividends of
$126,438.
For the six-months ended June 30, 2017
At
June 30, 2017, our portfolio contained 11 properties consisting of
208,253 rentable square feet located in seven states, which
includes seven properties consisting of 110,352 rentable square
feet that were contributed by our predecessor on May 26, 2017. On
March 31, 2017, we acquired a 53,917 rentable square foot,
built-to-suit, single-tenant, three-story office building in
Norfolk, Virginia for $14,500,000. The building was purchased
subject to a lease agreement administered by the General Services
Administration and on June 30, 2017, was 100% occupied by the
Social Security Administration with one floor sublet to a Virginia
State contractor to the SSA.
We
earned revenues of $1,341,061 and incurred operating costs of
$725,852, excluding asset management fees and depreciation and
amortization, for the six months ended June 30, 2017. Our net
operating income was $615,209; and, after deducting asset
management fees of 39,959, depreciation and amortization of
$481,790 and interest expense of $423,260, the Company’s net
loss was $329,800 for the six months ended June 30, 2017. Our net
loss attributed to our common shareholders was $461,752 after
allocating $5,514 of our Operating Partnership's net income to the
non-controlling interest in our operating partnership and after the
deduction of Series A Preferred Stock dividends of
$126,438.
Calculating Net Operating Income
We
believe that our net operating income, or NOI, a non-GAAP measure,
is a useful measure of our operating performance. We define NOI as
total property revenues less total property operating expenses,
excluding depreciation and amortization, interest expense and asset
management fees. Other REITs may use different methodologies for
calculating NOI, and accordingly, our NOI may not be comparable to
the NOI of other REITs. We believe that NOI, as we calculate it,
provides an operating perspective not immediately apparent from
GAAP operating income or net income. We use NOI to evaluate our
performance on a property-by-property basis, because NOI more
meaningfully reflects the core operations of our properties as well
as their performance by excluding items not related to property
operating performance and by capturing trends in property operating
expenses. However, NOI should only be used as an alternative
measure of our financial performance.
The
following table reflects property contributions to combined NOI
together with a reconciliation of NOI to net income (loss) as
computed in accordance with GAAP for the six-month periods ended
June 30, 2018 and 2017, respectively.
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For the Six Months Ended June 30,
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Revenues
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$3,775,761
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$1,341,061
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Less:
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Operating
expenses
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1,626,719
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692,465
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Management
fee
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102,437
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33,387
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Total
expenses
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1,729,156
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725,852
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Net
operating income
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2,046,605
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615,209
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Less:
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Asset
management fee
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157,067
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39,959
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Depreciation
and amortization
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1,423,466
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481,790
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Interest
expense
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1,444,494
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423,260
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Gain
on asset disposition
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(57,530)
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-
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Net
loss
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(920,892)
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(329,800)
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Less:
Net (loss) income attributable to noncontrolling
interest
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(188,714)
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5,514
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Net
loss loss attributed to HC Gov Realty Trust, Inc.
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(732,178)
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(335,314)
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Less:
Preferred stock dividends
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(126,438)
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(126,438)
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Net
(loss) income attributed to HC Gov Realty Trust, Inc.
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available
to common shareholders
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$(858,616)
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$(461,752)
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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. Since November, 2016, we have been engaged in a
public offering of our common stock pursuant to Tier II of
Regulation A, or our Offering, seeking up to $30,000,000 gross
proceeds (approximately $26,375,000, net) in equity to finance in
part our business model. As of September 13, 2018, we had issued
889,541 shares in our Offering for $8,129,206 in net proceeds.
While we expect to continue to issue equity in our Company through
our Offering with proceeds being used to acquire other
single-tenant properties, leased to the United States of America or
facilities that are leased to credit-worthy state or municipal
tenants, there can be no assurance as to when, if ever, amounts
raised will be sufficient to support growth through acquisition in
accordance with our business model
As
a result, we have actively explored additional capital
opportunities. First, our Manager has invested additional
resources, including hiring a Senior Director of National Accounts,
to solicit FINRA member broker-dealers to become members of the
selling group for the offering in order to ultimately increase the
number of registered representatives actively seeking subscribers
for our common shares. Secondly, in concert with our financial
advisor, BB&T Capital, we are actively seeking institutional
investors to fund our business model and acquisition plan. As of
the filing of this report, these efforts are ongoing.
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.
At June 30, 2018, we had four GSA
Properties under contract for $26,745,000 in the aggregate. Two of
the properties have been
acquired, since the end of the second quarter, the acquisitions
having been substantially financed with secured, first mortgage
debt on each of the properties and unsecured borrowings by our
operating partnership from our affiliate, Baker Hill Holding, LLC,
or BH, which is controlled by the spouse of Philip Kurlander, one
of our directors and an owner and the controlling manager of our
Manager. See
“Capital Resources—Notes Payable.”
Our
operating partnership is contractually bound to buy two additional
GSA properties, both scheduled to close before the end of
2018. Under the contracts for these GSA properties, we have
posted non-refundable deposits, aggregating $473,000, that will be
forfeited to the sellers as liquidated damages if we are unable to
close. These acquisitions require approximately $3,192,000 in
equity be contributed to the capital of the two SPEs, organized for
the purpose of making these two acquisitions in order for us to
access the two mortgage loans that have been arranged to finance
the balance of the purchase prices for the two GSA
properties. While our goal would be to use equity raised in
the Offering for the equity required to close, at our current rate
of capital raising in the Offering this is unlikely.
Therefore, we anticipate that the required funds will need to come
from additional borrowings from BH, presumably structured
identically to the Knoxville and Champaign BH notes or from
investment made by private or institutional investors, if
any. There can be no assurance that our company will raise
sufficient capital to complete these acquisitions.
