UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 1-K
ANNUAL REPORT
  
ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933
For the fiscal year ended December 31, 2020
  
HC GOVERNMENT REALTY TRUST, INC.
(Exact name of issuer as specified in its charter)
 
I.R.S. Employment Identification Number: 81-1867397
 
Maryland
 
81-1867397
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. No.)
 
 
 
390 S. Liberty Street, Suite 100
Winston-Salem, NC
 
  27101
(Address of principal executive offices)
 
(Zip Code)
 
(336) 477-2535
Issuer’s telephone number, including area code 
 
Common Stock
(Title of each class of securities issued pursuant to Regulation A)
 

 
 
 
Part II
 
In this annual report, references to the “Company,” “we,” “us” or “our” or similar terms refer to HC Government Realty Trust, Inc., a Maryland corporation, together with its consolidated subsidiaries, including HC Government Realty Holdings, L.P., a Delaware limited partnership, which we refer to as our Operating Partnership. We refer to Holmwood Capital, LLC, a Delaware limited liability company, as Holmwood or our predecessor, and Holmwood Capital Advisors, LLC, a Delaware limited liability company, as HCA. As used in this annual report on Form 1-K, an affiliate of, or person affiliated with, a specified person, is a person, who or which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the person specified.
 
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
 
We make statements in this annual report on Form 1-K, or this annual report, that are forward-looking statements within the meaning of the federal securities laws. The words “believe,” “estimate,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “may,” and similar expressions or statements regarding future periods are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results to differ materially from any predictions of future results, performance or achievements that we express or imply in this annual report or in the information incorporated by reference in this annual report.
 
The forward-looking statements included in this annual report are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve, among other things, judgments with respect to future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to:
  
changes in economic conditions generally and in the real estate and securities markets specifically,
the ability of our management team to source, originate and acquire suitable investment opportunities,
our expectation that there will be opportunities to acquire additional properties leased to the United States of America,
our expectations regarding demand by the federal government for leased space,
the United States 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 United States, 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 trust (“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 annual report. All forward-looking statements are made as of the date of this annual report on Form 1-K and the risk that actual results will differ materially from the expectations expressed in this annual report on Form 1-K will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this annual report on Form 1-K, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this annual report on Form 1-K, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this annual report on Form 1-K will be achieved.
 
 
 
1
 
 
 
Item 1. Business
 
The Company
 
We are an internally-managed 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 with sizes ranging from 5,000 to 50,000 rentable square feet, and in their first lease term after construction or improvement to post-9/11 standards. We generally intend to acquire GSA Properties that fulfill mission critical or citizen service functions. Leases associated with the GSA Properties in which our company invests are full faith and credit obligations of the United States of America.
 
Prior to March 14, 2019, we were externally managed by HCA, our former advisor. On March 14, 2019, we provided notice of nonrenewal (the “Nonrenewal Notice”) of our management agreement with HCA, and our board of directors (the “Board”) amended and restated our investment guidelines as of the date of the Nonrenewal Notice. Pursuant to the Nonrenewal Notice, the management agreement with HCA terminated on March 31, 2020. During the period between March 14, 2019 and March 31, 2020, we transitioned from being externally managed to a fully internally-managed company. In connection with the termination of the management agreement with HCA, we paid HCA a termination fee of $1,645,453, which was comprised of $1,275,000 in cash and $370,453 in shares of common stock of the Company, at a per share price of $7.17, for a total of 51,667 shares.
 
As of the filing of this report, our portfolio consists of 24 GSA Properties, comprised of 20 GSA Properties that we own in fee simple, one GSA Property that we own subject to a ground lease and three GSA Properties for which we have all of the rights to the profits, losses, any distributed cash flow and all of the other benefits and burdens of ownership including for federal income tax purposes, each of which is leased to the United States. Our portfolio of GSA Properties (“Portfolio Properties”), which includes four properties acquired during the year ended December 31, 2020, contains approximately 447,672 rentable square feet located in 16 states. Based on net operating income of our Portfolio Properties, our portfolio has a weighted average remaining lease term of 9.2 years if none of the early termination rights are exercised and 5.4 years if all of the early termination rights are exercised.
 
