UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
SEMI-ANNUAL REPORT PURSUANT
TO REGULATION A
For the fiscal
semi-annual period ended June 30, 2020
HC GOVERNMENT REALTY TRUST, INC.
(Exact
name of issuer as specified in its charter)
Maryland
|
|
81-1867397
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification 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)
In this semi-annual report,
references to the
“Company,” “we,” “us” or
“our” or similar terms refer to HC Government
Realty Trust, Inc. a Maryland
corporation, together with its consolidated subsidiaries, including
HC Government Realty Holdings, L.P., a Delaware limited
partnership, which we refer to as our Operating Partnership.
We refer to
Holmwood Capital, LLC, a Delaware limited liability company, as
Holmwood or our predecessor, and Holmwood Capital Advisors, LLC, a
Delaware limited liability company, as HCA. As used in this
Semi-Annual Report, an affiliate of,
or person affiliated with, a specified person,
is a person that directly, or indirectly through one or
more intermediaries, controls or is controlled by, or is under
common control with,
the person specified.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We
make statements in this semi-annual report on Form 1-SA that are
forward-looking statements within the meaning of the federal
securities laws. The words “believe,”
“estimate,” “expect,”
“anticipate,” “intend,” “plan,”
“seek,” “may,” and similar expressions or
statements regarding future periods are intended to identify
forward-looking statements. These forward-looking statements
involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from any
predictions of future results, performance or achievements that we
express or imply in this semi-annual report or in the information
incorporated by reference in this semi-annual report.
The forward-looking statements included in this
semi-annual report on Form 1-SA are based upon our current
expectations, plans, estimates, assumptions and beliefs that
involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve, 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
U.S. General Services Administration (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,
|
|
|
●
|
the
continuing adverse impact of the novel coronavirus (COVID-19) on
the U.S., regional and global economies and our financial condition
and results of operations,
|
|
|
●
|
acts of
terrorism and other disasters that are beyond our control,
|
|
|
●
|
legislative
or regulatory changes impacting our business or our assets,
including changes to the laws governing the taxation of real estate
investment trusts (“REITs”) and Securities and Exchange
Commission (“SEC”) guidance related to Regulation A or
the Jumpstart Our Business Startups Act (the “JOBS
Act”),
|
|
|
●
|
our
ability to raise equity or debt capital,
|
|
|
●
|
our
compliance with applicable local, state and federal laws, including
the Investment Advisers Act of 1940, as amended (the
“Advisers Act”), the Investment Company Act of 1940, as
amended (the “40 Act”), and other laws, or
|
|
|
●
|
changes
to generally accepted account principles, or GAAP.
|
Any
of the assumptions underlying forward-looking statements could be
inaccurate. You are cautioned not to place undue reliance on any
forward-looking statements included in this semi-annual report. All
forward-looking statements are made as of the date of this
semi-annual report on Form 1-SA and the risk that actual results
will differ materially from the expectations expressed in this
semi-annual report on Form 1-SA will increase with the passage of
time. Except as otherwise required by the federal securities laws,
we undertake no obligation to publicly update or revise any
forward-looking statements after the date of this semi-annual
report on Form 1-SA, whether as a result of new information, future
events, changed circumstances or any other reason. In light of the
significant uncertainties inherent in the forward-looking
statements included in this semi-annual report on Form 1-SA, the
inclusion of such forward-looking statements should not be regarded
as a representation by us or any other person that the objectives
and plans set forth in this semi-annual report on Form 1-SA will be
achieved.
Item 1. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Overview
We
are 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 June 30, 2020, the Company owned 21
GSA Properties, comprised of 17 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 Government. Our portfolio of GSA
Properties, or our portfolio, contains approximately 403,237 rentable square feet located in 13 states.
As of June 30, 2020, our portfolio properties are 100% leased to
the United States of America Government 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 9.1 years if none of the early termination
rights are exercised and 5.4 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 June 30, 2020, we
owned approximately 56.51% 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.
2019 Recapitalization Transaction
On
March 19, 2019, we consummated a recapitalization transaction (the
“Recapitalization Transaction”) with Hale Partnership
Capital Management, LLC (“Hale”), a company founded by
Steven A. Hale II, our Chairman, Chief Executive Officer and
President, and certain affiliated investors (each, a
“Recapitalization Investor” and collectively, the
“Recapitalization Investors”), pursuant to which (i)
certain of such Recapitalization Investors provided a $10,500,000
mezzanine loan to us through our Operating Partnership, (ii)
certain of such Recapitalization Investors purchased 1,050,000
shares of our 10.00% Series B Cumulative Preferred Stock (the
“Series B Preferred Stock”) and (iii) a
Recapitalization Investor purchased 300,000 shares of our common
stock (the “Common Stock”).
Operating Results
For the six months ended June 30, 2020
At
June 30, 2020, our portfolio contained 21 GSA Properties consisting
of 403,237 rentable square feet located in 13 states. Our
properties are 100% leased to the United States of America
Government and occupied by 11 different federal government
agencies. On April 30, 2020, we acquired a 12,470 rentable square
foot, build-to-suit, single-tenant building 100% leased to the
United States of America Government, administered by the GSA, and
occupied by the Immigration and Customs Enforcement agency, for
approximately $5,213,000. The lease commenced on November 1, 2019
and has a firm term of 15 years.
During
the six months ended June 30, 2020, we earned revenues of
$6,393,219 and incurred property operating costs of $1,936,414. Our
net operating income for the period was $4,456,805. For the six
months ended June 30, 2020, the Company’s net loss was
$2,755,423. Our net loss attributed to our common stockholders was
$2,243,097 after allocating $1,299,894 of the Company’s net
loss to the noncontrolling interest in our Operating Partnership
and after deducting preferred stock dividends of
$787,568.
For the six months ended June 30, 2019
At
June 30, 2019, our portfolio contained 17 properties consisting of
341,776 rentable square feet located in 12 states. At June 30,
2019, our properties were 100% leased to the United States of
America Government and occupied by 10 different federal government
agencies. On May 1, 2019, we acquired a 21,124 rentable square
foot, build-to-suit, single-tenant, community-based outpatient
clinic leased to and administered by the United States Department
of Veterans Affairs for $5,150,000.
During
the six months ended June 30, 2019, we earned revenues of
$4,962,540 and incurred property operating costs of $1,547,467. Our
net operating income for the period was $3,415,073. For the six
months ended June 30, 2019, the Company’s net loss was
$5,268,095. Our net loss attributed to our common stockholders was
$4,751,280, after allocating $962,389 of the Company’s net
loss to the noncontrolling interest in our Operating Partnership
and after deducting preferred stock dividends of
$445,574.
Calculating Net Operating Income
We
believe that our net operating income, or NOI, a non-GAAP measure,
is a useful measure of our operating performance. We define NOI as
total property revenues less total property operating expenses,
excluding depreciation and amortization, interest expense and asset
management fees. Other REITs may use different methodologies for
calculating NOI, and accordingly, our NOI may not be comparable to
the NOI of other REITs. We believe that NOI, as we calculate it,
provides an operating perspective not immediately apparent from
GAAP operating income or net income. We use NOI to evaluate our
performance on a property-by-property basis, because NOI more
meaningfully reflects the core operations of our properties as well
as their performance by excluding items not related to property
operating performance and by capturing trends in property operating
expenses. However, NOI should only be used as an alternative
measure of our financial performance.
The
following table reflects property contributions to combined NOI
together with a reconciliation of NOI to net income (loss) as
computed in accordance with GAAP for the six-month periods ended
June 30, 2020 and 2019:
|
For the six months ended June 30,
|
|
|
|
|
|
|
Revenues
|
$6,393,219
|
$4,962,540
|
Less:
|
|
|
Operating
expenses
|
1,820,875
|
1,409,871
|
Property
management fees
|
115,539
|
137,596
|
Total
expenses
|
1,936,414
|
1,547,467
|
|
|
|
Net
operating income
|
4,456,805
|
3,415,073
|
Less:
|
|
|
Asset
management fee
|
128,906
|
230,701
|
Corporate
expenses
|
1,464,036
|
2,214,513
|
Depreciation
and amortization
|
2,416,055
|
1,892,650
|
Management
termination fee
|
(4,547)
|
1,750,000
|
Interest
expense
|
3,207,778
|
2,303,958
|
Loss
on extinguishment of debt
|
-
|
419,563
|
Gain
on involuntary conversion
|
-
|
(128,217)
|
Net
loss
|
(2,755,423)
|
(5,268,095)
|
Less:
Net loss attributable to noncontrolling interest
|
(1,299,894)
|
(962,389)
|
Net
loss attributed to HC Government Realty Trust, Inc.
|
(1,455,529)
|
(4,305,706)
|
Less:
Preferred stock dividends
|
(787,568)
|
(445,574)
|
Net
loss attributed to HC Government Realty Trust, Inc. available to
common stockholders
|
$(2,243,097)
|
$(4,751,280)
|
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
June 30, 2020, we had approximately $7,255,132 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 (i) our 2019
Recapitalization Transaction, (ii) KeyBank Transaction (as defined
below), and (iii) the Series C Offering (as defined
below). In connection with the
Recapitalization Transaction, we received a $10,500,000 mezzanine
loan through our Operating Partnership pursuant to a certain loan
agreement, $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.