Capital Resources
Equity
On
November 7, 2016, the Securities and Exchange Commission (SEC)
qualified our Offering. Our Offering required that a minimum of
300,000 shares of our common stock at $10 per share be subscribed
for and the subscription price paid into escrow before we were
permitted to close any part of the offering. This minimum was
achieved and on May 18, 2017, when we issued 317,120 shares and
received initial proceeds, net of issuance costs, totaling
$2,894,580. The Offering also contemplates that up to a total of
3,000,000 shares can be issued in the offering at $10 per share.
The Offering continues and unless earlier terminated, which we
reserve the right to do, will terminate on the first to occur of
the issuance of a total of 3,000,000 shares for gross proceeds of
$30,000,000, or November 7, 2018.
As of
September 13, 2018, the Company has sold 889,541 cumulative shares
for net proceeds of $8,129,206 in the Offering. We have used, and will continue to use, net
proceeds from the 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. There
can be no assurance that the Offering will result in net proceeds
from the sale of our common stock sufficient to provide the equity
component for any of these uses, and it is unlikely to do so
without extending the Offering past the current termination date of
November 7, 2018 pursuant to a post-qualification amendment to our
Offering Statement on Form 1-A.
Mortgages
On
or about March 25, 2018, the Company secured a 90-day extension to
June 25, 2018 while negotiations were in process to procure a
long-term refinance agreement with respect to two mortgages, one on
its property located in Johnson City, Tennessee and the other
located in Cape Canaveral, Florida, both of which loans were
cross-collateralized. As a result of those negotiations, we entered
into a loan modification agreement on April 27, 2018 which, among
other things, extended the maturity date to April 27, 2020, changed
the principal amortization from 20 years to 17 and added $52,907 of
principal to cover debt issuance costs. The interest rate
calculation mechanism was unchanged.
On
July 27, 2018, the Company entered into a mortgage loan in the
amount of $5,360,000 with a maturity date of August 1, 2028 in
connection with the financing of a GSA property located in
Knoxville, Iowa. The loan’s interest rate is fixed at 5% and
requires principal and interest payments of $31,227 based upon a
25-year amortization schedule.
On
August 30, 2018, the Company entered into a mortgage loan in the
amount of $2,580,000 with a maturity date of September 1, 2028 in
connection with the financing of a GSA property located in
Champaign, Illinois. The loan’s interest rate is fixed at
4.75% and requires principal and interest payments of $14,709 based
upon a 25-year amortization schedule.
Notes Payable
On
April 11, 2018, for working capital purposes we caused our
Operating Partnership to borrow $500,000, pursuant to a promissory note payable to a member
of our predecessor. The note is
unsecured and requires monthly interest-only payments payable in
arrears at an interest rate of 8% per annum. The note is
pre-payable without penalty prior to its maturity date, May 1,
2019.
On July
24, 2018, we caused our Operating Partnership to borrow $100,000
from an unaffiliated third party pursuant to a promissory note. The
note is unsecured, bears interest at 8% per annum, requires
quarterly interest payments, commencing October 1, 2018 and
quarterly thereafter and matures on July 24, 2021. The Note is
pre-payable; provided that until July 24, 2019, prepayment must be
accompanied by all accrued interest, plus a premium equal to the
original principal amount of the Note multiplied by the remaining
number of whole calendar months remaining until July 24, 2019,
divided by twelve, and then multiplied by the 14% interest rate.
After July 24, 2019, the note is pre-payable without premium or
penalty of any kind.
On July
25, 2018, we caused our Operating Partnership to borrow $1,700,000
from BH, pursuant to an unsecured promissory note. The note bears
interest at 14% per annum, or the note rate, payable monthly in
arrears and matures on July 31, 2020. In the note, in lieu of
paying an interest payment at the note rate in immediately
available funds, we reserved the right to (1) pay interest on the
outstanding principal balance of the note on any interest payment
date in immediately available funds at the per annum rate of 6.0%
per annum, or the current pay portion, and (2) add an amount equal
to interest on the outstanding principal balance of the note on any
interest payment date, calculated at the per annum rate of 8.0% to
the principal balance of the note, which we call “paid in
kind” interest or “PIK” interest. From and after
the addition of any PIK interest to the principal balance of the
note, the increased principal amount of the note will bear interest
at the per annum rate of 14%, payable in like manner to the prior
payment of interest. The proceeds of the loan were contributed as
equity to the capital of the SPE that purchased the GSA property
located in Knoxville, Iowa. The Note is pre-payable; provided that
until July 31, 2019, prepayment must be accompanied by all accrued
interest, plus a premium equal to the original principal amount of
the Note multiplied by the number of whole calendar months
remaining until July 31, 2019, divided by twelve, and then
multiplied by the note rate. After July 31, 2019, the note is
pre-payable without premium or penalty of any kind.
On
August 30, 2018, we caused our Operating Partnership to borrow
$800,000 from BH, pursuant to an unsecured promissory note. The
note bears interest at the note rate, payable monthly in arrears
and matures on August 30, 2020. In the note, in lieu of paying an
interest payment at the note rate in immediately available funds,
we reserved the right to (1) pay the current pay portion on any
interest payment date in immediately available funds, and (2) add
an amount equal to the PIK interest to the principal balance of the
note. From and after the addition of any PIK interest to the
principal balance of the note, the increased principal amount of
the note will bear interest at the note rate, payable in like
manner to the prior payment of interest. The proceeds of the loan
were contributed as equity to the capital of the SPE that purchased
the GSA property located in Champaign, Illinois.
