UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT
ANNUAL REPORT PURSUANT TO REGULATION A OF
THE SECURITIES ACT OF
1933
For the fiscal year ended December 31, 2019
HC GOVERNMENT REALTY TRUST, INC.
(Exact
name of issuer as specified in its charter)
I.R.S.
Employment Identification Number: 81-1867397
Maryland
|
|
81-1867397
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
No.)
|
|
|
|
390 S. Liberty Street, Suite 100 Winston-Salem, NC
|
|
27101
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(336) 477-2535
Issuer’s
telephone number, including area code
Common Stock
(Title of each class of securities issued pursuant to Regulation
A)
Part II
In this annual report,
references to the
“Company,” “we,” “us” or
“our” or similar terms refer to HC Government
Realty Trust, Inc. a Maryland
corporation, together with its consolidated subsidiaries, including
HC Government Realty Holdings, L.P., a Delaware limited
partnership, which we refer to as our Operating Partnership.
We refer to
Holmwood Capital, LLC, a Delaware limited liability company, as
Holmwood, and Holmwood Capital Advisors, LLC, a Delaware limited
liability company, as HCA. As used in this annual report on Form
1-K, an affiliate of,
or person affiliated with, a specified person,
is a person, who or which, directly or indirectly through one
or more intermediaries, controls, is controlled by, or is under
common control with,
the person specified.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We make
statements in this annual report on Form 1-K or this annual report
that are forward-looking statements within the meaning of the
federal securities laws. The words “believe,”
“estimate,” “expect,”
“anticipate,” “intend,” “plan,”
“seek,” “may,” and similar expressions or
statements regarding future periods are intended to identify
forward-looking statements. These forward-looking statements
involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or
achievements, or industry results to differ materially from any
predictions of future results, performance or achievements that we
express or imply in this annual report or in the information
incorporated by reference in this annual report.
The
forward-looking statements included in this annual report are based
upon our current expectations, plans, estimates, assumptions and
beliefs that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve, among other things, judgments
with respect to future economic, competitive and market conditions
and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our
control. Although we believe that the expectations reflected in
such forward-looking statements are based on reasonable
assumptions, our actual results and performance could differ
materially from those set forth in the forward-looking statements.
Factors that could have a material adverse effect on our operations
and future prospects include, but are not limited to:
●
changes in economic
conditions generally and in the real estate and securities markets
specifically,
●
the ability of our
management team to source, originate and acquire suitable
investment opportunities,
●
our expectation
that there will be opportunities to acquire additional properties
leased to the United States of America,
●
our expectations
regarding demand by the federal government for leased
space,
●
the GSA (acting for
the United States as Tenant) renewing or extending one or more of
the leases for one or more of our GSA Properties (as defined
below), whether pursuant to early termination options or at
lease-end, and if not renewed or extended that we will be
successful in re-leasing the space,
●
the impact of
changes in real estate needs and financial conditions of federal,
state and local governments,
●
acts of terrorism
and other disasters that are beyond our control,
●
legislative or
regulatory changes impacting our business or our assets, including
changes to the laws governing the taxation of real estate
investment trust (“REITs”) and SEC guidance related to
Regulation A or the JOBS Act,
●
our ability to
raise equity or debt capital,
●
our compliance with
applicable local, state and federal laws, including the Investment
Advisers Act of 1940, as amended (the “Advisers Act”),
the Investment Company Act of 1940, as amended (the “40
Act”) and other laws, or
●
changes to
generally accepted account principles, or GAAP.
Any of
the assumptions underlying forward-looking statements could be
inaccurate. You are cautioned not to place undue reliance on any
forward-looking statements included in this annual report. All
forward-looking statements are made as of the date of this annual
report on Form 1-K and the risk that actual results will differ
materially from the expectations expressed in this annual report on
Form 1-K will increase with the passage of time. Except as
otherwise required by the federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking
statements after the date of this annual report on Form 1-K,
whether as a result of new information, future events, changed
circumstances or any other reason. In light of the significant
uncertainties inherent in the forward-looking statements included
in this annual report on Form 1-K, the inclusion of such
forward-looking statements should not be regarded as a
representation by us or any other person that the objectives and
plans set forth in this annual report on Form 1-K will be
achieved.
Item 1. Business
The Company
We
are an internally-managed real estate investment trust, or REIT,
formed to grow our business of acquiring, developing, financing,
owning and managing build-to-suit or improved-to-suit,
single-tenant properties leased primarily to the United States of
America and administered by the U.S. General Services
Administration (“GSA”) or directly by the federal
government agencies or departments occupying such properties
(referred to as “GSA Properties”). We invest primarily
in GSA Properties with sizes ranging from 5,000 to 50,000 rentable
square feet, and in their listed lease term after construction or
improvement to post-9/11 standards. We further emphasize GSA
Properties that fulfill mission critical or citizen service
functions. Leases associated with the GSA Properties in which our
company invests are full faith and credit obligations of the United
States of America.
On
March 14, 2019, we provided notice of nonrenewal (the
“Nonrenewal Notice”) of our Management Agreement with
HCA to be effective as of March 31, 2020. While our Management
Agreement has continued to be in place since the date of the
Nonrenewal Notice, our Board amended and restated our investment
guidelines as of the date of the Nonrenewal Notice. On March 31,
2020, the Management Agreement was terminated. We paid a total
termination fee of $1,645,453, which was satisfied with $1,275,000
in cash and $370,453 in shares of common stock of the Company at a
per share price of $7.17 for a total of 51,667 shares.
As
of the filing of this report, our portfolio consists of 20 GSA
Properties, comprised of 16 GSA Properties that we own in fee
simple, one GSA Property that we own subject to a ground lease and
three 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 (“Portfolio Properties”),
which includes one property acquired on May 1, 2019 and three
properties acquired on October 22, 2019, contains
approximately 390,767 rentable square feet located in 13
states. Based on net operating income of our Portfolio Properties,
our portfolio has a weighted average remaining lease term of 9.3
years if none of the early termination rights are exercised and 5.7
years if all of the early termination rights are
exercised.
The GSA-leased, real estate asset class has a number of attributes
that we believe will offer our stockholders significant benefits,
including a highly creditworthy and very stable tenant base,
long-term lease structures and low risk of tenant turnover. GSA
leases are backed by the full faith and credit of the United
States, and the GSA has never experienced a financial default.
Payment of rents under GSA leases are funded through the Federal
Buildings Fund and are not subject to direct federal
appropriations, which can fluctuate with federal budget and
political priorities. In addition to presenting reduced risk of
default, GSA leases typically have long initial terms of ten to 20
years with renewal leases having terms of five to ten years, which
limit operational risk. Upon renewal of a GSA lease, base rent
typically is reset based on a number of factors at the time of
renewal, including inflation and the replacement cost of the
building, that we generally expect will increase over the life of
the lease.
GSA-leased properties generally provide attractive
investment opportunities but require specialized knowledge and
expertise. Each U.S. Government agency has its own customs,
procedures, culture, needs and mission, which results in different
requirements for its leased space. Furthermore, the GSA-leased
sector is highly fragmented with a significant amount of
non-institutional owners. Moreover, while there are a number of
national real estate brokers that hold themselves out as having
GSA-leased property expertise, there are no national or regional
clearing houses for GSA-leased properties. We believe this
fragmentation can be ascribed particularly to the U.S.
Government’s – including GSA’s –
procurement policies, including policies of preference for small,
female and minority owned businesses. Long-term relationships and
specialized institutional knowledge regarding the agencies, their
space needs and the hierarchy and importance of a property to its
tenant agency are crucial to understanding which agencies and
properties present the greatest likelihood of long-term agency
occupancy, and, therefore, to identifying and acquiring attractive
GSA-leased properties. Our portfolio is
diversified among occupying agencies, including a number of the
largest and most essential agencies, such as the Drug Enforcement
Administration, the Federal Bureau of Investigation, the Social
Security Administration and the Department of Veterans
Affairs.
We
operate as an umbrella partnership REIT (“UPREIT”),
which means that we conduct substantially all of our business
through our Operating Partnership for which we serve as the general
partner. Our GSA-leased properties are owned through single-purpose
entities, 17 of which are wholly owned by our Operating Partnership
and three of which 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. While we focus on investments in GSA
Properties, in the future we also may invest in state and local
government, mission critical single tenant properties or properties
previously (but not exclusively) leased to the United States, the
GSA or one or more occupying agencies.
We
believe in the long-term there will be a consistent flow of GSA
Properties that meet our target investment criteria for purposes of
acquisition, leasing and managing, which we expect will enable us
to continue our platform into the foreseeable future. We acquire
GSA Properties with sizes ranging from 5,000 to 50,000 rentable
square feet, and in their listed lease term after construction or
improvement to post-9/11 standards throughout the United States. We
do not anticipate making acquisitions outside of the United States
or its territories.
We
primarily make direct acquisitions of GSA Properties, but we may
also invest in GSA Properties through indirect investments, such as
joint ventures, and whereby we may own less than a 100% of the
beneficial interest therein; provided, that in such event, we will
acquire at least 50 percent of the outstanding voting securities in
the investment, or otherwise comply with SEC staff guidance
regarding majority-owned subsidiaries so that the investment meets
the definition of “majority-owned subsidiary” under the
Investment Company Act of 1940, as amended.
Our Competitive Strengths and Strategic Opportunities
We
believe that we will benefit from the alignment of the following
competitive strengths and strategic opportunities:
High Quality Portfolio Leased to Mission-Critical U.S. Government
Agencies
●
We own a portfolio
of 20 GSA Properties, comprised of 16 GSA Properties we own in fee
simple, one GSA Property we own subject to a ground lease and three
GSA Properties for which we have all of the rights to the profits, losses, any distributed
cash flow and all of the other benefits and burdens of ownership
included for federal income tax purposes, each of which is
leased to the United States. As of the date of this annual report
on Form 1-K, based upon net operating income, the weighted average
age of the properties in our portfolio was approximately 8.6
years1,
and the weighted average remaining lease term is approximately 9.3
years if none of the early termination rights are exercised and 5.7
years, if all of the early termination rights are
exercised.