The GSA-leased, real estate asset class has a number of attributes that we believe will offer our stockholders significant benefits, including a highly creditworthy and very stable tenant base, long-term lease structures and low risk of tenant turnover. GSA leases are backed by the full faith and credit of the United States, and the GSA has never experienced a financial default. Payment of rents under GSA leases are funded through the Federal Buildings Fund and are not subject to direct federal appropriations, which can fluctuate with federal budget and political priorities. In addition to presenting reduced risk of default, GSA leases typically have long initial terms of ten to 20 years with renewal leases having terms of five to ten years, which limit operational risk. Upon renewal of a GSA lease, base rent typically is reset based on a number of factors at the time of renewal, including inflation and the replacement cost of the building, that we generally expect will increase over the life of the lease.
 
GSA-leased properties generally provide attractive investment opportunities but require specialized knowledge and expertise. Each U.S. Government agency has its own customs, procedures, culture, needs and mission, which results in different requirements for its leased space. Furthermore, the GSA-leased sector is highly fragmented with a significant amount of non-institutional owners. Moreover, while there are a number of national real estate brokers that hold themselves out as having GSA-leased property expertise, there are no national or regional clearing houses for GSA-leased properties. Long-term relationships and specialized institutional knowledge regarding the agencies, their space needs and the hierarchy and importance of a property to its tenant agency are crucial to understanding which agencies and properties present the greatest likelihood of long-term agency occupancy, and, therefore, to identifying and acquiring attractive GSA-leased properties. Our portfolio is diversified among occupying agencies, including a number of the largest and most essential agencies, such as the Drug Enforcement Administration, the Federal Bureau of Investigation, the U.S. Citizenship and Immigration Services, the U.S. Social Security Administration and the Department of Veterans Affairs.
  
We operate as an umbrella partnership REIT (“UPREIT”), which means that we conduct substantially all of our business through our Operating Partnership for which we serve as the general partner. Our GSA Properties are owned by us through single-purpose entities, 21 of which are wholly owned by our Operating Partnership and three of which are consolidated variable interest entities based upon management’s determination that the Operating Partnership has a variable interest in the entities and is the primary beneficiary. While we focus on investments in GSA Properties, in the future we also may invest in state and local government, mission critical single tenant properties or properties previously (but not exclusively) leased to the United States, the GSA or one or more occupying agencies.
 
 
 
2
 
 
 
We believe in the long-term there will be a consistent flow of GSA Properties that meet our target investment criteria for purposes of acquisition, leasing and managing, which we expect will enable us to continue our platform into the foreseeable future. We do not anticipate making acquisitions outside of the United States or its territories.
 
We primarily make direct acquisitions of GSA Properties, but we may also invest in GSA Properties through indirect investments, such as joint ventures, whereby we may own less than 100% of the beneficial interest therein; provided, that in such event, we will acquire at least 50% of the outstanding voting securities in the investment, or otherwise comply with SEC staff guidance regarding majority-owned subsidiaries so that the investment meets the definition of “majority-owned subsidiary” under the 40 Act.
 
Our Competitive Strengths and Strategic Opportunities
 
We believe that we will benefit from the alignment of the following competitive strengths and strategic opportunities:
 
High Quality Portfolio Leased to Mission-Critical U.S. Government Agencies
 
We own a portfolio of 24 GSA Properties, comprised of 20 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. As of the date of this annual report on Form 1-K, based upon net operating income, the weighted average age of our Portfolio Properties is approximately 8.5 years1, and the weighted average remaining lease term is approximately 9.2 years if none of the early termination rights are exercised and 5.4 years if all of the early termination rights are exercised.
All of our Portfolio Properties are occupied by agencies that serve mission-critical or citizen service functions.
Our Portfolio Properties generally meet our investment criteria, which target GSA Properties with sizes ranging between 5,000 to 50,000 rentable square feet and in their first lease term after construction or improvement to post-9/11 standards.
 
Credit Quality of Tenant 
 
Leases are full faith and credit obligations of the United States and, as such, are not subject to the risk of annual appropriations.
Leases typically include inflation-adjusted rent increases for certain property operating costs, which the Company believes will mitigate expense variability.
 
Investment Strategy
 
We believe there is a significant opportunity to acquire and build a portfolio consisting of high-quality GSA Properties at attractive risk-adjusted returns. We continue to invest in GSA Properties primarily with sizes ranging from 5,000 to 50,000 rentable square feet, and in their first lease term after construction or improvement to post-9/11 standards. We generally intend to acquire GSA Properties that fulfill mission critical or citizen service functions. Leases associated with the GSA Properties in which our Company invests are full faith and credit obligations of the United States of America.  
 