In April 2020, we issued an additional $8,250,000 of Series B
Preferred Stock to partially finance our acquisition of our
portfolio property in Birmingham, Alabama. As of June 30, 2020, we
had approximately $450,000 in authorized but unissued shares of
Series B Preferred Stock, and $20,800,000 of mezzanine debt
outstanding and $3,200,000 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
June 30, 2020, we had borrowed approximately $64,900,000 and had
approximately $35,100,000 committed and undrawn under our senior secured
revolving credit facility.
On August 14, 2020, the Company completed the sale
and issuance of 3,600,000 shares of the Company’s 7.00%
Series C Cumulative Redeemable Preferred Stock (the “Series C
Preferred Stock”) to qualified investors in a private
offering pursuant to exemptions from registration provided by
Section 4(a)(2) of the Securities Act of 1933, as amended (the
“Securities Act”), and Regulation D promulgated
thereunder, for an aggregate purchase price of $90,000,000 (the
“Series C Offering”). After deducting a placement agent
fee of $2,835,000, net proceeds to the Company from the Series C
Offering were $87,165,000. On August 14, 2020, the Company used
$21,846,295 and $62,100,000 of the net proceeds from the Series C
Offering to repay all outstanding mezzanine debt and amounts
outstanding under the credit facility, respectively, as of such
date. For further details, see Note 14 Subsequent
Events in Item 3 - Financial
Statements below.
Trend Information
Our
Company, through our Operating Partnership is engaged primarily in
the acquisition, leasing and disposition of single-tenanted,
mission critical or customer facing properties, leased to the
United States of America Government 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 and the six months ended June 30, 2020. While there can
be no assurance, we believe our credit facility and the proceeds of
the Series C Offering 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 portfolio
properties.
We
are not aware of any material trends, uncertainties, demands,
commitments or events, favorable or unfavorable, other than the
effect of national economic conditions and the impact of the
COVID-19 pandemic on real estate generally, that may reasonably be
anticipated to have a material effect on our revenue or income from
continuing operations, profitability, liquidity or capital
resources, or that would cause our reported financial information
to not necessarily to be indicative of future operating results or
our financial condition.
Item 2. Other Information
None.
Item 3. Financial
Statements
HC Government Realty Trust, Inc.
Consolidated Balance Sheets
June 30, 2020 (unaudited) and December 31, 2019
|
|
|
|
|
|
ASSETS
|
|
|
Investment in real
estate, net
|
$99,895,786
|
$96,972,845
|
Cash and cash
equivalents
|
7,255,132
|
3,436,577
|
Restricted
cash
|
165,164
|
120,166
|
Rent and other
tenant receivables, net
|
1,152,384
|
1,136,496
|
Leasehold
intangibles, net
|
9,180,886
|
9,319,030
|
Deposits on
properties under contract
|
50,000
|
-
|
Deferred financing,
net
|
1,806,209
|
2,023,844
|
Prepaid expenses
and other assets
|
565,602
|
188,058
|
Total
Assets
|
$120,071,163
|
$113,197,016
|
|
|
|
LIABILTIES
|
|
|
Revolving credit
facility
|
$64,900,000
|
$60,950,000
|
Mezzanine
debt
|
20,800,000
|
20,800,000
|
Mortgages payable,
net of unamortized debt costs
|
9,369,710
|
9,459,291
|
Declared dividends
and distributions
|
807,623
|
721,733
|
Accrued interest
payable
|
195,274
|
267,366
|
Accounts
payable
|
586,723
|
591,791
|
Accrued expenses
and other liabilities
|
1,441,937
|
1,289,450
|
Accrued management
termination fee
|
-
|
1,650,000
|
Tenant improvement
obligation
|
905,528
|
1,201,661
|
Acquisition fee
payable
|
-
|
556,739
|
Below-market
leases, net
|
654,792
|
753,515
|
Total
Liabilities
|
99,661,587
|
98,241,546
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 12)
|
-
|
-
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
Preferred stock
($0.001 par value, 250,000,000 shares authorized and 2,149,500 and
1,324,500 shares issued and outstanding at June 30, 2020 and
December 31, 2019, respectively)
|
2,149
|
1,324
|
Common stock
($0.001 par value, 750,000,000 shares authorized, 1,545,806 and
1,438,465 common shares issued and outstanding at June 30, 2020 and
December 31, 2019, respectively)
|
1,546
|
1,438
|
Additional paid-in
capital
|
32,874,205
|
24,463,133
|
Offering
costs
|
(1,320,643)
|
(1,459,479)
|
Accumulated
deficit
|
(10,780,155)
|
(9,324,626)
|
Accumulated
dividends and distributions
|
(4,680,858)
|
(3,478,926)
|
Total
Stockholders' Equity
|
16,096,244
|
10,202,864
|
Noncontrolling
interest in operating partnership
|
4,313,332
|
4,752,606
|
Total
Equity
|
20,409,576
|
14,955,470
|
Total
Liabilities and Stockholders' Equity
|
$120,071,163
|
$113,197,016
|
The following table presents the assets and liabilities of the
Company's consolidated variable interest entities as of June 30,
2020 (unaudited) and December 31, 2019 which are included on the
consolidated balance sheet above. The assets in the table below
include those assets that can only be used to settle obligations of
the consolidated variable interest 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
|
$11,043,980
|
$11,237,144
|
Intangible
assets, net
|
196,334
|
264,538
|
Prepaids
and other assets
|
369,414
|
358,998
|
Total
Assets
|
$11,609,728
|
$11,860,680
|
LIABILITIES OF CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH
CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO
THE COMPANY.
|
|
|
|
Mortgages
payable, net
|
$9,369,710
|
$9,459,291
|
Intangible
liabilities, net
|
56,145
|
79,237
|
Accounts
payable and accrued expenses
|
195,002
|
205,862
|
Total
liabilities
|
$9,620,857
|
$9,744,390
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Consolidated Statements of Operations
For the Six Months Ended June 30, 2020 and 2019
(unaudited)
|
|
|
|
|
Revenues
|
|
|
Rental
revenues
|
$6,161,302
|
$4,902,420
|
Real estate tax
reimbursements and other revenues
|
231,917
|
60,120
|
Total
revenues
|
6,393,219
|
4,962,540
|
|
|
|
Operating
expenses
|
|
|
Depreciation and
amortization
|
2,416,055
|
1,892,650
|
General and
administrative - corporate
|
599,253
|
223,838
|
General and
administrative - property
|
33,260
|
16,093
|
Ground
leases
|
47,969
|
45,681
|
Insurance
|
125,104
|
74,171
|
Janitorial
|
294,376
|
227,240
|
Management
fees
|
244,445
|
368,297
|
Management
termination fees
|
(4,547)
|
1,750,000
|
Professional
expenses
|
441,927
|
1,918,426
|
Real estate and
other taxes
|
612,942
|
533,923
|
Repairs and
maintenance
|
460,430
|
277,712
|
Equity-based
compensation
|
422,856
|
72,249
|
Utilities
|
246,794
|
235,051
|
Total operating
expenses
|
5,940,864
|
7,635,331
|
|
|
|
Other
expense
|
|
|
Interest
expense
|
3,207,778
|
2,303,958
|
Loss on
extinguishment of debt
|
-
|
419,563
|
Gain on involuntary
conversion
|
-
|
(128,217)
|
Net other
expense
|
3,207,778
|
2,595,304
|
|
|
|
Net
loss
|
(2,755,423)
|
(5,268,095)
|
Less: Net loss
attributable to noncontrolling interest in operating
partnership
|
(1,299,894)
|
(962,389)
|
Net loss attributed
to HC Government Realty Trust, Inc.