We
currently anticipate electing to PIK the maximum amount of interest
on each of the foregoing BH loans for the foreseeable future and
until such time as we generate sufficient funds from operations to
pay all, or an additional portion, of the BH loans in
cash.
Additional Related Party Loans
As
of the filing date of this report, the Company has outstanding,
loans from certain of its officers, directors or entities
affiliated with its officers and directors. $330,000 in aggregate
principal amount of payable on demand as to both principal and
interest. These related party loans bar interest at variable rates
in excess of 10% per annum.
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.
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, if any.
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. This trend has been exacerbated by the recent
slowdown in closings from our Offering. Without the substantial
completion of our Offering or a viable capital solution from one or
more private or institutional sources, we will not be able to
continue to grow our portfolio of GSA properties. If we are not
able to continue to grow our portfolio, our ability to continue to
pay dividends at our historical rates will likely be materially and
adversely affected as dividends at such historical rates are not
covered by our current funds from operations. There can be no
assurance, that we will be able to complete our offering or
complete private or institutional investment that will enable
management to resume and 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 2. Other Information
None.
Item 3. Financial
Statements
HC Government Realty Trust, Inc.
Consolidated Balance Sheets
June 30, 2018 (unaudited) and December 31, 2017
|
June 30, 2018
(Unaudited)
|
|
ASSETS
|
|
|
Investment in real
estate, net
|
$60,790,197
|
$61,922,635
|
Cash and cash
equivalents
|
467,828
|
695,719
|
Restricted
cash
|
3,101,025
|
1,676,152
|
Rent and other
tenant receivables, net
|
756,913
|
757,752
|
Leasehold
intangibles, net
|
5,194,418
|
5,635,435
|
Deposits on
properties under contract
|
877,339
|
58,000
|
Prepaid expenses
and other assets
|
162,275
|
307,840
|
Total
Assets
|
$71,349,995
|
$71,053,533
|
|
|
|
LIABIILTIES
|
|
|
Mortgages payable,
net of unamortized debt costs
|
$49,161,173
|
$49,573,683
|
Loans - related
party
|
175,000
|
-
|
Notes
payable
|
1,617,793
|
1,179,610
|
Notes payable -
related party
|
3,820,000
|
4,150,000
|
Declared dividends
and distributions
|
374,053
|
344,842
|
Accrued interest
payable
|
252,559
|
248,352
|
Accounts
payable
|
280,700
|
267,232
|
Accrued
expenses
|
391,290
|
357,981
|
Tenant improvement
obligation
|
1,315,366
|
1,315,366
|
Acquisition fee
payable - related party
|
274,345
|
274,345
|
Below-market
leases, net
|
920,837
|
1,001,754
|
Related parties
payable, net
|
518,073
|
461,858
|
Total
Liabilities
|
59,101,189
|
59,175,023
|
|
|
|
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,
1,100,291 and 895,307 common shares issued
|
|
|
and outstanding at
June 30, 2018 and December 31, 2017, respectively)
|
1,100
|
895
|
Additional paid-in
capital
|
11,249,952
|
8,948,713
|
Offering
costs
|
(1,459,479)
|
(1,459,479)
|
Accumulated
deficit
|
(2,073,152)
|
(1,340,974)
|
Accumulated
dividends and distributions
|
(1,105,836)
|
(690,963)
|
Total
Stockholders' Equity
|
6,612,729
|
5,458,336
|
Noncontrolling
interest in operating partnership
|
5,636,077
|
6,420,174
|
Total
Equity
|
12,248,806
|
11,878,510
|
Total
Liabilities and Stockholders' Equity
|
$71,349,995
|
$71,053,533
|
The
following table presents the assets and liabilities of the
Company's consolidated variable interest entities as of June 30,
2018 (unaudited) and 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
|
$11,810,139
|
$12,007,437
|
Intangible
assets, net
|
464,104
|
530,626
|
Prepaids
and other assets
|
449,681
|
457,096
|
Total
Assets
|
$12,723,924
|
$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
|
$9,715,847
|
$9,796,972
|
Intangible
liabilities, net
|
146,359
|
168,733
|
Accounts
payable and accrued expenses
|
263,653
|
242,284
|
Total
liabilities
|
$10,125,859
|
$10,207,989
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Consolidated Statements of Operations
For the Six Months Ended June 30, 2018 and 2017
(unaudited)
|
For the
Six Months Ended June 30,
|
|
|
|
Revenues
|
|
|
Rental
revenues
|
$3,758,846
|
$1,325,030
|
Real estate tax
reimbursments and other revenues
|
16,915
|
16,031
|
Total
revenues
|
3,775,761
|
1,341,061
|
|
|
|
Operating
expenses
|
|
|
Depreciation and
amortization
|
1,423,466
|
481,790
|
General and
administrative
|
216,199
|
169,232
|
Ground
lease
|
45,727
|
7,119
|
Insurance
|
45,993
|
16,250
|
Janitorial
|
181,944
|
57,180
|
Management
fees
|
259,504
|
73,346
|
Professional
expenses
|
248,331
|
158,725
|
Real estate and
other taxes
|
327,181
|
120,517
|
Repairs and
maintenance
|
212,905
|
60,837
|
Equity-based
compensation
|
139,859
|
31,498
|
Utilities
|
208,580
|
71,107
|
Total operating
expenses
|
3,309,689
|
1,247,601
|
|
|
|
Other (income)
expense
|
|
|
Interest
expense
|
1,444,494
|
423,260
|
Gain on disposition
of property
|
(57,530)
|
-
|
Net other (income)
expense
|
1,386,964
|
423,260
|
|
|
|
Net
loss
|
(920,892)
|
(329,800)
|
Less: Net (loss)
income attributable to nonconrolling interest in operating
partnership
|
(188,714)
|
5,514
|
Net loss attributed
to HC Government Realty Trust, Inc.