We believe the subset of GSA Properties on which we focus is highly fragmented and often overlooked by larger investors, which can provide opportunities for us to buy at more attractive pricing compared to other properties within the asset class. We also believe selection based on agency function, building use and location will help to mitigate risk of non-renewal. While we intend to focus on this subset of GSA Properties, we are not limited in the properties in which we may invest. We have the flexibility to expand our investment focus as market conditions may dictate, subject to broad investment policies adopted by our Board, as may be amended by the Board from time to time.
  
 

1 The weighted-average age of the properties in our portfolio is based on the later of (i) the date upon which the property was built or (ii) the date upon which the property was fully renovated.
 
3
 
 
Description of Our Properties
 
The following table presents an overview of our properties as of December 31, 2020:
 
Property
 
Current Occupant
 
 
 Rentable Sq. Ft (RSF)
 
 
% of Portfolio 1
 
 
% Leased
 
 
 
Early Termination 2
 
 
Expiration Date
 
 
 Effective Annual Rent
 
 
 Effective Annual Rent per RSF
 
 
Effective Annual Rent % of Portfolio
 
Our Operating Properties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Port Saint Lucie, Florida
DEA
  24,858 
  5.3%
  100%
5/31/2022
5/31/2027
 $574,614 
 $23.12 
  3.9%
Jonesboro, Arkansas
SSA
  16,439 
  3.5%
  100%
1/11/2022
1/11/2027
 $625,808 
 $38.07 
  4.2%
Lorain, Ohio
SSA
  11,607 
  2.5%
  100%
3/31/2021
3/31/2024
 $447,704 
 $38.57 
  3.0%
Cape Canaveral, Florida
CBP
  14,704 
  3.1%
  100%
7/15/2022
7/15/2027
 $674,729 
 $45.89 
  4.6%
Johnson City, Tennessee
FBI
  10,115 
  2.2%
  100%
8/20/2022
8/20/2027
 $397,468 
 $39.29 
  2.7%
Fort Smith, Arkansas
CIS
  13,816 
  2.9%
  100%
10/30/2024
10/30/2029
 $428,907 
 $31.04 
  2.9%
Silt, Colorado
BLM
  18,813 
  4.0%
  100%
9/30/2024
9/30/2029
 $389,095 
 $20.68 
  2.5%
Lakewood, Colorado
DOT
  19,241 
  4.1%
  100%
No Early Termination
6/20/2024
 $466,253 
 $24.23 
  3.1%
Moore, Oklahoma
SSA
  15,445 
  3.2%
  100%
4/9/2022
4/9/2027
 $532,136 
 $34.45 
  3.6%
Lawton, Oklahoma
SSA
  9,298 
  2.0%
  100%
8/16/2020
8/16/2025
 $209,956 
 $22.58 
  1.4%
Norfolk, Virginia
SSA
  53,917 
  11.5%
  100%
No Early Termination
6/26/2027
 $1,313,788 
 $24.37 
  8.9%
Montgomery, Alabama
CIS
  21,420 
  4.6%
  100%
12/8/2026
12/8/2031
 $580,233 
 $27.09 
  3.9%
San Antonio, Texas
ICE
  38,756 
  8.3%
  100%
4/30/2022
4/30/2027
 $1,093,962 
 $28.23 
  7.4%
Knoxville, Iowa
VA
  12,833 
  2.7%
  100%
No Early Termination
1/11/2032
 $690,057 
 $53.77 
  4.7%
Champaign, Illinois
FBI
  11,180 
  2.4%
  100%
4/12/2028
4/12/2033
 $372,231 
 $33.29 
  2.5%
Sarasota, Florida
USDA
  28,210 
  6.0%
  100%
7/19/2028
7/19/2038
 $919,688 
 $32.60 
  6.2%
Monroe, Louisiana
VA
  21,124 
  4.5%
  100%
No Early Termination
9/30/2023
 $746,442 
 $35.34 
  5.0%
Ft. Lauderdale, Florida
ICE
  16,000 
  3.4%
  100%
4/9/2028
4/9/2033
 $704,295 
 $44.02 
  4.7%
Lawrence, Kansas
USGS
  16,000 
  3.4%
  100%
No Early Termination
2/28/2033
 $597,181 
 $37.32 
  4.0%
Oklahoma City, Oklahoma
ICE
  16,991 
  3.6%
  100%
12/27/2028
12/27/2033
 $484,443 
 $28.51 
  3.3%
Birmingham, Alabama
ICE
  12,470 
  2.7%
  100%
10/31/2034
10/31/2039
 $447,985 
 $35.93 
  3.0%
Columbia, South Carolina
DEA
  19,368 
  4.1%
  100%
8/4/2030
8/4/2035
 $587,475 
 $30.33 
  4.0%
Lakewood, Washington
ICE
  9,567 
  2.0%
  100%
2/27/2029
2/27/2034
 $463,894 
 $48.49 
  3.1%
Total - Our Operating Properties
 