|
(1,455,529)
|
(4,305,706)
|
Preferred
stock dividends
|
(787,568)
|
(445,574)
|
Net loss attributed
to HC Government Realty Trust, Inc. available to common
stockholders
|
$(2,243,097)
|
$(4,751,280)
|
|
|
|
Basic and diluted
loss per share
|
$(1.45)
|
$(3.72)
|
|
|
|
Basic and diluted
weighted-average common shares outstanding
|
1,545,806
|
1,277,759
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Consolidated Statement of Changes in Stockholders’
Equity
For the Six Months Ended June 30, 2020 and 2019
(unaudited)
|
|
|
|
|
|
|
|
|
Non-controlling Interest in Operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Issuance of
common shares in connection with termination of management
agreement
|
-
|
-
|
-
|
-
|
51,667
|
52
|
370,401
|
-
|
-
|
-
|
370,453
|
-
|
370,453
|
Issuance of
common shares in satisfaction of acquistion fee
payable
|
-
|
-
|
-
|
-
|
55,674
|
56
|
556,683
|
-
|
-
|
-
|
556,739
|
-
|
556,739
|
Proceeds from
issuing preferred shares
|
-
|
-
|
825,000
|
825
|
-
|
-
|
8,249,175
|
|
|
|
8,250,000
|
-
|
8,250,000
|
Equity-based
compensation long-term incentive plan shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
363,501
|
363,501
|
Equity-based
compensation - restricted stock
|
-
|
-
|
-
|
-
|
-
|
-
|
59,355
|
-
|
-
|
-
|
59,355
|
-
|
59,355
|
Reimbursement
of Offering Costs
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
138,836
|
-
|
-
|
138,836
|
-
|
138,836
|
Dividends and
distributions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,201,932)
|
(1,201,932)
|
(327,423)
|
(1,529,355)
|
Allocation of
NCI in operating partnership
|
-
|
-
|
-
|
-
|
-
|
-
|
(824,542)
|
-
|
-
|
-
|
(824,542)
|
824,542
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,455,529)
|
-
|
(1,455,529)
|
(1,299,894)
|
(2,755,423)
|
Balance, June
30, 2020
|
144,500
|
$144
|
2,005,000
|
$2,005
|
1,545,806
|
$1,546
|
$32,874,205
|
$(1,320,643)
|
$(10,780,155)
|
$(4,680,858)
|
$16,096,244
|
$4,313,332
|
$20,409,576
|
|
|
|
|
|
|
|
|
|
Non-controlling
Interest in Operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
-
|
-
|
11,800,000
|
1,180
|
-
|
-
|
11,798,820
|
-
|
-
|
-
|
11,800,000
|
-
|
11,800,000
|
Equity-based
compensation long-term incentive plan shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
72,249
|
72,249
|
Dividends and
distributions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(832,510)
|
(832,510)
|
(327,424)
|
(1,159,934)
|
Allocation of
NCI in operating partnership
|
-
|
-
|
-
|
-
|
-
|
-
|
(56,089)
|
-
|
-
|
-
|
(56,089)
|
56,089
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,305,706)
|
-
|
(4,305,706)
|
(962,389)
|
(5,268,095)
|
Balance, June
30, 2019
|
144,500
|
$144
|
11,800,000
|
$1,180
|
1,407,041
|
$1,407
|
$26,057,249
|
$(1,459,479)
|
$(7,181,302)
|
$(2,369,218)
|
$15,049,981
|
$4,224,229
|
$19,274,210
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2020 and 2019
(unaudited)
|
For the six
months ended June 30,
|
|
|
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$(2,755,423)
|
$(5,268,095)
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation
|
1,821,772
|
1,441,187
|
Amortization of
acquired lease-up costs
|
249,191
|
195,957
|
Amortization of
in-place leases
|
345,092
|
255,505
|
Amortization of
above/below-market leases, net
|
75,505
|
76,553
|
Amortization of
debt issuance costs
|
391,621
|
136,774
|
Equity-based
compensation - long-term incentive plan units
|
363,501
|
72,249
|
Equity-based
compensation - restricted shares
|
59,355
|
-
|
Gain on involuntary
conversion
|
-
|
(128,217)
|
Change in assets
and liabilities
|
|
|
Rent and other
tenant receivables, net
|
(15,888)
|
241,491
|
Prepaid expense and
other assets
|
(379,019)
|
13,820
|
Deposits on
properties under contract
|
(50,000)
|
224,069
|
Accrued interest
payable
|
(72,092)
|
(152,931)
|
Accounts payable
and other accrued expenses
|
276,325
|
503,762
|
Deferred
revenue
|
-
|
1,750,000
|
Accrued management
termination fee
|
(1,279,547)
|
(28,269)
|
Tenant improvement
obligation
|
(296,133)
|
(21,762)
|
Related party
payable, net
|
-
|
(73,951)
|
Net cash used in
operating activities
|
(1,265,740)
|
(761,858)
|
|
|
|
Cash flows from investing activities:
|
|
|
Capital
improvements
|
(86,980)
|
(96,422)
|
Real estate
acquisitions and deposits
|
(5,286,625)
|
(5,220,154)
|
Net cash used in
investing activities
|
(5,373,605)
|
(5,316,576)
|
|
|
|
Cash flows from financing activities:
|
|
|
Debt issuance
costs
|
(158,661)
|
(83,500)
|
Dividends
paid
|
(1,433,535)
|
(834,051)
|
Proceeds from sale
of common stock, net of issuance costs
|
-
|
3,000,000
|
Proceeds from sale
of preferred stock
|
8,250,000
|
11,800,000
|
Borrowings under
revolving credit facility
|
3,950,000
|
-
|
Mortgage
proceeds
|
-
|
7,550,000
|
Mortgage principal
payments
|
(104,906)
|
(16,732,486)
|
Proceeds
from mezzanine loan
|
-
|
13,800,000
|
Proceeds
from notes payable
|
-
|
134,000
|
Notes
principal repayments
|
-
|
(1,259,670)
|
Notes
principal repayments - related party
|
-
|
(9,518,000)
|
Net cash provided
from financing activities
|
10,502,898
|
7,856,293
|
|
|
|
Net increase in
Cash and cash equivalents and Restricted cash
|
3,863,553
|
1,777,859
|
Cash and cash
equivalents and Restricted cash, beginning of period
|
3,556,743
|
3,162,848
|
Cash and cash
equivalents and Restricted cash, end of period
|
$7,420,296
|
$4,940,707
|
|
|
|
Supplemental cash flow information:
|
|
|
Cash
paid for interest
|
$2,888,249
|
$2,320,115
|
Cash
paid for income taxes
|
$-
|
$-
|
Non cash investing and financing activities:
|
|
|
Common shares
issued in connection with termination of management
agreement
|
$370,453
|
$-
|
Common shares
issued in satisfaction of acquisition fee payable
|
$556,739
|
$-
|
Reimbursement of
offering costs
|
$138,836
|
$-
|
Capitalized
acquisition fees
|
$-
|
$51,500
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Notes to Consolidated Financial Statements (Unaudited)
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 June 30,
2020, the Company owned approximately 56.51% of the aggregate
common limited partnership interests in our Operating Partnership,
or common units, and all of the preferred limited partnership
interests, or preferred units.
The consolidated financial statements include the
accounts of the Operating Partnership and related SPEs and the
accounts of the REIT. As of June 30, 2020, the financial statements
reflect the operations of 21 GSA Properties representing 403,237
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 June 30, 2020 of 9.1 years if none of the early
termination rights are exercised and 5.4 years if all of the early
termination rights are exercised. The Company operates as an
UPREIT, or an umbrella partnership real estate investment trust,
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 21 SPEs as of June 30, 2020. Of the SPEs,
18 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.
In our
opinion, 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. Certain
information and footnote disclosures prepared in accordance with
GAAP have been either condensed or omitted pursuant to SEC rules
and regulations. However, we believe that the disclosures made are
adequate for a fair presentation of results of operations and
financial position. Operating results for the interim periods
reported herein may not be indicative of the results expected for
the year. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and
accompanying notes included in our latest Annual Report on Form
1-K.
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
|
$7,255,132
|
$3,100,556
|
Restricted
cash
|
165,164
|
1,840,151
|
Cash,
cash equivalents and restricted cash
|
$7,420,296
|
$4,940,707
|
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 June 30, 2020, one
account had $6,435,062 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, 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 six months ended June 30, 2020 and 2019 was $75,505 and
$76,553, 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. 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 rental 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 is generally flat during the non-cancelable
term of the lease and include a reimbursement for certain operating
costs of the property. The operating cost reimbursement is
established as the base year operating expenses and is subject to
annual adjustment based on changes in the consumer price index. The
lessee is also required by the lease to reimburse the Company for
real estate taxes over the base year. Operating expenses include
repairs and maintenance, cleaning, landscaping and utilities. In
some cases, the leases provide the tenant with renewal options,
subject to generally the same terms and conditions of the base term
of the lease. The Company accounts for its leases using the
operating method.
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. Tenant
improvements and 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 over the term of the lease.
Impairment – Real Estate - The Company reviews investments in real
estate for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. To
determine if impairment may exist, the Company reviews its
properties and identifies those that have experienced either a
change or an event or circumstance warranting further assessment of
recoverability (such as a decrease in occupancy). If further
assessment of recoverability is needed, the Company estimates the
future net cash flows expected to result from the use of the
property and its eventual disposition, on an individual property
basis. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the
carrying amount of the property on an individual property basis,
the Company will recognize an impairment loss based upon the
estimated fair value of such property. For
the six months ended June 30, 2020 and
2019, the Company has not recognized any impairment
charges.
Organizational, Offering and Related Costs
- Organizational and offering costs of the Company are
presented as a reduction of stockholders’ 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.
Revenue Recognition - Revenue includes base rent due from
tenants in accordance with the terms of the 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 acquisition
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 Accounting Standards Update,
or 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. Topic 606
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 June 30, 2020 and December 31, 2019. The
Company has a straight-line rent receivable of $16,300 and $3,000
as of June 30, 2020 and December 31, 2019,
respectively.
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 stockholders 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 the four taxable years following the year it loses
its REIT status unless the Company’s failure to qualify was
due to reasonable cause and certain other conditions were
satisfied.
Management analyzes the Company’s 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;
accordingly, no associated interest and penalties were required to
be accrued at June 30, 2020 and December 31,
2019.