|
(732,178)
|
(335,314)
|
Preferred
stock dividends
|
(126,438)
|
(126,438)
|
Net loss attributed
to HC Government Realty Trust, Inc. available to common
shareholders
|
$(858,616)
|
$(461,752)
|
|
|
|
Basic and diluted
loss per share
|
$(0.86)
|
$(1.62)
|
|
|
|
Basic and diluted
weighted-average common shares outstanding
|
992,741
|
285,285
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Consolidated Statement of Changes in Stockholders’
Equity
For the Six Months Ended June 30, 2018
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital
|
|
|
Cumulative Dividends and Distributions
|
Total
Stockholders'
Equity
|
Non-controlling Interest in Operating Partnership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of stock
|
|
|
204,984
|
205
|
1,884,649
|
|
|
|
1,884,854
|
-
|
1,884,854
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based
compensation - restricted stock
|
-
|
-
|
-
|
-
|
61,333
|
-
|
-
|
-
|
61,333
|
-
|
61,333
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based
compensation long-term incentive plan shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
78,526
|
78,526
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and
distributions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(414,873)
|
(414,873)
|
(318,652)
|
(733,525)
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of
NCI in operating partnership
|
-
|
-
|
-
|
-
|
355,257
|
-
|
-
|
-
|
355,257
|
(355,257)
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(732,178)
|
-
|
(732,178)
|
(188,714)
|
(920,892)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June
30, 2018 (unaudited)
|
144,500
|
$144
|
1,100,291
|
$1,100
|
$11,249,952
|
$(1,459,479)
|
$(2,073,152)
|
$(1,105,836)
|
$6,612,729
|
$5,636,077
|
$12,248,806
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2018 and 2017
(unaudited)
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
Net loss
|
$(920,892)
|
$(329,800)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
Depreciation
|
1,099,580
|
376,474
|
Amortization of acquired lease-up
costs
|
147,473
|
49,565
|
Amortization of in-place
leases
|
176,412
|
55,751
|
Amortization of above/below-market
leases
|
36,215
|
(7,670)
|
Amortization of debt issuance
costs
|
116,848
|
29,720
|
Amortization of long-term incentive
plan units
|
78,526
|
12,832
|
Amortization of equity-based
compensation - restricted shares
|
61,333
|
18,666
|
Gain on disposition of
property
|
(57,530)
|
-
|
Change in assets and
liabilities
|
|
|
Restricted cash
|
(19,872)
|
(5,644)
|
Rent and other tenant receivables,
net
|
840
|
(121,887)
|
Prepaid expense and other
assets
|
145,565
|
(234,692)
|
Deposits on under contract
properties
|
(819,339)
|
-
|
Related party receivables,
net
|
-
|
167,334
|
Accrued interest
payable
|
4,207
|
12,495
|
Accounts payable and other accrued
expenses
|
38,284
|
376,008
|
Related party payable,
net
|
56,215
|
-
|
Net cash provided in operating
activities
|
143,865
|
399,152
|
|
|
|
Cash flows from investing activities:
|
|
|
Restricted cash
|
(1,405,000)
|
-
|
Capital
improvements
|
-
|
(15,011)
|
Sale of
property
|
98,879
|
-
|
Property
acquisitions
|
-
|
(14,528,464)
|
Net cash used in investing
activities
|
(1,306,121)
|
(14,543,475)
|
|
|
|
Cash flows from financing activities:
|
|
|
Debt issuance
costs
|
(2,653)
|
(151,493)
|
Dividends paid
|
(704,314)
|
(126,438)
|
Mortgage principal
payments
|
(526,705)
|
(173,673)
|
Mortgage
proceeds
|
-
|
10,875,000
|
Notes
principal repayments
|
(61,817)
|
(98,690)
|
Notes
principal repayments - related party
|
(330,000)
|
-
|
Offering costs
|
-
|
(330,730)
|
Proceeds from loans - related
party
|
525,000
|
-
|
Proceeds from
notes payable
|
500,000
|
330,000
|
Proceeds from
notes payable - related party
|
-
|
3,070,000
|
Proceeds from sale of common stock,
net of issuance costs
|
1,884,854
|
3,719,592
|
Repayment of loans - related
party
|
(350,000)
|
-
|
Repayment of
assumed notes payable
|
-
|
(1,321,210)
|
Net cash provided from financing
activities
|
934,365
|
15,792,358
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
(227,891)
|
1,648,035
|
Cash and cash equivalents,
beginning of period
|
695,719
|
247,137
|
Cash and cash equivalents, end of
period
|
$467,828
|
$1,895,172
|
|
|
|
Supplemental
cash flow information:
|
|
|
Cash paid for
interest
|
$1,323,439
|
$381,045
|
Cash paid for income
taxes
|
$-
|
$-
|
Non cash
investing and financing activities:
|
|
|
Mortgage
refinance
|
$6,834,293
|
$-
|
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.
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 June 30, 2018, the financial statements
reflect the operations of 13 properties representing 263,045
rentable square feet located in nine 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 9.1 years if none of the early termination rights are
exercised and 5.8 years if all of the early termination rights are
exercised as of June 30, 2018. 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 44.51%
of the common shares of the Company outstanding, on a fully diluted
basis as of June 30, 2018. 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 will 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 on or before October 15, 2018, the IRS filing
deadline for Form 1120-REIT.
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 June 30, 2018. 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.
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. As of
June 30, 2018 and December 31, 2017, the Company had a $0 and
$318,919, respectively, of cash balances in excess of FDIC 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.