●
All of our GSA
Properties are occupied by agencies that serve mission-critical or
citizen service functions.
●
Our GSA Properties
generally meet our investment criteria, which target GSA Properties
with sizes ranging between 5,000 to 50,000 rentable square feet and
in their first term after construction or improvement to post-9/11
standards.
Credit Quality of Tenant
●
Leases are full
faith and credit obligations of the United States and, as such, are
not subject to the risk of annual appropriations.
●
Leases typically
include inflation-adjusted rent increases for certain property
operating costs, which the Company believes will mitigate expense
variability.
1
The
weighted-average age of the properties in our portfolio is based on
the later of (i) the date upon which the property was built or (ii)
the date upon which the property was fully renovated
Investment Strategy
We
believe there is a significant opportunity to acquire and build a
portfolio consisting of high-quality GSA Properties at attractive
risk-adjusted returns. We seek primarily to acquire “citizen
service” GSA Properties, or GSA Properties that are
“mission critical” to an agency’s function.
Further, we primarily target GSA Properties with sizes ranging from 5,000 to 50,000 rentable
square feet, and in their first term after construction or to
post-9/11 standards.
We believe the subset of GSA Properties on which
we focus is highly fragmented and often overlooked by larger
investors, which can provide opportunities for us to buy at more
attractive pricing compared to other properties within the asset
class. We also believe selection based on agency function, building
use and location will help to mitigate risk of non-renewal. While
we intend to focus on this subset of GSA Properties, we are not
limited in the properties in which we may invest.
We have the flexibility to expand our
investment focus as market conditions may dictate, subject to broad
investment policies adopted by our board of directors, as may be
amended by the board of directors from time to
time.
Description of Our Properties
The
following table presents an overview of our properties as of
December 31, 2019.
Property
|
|
|
|
|
|
|
|
Effective Annual Rent per RSF
|
Effective Annual Rent % of Portfolio
|
Our Portfolio
|
|
|
|
|
|
|
|
|
|
Port
Saint Lucie, Florida
|
DEA
|
24,858
|
6.4%
|
100%
|
5/31/2022
|
5/31/2027
|
$574,875
|
$23.13
|
4.7%
|
Jonesboro,
Arkansas
|
SSA
|
16,439
|
4.2%
|
100%
|
1/11/2022
|
1/11/2027
|
$623,145
|
$37.91
|
5.1%
|
Lorain,
Ohio
|
SSA
|
11,607
|
3.0%
|
100%
|
3/31/2021
|
3/31/2024
|
$445,892
|
$38.42
|
3.6%
|
Cape
Canaveral, Florida
|
CBP
|
14,704
|
3.8%
|
100%
|
7/15/2022
|
7/15/2027
|
$673,653
|
$45.81
|
5.5%
|
Johnson
City, Tennessee
|
FBI
|
10,115
|
2.6%
|
100%
|
8/20/2022
|
8/20/2027
|
$396,781
|
$39.23
|
3.2%
|
Fort
Smith, Arkansas
|
CIS
|
13,816
|
3.5%
|
100%
|
10/30/2024
|
10/30/2029
|
$427,275
|
$30.93
|
3.5%
|
Silt,
Colorado
|
BLM
|
18,813
|
4.8%
|
100%
|
9/30/2024
|
9/30/2029
|
$388,380
|
$20.64
|
3.1%
|
Lakewood,
Colorado
|
DOT
|
19,241
|
4.9%
|
100%
|
No
Early Termination
|
6/20/2024
|
$466,253
|
$24.23
|
3.8%
|
Moore,
Oklahoma
|
SSA
|
15,445
|
3.9%
|
100%
|
4/9/2022
|
4/9/2027
|
$530,659
|
$34.36
|
4.3%
|
Lawton,
Oklahoma
|
SSA
|
9,298
|
2.4%
|
100%
|
8/16/2020
|
8/16/2025
|
$285,044
|
$30.66
|
2.3%
|
Norfolk,
Virginia
|
SSA
|
53,917
|
13.8%
|
100%
|
No
Early Termination
|
6/26/2027
|
$1,314,322
|
$24.38
|
10.7%
|
Montgomery,
Alabama
|
CIS
|
21,420
|
5.5%
|
76%
|
12/8/2026
|
12/8/2031
|
$578,848
|
$27.02
|
4.7%
|
San
Antonio, Texas
|
ICE
|
38,756
|
9.9%
|
100%
|
4/30/2022
|
4/30/2027
|
$1,093,819
|
$28.22
|
8.9%
|
Knoxville,
Iowa
|
VA
|
12,833
|
3.3%
|
100%
|
No
Early Termination
|
1/11/2032
|
$687,427
|
$53.57
|
5.6%
|
Champaign,
Illinois
|
FBI
|
11,180
|
2.9%
|
100%
|
4/12/2028
|
4/12/2033
|
$371,323
|
$33.21
|
3.0%
|
Sarasota,
Florida
|
USDA
|
28,210
|
7.2%
|
100%
|
7/19/2028
|
7/19/2038
|
$919,223
|
$32.59
|
7.5%
|
Monroe,
Louisiana
|
VA
|
21,124
|
5.4%
|
100%
|
No
Early Termination
|
9/30/2023
|
$744,471
|
$35.24
|
6.1%
|
Ft.
Lauderdale, Florida
|
ICE
|
16,000
|
4.1%
|
100%
|
4/9/2028
|
4/9/2033
|
$702,936
|
$43.93
|
5.7%
|
Lawrence,
Kansas
|
USGS
|
16,000
|
4.1%
|
100%
|
No
Early Termination
|
2/28/2033
|
$595,522
|
$37.22
|
4.8%
|
Oklahoma
City, Oklahoma
|
ICE
|
16,991
|
4.3%
|
100%
|
12/27/2028
|
12/27/2033
|
$483,642
|
$28.46
|
3.9%
|
|
|
|
|
|
|
|
|
|
Total - Our Portfolio
|
|
390,767
|
100.00%
|
100%
|
|
|
$12,303,491
|
$31.49
|
100.00%
|
1
By rentable square footage.
2
The early termination date, if any, for each lease
generally represents the commencement of the time period during
which our tenant may exercise its right to terminate the lease, in
whole or in part, at any time effective on or after such date by
providing us with sufficient prior written notice. The prior
written notice required for early termination under each lease
ranges from 60 to 180 days. If our tenant exercises its early
termination rights with respect to any lease, we cannot guarantee
that we will be able to re-lease the premises on comparable terms,
if at all. The lease expiration date is the date the applicable
lease will terminate if the early termination is not exercise or if
no early termination right exists. As of December 31, 2019, the
weighted average remaining lease term of our portfolio and pipeline
is 9.3 years if none of the early termination rights are exercised
and 5.7 years if all of the early termination rights are
exercised.
Recent Recapitalization Transaction
On
March 19, 2019, we consummated a recapitalization transaction (the
“Recapitalization Transaction”) with Hale Partnership
Capital Management, LLC (“Hale”) and certain affiliated
investors (each, an “Investor” and collectively, the
“Investors”), pursuant to which (i) certain of such
Investors provided a $10,500,000 mezzanine loan to us through our
Operating Partnership, (ii) certain of such Investors purchased
1,050,000 shares of our 10.00% Series B Cumulative Preferred Stock
(the “Series B Preferred Stock”) and (iii) an Investor
purchased 300,000 shares of our newly issued common stock (the
“Common Stock”). Additional description of the
Recapitalization Transaction can be found on our Current Report on
Form 1-U located at: https://www.sec.gov/Archives/edgar/data/1670010/000165495419002955/hcgrt_1u.htm.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Overview
We
are a real estate investment trust, or REIT, formed to grow our
business of acquiring, developing, financing, owning and managing
build-to-suit or improved-to-suit, single-tenant properties leased
primarily to the United States of America and administered by the
GSA or directly by the federal government agencies or departments
occupying such properties (referred to as “GSA
Properties”). We invest primarily in GSA Properties in sizes
that range from 5,000 to 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. Leases
associated with the GSA Properties in which our company invests are
full faith and credit obligations of the United States of America.
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 December 31, 2019, the Company owned
20 GSA Properties, comprised of 16 GSA Properties that we own in
fee simple, one GSA Property that we own subject to a ground lease
and three GSA Properties for which we have all of the rights to the profits, losses, any distributed
cash flow and all of the other benefits and burdens of ownership
including for federal income tax purposes, each of which is
leased to the United States. Our portfolio of GSA Properties, or
our portfolio, contains approximately 390,767 rentable square feet located in 13 states.
As of December 31, 2019, our portfolio properties are 100% leased
to the United States of America and occupied by 11 different
federal government agencies. Based on net operating income of each
property, our portfolio has a weighted average remaining lease term
of 9.3 years if none of the early termination rights are exercised
and 5.7 years if the early termination right 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 December 31,
2019, we owned approximately 54.7% of the aggregate common limited
partnership interests in our Operating Partnership, or common
units. We also own all of the preferred limited partnership
interests in our Operating Partnership. We were formed in 2016 as a
Maryland corporation and we have elected to be taxed as a REIT for
federal income tax purposes commencing with our fiscal year ended
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 year ended December 31, 2019
At
December 31, 2019, we owned 17 properties and all of the rights to
the profits, losses, any distributed cash flow and all of the other
benefits and burdens of ownership including for federal income tax
purposes for three other properties. Our portfolio comprises
390,767 rentable square feet located in 13 states and is 100%
leased to the United States and either administered by the GSA or
occupying department or agency.