Noncontrolling Interest
- Noncontrolling
interest represents the common units in the Operating
Partnership not attributable to the REIT. 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 REIT 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
REIT’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 REIT’s equity. The
REIT’s noncontrolling interest was 43.5% and 45.3% at June
30, 2020 and December 31, 2019, 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 stockholders 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 stockholders 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
|
3,229,874
|
2,119,214
|
Total
potentially dilutive securities
|
4,420,505
|
3,309,845
|
Recently Adopted Accounting
Pronouncements - The Company
has adopted reporting standards and disclosure requirements as a
“smaller reporting company” as defined in Rule 405 of
the Securities Act, Rule 12b-2 of the Securities Exchange Act of
1934 and Item 10(f) of Regulation S-K, as amended. These rules
provide 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 No. 2016-02, Leases (Topic 842) (“ASU
2016-02”). ASU 2016-02 is intended to improve financial
reporting about leasing transactions. ASU 2016-02 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, 2022.
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”), a
company founded by Steven A. Hale II, the Company’s Chairman,
Chief Executive Officer and President, and certain affiliated
investors (each, a “Recapitalization Investor” and
collectively, the “Recapitalization Investors”),
pursuant to which (i) certain of such Recapitalization Investors
provided a $10,500,000 mezzanine loan to the Company through the
Operating Partnership, (ii) certain of such Recapitalization
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) a
Recapitalization Investor purchased 300,000 shares of the
Company’s 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 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 FASB
Accounting Standards Codification Topic 810
“Consolidation” to consolidate these
SPEs.
A
summary of the VIEs’ assets and liabilities that are included
within the Company’s Consolidated Balance Sheets at June 30,
2020 and December 31, 2019 is as follows:
|
|
|
|
|
|
Assets:
|
|
|
Buildings
and improvements, net
|
$11,043,980
|
$11,237,144
|
Intangible
assets, net
|
196,334
|
264,538
|
Prepaids
and other assets
|
369,414
|
358,998
|
Total
assets
|
$11,609,728
|
$11,860,680
|
Liabilities:
|
|
|
Mortages
payable, net
|
$9,369,710
|
$9,459,291
|
Intangible
liabilities, net
|
56,145
|
79,237
|
Accounts
payable and accrued expenses
|
195,002
|
205,862
|
Total
liabilities
|
$9,620,857
|
$9,744,390
|
|
|
|
Net
identifiable assets
|
$1,988,871
|
$2,116,290
|
5.
|
Investment in Real Estate
|
The
following is a summary of the Company’s investment in real
estate, net as of June 30, 2020 and December 31, 2019,
respectively:
|
|
|
|
|
|
|
|
|
Land
|
$11,048,647
|
$10,092,020
|
Buildings
and improvements
|
86,881,398
|
83,785,235
|
Site
improvements
|
1,463,473
|
1,463,473
|
Tenant
improvements
|
9,302,202
|
8,611,754
|
|
108,695,720
|
103,952,482
|
Accumulated
depreciation
|
(8,799,934)
|
(6,979,637)
|
Investment
in real estate, net
|
$99,895,786
|
$96,972,845
|
Depreciation
expense related to the Company’s investment in real estate
for the six months ended June 30, 2020 and 2019 was $1,820,297 and
$1,441,487, respectively.
During
the six month period ended June 30, 2020, the Company acquired one
property located in Birmingham, Alabama (“Birmingham
Property”) with rentable square footage of 12,470 and a lease
in place with the United States of America Government with a
remaining non-cancelable term of 14.5 years at the time of
acquisition. The Birmingham Property was financed with a
combination of borrowings under the Credit Facility (as defined
below) and the issuance of additional Series B Preferred Stock. A
summary of the allocated purchase price, based on estimated fair
values is as follows:
|
|
2020 Acquisition:
|
|
|
|
Land
|
$956,627
|
Buildings
and improvements
|
3,087,389
|
Tenant
improvements
|
612,242
|
Acquired
in-place leases
|
365,954
|
Acquired
lease-up costs
|
264,413
|
|
$5,286,625
|
In
addition to the land, building and improvements acquired in
connection with the Birmingham Property acquisition, the Company
capitalized tenant improvements and building improvements with
respect to its existing portfolio of $86,980 during the six months
ended June 30, 2020.
During
the six month period ended June 30, 2019, the Company acquired one
property located in Monroe, Louisiana (“Monroe
Property”) with rentable square footage of 21,124 and a lease
in place with the United States of America Government with a
remaining non-cancelable term of 4.4 years at the time of
acquisition. The Monroe Property was financed with a combination of
Mezzanine Debt, the issuance of additional Series B Preferred Stock
and an unsecured note. A summary of the allocated purchase price,
based on estimated fair values is as follows:
|
|
2019 Acquisition:
|
|
|
|
Land
|
$805,635
|
Buildings
and improvements
|
3,746,007
|
Tenant
improvements
|
184,868
|
Site
improvements
|
340,546
|
Acquired
in-place leases
|
155,678
|
Acquired
lease-up costs
|
97,299
|
Above
market leases
|
-
|
Below
market leases
|
(58,379)
|
Acquisition
fees payable
|
(51,500)
|
|
$5,220,154
|
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 and, subsequent to June 30, 2019, The Company
received the full amount of the insurance proceeds. The estimated
net book value of the roof and HVAC at the time of damage was
$313,103. During the six months ended June 30, 2019, the Company
recognized $128,217 as a gain on involuntary conversion on the
Consolidated Statements of Operations.
In
addition to the building and site improvements acquired in
connection with the Monroe Property acquisition, the Company
capitalized building and site improvements with respect to its
existing portfolio of $96,422 during the six months ended June 30,
2019.
6.
|
Leasehold Intangibles, net
|
The
following is a summary of the Company’s leasehold intangibles
as of June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
Acquired
in-place leases
|
$5,620,383
|
$5,254,430
|
Acquired
lease-up costs
|
4,072,842
|
3,808,428
|
Acquired
above-market leases
|
3,133,171
|
3,133,171
|
|
12,826,396
|
12,196,029
|
Accumulated
amortization
|
(3,645,510)
|
(2,876,999)
|
Leasehold
intangibles, net
|
$9,180,886
|
$9,319,030
|
Amortization
of in-place leases and lease-up costs was $594,283 and $451,462 for
the six months ended June 30, 2020 and 2019,
respectively.
Amortization
of acquired above market leases resulted in a reduction to rental
revenue of $174,228 and $161,180 for the six months ended June 30,
2020 and 2019, respectively.
Future
amortization of acquired in-place lease value, acquired lease-up
costs and acquired above market leases as of June 30, 2020 is as
follows:
|
|
|
|
Year Ended
|
|
For
the remaining six month period ended December 31, 2020
|
$766,496
|
2021
|
1,490,219
|
2022
|
1,203,075
|
2023
|
1,043,501
|
2024
|
978,681
|
2025
|
938,539
|
Thereafter
|
2,760,375
|
Total
|
$9,180,886
|
The
weighted-average amortization period is approximately 10.6
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 June 30, 2020 and
December 31, 2019:
|
|
|
|
|
|
|
|
|
Acquired
below-market leases
|
$1,241,418
|
$1,241,418
|
|
(586,626)
|
(487,903)
|
Below-market
leases, net
|
$654,792
|
$753,515
|
Amortization
of below-market leases resulted in an increase in rental revenue of
$98,723 and $84,627 for the six months ended June 30, 2020 and
2019, respectively.
The
future amortization of acquired below market leases as of June 30,
2020 is as follows:
|
|
|
|
Year Ended
|
|
For
the remaining six month period ended December 31, 2020
|
$88,927
|
2021
|
161,059
|
2022
|
120,309
|
2023
|
98,362
|
2024
|
58,346
|
2025
|
28,424
|
Thereafter
|
99,365
|
Total
|
$654,792
|
The
weighted-average amortization period is approximately 7.3
years.
The
following table summarizes the Company’s outstanding
indebtedness as of June 30, 2020 and December 31,
2019:
|
|
|
|
|
|
|
|
|
Loan
|
|
Maturity
|
|
|
|
|
|
|
|
Senior revolving credit facility:
|
|
|
|
|
Senior
revolving credit facility
|
|
October
2022
|
$64,900,000
|
$60,950,000
|
Total revolving credit facility
|
|
|
64,900,000
|
60,950,000
|
|
|
|
Mezzanine debt:
|
|
|
|
|
Mezzanine
debt
|
14.0%
|
April
2023
|
20,800,000
|
20,800,000
|
Total mezzanine debt
|
|
|
20,800,000
|
20,800,000
|
|
|
|
|
|
Mortgage notes payable
|
|
|
|
|
Lorain,
Ohio, Jonesboro, Arkansas and Port Saint Lucie,
Florida
|
5.3%
|
August
2023
|
9,476,350
|
9,581,255
|
Total
mortgage notes payable
|
|
|
9,476,350
|
9,581,255
|
Less:
Total unamortizd debt issurance costs
|
|
|
(106,640)
|
(121,964)
|
Total mortgage payable, net
|
|
|
9,369,710
|
9,459,291
|
|
|
|
|
|
Total debt
|
|
|
$95,069,710
|
$91,209,291
|
Revolving Credit Facility
In
October 2019, the Company, through the Operating Partnership,
entered into a senior secured revolving credit facility
(“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 the Operating Partnership obtained revolving
loan commitments in an initial amount of $60,000,000, subject to
customary terms and availability conditions. 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 Credit Facility includes an
accordion feature that will permit the Operating Partnership to
further increase the commitments available to the Operating
Partnership up to $200,000,000, subject to customary terms and
conditions. The Company intends to use the Credit Facility to repay
certain indebtedness, fund acquisitions and capital expenditures
and provide working capital.