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
six months ended June 30, 2018 and 2017, 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 June 30, 2018 and December 31,
2017, organizational and offering costs totaled $1,459,479,
respectively.
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 June 30, 2018 and December 31, 2017,
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 June 30, 2018 and December 31, 2017,
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.
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
|
1,078,416
|
Convertible
long-term incentive plan units
|
80,789
|
66,056
|
Convertible
preferred stock
|
433,500
|
433,500
|
Unvested
restricted stock
|
-
|
16,000
|
Total
potential dilutive securities
|
1,592,705
|
1,593,972
|
Reclassifications –
Certain December 31, 2017 amounts have been reclassified for
consistency with the current year presentation. Accordingly,
$58,000 has been reclassified from prepaid expenses and other
assets to deposits on properties under contract on the consolidated
balance sheet as of December 31, 2017. This reclassification has no
effect on the reported total stockholders’ equity or results
of operations as of and for the year ended December 31,
2017.
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.
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 book value of net identifiable
assets received. 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.
This issuance of OP units was recorded as a non-cash
transaction.
A
summary of the Company’s contributed assets and assumed
liabilities 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 June 30,
2018 and December 31, 2017, is as follows:
|
June
30,
2018
(unaudited)
|
|
Assets:
|
|
|
Buildings
and improvements, net
|
$11,810,139
|
$12,007,437
|
Intangible
assets, net
|
464,104
|
530,626
|
Prepaids
and other assets
|
449,681
|
457,096
|
Total
assets
|
$12,723,924
|
12,995,159
|
Liabilities:
|
|
|
Mortages
payable
|
$9,715,847
|
$9,796,972
|
Intangible
liabilities, net
|
146,359
|
168,733
|
Accounts
payable and accrued expenses
|
263,653
|
242,284
|
Total
liabilities
|
$10,125,859
|
$10,207,989
|
|
|
|
Net
identifiable assets
|
$2,598,064
|
$2,787,170
|
5.
Investment
in Real Estate
The
following is a summary of the Company’s investment in real
estate, net as of June 30, 2018 and December 31, 2017,
respectively:
|
June 30, 2018
(Unaudited)
|
|
Land
|
$6,032,280
|
$6,065,137
|
Buildings
and improvements
|
52,699,105
|
52,699,106
|
Tenant
improvements
|
4,701,613
|
4,701,613
|
|
63,432,998
|
63,465,856
|
Accumulated
depreciation
|
(2,642,801)
|
(1,543,221)
|
Investments
in real estate, net
|
$60,790,197
|
$61,922,635
|
Depreciation
expense for the six months ended June 30, 2018 and 2017 was
$1,099,580 and $376,474, respectively.
6.
Leasehold
Intangibles, net
The
following is a summary of the Company’s leasehold intangibles
as of June 30, 2018 and December 31, 2017.
|
June 30, 2018
(Unaudited)
|
|
Acquired
in-place leases
|
$2,171,435
|
$2,171,435
|
Acquired
lease-up costs
|
2,022,123
|
2,022,123
|
Acquired
above-market leases
|
2,038,492
|
2,038,492
|
|
6,232,050
|
6,232,050
|
Accumulated
amortization
|
(1,037,632)
|
(596,615)
|
Leasehold
intangibles, net
|
$5,194,418
|
$5,635,435
|
Amortization
of in-place leases, lease-up costs and acquired above market leases
was $441,017 and $136,639 for the six months ended June 30, 2018
and 2017, 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:
|
|
|
|
|
|
For the remaining six month period ended December 31,
2018
|
$399,084
|
2019
|
650,588
|
2020
|
654,388
|
2021
|
610,228
|
2022
|
920,716
|
2023
|
411,010
|
Thereafter
|
1,548,404
|
Total
|
$5,194,418
|
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 June 30, 2018 and
December 31, 2017.
|
June 30, 2018
(Unaudited)
|
|
Acquired
below-market leases
|
$1,153,546
|
$1,153,546
|
Accumulated
amortization
|
(232,709)
|
(151,792)
|
Below-market
leases, net
|
$920,837
|
$1,001,754
|
Amortization
of below-market leases resulted in an increase in rental revenue of
$80,916 and $38,993 for the six months ended June 30, 2018 and
2017, respectively.
The
future amortization of acquired below market leases is as
follows:
|
|
|
|
|
|
For the remaining six month period ended December 31,
2018
|
$109,166
|
2019
|
163,321
|
2020
|
163,648
|
2021
|
155,023
|
2022
|
131,858
|
2023
|
85,460
|
Thereafter
|
112,361
|
Total
|
$920,837
|
The
following table outlines the mortgages payable as of June 30, 2018
and December 31, 2017:
|
|
|
|
|
Issuance Date
|
|
|
Maturity
|
June 30, 2018 (Unaudited)
|
|
|
|
|
|
|
|
August-2013
|
$10,700,000
|
5.27%
|
August-2023
|
$9,881,047
|
$9,976,722
|
April-2015
|
7,600,000
|
3.72%
|
March-2018
|
-
|
6,874,169
|
June-2016
|
9,675,000
|
3.93%
|
July-2019
|
9,221,995
|
9,343,234
|
July-2017
|
10,875,000
|
4.00%
|
August-2022
|
10,660,276
|
10,789,967
|
July-2017
|
3,530,000
|
4.00%
|
August-2022
|
3,460,301
|
3,502,398
|
September-2017
|
2,750,000
|
4.00%
|
August-2022
|
2,688,631
|
2,734,311
|
November-2017
|
6,991,250
|
4.25%
|
June-2019
|
6,991,250
|
6,991,250
|
April-2018
|
6,834,293
|
4.26%
|
April-2020
|
6,834,293
|
-
|
Total
principal
|
|
|
|
49,737,793
|
50,212,051
|
Debt
issuance costs
|
|
|
|
(810,438)
|
(755,338)
|
Accumulated
amortization
|
|
|
|
233,818
|
116,970
|
Mortgage payable net of unamortized debt costs
|
|
|
$49,161,173
|
$49,573,683
|
At
June 30, 2018 and December 31, 2017, the Company had unamortized
debt issuance costs of $576,620 and $638,368 net of $233,818, and
$116,970 of accumulated amortization, respectively, in connection
with its various mortgage payables.