  432,172 
  92.0%
  100%
 
 
 $13,748,344 
 $31.81 
  92.60%
 
    
    
    
 
 
    
    
    
Our Development Property
 
    
    
    
 
 
    
    
    
Portland, Maine
CIS
  15,500 
  3.3%
  100%
6/29/2031 3
6/29/2036 3
 $494,941 
 $31.93 
  3.34%
Total - Our Development Property
 
  15,500 
  3.3%
  100%
 
 
 $494,941 
 $31.93 
  3.34%
 
    
    
    
 
 
    
    
    
Total - Our Portfolio
 
  447,672 
  95.3%
  100%
 
 
 $14,243,285 
 $31.82 
  95.9%
 
    
    
    
 
 
    
    
    
Our Pipeline
 
    
    
    
 
 
    
    
    
Houston, Texas
SSA
  21,019 
  4.5%
  100%
2/21/2030
2/21/2035
 $585,660 
 $27.86 
  3.95%
Total - Our Pipeline
 
  21,019 
  4.5%
  100%
 
 
  585,660 
 $27.86 
  3.95%
 
    
    
    
 
 
    
    
    
Total - Our Portfolio and Pipeline
 
  468,691 
  100%
  100%
 
 
 $14,828,945 
 $31.64 
  100%
 
1 By rentable square footage.
2 The early termination date, if any, for each lease generally represents the commencement of the time period during which our tenant may exercise its right to terminate the lease, in whole or in part, at any time effective on or after such date by providing us with sufficient prior written notice.  The prior written notice required for early termination under each lease ranges from 60 to 180 days. If our tenant exercises its early termination rights with respect to any lease, we cannot guarantee that we will be able to re-lease the premises on comparable terms, if at all. The lease expiration date is the date the applicable lease will terminate if the early termination is not exercised or if no early termination right exists.
3 Early termination date and lease expiration date are based on the estimated development project completion.
 
 
4
 
 
 
2019 Recapitalization Transaction
 
On March 19, 2019, we consummated a recapitalization transaction (the “Recapitalization Transaction”) with Hale Partnership Capital Management, LLC (“Hale”) and certain affiliated investors (each, 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 Convertible Preferred Stock (the “Series B Preferred Stock”) and (iii) a Recapitalization Investor purchased 300,000 shares of our common stock. Additional description of the Recapitalization Transaction can be found on our Current Report on Form 1-U located at: https://www.sec.gov/Archives/edgar/data/1670010/000165495419002955/hcgrt_1u.htm.
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
We are a real estate investment trust, or REIT, formed to grow our business of acquiring, developing, financing, owning and managing build-to-suit or improved-to-suit, single-tenant properties leased primarily to the United States of America and administered by the GSA or directly by the federal government agencies or departments occupying such 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 lease term after construction or improvement to post-9/11 standards. We further emphasize GSA Properties that fulfill mission critical or direct citizen service functions.  Leases associated with the GSA Properties in which our company invests are full faith and credit obligations of the United States of America. We intend to grow our portfolio primarily through acquisitions of single-tenanted, federal government-leased properties in such markets; although, at some point in the future we may elect to develop, or joint venture with others in the development of, competitively bid, built-to-suit, single-tenant, federal government-leased properties, or buy facilities that are leased to credit-worthy state or municipal tenants.
  