The
Company and its subsidiaries that directly own properties included
in the Credit Facility’s borrowing base are guarantors under
the Credit Facility. The Credit Facility matures in October 2022
with a one-time option to extend the maturity date until October
2023, subject to certain conditions and the payment of an extension
fee.
The
Credit Facility bears interest at a base rate plus a range of 100
to 150 basis points or LIBOR plus a range of 200 to 250 basis
points, each depending on the Company’s consolidated leverage
ratio. In addition, the Company will pay an unused facility fee on
the revolving commitments under the Credit Facility of 0.25% or
0.30% per annum based on the ratio of aggregate borrowings under
the Credit Facility and the aggregate revolving
commitments.
The
Credit Facility also contains certain customary financial
covenants, as follows: (i) the maximum ratio of consolidated total
indebtedness to total asset value (each as defined in the
agreement) may not exceed 60.0%, (ii) the minimum ratio of adjusted
consolidated EBITDA to consolidated fixed charges (each as defined
in the agreement) may not be less than 1.40 to 1.00 for the first
18 months following the closing date of the Credit Facility and not
less than 1.50 to 1.00 thereafter, and (iii) the minimum
consolidated tangible net worth (as defined in the agreement) may
not be less than the sum of an amount equal to 85.0% of
consolidated tangible net worth as of the closing date of the
Credit Facility plus an amount equal to 85.0% of the aggregate net
proceeds received from subsequent issuances of the Company’s
stock after the closing date of the Credit Facility.
The
Credit Facility also includes other customary covenants, including
limits on the percentage of the Company’s total asset value
that may be invested in unimproved land, unconsolidated joint
ventures, redevelopment and development assets and loans, advances
or extensions of credit and require that the Company obtain consent
for mergers in which the Company is not the surviving entity. The
Company’s dividends and distributions are not permitted to
exceed 110% of funds from operations (as defined in the agreement)
for the period commencing 12 months after the closing of the Credit
Facility and are not permitted to exceed 95% of funds from
operations thereafter. Further, the Company will not be permitted
to pay any such dividends or make any such distributions if it does
not maintain certain minimum liquidity requirements.
These
financial and restrictive covenants may limit the investments the
Company may make and the Company’s ability to make dividends
and distributions. As of June 30, 2020, the Company is in
compliance with all financial and restrictive covenants under the
Credit Facility. The occurrence of an event of default under the
Credit Facility could result in the termination of the commitments
thereunder and in all loans and other obligations becoming
immediately due and payable.
As of
June 30, 2020, the Company had approximately $64,900,000
outstanding and approximately $35,100,000 committed and undrawn
under the Credit Facility. The weighted average interest rate on
the outstanding borrowings was 2.43% as of June 30, 2020. The fair
value of the Credit Facility approximates its carrying
value.
Subsequent to the six month period ended June 30,
2020, the Company amended the Credit Facility, including the
financial covenants set forth therein, and used a portion of the
net proceeds from the Series C Offering to repay amounts
outstanding under the Credit Facility (as defined below). For
further details, see Note 14 Subsequent
Events,
below.
Mezzanine Debt
In
connection with the closing of the Recapitalization Transaction, on
March 19, 2019, the Company, through the Operating Partnership,
entered into a Loan Agreement (as amended, the “Loan
Agreement”) pursuant to which certain of the Recapitalization
Investors, as lenders (the “Lenders”) provided a
$10,500,000 senior secured term loan to the Operating Partnership
(the “Loan”), with an option to fund up to an
additional $10,000,000 in term loans, subject to customary terms
and conditions, pursuant to which all such debt will accrue
interest and mature on the same terms (collectively, the
“Mezzanine Debt”). The Loan Agreement was amended in
October 2019 to increase the additional amount available to the
Operating Partnership to $13,500,000. The Mezzanine Debt is
subordinate to the Credit Facility.
The
Loan is not evidenced by a promissory note. However, pursuant to
the Loan Agreement, promissory notes evidencing the Loan and/or the
Mezzanine Debt may be issued in the future at the request of the
Lenders.
The
Mezzanine Debt accrues interest at a rate of fourteen percent (14%)
per annum. Such interest is to be paid in monthly, interest-only
cash payments payable in arrears at a rate of twelve percent (12%)
per annum plus (i) a cash payment at a rate of two percent (2%) per
annum, (ii) an increase in the principal of the Mezzanine Debt
equal to two percent (2%) per annum or (iii) a combination of both
(i) and (ii) above, which such combined amount will be equal to two
percent (2%) per annum. The Operating Partnership is required to
repay all outstanding principal and any accrued but unpaid interest
on or before April 22, 2023. All outstanding principal and any
accrued but unpaid interest shall become immediately due and
payable upon certain events including, but not limited to, an
initial public offering of the Company’s common
stock.
Before
October 2019, the Mezzanine Debt was secured by a security interest
granted in favor of HCM Agency, LLC (the “Agent”), an
affiliate of Hale and the collateral agent under the Loan
Agreement, in the accounts receivable and other personal property
of the Operating Partnership, the Company and its subsidiaries,
including the Operating Partnership’s ownership interest in
its subsidiaries. In October 2019, the Loan Agreement was amended
to release and discharge the security interest held by the Agent
and cause the Loan to become unsecured. The Company and Holmwood
Portfolio Holdings, LLC, a limited partner in the Operating
Partnership, also entered into customary guaranty agreements
related to the payment by and performance of the Operating
Partnership of its obligations under the Loan
Agreement.
The
Loan Agreement also includes customary representations, warranties,
covenants and terms and conditions for transactions of this type
and consistent with the Credit Facility. The occurrence of an event
of default under the Loan Agreement could result in all loans and
other obligations becoming immediately due and payable. The Company
was in compliance with the Loan Agreement as of June 30,
2020.
As of
June 30, 2020, the Company had approximately $20,800,000
outstanding and $3,200,000 available under the Loan
Agreement.
Subsequent to the six month period ended June 30,
2020, the Company used a portion of the net proceeds from the
Series C Offering to repay amounts outstanding under the Loan
Agreement. For further details, see Note 14 Subsequent
Events,
below.
Notes Payable
In connection with the payoff of the notes payable
in connection with the Recapitalization Transaction, the Company
incurred a make whole premium on certain notes payable totaling
$381,647, which is classified as a loss on extinguishment of
debt on the Consolidated Statements of Operations for the six
months ended June 30, 2019.
Mortgage Notes Payable
The
Company’s fixed rate mortgage notes payable balances,
excluding unamortized debt issuance costs, were $9,476,350 and
$9,581,255 as of June 30, 2020 and December 31, 2019, respectively.
There were no variable rate mortgage notes payable as of June 30,
2020 and December 31, 2019. As of June 30, 2020 and December 31,
2019, the Company had unamortized debt issuance costs of $106,640
and $121,964, respectively, in connection with its mortgage notes
payables.
The
mortgage notes payable are collateralized by the specific
properties to which the mortgage notes payable pertain. The
carrying amount of real estate that serves as collateral for these
mortgages as of June 30, 2020 and December 31, 2019 was $11,043,979
and $11,237,144, respectively.
The
following table summarizes the Company’s aggregate debt
maturities based on outstanding principal as of June 30,
2020:
|
|
|
|
Year Ended
|
|
For
the remaining six month period ended December 31, 2020
|
$111,933
|
2021
|
232,882
|
2022
|
65,145,444
|
2023
|
29,686,091
|
Total
|
$95,176,350
|
Preferred Stock
In
April 2020, the Company issued a total of 825,000 shares of its
Series B Preferred Stock to a Recapitalization
Investor for total proceeds of $8,250,000.
Notes Payable
On March 19, 2019, the Company repaid in
full various promissory notes with former related parties
in connection with the
Recapitalization Transaction totaling $9,518,000. There were
no such related party notes payable entered into during both the
six months ended June 30, 2020 and 2019.
Legal Fees
During
the six months ended June 30, 2020 and 2019, the Company paid
$21,567 and $442,211, respectively for legal services to a law firm
where our former President is a partner and our former Secretary is
employed. Of the $442,211 paid during the six months ended June 30,
2019, $252,100 was paid for services performed in connection with
the Recapitalization Transaction. The outstanding payable balance
to the law firm was $4,888 and less than $1,000 as of June 30, 2020
and December 31, 2019, respectively.