Mortgage
loan balances as of June 30, 2018 and December 31, 2017 totaled
$49,161,173 and $49,573,683, respectively. Fixed rate loans before
unamortized debt issuance costs totaled $42,903,189 and $43,337,882
as of June 30, 2018 and December 31, 2017, respectively. Variable
rate loans before unamortized debt issuance costs totaled
$6,834,293 and $6,874,169 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 June
30, 2018 and December 31, 2017 was $9,881,047 and $9,976,722,
respectively.
The
mortgage loan issued in April 2015 had a variable interest rate
equal to the one-month LIBOR rate plus 235 basis points. This
mortgage was assumed by the Company in connection with the
Contribution Agreement. The loan had 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, changed the principal amortization
from 20 years to 17 and added $52,907 of principal to cover debt
issuances costs. The interest rate calculation was unchanged. As of
June 30, 2018, the interest rate was 4.26% and the outstanding
principal balance was $6,834,293.
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. This financing
consists of four separate properties each with a separate mortgage
payable. One of the properties financed was a property of our
predecessor, and we acquired the property and assumed the mortgage
as a result of the Contribution Transaction. The initial mortgage
balance of the contributed property was $2,450,000. The outstanding
principal balances of these mortgage loans were $9,221,995 and
$9,343,234 as of June 30, 2018 and December 31, 2017,
respectively.
The
mortgage loan issued in July 2017, for an acquired property in
Norfolk, Virginia., 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 June 30, 2018 and December 31, 2017 was
$10,660,276 and $10,789,967, respectively.
The
mortgage loan issued in July 2017, for an acquired property in
Montgomery, Alabama, 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 June 30, 2018 and December 31, 2017 was
$3,460,301 and $3,502,398, respectively.
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 June 30,
2018 and December 31, 2017 was $2,688,631 and $2,734,311,
respectively.
The
mortgage loan issued in November 2017, for an acquired property in
San Antonio, Texas, 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 June 30, 2018 and December 31, 2017 was
$6,991,250.
The
carrying amount of the Company’s variable rate debt
approximates its fair value as of June 30, 2018 and December 31,
2017.
The
following table outlines the notes payable as of June 30, 2018 and
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
Related Parties
|
|
|
|
|
|
March-2017
|
3,070,000
|
12.00%
|
May-2019
|
$3,070,000
|
$3,070,000
|
December-2017
|
330,000
|
3.25%
|
February-2018
|
-
|
330,000
|
December-2017
|
750,000
|
8.00%
|
May-2019
|
750,000
|
750,000
|
Total related parties notes payable
|
|
|
|
$3,820,000
|
$4,150,000
|
|
|
|
|
|
|
Third parties
|
|
|
|
|
|
April-2018
|
500,000
|
8.00%
|
May-2019
|
$500,000
|
$-
|
March-2017
|
330,000
|
12.00%
|
May-2019
|
330,000
|
330,000
|
November-2017
|
124,000
|
4.98%
|
September-2018
|
37,793
|
99,610
|
December-2017
|
750,000
|
8.00%
|
May-2019
|
750,000
|
750,000
|
Total third party notes payable
|
|
|
|
$1,617,793
|
$1,179,610
|
|
|
|
|
|
|
Total related and third party notes
|
|
|
|
$5,437,793
|
$5,329,610
|
March 2017 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 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 June 30, 2018
and December 31, 2017, the outstanding principal balance of these
notes was $3,400,000.
December 2017 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.
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 June 30, 2018 and
December 31, 2017, the outstanding principal balance of these notes
was $1,500,000.
April 2018
Note
On April 11,
2018, the Company borrowed
$500,000 pursuant to a promissory notes payable to an unaffiliated
third party. The note is unsecured, require monthly interest-only
payments payable in arrears at an interest rate of 8% per annum.
The notes pre-payable without penalty prior to its maturity date of
May 1, 2019.
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 June
30, 2018 and December 31, 2017, the outstanding balance was $37,793
and $99,610, respectively.
Payable
At
June 30, 2018, the Company had a related party payable of $518,073.
The payable consists of $88,225 payable to the Asset Manager for
asset management fees and for other reimbursable expenses. The
remaining $429,848 is payable to Holmwood for amounts
borrowed.
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.
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 six months ended June 30, 2018 and
2017 was $156,752 and $39,959, respectively. Accrued asset
management fees at June 30, 2018 and December 31, 2017 were $82,824
and $74,807, respectively, and have been subsequently
paid.
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 and paid
property management fees of $102,752 and $33,387 for the six months
ended June 30, 2018 and 2017, 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 June 30, 2018 and December 31, 2017
were $274,345, 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 six months ended
June 30, 2018 and 2017. There were no leasing fees accrued at June
30, 2018 and December 31, 2017.
Notes payable
The
Company has entered into various promissory notes with related
parties (See Note 9 for further discussion). As of June 30, 2018
and December 31, 2017, the unpaid principal balance of related
party notes payable was $3,820,000 and $4,150,000.