During
the year ended December 31, 2019, we earned revenues of $10,788,099
and incurred operating costs of $3,356,328, excluding asset
management fees, depreciation and amortization and corporate
expenses. Our net operating income for the period was $7,431,771;
and, after deducting asset management fees of $485,813, corporate
expenses of $3,649,756, depreciation and amortization of
$4,046,413, interest expense of $5,045,639, loss on extinguishment
of debt of $966,200, management termination fees of $1,900,002 and
the recognition of a gain on involuntary conversion of $192,717,
the Company’s net loss was $8,469,335 for the year ended
December 31, 2019. Our net loss attributed to our common
shareholders was $7,611,041 after allocating $2,020,305 of the
Company’s net loss to the noncontrolling interest in our
Operating Partnership and after deducting preferred stock dividends
of $1,162,011. In connection with the Recapitalization Transaction,
we incurred certain one-time expenses totaling $1,655,631 primarily
for legal and professional services and make-whole premium on
certain notes payable that were paid off at closing. During the
year ended December 31, 2019, we recognized $584,553 to write-off
debt issuance costs associated with the early repayment of certain
mortgages and $1,900,002 of management termination fees comprised
of (1) fees associated with the termination of certain property
management agreements and (2) estimated fees expected to be paid to
HCA in connection with the non-renewal of our asset management
agreement, which formally terminated effective March 31, 2020.
Excluding the impact of these one-time expenses, our net loss was
$4,329,149 for the year ended December 31, 2019 and our net loss
attributed to our common shareholders was $3,470,855.
For the year ended December 31, 2018
At
December 31, 2018, we owned 13 properties and all of the rights to
the profits, losses, any distributed cash flow and all of the other
benefits and burdens of ownership including for federal income tax
purposes for three other properties. The portfolio contained
320,652 rentable square feet located in 11 states and was 100%
leased to the United States and either administered by the GSA or
occupying department or agency.
During
the year ended December 31, 2018, we earned revenues of $8,431,607
and incurred operating costs, excluding asset management fees,
depreciation and amortization and corporate expenses, of
$2,622,000. Our net operating income for the period was $5,809,607;
and, after deducting asset management fees of $328,053, corporate
expenses of $1,010,866, depreciation and amortization of
$3,102,762, interest expense of $3,529,982 and after the
recognition of a gain on an asset disposition of $57,530, the
Company’s net loss was $2,104,526 for the year ended December
31, 2018. Our net loss attributed to our common shareholders was
$1,787,497 after allocating $569,904 of the Company’s net
loss to the noncontrolling interest in our Operating Partnership
and after deducting preferred stock dividends of
$252,875.
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 a reconciliation of NOI to net income
(loss) as computed in accordance with GAAP for the periods
presented.
|
For the year ended December 31,
|
|
|
|
|
|
|
Revenues
|
$10,788,099
|
$8,431,607
|
Less:
|
|
|
Operating
expenses
|
3,087,487
|
2,397,348
|
Property
management fee
|
268,841
|
224,652
|
Total
expenses
|
3,356,328
|
2,622,000
|
|
|
|
Net
operating income
|
7,431,771
|
5,809,607
|
Less:
|
|
|
Asset
management fee
|
485,813
|
328,053
|
Corporate
expenses
|
3,649,756
|
1,010,866
|
Depreciation
and amortization
|
4,046,413
|
3,102,762
|
Interest
expense
|
5,045,639
|
3,529,982
|
Loss
on extinguishment of debt
|
966,200
|
-
|
Management
termination fees
|
1,900,002
|
-
|
Gain
on involuntary conversion
|
(192,717)
|
-
|
Gain
on asset disposition
|
-
|
(57,530)
|
Net
loss
|
(8,469,335)
|
(2,104,526)
|
Less:
Net loss attributable to noncontrolling interest
|
(2,020,305)
|
(569,904)
|
Net
loss attributed to HC Gov Realty Trust, Inc.
|
(6,449,030)
|
(1,534,622)
|
Less:
Preferred stock dividends
|
(1,162,011)
|
(252,875)
|
Net
loss attributed to HC Gov Realty Trust, Inc. available to common
shareholders
|
$(7,611,041)
|
$(1,787,497)
|
Liquidity and Capital Resources
Our business model is intended to drive growth
through acquisitions. Our Recapitalization Transaction and KeyBank
Transaction (as defined below) provided us with liquidity through
both debt and equity investments. This allowed us to refinance our
existing debt and provided us with additional capital to continue
pursuing our acquisition strategies. In addition, access to the
capital markets is an important factor for our continued
success
. In November 2019,
our securities offering pursuant to Regulation A (the
“Offering”) expired and we did not file a
post-qualification amendment to extend the Offering. While we have
currently elected to not continue to issue equity under Regulation
A, we expect to continue to issue equity in our company with
proceeds being used to acquire GSA Properties or buy facilities
that are leased to credit-worthy state or municipal tenants. As of
December 31, 2019, we had approximately $3,436,577 available in
cash and cash equivalents.
Liquidity General
Our need for liquidity will be primarily to fund (i)
operating expenses and cash dividends and distributions; (ii)
property acquisitions; (iii) capital expenditures; (iv) payment of
principal of, and interest on, outstanding indebtedness; and (v)
other investments, consistent with our Investment Guidelines and
Investment Policies.
Capital Resources
Our
capital resources are substantially related to our recent
Recapitalization Transaction and KeyBank Transaction (as defined
below). In connection with the
Recapitalization Transaction, we received $10,500,000 in mezzanine
debt, $10,500,000 through the issuance of our Series B Preferred
Stock and $3,000,000 through the issuance of our common stock. This
capital was primarily used to pay off existing debt, including
accrued interest, in the aggregate amount of $20,139,316 comprised
of $9,708,581 to pay off various debt affiliated with our former
directors and officers or their affiliates, $1,439,557 of unsecured promissory notes
payable to accredited investors, and $8,991,178 to pay off a loan
cross-collateralized by four of our properties. The remaining
$3,860,684 received from the Recapitalization Transaction was used
to pay transaction-related expenses and past due accounts payable,
with the balance reserved for general working capital purposes
including pursuing and making acquisitions.
The
Recapitalization Transaction permitted the issuance of up to an
additional $10,000,000 of Series B Preferred Stock and the
borrowing of up to an additional $10,000,000 of mezzanine debt,
which was later increased in October 2019 to an additional
$13,500,000 of mezzanine debt in the aggregate. In May 2019, we
issued an additional $1,300,000 of Series B Preferred Stock and
borrowed an additional $1,300,000 in mezzanine debt to partially
finance our acquisition of our Portfolio Property in Monroe,
Louisiana. In June 2019, we borrowed an additional $2,000,000 of
mezzanine debt to partially refinance the mortgage debt on our
Portfolio Property in San Antonio, Texas. In October 2019, we
borrowed an additional $7,000,000 of mezzanine debt to partially
finance our acquisition of our Portfolio Properties in Ft.
Lauderdale, Florida, Lawrence, Kansas and Oklahoma City, Oklahoma.
As of December 31, 2019, we had approximately $8,700,000 in
authorized but unissued shares of Series B Preferred Stock and
$3,200,00 of mezzanine debt available.
In
October 2019, we also entered into a senior secured revolving
credit facility with KeyBanc Capital Markets, Inc., as sole
bookrunner and lead arranger, and KeyBank National Association, as
syndication agent and administrative agent, in connection with
which we obtained commitments in an initial amount of $60,000,000
(the “KeyBank Transaction”) and borrowed an initial
principal amount of $60,000,000 in order to refinance certain
existing indebtedness and to partially finance our acquisition of
our Portfolio Properties in Ft. Lauderdale, Florida, Lawrence,
Kansas and Oklahoma City, Oklahoma. In December 2019, the senior
secured revolving credit facility was increased to provide total
availability of up to $100,000,000, subject to customary terms and
availability conditions. The senior secured revolving credit
facility includes an accordion feature that will permit the Company
to further increase the amount of commitments available to the
Company, up to $200,000,000, subject to customary terms and
conditions. The Company intends to use the senior secured revolving
credit facility to repay certain indebtedness, fund acquisitions
and capital expenditures and provide working capital.
As of
December 31, 2019, we had approximately $39,050,000 committed and
undrawn under our senior secured revolving credit
facility.
Trend Information
Our
Company, through our Operating Partnership is engaged primarily in
the acquisition, leasing and management of single-tenanted, mission
critical or customer facing properties, leased to the United States
of America 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.
Prior
to our Recapitalization Transaction, our Company had been capital
constrained, which affected liquidity adversely from an operating
perspective and the ability of our Company to manage several viable
acquisition opportunities at the same time. We believe the
Recapitalization Transaction enabled management to accelerate its
acquisition plans and provided much needed liquidity to our Company
during 2019. While there can be no assurance, we believe our senior
secured revolving credit facility will support our Company’s
growth strategy, provide liquidity to recruit and retain qualified
personnel, and enhance purchasing power for goods and services in
connection with the operation of our properties.
Item
3. Directors and
Officers
The
individuals listed below are our executive officers and directors.
The following table and biographical descriptions set forth certain
information with respect to the individuals who currently serve as
our directors and the executive officers:
Name
|
|
Position
|
|
Age
|
|
Term of Office
|
Steven A. Hale II
|
|
Chairman and Chief Executive Officer
|
|
36
|
|
March 2019
|
Jacqlyn Piscetelli
|
|
Chief Financial Officer, Treasurer and Secretary
|
|
36
|
|
March 2019
|
Brad G. Garner
|
|
Director
|
|
37
|
|
March 2019
|
Matthew A. Hultquist
|
|
Director
|
|
41
|
|
March 2019
|
Jeffrey S. Stewart
|
|
Director
|
|
53
|
|
March 2019
|
Anthony J. Sciacca, Jr.
|
|
Director
|
|
49
|
|
September 2019
|
Steven A. Hale II. Mr. Hale has managed
the Hale Partnership Fund LP, MGEN-II Hale Fund LP, Clark-Hale Fund
LP, and Hale Medical Office Building Fund, LP, via Hale Partnership
Capital Management, LLC, since September 2010. In November 2017,
Mr. Hale was named Chairman of the Board for Stanley Furniture
Company, Inc. (since renamed HG Holdings, Inc.). He has served as
Chief Executive Officer of HG Holdings, Inc. since March 2018.