Our
rental properties are subject to generally non-cancelable operating
leases generating future minimum contractual rent payments due from
tenants. Occupancy of the operating properties was at 100% as of
June 30, 2020 and December 31, 2019. The future non-cancelable
minimum rents for our properties as of June 30, 2020 are as
follows:
|
|
|
|
Year Ended
|
|
For
the remaining six month period ended December 31, 2020
|
$6,385,946
|
2021
|
12,149,527
|
2022
|
9,516,688
|
2023
|
7,952,126
|
2024
|
6,969,882
|
2025
|
6,106,262
|
Thereafter
|
21,117,028
|
Total
|
$70,197,459
|
The properties are 100% leased to the United
States of America Government and administered by either the
GSA or occupying agency. Non-cancelable lease maturities
range from 2020 to 2034, with remaining non-cancelable lease terms range from 0.1
years to 14.3 years as of June 30, 2020. At June 30, 2020, the
weighted average non-cancelable lease term is 5.4 years if the GSA
elects to exercise its early termination right and the weighted
average total remaining contractual lease term is 9.1 years if none
of the early termination rights are exercised.
Preferred Stock
In
2016, the Company issued 144,500 shares of its 7.00% Series A
Cumulative Convertible Preferred Stock (the “Series A
Preferred Stock”) to various investors in exchange for a
total of $3,612,500, or $25 per share. The Series A Preferred Stock
will automatically convert into common stock upon the occurrence of
the Company’s listing of such common stock on a national
securities exchange. As the listing event did not occur on or prior
to March 31, 2020, holders of the Series A Preferred Stock may, at
their option, at any time and from time to time after such date,
convert all, but not less than all, of their outstanding shares of
Series A Preferred Stock into common stock. The shares of Series A
Preferred Stock are convertible into shares of common stock at a
3:1 ratio. As of June 30, 2020 and December 31, 2019, there were
144,500 shares of Series A Preferred Stock
outstanding.
Subsequent to the six month period ended June 30,
2020, on August 21, 2020, the Company offered to repurchase all of
its outstanding shares of Series A Preferred Stock for $25.00 per
share, using a portion of the net proceeds from the Series C
Offering (the “Series A Repurchase Offer”). The Series
A Repurchase Offer expired at 11:59 p.m., Eastern Time, on
September 11, 2020. For further details, see Note 14 Subsequent
Events,
below.
On March 19, 2019, the Company issued 1,050,000
shares of its Series B Preferred Stock in connection with the
Recapitalization Transaction in exchange for total proceeds of
$10,500,000, or $10 per share. The Series B Preferred Stock
will automatically convert into common stock upon the occurrence of
the Company’s listing of such
common stock on a national securities exchange. As the listing
event did not occur on or prior to March 31, 2020, holders of the
Series B Preferred Stock may, at their option, at any time
and from time to time after such date, convert all, but not less
than all, of their outstanding shares of Series B Preferred Stock
into common stock. Upon conversion, a holder of shares of Series B
Preferred Stock will receive a number of shares of common stock
equal to the original issue price of the Series B Preferred Stock
(plus any accrued and unpaid dividends) divided by the lesser of
(i) $9.10 or (ii) the fair market value of the common stock.
As of June 30, 2020 and December 31,
2019, there were 2,005,000 shares and 1,180,000 shares of Series B
Preferred Stock outstanding, respectively.
During
the six months ended June 30, 2020, the Company issued an
additional 825,000 shares of the Series B Preferred Stock for total
proceeds of $8,250,000.
Common Stock
On
November 7, 2016, the Company’s offering statement on Form
1-A (the “Offering”) filed pursuant to Regulation A was
qualified by the SEC. The Offering’s minimum and maximum
offering amounts are $3,000,000 and $30,000,000, respectively, at
an offering price of $10 per share. The initial purchase of common
stock with respect to the Offering occurred on May 18, 2017. In
November 2019, the Offering expired and the Company did not file a
post-qualification amendment to extend the Offering.
In
connection with the Recapitalization Transaction, the Company
issued 300,000 shares of the Company’s Common Stock on March
19, 2019 for total proceeds of $3,000,000, or $10 per
share.
In connection with the former asset management
agreement (the “Management Agreement”) with Holmwood
Capital Advisors, LLC, our former advisor (“HCA”), the
Company issued 55,674 shares of common stock to HCA for a total
value of $556,740 in satisfaction of the Acquisition Fee (as
defined below) due to HCA on March 31, 2020. Refer to
Note 13
Commitments and Contingencies for further discussion.
Further, in connection with the termination of the
former Management Agreement, the Company issued 51,677 of common
stock to HCA for a total value of $370,453 on March 31, 2020. Refer
to Note 13
Commitments and Contingencies for further discussion.
Restricted Common Stock
Issuance
On
October 22, 2019, the Company granted an aggregate of 14,646 shares
of restricted common stock to its non-employee directors valued at
$7.17 per share. The shares pay dividends on the number of shares
issued without regard to the number of shares vested. For the six
months ended June 30, 2020, the Company recognized $59,355 of
equity-based compensation related to this grant. The shares related
to this grant will vest in September 2020.
Long-Term Incentive Plan Units
LTIP Units, are a special class of partnership
interests in the Company’s Operating Partnership. Each LTIP
Unit is convertible into a Common Unit of the Operating Partnership
at a 1:1 ratio which can then be further exchanged into the
REIT’s common stock at a 1:1 ratio. Pursuant to an agreement,
HCA was granted LTIP Units concurrent with each sale of the
REIT’s common stock under the Offering. The LTIP Units vested
over five years unless the Company terminated the Management
Agreement with HCA, in which case, the vesting accelerated.
Effective March 31, 2020, the Company terminated the Management
Agreement with HCA and HCA’s LTIP Units became fully vested.
As such, the Company recognized the remaining equity-based
compensation expense during the six months ended June 30,
2020.
As of
June 30, 2020 and December 31, 2019, the Company had granted 72,215
LTIP Units. For the six
months ended June 30, 2020 and 2019, the Company recognized
$363,501 and $72,249 of equity-based compensation expense,
respectively.
Dividends and Distributions
During
both the six months ended June 30, 2020 and 2019, the REIT declared
dividends on its Series A Preferred Stock of $126,438. As of both
June 30, 2020 and December 31, 2019, accrued, unpaid preferred
stock dividends were $63,219.
During
the six months ended June 30, 2020 and 2019, the REIT declared
dividends on its Series B Preferred Stock of $661,130 and $319,136,
respectively. As of June 30, 2020 and December 31, 2019, accrued,
unpaid preferred stock dividends were $366,130 and $295,000,
respectively.
During
the six months ended June 30, 2020 and 2019, the REIT declared
dividends on its common stock of $414,365 and $386,936,
respectively. As of June 30, 2020 and December 31, 2019, accrued,
unpaid common stock dividends were $214,562 and $199,802,
respectively.
During
the six months ended June 30, 2020 and 2019, the Operating
Partnership declared distributions of $327,424, with respect to its
outstanding common units and LTIP Units. As of both June 30, 2020
and December 31, 2019, accrued, unpaid distributions were
$163,712.
12.
|
Noncontrolling Interest
|
The Company’s noncontrolling interest
represents the portion of common units in the REIT’s
Operating Partnership not attributable to the REIT. The
REIT’s noncontrolling interest was 43.5% and 45.3% at June
30, 2020 and December 31, 2019, respectively. The reduction in the
noncontrolling interest is primarily due to the REIT issuing 51,667
shares of common stock to HCA in connection with the termination of
the Management Agreement and 55,674 shares of common stock to HCA
in satisfaction of the Acquisition Fees due to
HCA.
The
Company’s Predecessor and HCA own an aggregate of 42.0% and
43.8% of the common units in the Operating Partnership as of June
30, 2020 and December 31, 2019, respectively.
13.
|
Commitments and Contingencies
|
Leases
The
property located in Port Canaveral, Florida was purchased subject
to a ground lease. The ground lease has an extended term of 30
years and expires in December 2045 with one 10-year renewal option.
The Company made ground lease payments of $38,969 and $36,681
during the six months ended June 30, 2020 and 2019,
respectively.
The
Company has two parking lot leases in connection with its property
located in San Antonio, Texas. These leases commenced on June 1,
2015 and have an initial term of 10 years with two 5-year renewal
options. The Company made payments of $9,000 on these leases during
the six months ended June 30, 2020 and 2019.
The
Company has an office lease for its Corporate office in
Winston-Salem, North Carolina. The lease commenced on February 15,
2019 and has a term of 3 years. The Company made payments of
$12,000 and $8,934 on this lease during the six months ended June
30, 2020 and 2019.
Future
minimum rent payments for the ground lease, parking lot leases and
corporate office lease subsequent to June 30, 2020 are as
follows:
Year Ended
|
|
For
the remaining six month period ended December 31, 2020
|
$59,969
|
2021
|
119,938
|
2022
|
98,938
|
2023
|
95,938
|
2024
|
95,938
|
2025
|
85,438
|
Thereafter
|
1,553,695
|
Total
|
$2,109,854
|
Management Fees
In connection with the Recapitalization
Transaction, on March 14, 2019, the Company provided notice to HCA,
pursuant to the resolution of the Company’s Board of
Directors (the “Board”), that the Company elected to
not renew the Management Agreement with HCA under its terms,
effective March 31, 2020. With respect to the Management Agreement,
the Company had contracted with HCA to provide asset
management, acquisition and leasing services for the Company,
subject to the direction and supervision of the Board.