Additional Related Party Loans
The
Company has received on demand loans from certain of its officers,
directors or entities affiliated with its officers and directors.
These related party loans bar interest at variable rates in excess
of 10% per annum. During the six months ended June 30, 2018, the
total amount of loans made were $525,000 and the total amount of
loans repaid was $350,000. At June 30, 2018, the outstanding
balance of these loans was $175,000. There were no loans at
December 31, 2017.
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% as of
June 30, 2018 and December 31, 2017. Lease terms range from 2.1 to
11.3 years as of June 30, 2018. The future minimum rents for
existing leases as of June 30, 2018 are as follows:
|
|
|
|
|
|
For the remaining six month period ended December 31,
2018
|
$3,821,511
|
2019
|
7,580,715
|
2020
|
7,546,686
|
2021
|
7,164,390
|
2022
|
6,486,315
|
2023
|
4,102,883
|
Thereafter
|
10,703,276
|
Total
|
$47,405,776
|
The
properties are 100% leased to the United States of America and
administered by either the GSA or occupying agency. At June
30, 2018 the weighted average firm lease term is 5.8 years if GSA
elects its early termination right and the total remaining weighted
average contractual lease term including renewal options is 9.1
years. Lease maturities range from 2020 to 2029.
Preferred Stock
In
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. As of June 30, 2018 and December 31,
2017, the outstanding Series A Preferred Stock was 144,500 shares,
respectively.
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 six months ended June 30, 2018 and 2017, the Company sold
204,984 and 407,922 shares in connection with the Offering for net
proceeds of $1,884,854 and $3,719,592.
As
of June 30, 2018 and December 31, 2017, the common stock
outstanding was 1,100,291 and 895,307 shares,
respectively.
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 six months ended June 30,
2018 and 2017, the Company recognized $61,333 and $18,666,
respectively, of equity-based compensation with respect to this
grant. As of June 30, 2018, the restricted common shares are fully
vested.
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 six months ended June 30, 2018 and 2017, the Operating
Partnership issued the Asset Manager 6,639 and 66,056,
respectively, 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 six months ended June 30, 2018 and 2017, the Company
recognized $78,526 and $12,832 of equity-based compensation
expense.
Dividends and Distributions
During
the six months ended June 30, 2018 and 2017, the REIT declared
dividends on its Series A Preferred Stock of $126,438,
respectively. As of June 30, 2018 and December 31, 2017, accrued,
unpaid preferred stock dividends were $63,219,
respectively.
During
the six months ended June 30, 2018 and 2017, the REIT declared
dividends on its common stock of $288,435 and $40,536,
respectively. As of June 30, 2018 and December 31, 2017, accrued,
unpaid common stock dividends were $151,290 and $123,104,
respectively.
During
the six months ended June 30, 2018 and 2017, the Operating
Partnership declared distributions of $318,652 and $74,356,
respectively, with respect to its outstanding common units and
LTIPs. As of June 30, 2018 and December 31, 2017, accrued, unpaid
distributions were $159,544 and $158,519,
respectively.
13.
Commitments
and Contingencies
Our
property located in Port Canaveral, Florida was purchased subject
to ground leases. The ground lease has an extended term of 30 years
and expires in December 2045 with one 10-year renewal option. The
Company made ground lease payments of $36,726 and $7,119 during the
six months ended June 2018 and 2017, respectively. Future minimum
rent payments for the ground lease subsequent to June 30, 2018 are
as follows:
|
|
For the remaining six month period ended December 31,
2018
|
$36,784
|
2019
|
73,568
|
2020
|
73,568
|
2021
|
73,568
|
2022
|
73,568
|
2023
|
73,489
|
Thereafter
|
1,618,489
|
Total
|
$2,023,113
|
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.
Property Acquisitions
On
July 27, 2018, the Operating Partnership, through its subsidiary
Gov Knoxville, LLC, acquired the real property commonly known as
1607 North Lincoln Street, Knoxville, Iowa 50138 (the
“Knoxville Property”), pursuant to a Purchase and Sales
Agreement with a purchase price of $7,150,000. The Knoxville
Property consists of 16,731 rentable square foot, build-to-suit
single-tenant, one-story office building, built in 2017, located on
2.96 acres in Knoxville, Iowa. The Property is 100% leased by the
United States of America and administered and occupied by the US
Department of Veterans Affairs (the “VA”) on a single
tenant/user basis. The VA operates a community based outpatient
clinic with said property. The lease commencement date was January
12, 2017 and has an initial firm term of 15 years.
On
August 30, 2018, the Operating Partnership, through its subsidiary
Gov Champaign, LLC, acquired the real property commonly known as
2117 West Park Court, Champaign, Illinois 61821 (the
“Champaign Property”), pursuant to a Purchase and Sales
Agreement with a purchase price of $3,445,000. The Champaign
Property consists of 11,180 rentable square foot, build-to-suit
single-tenant, two-story office building, built in 2005, located on
0.69 acres in Champaign, IL. The Property is 100% leased by the
United States of America, administered by the U.S. General Services
Administration, and occupied by the Federal Bureau of Investigation
(the “FBI”) on a single tenant/user basis. The FBI
operates a resident agency office with said property. The lease
commencement date was April 13, 2018 and has an initial firm term
of 10 years.
Mortgage Payable
On
July 27, 2018, the Company entered into a mortgage loan in the
amount of $5,360,000 with a maturity date of August 1, 2028 in
connection with the financing of the Knoxville Property. The
loan’s interest rate is fixed at 5% and requires principal
and interest payments of $31,227 based upon a 25-year amortization
schedule.