Prior to founding Hale Partnership Capital Management, LLC, Mr.
Hale worked for Babson Capital Management, LLC where he was
responsible for primary coverage of distressed debt investments
across a variety of industries including manufacturing commercial
real estate, services, and casinos/gaming. Prior to joining Babson,
Mr. Hale was a Leveraged Finance Analyst at Bank of America
Securities. Mr. Hale graduated from Wake Forest University in 2005,
where majored in economics, minored in psychology and religion, and
was a 3-year letterman on the varsity football team.
Jacqlyn Piscetelli. Ms. Piscetelli
served as Chief Financial Officer of Stanley Furniture Company, LLC
(“Stanley Furniture”) from March 2018 until January
2019 where she directed all finance and accounting operations.
Prior to joining Stanley Furniture, Ms. Piscetelli served as the
Financial Executive – Governance for the Financial Management
group at BB&T Corporation (“BB&T”) from 2016 to
2018 where she managed BB&T’s Sarbanes-Oxley Section 302
and 404 compliance programs. From 2013 to 2016, Ms. Piscetelli
worked in BB&T’s Accounting Policy group where she was
primarily responsible for monitoring the issuance of new accounting
pronouncements and evaluating their impact on the financial
institution. Ms. Piscetelli spent over 7 years in public accounting
at Ernst & Young LLP (“EY”) in their Assurance
practice. At EY, she served both public and private clients with
domestic and foreign operations across a variety of industries
including manufacturing and distribution, automotive, retail and
financial services. Ms. Piscetelli graduated from Wake Forest
University in 2006 with a B.S. and M.S. in
Accountancy.
Brad G. Garner. Mr. Garner joined Hale
Partnership Capital Management, LLC in 2015 as Chief Financial
Officer and Partner. In April 2018, Mr. Garner was named Chief
Financial Officer of HG Holdings, Inc. (formerly Stanley Furniture
Company, Inc.). Mr. Garner leads Real Estate efforts and private
equity investments for the Hale entities. He has also served as
Chief Financial Officer of Best Bar Ever, Inc., a protein bar
business from 2015-2017. Mr. Garner assisted in raising and
structuring a capital investment and successful exit to a strategic
partner while overseeing all financial reporting functions during a
two-year time horizon. Prior to taking on that role, he spent 10
years in public accounting at Dixon Hughes Goodman LLP
(“DHG”), the largest public accounting firm
headquartered in the Southeast, as a Senior Tax Manager. At DHG, he
served domestic closely held companies (specifically pass-through
entities) and individuals. These clients represented a variety of
industries including manufacturing and distribution, construction
and real estate, and financial institutions. Mr. Garner earned B.S
and M.S in Accounting from Wake Forest.
Matthew A. Hultquist. Mr. Hultquist has
served as the Managing Member of Hillandale Advisors, a private
investment and advisory firm that works with private businesses and
their owners on strategic growth since January 2017. In June 2018,
Matthew joined the Board of Directors of HG Holdings, Inc.
(formerly Stanley Furniture Company, Inc.). From 2006 to 2016, Matt
served on the investment team as Sasco Capital, Inc., a public
equity asset management firm overseeing $4 billion + of assets for
public funds, corporations and endowments. Sasco Capital invested
in mid to large capitalization public companies across most
industries, with jewel businesses, that are undergoing corporate
restructuring, transformation, or management change. Matt earned
B.S in Finance from Wake Forest University and M.B.A from Columbia
Business School.
Jeffrey S. Stewart. Mr. Stewart has
been the Chairman of the Foursquare Foundation Investment Committee
since 2008. Mr. Stewart also currently sits on Morgan
Stanley’s North Haven Credit Advisory Board. Mr. Stewart is a
highly experienced portfolio manager with 24 years of experience
investing and researching debt and equity, including equity
research at IJL and fixed income at First Union, and portfolio
management at Babson Capital Management, LLC. Jeff started his
career as a United States Marine in 1985. Three time meritoriously
promoted, he was awarded a NROTC scholarship in 1988 and attended
UNC Chapel Hill, where he received a BSBA with a concentration in
finance and a minor in history with distinction.
Anthony J. Sciacca, Jr. Mr. Sciacca
serves as Head of Global Alternative Investments at Barings Real
Estate Advisers LLC and Babson Capital Management LLC, Investment
Arm. Mr. Sciacca is responsible for overseeing the group's
investment activities across private equity, asset-based
investments, and real assets. He serves as the Head of Barings
Alternative Investments at Barings LLC. Previously, he served as a
Managing Director, Head of Babson Capital Strategic Investors and
Head of Global Business Development Group at the firm. In this
capacity, he drove business development initiatives across Babson's
investment strategies from fixed income to alternative asset
markets and oversaw the management of Babson's institutional and
retail relationships globally. He joined the firm in 2006. He also
leads the middle-market bank loan business at the firm's U.S. bank
loan team. Mr. Sciacca is also a member of the firm's Senior
Management Team and the President of Babson Capital Securities. He
was a Managing Director and the Head of Structured Credit
Origination for the collateralized loan obligation and corporate
collateralized debt obligation businesses at Wachovia Securities.
Mr. Sciacca was employed at Wachovia Securities from April 2002 to
April 2006. Before that, he was a Managing Director at Bear,
Stearns & Co. where he was a structured credit market
specialist. Mr. Sciacca was an Associate Director at Bank of
America from October 1996 to September 2000. He served as a
Consultant at Accenture from September 1993 till October 1996. He
also worked in middle market senior lending as well as financial
services consulting with Accenture. Mr. Sciacca serves as a member
of Board of Managers of Cornerstone Real Estate Advisors LLC. He
has worked in the industry since 1993. Mr. Sciacca has several
years of industry experience, encompassing private equity, middle
market finance and structured credit. He received a B.S. degree in
Applied Economics from Cornell University in 1993.
Executive Compensation
The
following table summarizes compensation to our executive officers
for the year ended December 31, 2019:
Name
|
|
|
|
Steven A. Hale II, Chief Executive
Officer
|
$175,625
|
$225,000
|
$400,625
|
Jacqlyn Piscetelli, Chief Financial
Officer
|
117,083
|
50,000
|
167,083
|
Director Compensation
In
2019, we granted $35,000 of shared-based compensation in the form
of restricted shares of our common stock to each of our
non-employee directors, which vests in September 2020.
A
description of our 2016 Equity Incentive Plan is incorporated by
reference herein from the post-qualification amendment to our
Offering Statement on Form 1-A located at: https://www.sec.gov/Archives/edgar/data/1670010/000165495418012065/hcgov_1apos.htm
under the caption “COMPENSATION OF DIRECTORS AND EXECUTIVE
OFFICERS— HC Government Realty Trust 2016 Long Term
Incentive Plan.”
Item 4. Security Ownership of Management and Certain Security
Holders
The
table below sets forth, as of the filing of this report, certain
information regarding the beneficial ownership of our stock for (1)
each person who is expected to be the beneficial owner of 10% or
more of our outstanding shares of any class of voting stock and (2)
each of our directors and named executive officers, if together
such group would be expected to be the beneficial owners of 10% or
more of our outstanding shares of any class of voting stock. Each
person named in the table has sole voting and investment power with
respect to all of the shares of common stock shown as beneficially
owned by such person.
The
SEC has defined “beneficial ownership” of a security to
mean the possession, directly or indirectly, of voting power and/or
investment power over such security. A stockholder is also deemed
to be, as of any date, the beneficial owner of all securities that
such stockholder has the right to acquire within 60 days after that
date through (1) the exercise of any option, warrant or right, (2)
the conversion of a security, (3) the power to revoke a trust,
discretionary account or similar arrangement or (4) the automatic
termination of a trust, discretionary account or similar
arrangement. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, our shares
of common stock subject to options or other rights (as set forth
above) held by that person that are exercisable as of the
completion of this offering or will become exercisable within 60
days thereafter, are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing
percentage ownership of any other person.
Title of Class
|
Name and Address of Beneficial Owner
|
Amount and Nature of Beneficial Ownership
|
Amount and Nature of Beneficial Ownership
Acquirable
|
|
Common
Stock
|
All Executive Officers and
Directors1
|
31,424
Shares
|
N/A
|
2.2%
|
Common
Stock
|
HG Holdings, Inc.2
|
300,000
Shares
|
N/A
|
20.9%
|
Series
A Preferred Stock
|
Baker Hill Holding, LLC3
|
26,000
Shares
|
N/A
|
18.0%
|
Series
B Preferred Stock
|
All Executive Officers and
Directors1
|
730,000 Shares4
|
N/A
|
61.9%
|
Series
B Preferred Stock
|
Hale Partnership Capital
Management5,
6
|
730,000
Shares
|
N/A
|
61.9%
|
Series
B Preferred Stock
|
HG Holdings, Inc.2
|
200,000
Shares
|
N/A
|
16.9%
|
Series
B Preferred Stock
|
International Church of the Foursquare
Gospel7
|
250,500
Shares
|
N/A
|
21.2%
|
1
The address of each beneficial owner is 390 S Liberty Street, Suite
100, Winston-Salem, NC 27101.
2
The address of HG Holdings, Inc. is 2115 E. 7th Street, Suite 101,
Charlotte, NC 27804.
3
The address of Baker Hill Holding, LLC is 54 Phipps Lane,
Plainview, NY 11803.
4
Includes the shares directed by Hale Partnership Capital Management
(“HPCM”).
5
The address of HPCM is 3675 Marine Drive, Greenville, NC
27834.
6
HPCM serves as investment manager or adviser to commingled funds,
group trusts and separate accounts (such investment companies,
funds, trusts and accounts, collectively referred to as the
“Funds”). In certain cases, HPCM may act as an adviser
or sub-adviser to certain Funds. In its role as investment adviser,
sub-adviser and/or manager, HPCM may possess voting and/or
investment power over the securities of the Company owned by the
Funds and may be deemed to be the beneficial owner of these shares.
However, all securities reported on the table are owned by the
Funds, and HPCM disclaim beneficial ownership of all of the shares
shown.