Through
March 31, 2020, HCA earned an asset management fee equal to 1.5% of
the stockholders’ equity payable, subject to certain
adjustments, in arrears and on a quarterly basis. The Company paid
asset management fees of $128,906 and $230,701 for the six months
ended June 30, 2020 and 2019, respectively. At December 31, 2019,
accrued asset management fees were calculated to be $125,484. There
were no outstanding asset management fees at June 30,
2020.
HCA
earned a fee based on 1% of the acquisition cost
(“Acquisition Fee”) of each real estate investment made
by HCA on behalf of the Company for services with respect to the
identification of an investment, arrangement of the purchase, and
coordination of closing. HCA’s discretion to make additional
acquisitions following the Recapitalization Transaction was made
subject to Board approval. No such Acquisition Fees were earned by
HCA following the Recapitalization Transaction other than in
connection with the Monroe Property, which, as of the
Recapitalization Transaction, was subject to a binding agreement to
purchase previously executed by HCA.
The
Acquisition Fee was to be paid in common stock or other equity
securities of the Company. The Acquisition Fee was to be accrued
and unpaid until the earlier of the date on which the
Company’s common stock was initially listed with a national
securities exchange or on March 31, 2020. Unpaid acquisition fees
were calculated to be $556,739 at December 31, 2019. On March 31,
2020, the Company paid Acquisition Fees to HCA through the issuance
of 55,674 shares of common stock of the Company at a per share
price of $10 per share.
In accordance with the terms of the Management
Agreement, the Company was required to pay HCA a termination fee
upon the effective date of the termination. The termination fee is
calculated as a multiple of the sum of the asset management fees,
acquisition fees and leasing fees earned by HCA during the 24-month
period ending as of the most recently completed fiscal quarter
prior to the effective date of the termination. The appropriate
multiple is dependent on the stockholders’ equity, as defined
by the Management Agreement, of the Company at the time of
termination. The Company has the option to pay the termination fee
in cash, common stock, or with the consent of HCA, other equity
securities of the Company or Operating Partnership, including
without limitation LTIP Units, or a combination thereof. As of
December 31, 2019, an estimated liability for the termination fee
was accrued in the amount of $1,650,000. On March 31, 2020,
the Company terminated the Management Agreement with HCA. In
connection with the termination, the Company paid a total
termination fee of $1,645,453. The termination fee payable 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.
The
Company contracts with third party property managers to provide
property management services at each of its properties. The
property management fee is due and payable on a monthly basis at
the beginning of each month. The Company incurred property
management fees of $115,540 and $137,596 for the six months ended
June 30, 2020 and 2019, respectively. Accrued property management
fees were $9,617 and $9,387 at June 30, 2020 and December 31, 2019,
respectively.
Legal Proceedings
The
Company can be party to or otherwise be involved in legal
proceedings arising in the normal and ordinary course of business.
Other than the following, we are not aware of any proceeding,
threatened or pending, against us which, if determined adversely,
would have a material effect on our business, results of
operations, cash flows or financial position.
On
May 14, 2020, HCA and Holmwood filed suit in the Delaware Chancery
Court against the REIT and the Operating Partnership. The suit
alleges that the Company: (1) improperly calculated the termination
fee and other amounts due to HCA under its Management Agreement
with the Company; (2) improperly paid portions of the termination
fee and other amounts in common stock (as opposed to other common
equity interests in the Company); (3) failed to repay loans
allegedly made to the Company by the plaintiffs; and, (4)
improperly denied HCA powers granted by the Management Agreement to
control the day-to-day business and affairs of the REIT and the
Operating Partnership. The suit also alleges that the Company
cannot recoup certain expenses to which the Company claims
entitlement. The Company intends to vigorously defend against the
claims and has brought counterclaims in the matter. Because the
litigation is in its very early stages, at this time, the Company
cannot estimate the financial impact of the litigation on the
Company, if any.
Dividends and Distributions
On July
6, 2020, the REIT and the Operating Partnership paid accrued common
dividends, preferred dividends and distributions of $199,803, $426,689 and $153,782,
respectively.
On
September 25, 2020, the Company declared a dividend on its Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and common stock of $0.4375, $0.25, $0.2333 and $0.1375 per share
for stockholders of record on September 25, 2020. The aggregate
dividend of $1,569,255 will be paid on October 5,
2020.
On
September 25, 2020, the Operating Partnership declared an aggregate
distribution of $163,712 with respect to its OP Units and LTIP
Units, representing $0.1375 per unit for holders of record on
September 25, 2020. The aggregate distribution will be paid on
October 5, 2020.
Series C Offering
On
August 14, 2020, the Company completed the sale and issuance of
3,600,000 shares of the Company’s Series C Preferred Stock to
qualified investors in a private offering pursuant to exemptions
from registration provided by Section 4(a)(2) of the Securities Act
and Regulation D promulgated thereunder, for an aggregate purchase
price of $90,000,000 (the “Series C Offering”). After
deducting a placement agent fee of $2,835,000, net proceeds to the
Company from the Series C Offering were $87,165,000.
The
Company has used, or intends to use, the net proceeds from the
Series C Offering primarily to acquire new GSA Properties, repay a
portion of the indebtedness outstanding under the Credit Facility,
fully repay the Company’s Mezzanine Debt, purchase existing
shares of the Company’s Series A Preferred Stock and for
general corporate purposes.
Repayment of Mezzanine Debt
On
August 14, 2020, the Company used a portion of the net proceeds
from the Series C Offering to repay an aggregate amount of
$21,846,295 of the Company’s Mezzanine Debt outstanding under
the Loan Agreement, including accrued interest and make-whole
payments. As of the date of this semi-annual report, the Company
has no Mezzanine Debt outstanding.
Series A Repurchase Offer
On
August 21, 2020, the Company offered to repurchase all of its
outstanding shares of Series A Preferred Stock for $25.00 per share
(the “Repurchase Price”), using a portion of the net
proceeds from the Series C Offering. The Repurchase Price is equal
to the liquidation preference per share of Series A Preferred
Stock. The Series A Repurchase Offer expired at 11:59 p.m., Eastern
Time, on September 11, 2020. The Series A Repurchase Offer is
designed to provide liquidity to holders of the Company’s
Series A Preferred Stock, for which there is no public market, and
to lower the Company’s costs of operations. The Company has
repurchased 113,500 shares of Series A Preferred Stock for an
aggregate repurchase price of $2,837,500.
Credit Facility Amendment
On
August 14, 2020, the Company, certain subsidiaries of the Company,
Holmwood, KeyBank National Association, as a lender and
administrative agent, and each of the other lenders party thereto,
entered into that certain Limited Consent and Second Amendment to
Credit Agreement pursuant to which requisite lenders consented to
the Company’s repayment of its Mezzanine Debt and the Series
A Repurchase Offer and certain modifications were made to the
Company’s Credit Facility, including the financial covenants
set forth therein.
On
August 14, 2020, the Company used a portion of the net proceeds
from the Series C Offering to repay $62,100,000 of the
Company’s outstanding borrowings under its Credit
Facility.
Property Acquisitions
On September 22, 2020, the Operating Partnership
acquired real property located in Columbia, South Carolina (the
“Columbia Property”), pursuant to a Membership Interest
Purchase and Sale Agreement for a purchase price of approximately
$5,800,000. The Columbia Property consists of 19,368 rentable
square foot, build-to-suit single-tenant, one-story office
building, fully renovated in 2020, located on 1.85 acres in
Columbia, South Carolina. The Columbia Property is 100% leased by
the United States of America, administered by the U.S. General
Services Administration, and occupied by the Drug Enforcement
Administration on a single tenant/user basis. The lease commenced
on August 5, 2020 with a non-cancelable lease term of 10 years and
a total lease term of 15 years. This acquisition was funded
with $4,000,000 of borrowings on the Credit Facility and the
balance with proceeds from the Series C Offering.
Item 4. Exhibits
The following exhibits are filed as part of this semi-annual report
on Form 1-SA:
Exhibit
Number
|
Description
|
|
|
|
|
|
Articles
of Incorporation of HC Government Realty Trust, Inc., incorporated
by reference to Exhibit 2.1 to the Company’s Offering
Statement on Form 1-A filed on June 15, 2016
|
|
Articles
Supplementary of HC Government Realty Trust, Inc., incorporated by
reference to Exhibit 2.2 to the Company’s Offering Statement
on Form 1-A filed on June 15, 2016
|
|
Articles
Supplementary of HC Government Realty Trust, Inc., incorporated by
reference to Exhibit 1.1 to the Company’s Current Report on
Form 1-U filed on March 19, 2019
|
|
Articles
Supplementary of HC Government Realty Trust, Inc., incorporated by
reference to Exhibit 2.1 to the Company’s Current Report on
Form 1-U filed on August 18, 2020
|
|
Amended
and Restated Bylaws of HC Government Realty Trust, Inc.,
incorporated by reference to Exhibit 1.2 to the Company’s
Current Report on Form 1-U filed on March 19, 2019
|
|
Form of
Subscription Agreement, incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 1-U filed on December
21, 2017
|
|
Form of
Series B Preferred Stock Subscription Agreement, incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on
Form 1-U filed on March 19, 2019
|
|
Form of
Common Stock Subscription Agreement, incorporated by reference to
Exhibit 4.2 to the Company’s Current Report on Form 1-U filed
on March 19, 2019
|
4.4
|
Form of
Series C Preferred Stock Subscription Agreement, incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on
Form 1-U filed on August 18, 2020
|
|
Agreement
of Limited Partnership of HC Government Realty Holdings, L.P.,
incorporated by reference to Exhibit 6.1 to the Company’s
Offering Statement on Form 1-A filed on June 15, 2016
|
|
First
Amendment to the Agreement of Limited Partnership of HC Government
Realty Holdings, L.P., incorporated by reference to Exhibit 6.2 to
the Company’s Offering Statement on Form 1-A filed on June
15, 2016
|
|
Limited
Liability Company Agreement of Holmwood Portfolio Holdings, LLC,
incorporated by reference to Exhibit 6.3 to the Company’s
Offering Statement on Form 1-A filed on June 15, 2016
|
|
Contribution
Agreement by and between Holmwood Capital, LLC and HC Government
Realty Holdings, L.P., incorporated by reference to Exhibit 6.4 to
the Company’s Pre-Qualification Amendment No. 2 to its
Offering Statement on Form 1-A filed on September 16,
2016
|
|
Form of
Tax Protection Agreement by and between Holmwood Capital, LLC and
HC Government Realty Holdings, L.P., incorporated by reference to
Exhibit 6.5 to the Company’s Pre-Qualification Amendment No.