As of December 31, 2020, the Company owned 24 GSA Properties, comprised of 20 GSA Properties that we own in fee simple, one GSA Property that we own subject to a ground lease and three GSA Properties for which we have all of the rights to the profits, losses, any distributed cash flow and all of the other benefits and burdens of ownership including for federal income tax purposes, each of which is leased to the United States. Our Portfolio Properties contain approximately 447,672 rentable square feet located in 16 states. As of December 31, 2020, our Portfolio Properties are 100% leased to the United States of America and occupied by 11 different federal government agencies. Based on net operating income of each property, our portfolio has a weighted average remaining lease term of 9.2 years if none of the early termination rights are exercised and 5.4 years if all of the early termination right are exercised.
 
Our Operating Partnership, through wholly-owned special purpose entities, or SPEs, holds substantially all of our assets and conducts substantially all of our business. As of December 31, 2020, we owned approximately 55.9% 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 Portfolio Property, of which 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, were contributed to our Operating Partnership by Holmwood on May 26, 2017.
 
 
5
 
 
 
Operating Results
 
For the year ended December 31, 2020
 
At December 31, 2020, we owned 21 properties and all of the rights to the profits, losses, any distributed cash flow and all of the other benefits and burdens of ownership including for federal income tax purposes for three other properties. Our portfolio comprises 447,672 rentable square feet located in 16 states and is 100% leased to the United States and either administered by the GSA or occupying department or agency.
 
During the year ended December 31, 2020, we earned revenues of $13,074,121 and incurred operating costs of $3,878,851. Our net operating income was $9,195,270 and our net loss was $6,924,575 for the year ended December 31, 2020. Our net loss attributed to our common stockholders was $5,586,611 after allocating $3,157,155 of the Company’s net loss to the noncontrolling interest in our Operating Partnership and after deducting preferred stock dividends of $1,819,191.
 
For the year ended December 31, 2019
 
At December 31, 2019, we owned 17 properties and all of the rights to the profits, losses, any distributed cash flow and all of the other benefits and burdens of ownership, including for federal income tax purposes, for three other properties. As of December 31, 2019, our portfolio comprised 390,767 rentable square feet located in 13 states and was 100% leased to the United States and either administered by the GSA or occupying department or agency.
 
During the year ended December 31, 2019, we earned revenues of $10,788,099 and incurred operating costs of $3,356,328. Our net operating income was $7,431,771 and our net loss was $8,469,335 for the year ended December 31, 2019. Our net loss attributed to our common stockholders was $7,611,041 after allocating $2,020,305 of the Company’s net loss to the noncontrolling interest in our Operating Partnership and after deducting preferred stock dividends of $1,162,011.
 
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 a useful measure of operating performance 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.
 
 
 
6
 
 
 
The following table reflects a reconciliation of NOI to net loss as computed in accordance with GAAP for the periods presented.
 
 
 
For the year ended December 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Revenues
 $13,074,121 
 $10,788,099 
Less:
    
    
Operating expenses
  3,644,299 
  3,087,487 
Property management fee
  234,552 
  268,841 
Total expenses
  3,878,851 
  3,356,328 
 
    
    
Net operating income
  9,195,270 
  7,431,771 
Less:
    
    
Asset management fee
  128,906 
  485,813 
Corporate expenses
  2,006,162 
  3,157,102 
Depreciation and amortization
  5,005,624 
  4,046,413 
Interest expense
  7,210,700 
  5,045,639 
Loss on extinguishment of debt
  933,051 
  966,200 
Management termination fees
  (4,547)
  1,900,002 
Gain on involuntary conversion
  - 
  (192,717)
Equity-based compensation
  839,949 
  492,654 
Net loss
  (6,924,575)
  (8,469,335)
Less: Net loss attributable to noncontrolling interest
  (3,157,155)
  (2,020,305)
Net loss attributed to HC Gov Realty Trust, Inc.
  (3,767,420)
  (6,449,030)
Less: Preferred stock dividends
  (1,819,191)
  (1,162,011)
Net loss attributed to HC Gov Realty Trust, Inc. available to common shareholders
 $(5,586,611)
 $(7,611,041)
 
 Liquidity and Capital Resources
 
Our business model is intended to drive growth through acquisitions. Our Recapitalization Transaction, KeyBank Transaction (as defined below) and Series C Offering (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 “Regulation A Offering”) expired and we did not file a post-qualification amendment to extend the Regulation A Offering. While we have currently elected to not continue to issue equity under Regulation A, we expect to continue to issue equity in our company with proceeds being used to acquire GSA Properties or buy facilities that are leased to credit-worthy state or municipal tenants. As of December 31, 2020, we had approximately $4,906,679 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 and development projects; (iv) payment of principal of, and interest on, outstanding indebtedness; and (v) other investments, consistent with our Investment Guidelines and Investment Policies.
 