7
The address of International Church of the Foursquare Gospel is
1910 W. Sunset Boulevard, Suite 200, Los Angeles, CA
90026.
Item
5. Interest of Management and Others in Certain
Transactions
The
information included above under the caption “Item 1. Business—Recent Recapitalization
Transaction” is hereby incorporated by reference into
this Item 5. The information contained in the post-qualification
amendment to our Offering Statement on Form 1-A located at:
https://www.sec.gov/Archives/edgar/data/1670010/000165495418012065/hcgov_1apos.htm
under the caption “INTEREST
OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS” is
incorporated herein by reference.
The
following information has changed since the date of our
post-qualification amendment to our Offering Statement on Form
1-A:
Norfolk Interim Loans
On
March 31, 2017, the Company borrowed $2,770,000 from Baker Hill
Holdings LLC (“BH”) and $300,000 from Mr. Robert R.
Kaplan. These loans were repaid in full in the aggregate amount of
$3,070,000 with proceeds from our Recapitalization
Transaction.
Additional Affiliated Loans and Advances
In
July 2018, Messrs. Kaplan, Kaplan Jr., and Stanton, and BH, each
advanced $60,000 to our Company to fund working capital and
distributions. These advances were repaid during 2019.
In
October 2018, BH made two unsecured loans to our Company in the
amounts of $78,000 and $150,000 to fund distributions to our
stockholders. These loans were repaid in full in the aggregate
amount of $228,000 with proceeds from our Recapitalization
Transaction.
Promissory Notes
On
December 11, 2017, the Company borrowed $1,500,000 in aggregate
principal amount pursuant to multiple unsecured promissory notes
payable to accredited investors. With respect to these notes,
$500,000 in principal amount was loaned by BH, and $250,000 was
loaned by a member of the Company’s predecessor. These loans
were repaid in full with proceeds from our Recapitalization
Transaction.
BH Notes
On
July 27, 2018, our Operating Partnership borrowed $1,700,000 from
BH, pursuant to an unsecured promissory note. Also, on August 30,
2018, our Operating Partnership borrowed $800,000 from BH, pursuant
to an unsecured promissory note. In addition, on October 12, 2018,
our Operating Partnership borrowed $2,470,000 from BH, pursuant to
an unsecured promissory note. The principal balance of these loans
were repaid in full along with $356,697 of make whole premium with
proceeds from our Recapitalization Transaction.
Real Estate Notes
On May
1, 2019, one of our single-purpose entities that is wholly-owned by
our Operating Partnership borrowed $2,550,000 from the Hale
Partnership Fund, L.P. to partially finance the acquisition of our
GSA Property located in Monroe, Alabama. The unsecured loan bears a
variable interest rate based on one-month LIBOR plus 225 basis
points. This loan was fully repaid with proceeds from the KeyBank
Transaction. The loan was not subject to any prepayment
penalty.
On June
5, 2019, one of our single-purpose entities that is wholly-owned by
our Operating Partnership borrowed $5,000,000 from the Hale
Partnership Fund, L.P. to partially refinance the mortgage on our
GSA Property located in San Antonio, Texas. The unsecured loan
bears interest at a fixed rate of 5.50%. This loan was fully repaid
with proceeds from the KeyBank Transaction. The loan was not
subject to any prepayment penalty.
Predecessor Payables
Our
Company had outstanding payables to our predecessor for various
expenses paid on our behalf by our predecessor in the amount of
$408,514. As of the date of this annual report, this amount remains
outstanding.
Item 6. Other Information
None
Item 7. Financial Statements
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Stockholders
HC Government Realty Trust, Inc.
Winston-Salem, North Carolina
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of HC
Government Reality Trust, Inc. and subsidiaries (collectively,
“the Company”) as of December 31, 2019 and 2018, the
related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2019 and 2018, and the related
notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018,
and the results of their operations and their cash flows for each
of the years in the two-year period ended December 31, 2019 in
conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB and in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/
Cherry Bekaert LLP
We have served as the Company’s auditor since
2016.
Richmond, VA
April 2, 2020
HC Government Realty Trust, Inc.
Consolidated Balance Sheets
December 31, 2019 and 2018
|
|
|
ASSETS
|
|
|
Investment in real
estate, net
|
$96,972,845
|
$79,786,230
|
Cash and cash
equivalents
|
3,436,577
|
1,444,172
|
Restricted
cash
|
120,166
|
1,718,676
|
Rent and other
tenant receivables, net
|
1,136,496
|
1,073,881
|
Leasehold
intangibles, net
|
9,319,030
|
8,024,729
|
Deposits on
properties under contract
|
-
|
224,069
|
Deferred financing,
net
|
2,023,844
|
-
|
Prepaid expenses
and other assets
|
188,058
|
235,005
|
Total
Assets
|
$113,197,016
|
$92,506,762
|
|
|
|
LIABILTIES
|
|
|
Revolving credit
facility
|
$60,950,000
|
$-
|
Mezzanine
debt
|
20,800,000
|
-
|
Mortgages payable,
net of unamortized debt costs
|
9,459,291
|
65,503,177
|
Notes payable -
related party
|
-
|
9,518,000
|
Notes
payable
|
-
|
1,180,000
|
Declared dividends
and distributions
|
721,733
|
378,687
|
Accrued interest
payable
|
267,366
|
417,141
|
Accounts
payable
|
591,791
|
422,162
|
Accrued
expenses
|
1,289,450
|
483,879
|
Accrued management
termination fee
|
1,650,000
|
-
|
Deferred
revenue
|
-
|
452,313
|
Tenant improvement
obligation
|
1,201,661
|
1,224,923
|
Acquisition fee
payable
|
556,739
|
505,239
|
Below-market
leases, net
|
753,515
|
868,786
|
Related party
payable, net
|
-
|
722,465
|
Total
Liabilities
|
98,241,546
|
81,676,772
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 13)
|
-
|
-
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
Preferred stock
($0.001 par value, 250,000,000 shares authorized and 1,324,500 and
144,500 shares issued and outstanding at December 31, 2019 and
2018, respectively)
|
1,324
|
144
|
Common stock
($0.001 par value, 750,000,000 shares authorized, 1,438,465 and
1,107,041 common shares issued and outstanding at December 31, 2019
and 2018, respectively)
|
1,438
|
1,107
|
Additional paid-in
capital
|
24,463,133
|
11,314,818
|
Offering
costs
|
(1,459,479)
|
(1,459,479)
|
Accumulated
deficit
|
(9,324,626)
|
(2,875,596)
|
Accumulated
dividends and distributions
|
(3,478,926)
|
(1,536,708)
|
Total
Stockholders' Equity
|
10,202,864
|
5,444,286
|
Noncontrolling
interest in operating partnership
|
4,752,606
|
5,385,704
|
Total
Equity
|
14,955,470
|
10,829,990
|
Total
Liabilities and Stockholders' Equity
|
$113,197,016
|
$92,506,762
|
The
following table presents the assets and liabilities of the
Company's three consolidated variable interest entities as of
December 31, 2019 and 2018 which are included on the Consolidated
Balance Sheets above. The assets in the table below include those
assets that can only be used to settle obligations of the
consolidated variable interest entities. The liabilities in the
table below include third-party liabilities of the consolidated
variable interest entities 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
|
$11,237,144
|
$11,627,603
|
Intangible
assets, net
|
264,538
|
397,582
|
Prepaids
and other assets
|
358,998
|
122,777
|
Total
Assets
|
$11,860,680
|
$12,147,962
|
LIABILITIES OF CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH
CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO
THE COMPANY.
Mortgages
payable, net
|
$9,459,291
|
$9,633,590
|
Intangible
liabilities, net
|
79,237
|
123,985
|
Accounts
payable and accrued expenses
|
205,862
|
255,205
|
Total
liabilities
|
$9,744,390
|
$10,012,780
|
The accompanying notes are an integral part of the consolidated
financial statements
HC Government Realty Trust, Inc.
Consolidated Statements of Operations
For the years ended December 31, 2019 and 2018
|
|
|
|
|
Revenues
|
|
|
Rental
revenues
|
$10,441,958
|
$8,145,067
|
Real estate tax
reimbursements and other revenues
|
346,141
|
286,540
|
Total
revenues
|
10,788,099
|
8,431,607
|
|
|
|
Operating
expenses
|
|
|
Depreciation and
amortization
|
4,046,413
|
3,102,762
|
General and
administrative - corporate
|
885,888
|
416,183
|
General and
administrative - property
|
52,201
|
24,846
|
Ground
leases
|
91,755
|
91,545
|
Insurance
|
172,129
|
100,359
|
Janitorial
|
498,423
|
389,552
|
Management
fees
|
754,654
|
552,705
|
Management
termination fees
|
1,900,002
|
-
|
Professional
expenses
|
2,299,084
|
468,263
|
Real estate and
other taxes
|
1,034,703
|
849,546
|
Repairs and
maintenance
|
720,501
|
435,631
|
Equity-based
compensation
|
492,654
|
193,119
|
Utilities
|
489,905
|
439,170
|
Total operating
expenses
|
13,438,312
|
7,063,681
|
|
|
|
Other (income)
expense
|
|
|
Interest
expense
|
5,045,639
|
3,529,982
|
Loss on
extinguishment of debt
|
966,200
|
-
|
Gain on involuntary
conversion
|
(192,717)
|
-
|
Gain on sale of
property
|
-
|
(57,530)
|
Net other (income)
expense
|
5,819,122
|
3,472,452
|
|
|
|
Net
loss
|
(8,469,335)
|
(2,104,526)
|
Less: Net loss
attributable to noncontrolling interest in operating
partnership
|
(2,020,305)
|
(569,904)
|
Net loss attributed
to HC Government Realty Trust, Inc.
|
(6,449,030)
|
(1,534,622)
|
Preferred
stock dividends
|
(1,162,011)
|
(252,875)
|
Net loss attributed
to HC Government Realty Trust, Inc. available to common
shareholders
|
$(7,611,041)
|
$(1,787,497)
|
|
|
|
Basic and diluted
loss per share
|
$(5.64)
|
$(1.70)
|
|
|
|
Basic and diluted
weighted-average common shares outstanding
|
1,348,958
|
1,048,495
|
The accompanying notes are an integral part of the consolidated
financial statements
HC Government Realty Trust, Inc.