1 to its Offering Statement on Form 1-A filed on July 29,
2016
|
|
Form of
Registration Rights Agreement by and between Holmwood Capital, LLC
and HC Government Realty Trust, Inc., incorporated by reference to
Exhibit 6.6 to the Company’s Pre-Qualification Amendment No.
4 to its Offering Statement on Form 1-A filed on October 24,
2016
|
|
Form of
Registration Rights Agreement by and between Holmwood Capital
Advisors, LLC and HC Government Realty Trust, Inc., incorporated by
reference to Exhibit 6.7 to the Company’s Pre-Qualification
Amendment No. 4 to its Offering Statement on Form 1-A filed on
October 24, 2016
|
|
Management
Agreement by and among Holmwood Capital Advisors, LLC, HC
Government Realty Trust, Inc. and HC Government Realty Holdings,
L.P., incorporated by reference to Exhibit 6.8 to the
Company’s Offering Statement on Form 1-A filed on June 15,
2016
|
|
Form of
Independent Director Agreement, incorporated by reference to
Exhibit 6.9 to the Company’s Offering Statement on Form 1-A
filed on June 15, 2016
|
|
Form of
Independent Director Indemnification Agreement, incorporated by
reference to Exhibit 6.10 to the Company’s Offering Statement
on Form 1-A filed on June 15, 2016
|
|
Form of
Officer/Director Indemnification Agreement, incorporated by
reference to Exhibit 6.11 to the Company’s Pre-Qualification
Amendment No. 1 to its Offering Statement on Form 1-A filed on July
29, 2016
|
|
2016 HC
Government Realty Trust, Inc. Equity Incentive Plan, incorporated
by reference to Exhibit 6.12 to the Company’s
Pre-Qualification Amendment No. 4 to its Offering Statement on Form
1-A filed on October 24, 2016
|
|
|
First
Amendment to Contribution Agreement by and between Holmwood
Capital, LLC and HC Government Realty Holdings, L.P., dated as of
June 10, 2016, incorporated by reference to Exhibit 6.25 to the
Company’s Pre-Qualification Amendment No. 2 to its Offering
Statement on Form 1-A filed on September 16, 2016
|
|
|
Second
Amendment to Contribution Agreement by and between Holmwood
Capital, LLC and HC Government Realty Holdings, L.P., dated as of
May 26, 2017, incorporated by reference to Exhibit 6.1 to the
Company’s Current Report on Form 1-U filed on June 2,
2017
|
6.15
|
|
First
Amendment to 2016 HC Government Realty Trust, Inc. Equity Incentive
Plan
|
|
|
Second Amendment to the Amended and Restated Limited Partnership
Agreement of HC Government Realty Holdings, L.P., dated March 14,
2019, incorporated by reference to Exhibit 6.1 to the
Company’s Current Report on Form 1-U filed on March 19,
2019
|
|
|
Loan
Agreement, dated March 19, 2019, by and between HC Government
Holdings, L.P., the Lenders Party thereto and HCM Agency, LLC, as
Collateral Agent, incorporated by reference to Exhibit 6.2 to the
Company’s Current Report on Form 1-U filed on March 19,
2019
|
|
|
Holding
Company Guaranty Agreement, dated March 19, 2019, by HC Government
Realty Trust, Inc. and Holmwood Portfolio Holdings, LLC for the
benefit of HCM Agency, LLC, as Collateral Agent and the Lenders,
incorporated by reference to Exhibit 6.3 to the Company’s
Current Report on Form 1-U filed on March 19, 2019
|
|
|
Security
and Pledge Agreement, dated March 19, 2019, by and among HC
Government Realty Holdings, L.P., Holmwood Portfolio Holdings, LLC,
HC Government Realty Trust, Inc., HCM Agency, LLC, as Collateral
Agent and the Lenders, incorporated by reference to Exhibit 6.4 to
the Company’s Current Report on Form 1-U filed on March 19,
2019
|
|
|
Credit
Agreement, dated October 22, 2019, by and among HC Government
Realty Holdings, L.P., as Borrower, HC Government Realty Trust,
Inc, Holmwood Portfolio Holdings, LLC and certain subsidiaries of
HC Government Realty Holdings, L.P., as Guarantors, KeyBank
National Association, as syndication agent and administrative
agent, KeyBanc Capital Markets, Inc., as sole bookrunner and lead
arranger, and the lenders from time to time party thereto,
incorporated by reference to Exhibit 6.20 to the Company’s
Annual Report on Form 1-K filed on April 3, 2020
|
|
|
Second
Amendment to Loan Agreement, dated October 22, 2019, by and between
HC Government Holdings, L.P., the Lenders Party thereto and HCM
Agency, as Collateral Agent, incorporated by reference to Exhibit
6.21 to the Company’s Annual Report on Form 1-K filed on
April 3, 2020
|
|
|
Increase
Agreement and Amendment No. 1 to Credit Agreement, dated as of
December 20, 2019, by an among HC Government Realty Holdings, L.P.,
as Borrower, HC Government Realty Trust, Inc., as Parent Guarantor,
and Holmwood Portfolio Holdings, LLC and certain subsidiaries of HC
Government Realty Holdings, L.P., as Guarantors, KeyBank National
Association, as syndication agent, administrative agent and Lender,
and IberiaBank and Synovus Bank, as Augmenting Lender, incorporated
by reference to Exhibit 6.22 to the Company’s Annual Report
Form 1-K filed on April 3, 2020
|
|
|
Limited
Consent and Second Amendment to Credit Agreement, dated August 14,
2020, by and among HC Government Realty Holdings, L.P., as
Borrower, HC Government Realty Trust, Inc., as Parent Guarantor,
and Holmwood Portfolio Holdings, LLC and certain subsidiaries of HC
Government Realty Holdings, L.P., as Guarantors, KeyBank National
Association, as an administrative agent and Lender, and each of the
other Lenders party thereto
|
|
|
Third
Amendment to the Agreement of Limited Partnership of HC Government
Realty Holdings, L.P., dated August 12, 2020, incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on
Form 1-U filed on August 18, 2020
|
|
|
Form
of Escrow Agreement by and among Branch Banking & Trust
Company, HC Government Realty Trust, Inc., and Orchard Securities,
LLC, incorporated by reference to Exhibit 8.1 to the
Company’s Pre-Qualification Amendment No. 4 to its Offering
Statement on Form 1-A filed on October 24, 2016
|
|
|
Assignment
of Escrow Agreement by and among HC Government Realty Trust, Inc.,
Branch Banking & Trust Company, Orchard Securities, LLC and
SANDLAPPER Securities, LLC, dated as of April 10, 2017,
incorporated by reference to Exhibit 8.1 to the Company’s
Current Report on Form 1-U filed on April 25, 2017
|
|
|
Assignment of Escrow Agreement by and among HC Government Realty
Trust, Inc., Branch Banking & Trust Company, Boustead
Securities, LLC and SANDLAPPER Securities, LLC, dated as of
December 20, 2017, incorporated by reference to Exhibit 8.1
to the Company’s Current Report on Form 1-U filed on December
21, 2017.
|
_________________________________
* Filed
herewith.
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
HC GOVERNMENT REALTY TRUST, INC.
|
|
|
|
|
|
|
By:
|
/s/ Steven
A. Hale II
|
|
|
|
Steven A. Hale II
|
|
Date:
September 29, 2020
|
|
Chairman, Chief Executive Officer and President
|
|
Pursuant to the requirements of Regulation A, this report has been
signed by the following persons in the capacities and on the dates
indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Steven A. Hale II
|
|
Chairman,
Chief Executive Officer and President
|
|
September
29, 2020
|
Steven
A. Hale II
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
/s/
Jacqlyn Piscetelli
|
|
Chief
Financial Officer
|
|
September
29, 2020
|
Jacqlyn
Piscetelli
|
|
(principal
finance officer and principal accounting officer)
|
|
|