As of the date of this annual report, we have two GSA Properties under contract and one GSA Property under development which will require approximately $9,500,000 and $1,900,000 of funding, respectively, through borrowings on our senior secured revolving credit facility.
 
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 (“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.
 
 
7
 
 
 
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. During the year ended December 31, 2020, we issued an additional $8,700,000 of Series B Preferred Stock to partially finance our acquisitions.
 
In October 2019, we also entered into a senior secured revolving credit facility (as amended, the “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 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 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 Credit Facility to repay certain indebtedness, fund acquisitions and capital expenditures and provide working capital.
 
As of December 31, 2020, we had borrowed approximately $15,650,000 and had approximately $84,350,000 committed and undrawn under our 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.
 
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 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.
 
 
8
 
 
 
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 3. Directors and Officers
 
The individuals listed below are our executive officers and directors. The following table and biographical descriptions set forth certain information with respect to the individuals who currently serve as our directors and the executive officers:
 
Name
Position
 
Age
 
Term of Office
Steven A. Hale II
Chairman, Chief Executive Officer and President
 
37
 
March 2019
Jacqlyn Piscetelli
Chief Financial Officer, Treasurer and Secretary
 
37
 
March 2019
Brad G. Garner
Director
 
38
 
March 2019
Matthew A. Hultquist
Director and Head of Acquisitions and Business Development
 
42
 
March 2019
Jeffrey S. Stewart
Director
 
54
 
March 2019
Anthony J. Sciacca, Jr.
Director
 
50
 
September 2019
 
 
Steven A. Hale II. Mr. Hale has managed the Hale Partnership Fund LP, MGEN-II Hale Fund LP, Clark-Hale Fund LP, and Hale Medical Office Building Fund, LP, via Hale Partnership Capital Management, LLC, since September 2010. In November 2017, Mr. Hale was named Chairman of the Board for Stanley Furniture Company, Inc. (since renamed HG Holdings, Inc.). He has served as Chief Executive Officer of HG Holdings, Inc. since March 2018. Prior to founding Hale Partnership Capital Management, LLC, Mr. Hale worked for Babson Capital Management, LLC where he was responsible for primary coverage of distressed debt investments across a variety of industries including manufacturing commercial real estate, services, and casinos/gaming. Prior to joining Babson, Mr. Hale was a Leveraged Finance Analyst at Bank of America Securities. Mr. Hale graduated from Wake Forest University in 2005, where majored in economics, minored in psychology and religion, and was a three-year letterman on the varsity football team.
 
Jacqlyn Piscetelli. Ms. Piscetelli served as Chief Financial Officer of Stanley Furniture Company, LLC (“Stanley Furniture”) from March 2018 until January 2019 where she directed all finance and accounting operations. Prior to joining Stanley Furniture, Ms. Piscetelli served as the Financial Executive – Governance for the Financial Management group at BB&T Corporation (“BB&T”) from 2016 to 2018 where she managed BB&T’s Sarbanes-Oxley Section 302 and 404 compliance programs. From 2013 to 2016, Ms. Piscetelli worked in BB&T’s Accounting Policy group where she was primarily responsible for monitoring the issuance of new accounting pronouncements and evaluating their impact on the financial institution. Ms. Piscetelli spent over 7 years in public accounting at Ernst & Young LLP (“EY”) in their Assurance practice. At EY, she served both public and private clients with domestic and foreign operations across a variety of industries including manufacturing and distribution, automotive, retail and financial services. Ms. Piscetelli graduated from Wake Forest University in 2006 with a B.S. and M.S. in Accountancy.
 