Consolidated Statements of Changes in Stockholders’
Equity
For the years ended December 31, 2019 and 2018
|
|
|
|
|
|
|
|
|
Non-controlling
Interest in
|
|
|
|
Par
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 issuing
common shares, net of issuances costs
|
-
|
-
|
-
|
-
|
211,734
|
212
|
1,947,443
|
-
|
-
|
-
|
1,947,655
|
-
|
1,947,655
|
Issuance of OP Units in
connection with property closing
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
400,000
|
400,000
|
Equity-based
compensation - restricted stock
|
-
|
-
|
-
|
-
|
-
|
-
|
61,333
|
-
|
-
|
-
|
61,333
|
-
|
61,333
|
Equity-based
compensation long-term incentive plan shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
131,786
|
131,786
|
Dividends and
distributions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(845,745)
|
(845,745)
|
(639,023)
|
(1,484,768)
|
Allocation of NCI in
operating partnership
|
-
|
-
|
-
|
-
|
-
|
-
|
357,329
|
-
|
-
|
-
|
357,329
|
(357,329)
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,534,622)
|
-
|
(1,534,622)
|
(569,904)
|
(2,104,526)
|
Balance, December 31,
2018
|
144,500
|
$144
|
-
|
$-
|
1,107,041
|
$1,107
|
$11,314,818
|
$(1,459,479)
|
$(2,875,596)
|
$(1,536,708)
|
$5,444,286
|
$5,385,704
|
$10,829,990
|
Proceeds from issuing
common shares, net of issuances costs
|
-
|
-
|
-
|
-
|
300,000
|
300
|
2,999,700
|
-
|
-
|
-
|
3,000,000
|
-
|
3,000,000
|
Proceeds from issuing
preferred shares
|
-
|
-
|
1,180,000
|
1,180
|
-
|
-
|
11,798,820
|
-
|
-
|
-
|
11,800,000
|
-
|
11,800,000
|
Equity-based
compensation long-term incentive plan shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
144,499
|
144,499
|
Equity-based
compensation - restricted stock
|
-
|
-
|
-
|
-
|
31,424
|
31
|
247,350
|
-
|
-
|
-
|
247,381
|
-
|
247,381
|
Dividends and
distributions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,942,218)
|
(1,942,218)
|
(654,847)
|
(2,597,065)
|
Allocation of NCI in
operating partnership
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,897,555)
|
-
|
-
|
-
|
(1,897,555)
|
1,897,555
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,449,030)
|
-
|
(6,449,030)
|
(2,020,305)
|
(8,469,335)
|
Balance, December 31,
2019
|
144,500
|
$144
|
1,180,000
|
$1,180
|
1,438,465
|
$1,438
|
$24,463,133
|
$(1,459,479)
|
$(9,324,626)
|
$(3,478,926)
|
$10,202,864
|
$4,752,606
|
$14,955,470
|
The accompanying notes are an integral part of the consolidated
financial statements
HC Government Realty Trust, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2019 and 2018
|
For the years
ended December 31,
|
|
|
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$(8,469,335)
|
$(2,104,526)
|
Adjustments to
reconcile net loss to net cash provided from (used in) operating
activities:
|
|
|
Depreciation
|
3,074,466
|
2,385,819
|
Amortization of
acquired lease-up costs
|
416,310
|
322,446
|
Amortization of
in-place leases
|
555,637
|
394,497
|
Amortization of
above/below-market leases, net
|
154,375
|
101,008
|
Amortization of
debt issuance costs
|
864,927
|
243,223
|
Equity-based
compensation - long-term incentive plan units
|
144,499
|
131,786
|
Equity-based
compensation - restricted shares
|
247,381
|
61,333
|
Gain on disposition
of property
|
-
|
(57,530)
|
Gain on involuntary
conversion
|
(192,717)
|
-
|
Change in assets
and liabilities
|
|
|
Rent and other
tenant receivables, net
|
(62,615)
|
(316,129)
|
Prepaid expense and
other assets
|
552,767
|
72,835
|
Deposits on
properties under contract
|
224,069
|
(166,069)
|
Accrued interest
payable
|
(149,775)
|
244,789
|
Accounts payable
and other accrued expenses
|
(125,627)
|
272,335
|
Deferred
revenue
|
-
|
452,313
|
Accrued management
termination fee
|
1,650,000
|
-
|
Tenant improvement
obligation
|
(23,262)
|
(90,443)
|
Related party
payable, net
|
(73,951)
|
20,607
|
Net cash provided
from (used in) operating activities
|
(1,212,851)
|
1,968,294
|
|
|
|
Cash flows from investing activities:
|
|
|
Capital
improvements
|
(565,658)
|
(133,101)
|
Sale of
property
|
-
|
98,879
|
Real estate
acquisitions and deposits
|
(22,492,920)
|
(22,858,488)
|
Net cash used in
investing activities
|
(23,058,578)
|
(22,892,710)
|
|
|
|
Cash flows from financing activities:
|
|
|
Debt issuance
costs
|
(2,216,921)
|
(345,762)
|
Dividends
paid
|
(2,254,019)
|
(1,450,923)
|
Proceeds from sale
of common stock, net of issuance costs
|
3,000,000
|
1,947,655
|
Proceeds from sale
of preferred stock
|
11,800,000
|
-
|
Borrowings under
revolving credit facility
|
60,950,000
|
-
|
Mortgage
proceeds
|
7,550,000
|
17,140,000
|
Mortgage principal
payments
|
(64,265,736)
|
(1,107,967)
|
Proceeds
from notes payable
|
20,934,000
|
100,000
|
Proceeds from notes
payable - related party
|
-
|
5,622,000
|
Proceeds from
advances - related party
|
-
|
765,000
|
Notes
principal repayments
|
(1,314,000)
|
(99,610)
|
Notes
principal repayments - related party
|
(9,518,000)
|
(330,000)
|
Advances
repayments - related party
|
-
|
(525,000)
|
Net cash provided
from financing activities
|
24,665,324
|
21,715,393
|
|
|
|
Net increase in
Cash and cash equivalents and Restricted cash
|
393,895
|
790,977
|
Cash and cash
equivalents and Restricted cash, beginning of period
|
3,162,848
|
2,371,871
|
Cash and cash
equivalents and Restricted cash, end of period
|
$3,556,743
|
$3,162,848
|
|
|
|
Supplemental cash flow information:
|
|
|
Cash
paid for interest
|
$4,439,279
|
$2,104,206
|
Cash
paid for income taxes
|
$-
|
$-
|
Non cash investing and financing activities:
|
|
|
Capitalized
acquisition fees
|
$51,500
|
$230,894
|
Accrued interest
added to note payable - related party
|
$-
|
$76,000
|
Common units issued
in connection with property acquisition
|
$-
|
$400,000
|
Mortgage principal
refinanced
|
$-
|
$6,781,386
|
Refinance costs
added to mortgage
|
$-
|
$52,907
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
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
within size ranges of 5,000 to 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 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, (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”). As of December
31, 2019, the Company owned approximately 54.7% of the aggregate
common limited partnership interests in our Operating Partnership,
or common units, and all of the preferred limited partnership
interests, preferred units.
The consolidated financial statements include the
accounts of its Operating Partnership subsidiary and related SPEs
and the accounts of the REIT. As of December 31, 2019, the
financial statements reflect the operations of 20 GSA Properties
representing 390,767 rentable square feet located in 13 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 as of December 31, 2019 of 9.3 years
if none of the early termination rights are exercised and 5.7 years
if all of the early termination rights are exercised. The
Company operates as an UPREIT and has elected to be treated as a
real estate investment trust, or REIT, for federal income tax
purposes under the Internal Revenue Code of 1986, as amended, or
the Code, beginning with the taxable year ended December 31,
2017.
2.
Significant
Accounting Policies
Basis of Accounting and Consolidation
Basis - The accompanying consolidated financial statements
are presented on the accrual basis of accounting in accordance with
principles generally accepted in the United States of America
(“GAAP”) and include the accounts of the REIT, the
Operating Partnership and 20 SPEs as of December 31, 2019. Of the
SPEs, 17 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.
Intercompany accounts and transactions are eliminated in
consolidation. The results of operations of companies or assets
acquired are included from the dates of
acquisition.
These
statements include all adjustments necessary for a fair
presentation of the results of all periods reported herein. All
such adjustments are of a normal recurring nature.
Use of Estimates - The preparation of the consolidated
financial statements in conformity with GAAP 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, Cash Equivalents and Restricted
Cash - Cash and cash
equivalents include all cash and liquid investments that mature
three months or less from when they are purchased. 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. The following table
provides a reconciliation of cash, cash equivalents and restricted
cash reported within the Consolidated Balance Sheets that sum to
the totals of the same such amounts presented in the Consolidated
Statements of Cash Flows:
|
|
|
Cash
and cash equivalents
|
$3,436,577
|
$1,444,172
|
Restricted
cash
|
120,166
|
1,718,676
|
Cash,
cash equivalents and restricted cash
|
$3,556,743
|
$3,162,848
|
At
times, the Company’s cash and cash equivalents balance
deposited with financial institutions may exceed federally
insurable limits. The Company maintains separate cash balances at
the operating partnership and SPE level. At December 31, 2019, one
account had $2,756,885 in excess of insured limits, all others were
below the insurable limits. The Company mitigates this risk by
depositing funds with major financial institutions. The Company has
not experienced any losses in connection with such
deposits.
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.
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. Amortization relating
to above (below) market leases for the years ended December 31,
2019 and 2018 was $154,375 and $101,008, respectively, and was
recorded as a reduction to rental revenues.