On
August 30, 2018, the Company entered into a mortgage loan in the
amount of $2,580,000 with a maturity date of September 1, 2028 in
connection with the financing of the Champaign Property. The
loan’s interest rate is fixed at 4.75% and requires principal
and interest payments of $14,709 based upon a 25-year amortization
schedule.
Notes Payable
On
July 24, 2018, we caused our Operating Partnership to borrow
$100,000 from an unaffiliated third party accredited investor
pursuant to a promissory note. The note is unsecured, bears
interest at 8% per annum, requires quarterly interest payments,
commencing October 1, 2018 and quarterly thereafter and matures on
July 24, 2021. The Note is pre-payable; provided that until July
24, 2019, prepayment must be accompanied by all accrued interest,
plus a premium equal to the original principal amount of the Note
multiplied by the remaining number of whole calendar months
remaining until July 24, 2019, divided by twelve, and then
multiplied by the 14% interest rate. After July 24, 2019, the note
is pre-payable without premium or penalty of any kind.
On July
25, 2018, we caused our Operating Partnership to borrow $1,700,000
from BH, pursuant to an unsecured promissory note. The note bears
interest at 14% per annum, or the note rate, payable monthly in
arrears and matures on July 31, 2020. In the note, in lieu of
paying an interest payment at the note rate in immediately
available funds, we reserved the right to (1) pay interest on the
outstanding principal balance of the note on any interest payment
date in immediately available funds at the per annum rate of 6.0%
per annum, or the current pay portion, and (2) add an amount equal
to interest on the outstanding principal balance of the note on any
interest payment date, calculated at the per annum rate of 8.0% to
the principal balance of the note, which we call “paid in
kind” interest or “PIK” interest. From and after
the addition of any PIK interest to the principal balance of the
note, the increased principal amount of the note will bear interest
at the per annum rate of 14%, payable in like manner to the prior
payment of interest. The proceeds of the loan were contributed as
equity to the capital of the SPE that purchased the GSA property
located in Knoxville, Iowa. The Note is pre-payable; provided that
until July 31, 2019, prepayment must be accompanied by all accrued
interest, plus a premium equal to the original principal amount of
the Note multiplied by the number of whole calendar months
remaining until July 31, 2019, divided by twelve, and then
multiplied by the note rate. After July 31, 2019, the note is
pre-payable without premium or penalty of any kind.
On
August 30, 2018, we caused our Operating Partnership to borrow
$800,000 from BH, pursuant to an unsecured promissory note. The
note bears interest at the note rate, payable monthly in arrears
and matures on August 30, 2020. In the note, in lieu of paying an
interest payment at the note rate in immediately available funds,
we reserved the right to (1) pay the current pay portion on any
interest payment date in immediately available funds, and (2) add
an amount equal to the PIK interest to the principal balance of the
note. From and after the addition of any PIK interest to the
principal balance of the note, the increased principal amount of
the note will bear interest at the note rate, payable in like
manner to the prior payment of interest. The proceeds of the loan
were contributed as equity to the capital of the SPE that purchased
the GSA property located in Champaign, Illinois.
Related Party Loans
The
Company has received additional on demand loans of $330,000 from
certain of its officers, directors or entities affiliated with its
officers and directors and had repaid the June 30, 2018 outstanding
loan balance of $175,000. These related party loans bar interest at
variable rates in excess of 10% per annum.
Item 4. Exhibits
The following exhibits are filed as part of this semi-annual report
on Form 1-SA:
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
Purchase
and Sale Agreement by and between USAA Real Estate Company and HC
Government Realty Holdings, L.P., dated as of December 28, 2016,
incorporated by reference to Exhibit 6.1 to the Company’s
Current Report on Form 1-U filed on March 7, 2017
|
|
|
First
Amendment to Purchase and Sale Agreement by and between USAA Real
Estate Company and HC Government Realty Holdings, L.P., dated as of
January 19, 2017, incorporated by reference to Exhibit 6.2 to the
Company’s Current Report on Form 1-U filed on March 7,
2017
|
|
|
Second
Amendment to Purchase and Sale Agreement by and between USAA Real
Estate Company and HC Government Realty Holdings, L.P., dated as of
January 27, 2017, incorporated by reference to Exhibit 6.3 to the
Company’s Current Report on Form 1-U filed on March 7,
2017
|
|
|
Third
Amendment to Purchase and Sale Agreement by and between USAA Real
Estate Company and HC Government Realty Holdings, L.P., dated as of
February 8, 2017, incorporated by reference to Exhibit 6.4 to the
Company’s Current Report on Form 1-U filed on March 7,
2017
|
6.19
|
|
First
Amendment to 2016 HC Government Realty Trust, Inc. Equity Incentive
Plan
|
|
|
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
|
|
|
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
|
|
|
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 the Company’s
Current Report on Form 1-U filed on December 21, 2017
|
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.
|
HC GOVERNMENT REALTY TRUST, INC.
|
|
|
|
|
|
|
By:
|
/s/
Edwin M. Stanton
|
|
|
|
Edwin
M. Stanton
|
|
|
|
Director
and Chief Executive Officer
|
|
Pursuant to the requirements of Regulation A, this report has been
signed by the following persons in the capacities and on the dates
indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Edwin M. Stanton
|
|
Director
and Chief Executive Officer
|
|
September
28, 2018
|
Edwin
M. Stanton
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
/s/
Philip Kurlander
|
|
Director
and Treasurer
|
|
September
28, 2018
|
Philip
Kurlander
|
|
(principal
financial officer)
|
|
|
/s/
Jason D. Post
|
|
Vice
President of Finance
|
|
September
28, 2018
|
Jason
D. Post
|
|
(principal
accounting officer)
|
|
|