In-place leases are
valued in consideration of the net rents earned that would have
been foregone during an assumed lease-up period. Lease-up costs are
valued based upon avoided brokerage fees. In-place leases and
lease-up costs are amortized over the remaining non-cancelable term
of the leases. The Company has not recognized any value
attributable to customer relationships.
Management utilizes
independent third parties to assist with the determination of fair
value of the various tangible and intangible assets that are
acquired. The difference between the total of the calculated values
described above, and the actual purchase price plus acquisition
costs, is allocated pro-rata to each component of calculated
value.
The
cost of tenant improvements is capitalized and amortized over the
non-cancelable term of each specific lease.
Maintenance and
repair costs are expensed as incurred while costs incurred that
extend the useful life of the real estate investment are
capitalized.
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 and site improvements
|
|
5 - 40 years
|
Tenant improvements
|
|
Shorter of remaining life of the lease or useful life
|
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
non-cancelable 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 lease’s base year
property taxes and an increase in operating costs based on the
lease’s base year operating expenses multiplied by the annual
percentage change in the consumer price index. Operating costs
include repairs and maintenance, cleaning, utilities and other
related costs. Generally, the leases provide the tenant with
renewal options, subject to substantially the same terms and
conditions of the non-cancelable term of the lease. The Company
accounts for its leases using the 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
intangibles 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 revenue over the
term of the lease.
Impairment – Real Estate - The Company reviews
investments in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not
be recoverable. To determine if impairment may exist, the Company
reviews its properties and identifies those that have experienced
either a change or an event or circumstance warranting further
assessment of recoverability (such as a decrease in occupancy). If
further assessment of recoverability is needed, the Company
estimates the future net cash flows expected to result from the use
of the property and its eventual disposition, on an individual
property basis. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the
carrying amount of the property on an individual property basis,
the Company will recognize an impairment loss based upon the
estimated fair value of such property. For the year ended December
31, 2019 and 2018, 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 Consolidated Statements of Changes
in Stockholders’ Equity. Organizational and offering costs
represent expenses incurred in connection with the formation of the
Company and the filing of the Company’s securities offering
pursuant to Regulation A. As of December 31, 2019 and 2018,
organizational and offering costs totaled $1,459,479.
Revenue Recognition - Revenue includes base rent due from
tenants in accordance with the terms of its respective lease. The
Company recognizes rental income on a straight-line basis over the
non-cancellable term of the respective lease. Revenue also includes
reimbursement income from the recovery of all or a portion of
operating expenses and real estate taxes and are recognized in the
same periods as the related expenses are incurred. For newly
acquired properties, the Company begins to recognize rental income
from leases concurrently with the date of the property closing.
Revenue also includes the amortization or accretion of acquired
above (below) market leases over the remaining non-cancelable term
of the lease.
On
January 1, 2019, the Company adopted ASU No. 2014-09, Revenue from
Contracts with Customers (Topic 606) using the modified
retrospective method and applied it to all contracts that were not
completed as of January 1, 2019. The new guidance requires an
entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to
customers and replaced the existing revenue recognition
guidance. The adoption of Topic 606 did not have an
impact on the Company’s historical financial statements as
the majority of the Company’s revenue does not fall under the
scope of this guidance.
Rents and Other Tenant Receivables net
- Rents and other tenant receivables represent amounts billed and
due from tenants. When a portion of the tenants’ receivable
is estimated to be uncollectible, an allowance for doubtful
accounts is recorded. Due to the high credit worthiness of the tenants, there were
no allowances as of December 31, 2019 and 2018. The Company has a
straight-line rent receivable of $3,000 as of December 31, 2019.
There was no such receivable as of December 31, 2018.
Income Taxes – The Company has elected to be
taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code and applicable Treasury regulations relating to REIT
qualification beginning with its fiscal year ending December 31,
2017. In order to maintain this REIT status, the regulations
require the Company to distribute at least 90% of its
taxable income to shareholders and meet certain other asset and
income tests, as well as other requirements. If the Company fails
to qualify as a REIT, it will be subject to tax at regular
corporate rates for the years in which it fails to qualify. If the
Company loses its REIT status it could not elect to be taxed as a
REIT for five years unless the Company’s failure to
qualify was due to reasonable cause and certain other conditions
were satisfied.
Management analyzes its tax filing positions in
the U.S. federal, state and local jurisdictions where it is
required to file income tax returns for all open tax years. If,
based on this analysis, management determines that uncertainties in
tax positions exist, a liability is established along with an
estimate for interest and penalty. Management has
determined that there were no uncertain tax positions; and,
accordingly, no associated interest and penalties were required to
be accrued at December 31, 2019 and 2018.
Noncontrolling Interest
- Noncontrolling
interest represents the common units in the Company’s
Operating Partnership not attributable to the Company. The
noncontrolling interest is calculated by multiplying the
noncontrolling interest ownership percentage at the balance sheet
date by the Operating Partnership’s common equity. The
noncontrolling interest ownership percentage is calculated by
dividing the Operating Partnership common units not owned by the
Company by the total Operating Partnership 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. The Company’s noncontrolling interest
was 45.3% and 51.8% at December 31, 2019 and 2018,
respectively.
Deferred Costs – Deferred
financing fees include costs incurred in obtaining debt. For debt
other than a line-of credit arrangement, deferred financing fees
are capitalized and presented as a direct reduction from the
carrying amount of the associated debt liability within the
Consolidated Balance Sheets. Deferred financing fees related to
line-of-credit arrangements are capitalized and presented as an
asset within the Consolidated Balance Sheets. Deferred financing
fees are amortized through interest expense over the life of the
respective loans on a basis which approximates the effective
interest method for debt other than a line-of credit arrangement or
straight-line over the contractual term of the arrangement for a
line-of-credit arrangement. Any unamortized amounts upon early
repayment of debt are written off in the period of repayment as a
loss on extinguishment of debt.
Stock Based Compensation – The
Company grants equity-based compensation awards to its officers,
employees and non-employee directors in the form of restricted
shares of common stock and long-term incentive plan units in the
Operating Partnership (“LTIP units”). The Company
recognizes compensation expense for non-vested restricted shares of
common stock and LTIP units granted to officers, employees and
non-employee directors on a straight-line basis over the requisite
service and/or performance period based upon the fair market value
of the shares on the date of grant, as adjusted for
forfeitures.
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
|
|
|
Convertible
common units
|
1,118,416
|
1,118,416
|
Convertible
long-term incentive plan units
|
72,215
|
72,215
|
Convertible
preferred stock
|
2,079,246
|
433,500
|
Total
potentially dilutive securities
|
3,269,877
|
1,624,131
|
Recently Adopted 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 Company adopted the standard on
January 1, 2019. The Company’s revenue is based on real
estate leasing transactions which are not within the scope of the
new standard. The adoption of ASU 2014-09 did not have a material
impact on its consolidated financial
statements.
In
August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments.” ASU 2016-15 is intended to improve cash flow
statement classification guidance. The Company adopted this ASU on
January 1, 2019 and applied the amendments using a retrospective
transition method. The adoption of ASU 2016-15 did not have a
material impact on its consolidated financial
statements.
In
November 2016, the FASB issued ASU 2016-18, "Statement of Cash
Flows (Topic 230): Restricted Cash” to address the diversity
in practice with respect to the classification and presentation of
changes in restricted cash on the statement of cash flows. ASU
2016-18 requires that the statement of cash flows explain the
change during the period in the total of cash, cash equivalents,
and amounts generally described as restricted cash or restricted
cash equivalents. The Company adopted this ASU on January 1, 2019
and applied the amendments using a retrospective transition method.
The Company now reconciles both cash and cash equivalents and
restricted cash in the accompanying Consolidated Statements of Cash
Flows for all periods. For the year ended December 31, 2018, the
effect of the change in accounting principle was an increase in
cash provided from operating activities of $42,524 on the
accompanying Consolidated Statements of Cash Flows.
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.
Recent Accounting Pronouncements Not Yet
Adopted - 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 Company for the year ended December 31, 2021.
Early adoption is permitted, and a modified retrospective approach
must be applied. The Company is currently evaluating the
impact of ASU 2016-02 on its financial
statements. See Note 13 Commitments and
Contingencies for the
Company’s operating leases.
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.
Recapitalization
Transaction
On
March 19, 2019, the Company consummated a recapitalization
transaction (the “Recapitalization Transaction”) with
Hale Partnership Capital Management, LLC (“Hale”) and
certain affiliated investors (each, an “Investor” and
collectively, the “Investors”), pursuant to which (i)
certain of such Investors have provided a $10,500,000 mezzanine
loan to the Company through the Operating Partnership, (ii) certain
of such Investors purchased 1,050,000 shares of the Company’s
10.00% Series B Cumulative Preferred Stock (the “Series B
Preferred Stock”) for proceeds of $10,500,000 and (iii) an
Investor purchased 300,000 shares of the Company’s newly
issued common stock (the “Common Stock”) for proceeds
of $3,000,000.
The
Company satisfied $10,698,000 of outstanding notes payable, $68,491
of accrued interest through March 19, 2019 and $381,647 of
prepayment penalties on certain notes payable with proceeds from
the Recapitalization Transaction. In addition, the Company
satisfied four mortgages with an aggregate principal balance, net
of escrows for property taxes and insurance, of
$8,991,178.
Transaction costs
of the Recapitalization Transaction totaled $1,273,984. Of the
transaction costs, $252,100 was paid to the Company’s law
firm where our former President is a partner and our former
Secretary is employed.
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 810 “Consolidation” to consolidate these
SPEs.
A
summary of the VIE’s assets and liabilities that are included
within the Company’s Consolidated Balance Sheets at December
31, 2019 and 2018 is as follows:
Assets:
|
|
|
Buildings
and improvements, net
|
$11,237,144
|
$11,627,603
|
Intangible
assets, net
|
264,538
|
397,582
|
Prepaids
and other assets
|
358,998
|
122,777
|
Total
assets
|
$11,860,680
|
$12,147,962
|
Liabilities:
|
|
|
Mortages
payable, net
|
$9,459,291
|
$9,633,590
|
Intangible
liabilities, net
|
79,237
|
123,985
|
Accounts
payable and accrued expenses
|
205,862
|
255,205
|
Total
liabilities
|
$9,744,390
|
$10,012,780
|
|
|
|
Net
identifiable assets
|
$2,116,290
|
$2,135,182
|
5.
Investment
in Real Estate
The
following is a summary of the Company’s investment in real
estate, net as of December 31, 2019 and 2018:
|
|
|
Land
|
$10,092,020
|
$7,486,554
|
Buildings
and improvements
|
83,785,235
|
69,150,056
|
Site
improvements
|
1,463,473
|
1,116,653
|
Tenant
improvements
|
8,611,754
|
5,962,007
|
|
103,952,482
|
83,715,270
|
Accumulated
depreciation
|
(6,979,637)
|
(3,929,040)
|
Investment
in real estate, net
|
$96,972,845
|
$79,786,230
|
Depreciation
expense for the years ended December 31, 2019 and 2018 was
$3,074,466 and $2,385,819, respectively.
In
March 2019, the Company experienced damage to the roof and HVAC at
its property located in Moore, Oklahoma (“Moore
Property”) due to hail and wind from storms. The Company
maintains insurance that covers the repair or replacement of the
Company’s assets that suffer loss or damage. The deductible
under the Company’s insurance policy for this event was
$5,000. In June 2019, the Company received approval of the claim
from the insurance adjuster for the full replacement cost of the
roof of $441,320. In July 2019, the Company received approval of
the claim from the insurance adjuster for the full replacement cost
of the HVAC of $64,500. The estimated net book value of the roof
and the HVAC at the time of damage was $313,103. The Company
received insurance proceeds, net of deductible, totaling $501,328
during 2019. The Company recognized $192,717 as a gain on
involuntary conversion on the Consolidated Statements of Operations
as it relates to this matter.
During
the year ended December 31, 2019, the Company acquired four
properties located in Monroe, Louisiana (“Monroe
Property”), Ft. Lauderdale, Florida (“Ft. Lauderdale
Property”), Lawrence, Kansas (“Lawrence
Property”), and Oklahoma City, Oklahoma (“Oklahoma City
Property”) with rentable square footage of 21,124, 16,000,
16,000 and 16,991, respectively. The Monroe Property was acquired
with a lease in place with the United States of America with a
remaining non-cancelable term of 4.4 years at the time of
acquisition and was financed with a combination of Mezzanine Debt,
the issuance of additional Series B Preferred Stock and an
unsecured note. The Ft. Lauderdale Property, Lawrence Property and
Oklahoma City Property were acquired with leases in place with the
United States of America with remaining non-cancelable terms
ranging from 8 to 13 years at the time of acquisition. These three
properties were financed with a combination of borrowings under the
Credit Facility and Mezzanine Debt. See Note 8 Debt regarding the Company’s Credit Facility and
Mezzanine Debt. A summary of the allocated purchase price,
based on estimated fair values is as follows:
|
|
|
|
|
|
2019 Acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
$805,635
|
$1,227,620
|
$359,280
|
$212,930
|
$2,605,465
|
Buildings
and improvements
|
3,746,007
|
3,555,100
|
3,714,520
|
3,397,140
|
14,412,767
|
Tenant
improvements
|
184,868
|
715,610
|
749,490
|
999,780
|
2,649,748
|
Site
improvements
|
340,546
|
-
|
-
|
-
|
340,546
|
Acquired
in-place leases
|
155,678
|
559,705
|
456,722
|
375,038
|
1,547,143
|
Acquired
lease-up costs
|
97,299
|
275,669
|
214,916
|
229,866
|
817,750
|
Above
market leases
|
-
|
-
|
-
|
229,380
|
229,380
|
Below
market leases
|
(58,379)
|
-
|
-
|
-
|
(58,379)
|
Acquisition
fees payable
|
(51,500)
|
-
|
-
|
-
|
(51,500)
|
|
$5,220,154
|
$6,333,704
|
$5,494,928
|
$5,444,134
|
$22,492,920
|
In
addition to the building and site improvements acquired in
connection with the Monroe Property acquisition and the replacement
of the roof and HVAC at the Moore Property, the Company capitalized
building and site improvements with respect to its existing
portfolio of $59,838 for the year ended December 31,
2019.
During
the year ended December 31, 2018, the Company acquired three
properties located in Knoxville, Iowa (“Knoxville
Property”), Champaign, Illinois (“Champaign
Property”), and Sarasota, Florida (“Sarasota
Property”) with rentable square footage of 12,833, 11,180 and
28,210, respectively. The Knoxville Property and Champaign Property
acquisitions were financed with a combination of operating cash,
first mortgage loans and unsecured debt; and the Sarasota Property
was financed with a combination of operating cash, first mortgage
loan, unsecured debt and OP Units. All three properties were
acquired with leases in place with the United States of America
with remaining non-cancelable lease terms between 9 and 13 years at
the time of acquisition.
Pursuant to a
purchase and sale agreement dated April 27, 2017 (“the
Agreement”) and further with respect to our Montgomery
Property, the Company was obligated to pay additional purchase
price (1) in the event the actual base year property taxes are less
than the estimated base year property taxes used in the Agreement
and (2) in the event the seller (i) procured an amendment to the
existing GSA lease for additional space and (ii) paid for the
development and construction of the additional space. Effective
October 19, 2018, the Company completed the purchase of the
additional space for approximately $1,419,000, including
transaction related costs of approximately $14,200. The effect of
the lease amendment was to increase rentable square feet by 5,384
and increase rental income approximately $125,000 per year. On
December 3, 2018, the Company paid additional purchase price of
$89,469 with respect to the base year tax adjustment.
A
summary of the allocated purchase price, based on estimated fair
values, for each acquired property and the additional purchase
price paid with respect to the Montgomery Property in 2018 is as
follows:
|
|
|
|
|
|
2018 Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
$521,984
|
$149,320
|
$782,969
|
$-
|
$1,454,273
|
Buildings
and improvements
|
4,840,784
|
1,472,576
|
8,907,758
|
1,217,766
|
16,438,884
|
Tenant
improvements
|
213,179
|
704,810
|
286,238
|
56,166
|
1,260,393
|
Site
improvements
|
583,103
|
45,544
|
366,972
|
-
|
995,619
|
Acquired
In-place leases
|
561,078
|
231,651
|
640,536
|
102,586
|
1,535,851
|
Acquired
lease-up costs
|
422,864
|
181,479
|
278,272
|
85,941
|
968,556
|
Above
market leases
|
90,646
|
727,700
|
-
|
46,955
|
865,301
|
Below
market leases
|
-
|
-
|
(29,493)
|
-
|
(29,493)
|
Acquisition
fees payable
|
(71,500)
|
(34,450)
|
(110,000)
|
(14,944)
|
(230,894)
|
|
$7,162,138
|
$3,478,630
|
$11,123,252
|
$1,494,470
|
$23,258,490
|
In
addition to the building and site improvements acquired in
connection with the 2018 property acquisitions, the Company
capitalized building and site improvements with respect to its
existing portfolio of $133,101 for the year ended December 31,
2018.
6.
Leasehold
Intangibles, net
The
following is a summary of the Company’s leasehold intangibles
as of December 31, 2019 and 2018.
|
|
|
Acquired
in-place leases
|
$5,254,430
|
$3,707,286
|
Acquired
lease-up costs
|
3,808,428
|
2,990,679
|
Acquired
above-market leases
|
3,133,171
|
2,903,791
|
|
12,196,029
|
9,601,756
|
Accumulated
amortization
|
(2,876,999)
|
(1,577,027)
|
Leasehold
intangibles, net
|
$9,319,030
|
$8,024,729
|
Amortization of
in-place leases, lease-up costs and acquired above market leases
was $1,299,972 and $980,412 for the years ended December 31, 2019
and 2018, respectively.
Future
amortization of acquired in-place lease value, acquired lease-up
costs and acquired above market leases as of December 31, 2019 is
as follows:
|
|
|
|
Year Ended
|
|
2020
|
$1,518,416
|
2021
|
1,465,130
|
2022
|
1,177,986
|
2023
|
1,018,412
|
2024
|
945,774
|
Thereafter
|
3,193,312
|
Total
|
$9,319,030
|
The
weighted-average amortization period is approximately 13.8
years.
7.
Below-Market
Leases, net
The
Company’s intangible liabilities consist of acquired
below-market leases. The following is a summary of the
Company’s intangible liabilities as of December 31, 2019 and
2018.
|
|
|
Acquired
below-market leases
|
$1,241,418
|
$1,183,039
|
|
(487,903)
|
(314,253)
|
Below-market
leases, net
|
$753,515
|
$868,786
|
Amortization of
below-market leases resulted in an increase in rental revenue of
$173,650 and $162,461 for the years ended December 31, 2019 and
2018, respectively.
The
future amortization of acquired below market leases as of December
31, 2018 is as follows:
|
|
|
|
Year Ended
|
|
2020
|
$195,937
|
2021
|
178,151
|
2022
|
137,401
|
2023
|
115,455
|
2024
|
68,267
|
Thereafter
|
58,304
|
Total
|
$753,515
|
The
weighted-average amortization period is approximately 7.3
years.
The
following table summarizes the Company’s outstanding
indebtedness as of December 31, 2019 and December 31,
2018:
|
|
|
|
Loan
|
|
Maturity
|
|
|
|
|
|
|
|
Senior revolving credit facility:
|
|
|
|
|
Senior
revolving credit facility
|
L +
225bps
|
October
2022
|
$60,950,000
|
$-
|
Total revolving credit facility
|
|
|
60,950,000
|
-
|
|
|
|
|
|
Mezzanine debt:
|
|
|
|
|
Mezzanine
debt
|
14.0%
|
April
2023
|
20,800,000
|
-
|
Total mezzanine debt
|
|
|
20,800,000
|
|