Brad G. Garner. Mr. Garner joined Hale Partnership Capital Management, LLC in 2015 as Chief Financial Officer and Partner. In April 2018, Mr. Garner was named Chief Financial Officer of HG Holdings, Inc. (formerly Stanley Furniture Company, Inc.). Mr. Garner leads real estate efforts and private equity investments for the Hale entities. He has also served as Chief Financial Officer of Best Bar Ever, Inc., a protein bar business from 2015 to 2017. Mr. Garner assisted in raising and structuring a capital investment and successful exit to a strategic partner while overseeing all financial reporting functions during a two-year time horizon. Prior to taking on that role, he spent ten years in public accounting at Dixon Hughes Goodman LLP (“DHG”), the largest public accounting firm headquartered in the Southeast, as a Senior Tax Manager. At DHG, he served domestic closely held companies (specifically pass-through entities) and individuals. These clients represented a variety of industries including manufacturing and distribution, construction and real estate, and financial institutions. Mr. Garner earned a B.S. and M.S. in Accounting from Wake Forest University in 2006.
 
 
9
 
 
 
Matthew A. Hultquist. Mr. Hultquist has served as the Managing Member of Hillandale Advisors, a private investment and advisory firm that works with private businesses and their owners on strategic growth since January 2017. From 2006 to 2016, Mr. Hultquist served on the investment team at Sasco Capital, Inc., a public equity asset management firm overseeing more than $4 billion of assets for public funds, corporations and endowments. Sasco Capital invested in mid to large capitalization public companies undergoing corporate restructuring, transformation, or management change. Mr. Hultquist earned a B.S. in Finance from Wake Forest University and M.B.A. from Columbia Business School.
 
Jeffrey S. Stewart. Mr. Stewart has been the Chairman of the Foursquare Foundation Investment Committee since 2008. Mr. Stewart also currently sits on Morgan Stanley’s North Haven Credit Advisory Board. Mr. Stewart is a highly experienced portfolio manager with 24 years of experience investing and researching debt and equity, including equity research at Interstate/Johnson Lane, a financial services company, and fixed income at First Union National Bank, and portfolio management at Babson Capital Management, LLC. Mr. Stewart started his career as a United States Marine in 1985. Three time meritoriously promoted, he was awarded a NROTC scholarship in 1988 and attended UNC Chapel Hill, where he received a BSBA with a concentration in finance and a minor in history with distinction.
 
Anthony J. Sciacca, Jr. Mr. Sciacca served as Head of Global Alternative Investments at Barings Real Estate Advisers LLC (now known as Babson Capital Management LLC). Mr. Sciacca was responsible for overseeing the group's investment activities across private equity, asset-based investments, and real assets. He served as the Head of Barings Alternative Investments at Barings LLC. Previously, he served as a Managing Director, Head of Babson Capital Strategic Investors and Head of Global Business Development Group at Babson. In this capacity, he drove business development initiatives across Babson's investment strategies from fixed income to alternative asset markets and oversaw the management of Babson's institutional and retail relationships globally. He joined Babson in 2006. He also led the middle-market bank loan business at Babson’s U.S. bank loan team. Mr. Sciacca was also a member of Babson’s Senior Management Team and the President of Babson Capital Securities. He was a Managing Director and the Head of Structured Credit Origination for the collateralized loan obligation and corporate collateralized debt obligation businesses at Wachovia Securities. Mr. Sciacca was employed at Wachovia Securities from April 2002 to April 2006. Before that, he was a Managing Director at Bear, Stearns & Co. where he was a structured credit market specialist. Mr. Sciacca was an Associate Director at Bank of America from October 1996 to September 2000. He served as a Consultant at Accenture from September 1993 until October 1996. He also worked in middle market senior lending as well as financial services consulting with Accenture. Mr. Sciacca serves as a member of the Board of Managers of Cornerstone Real Estate Advisors LLC. He has worked in the industry since 1993 and his industry experience encompasses private equity, middle market finance and structured credit. He received a B.S. degree in Applied Economics from Cornell University in 1993.
 
Executive Compensation
 
The following table summarizes compensation to our executive officers for the year ended December 31, 2020 and 2019, respectively:
 
Name
 
Year
 
 
Salary
 
 
Equity Awards
 
 
Total Compensation
 
Steven A. Hale II
2020
 $225,000 
 $2,062,574 
 $2,287,574 
Chairman of the Board of Directors, Chief Executive Officer and President
2019
 $175,625 
 $225,000 
 $400,625 
Jacqlyn Piscetelli
2020
 $150,000 
 $314,832 
 $464,832 
Chief Financial Officer
2019
 $117,083 
 $50,000 
 $167,083 
Matthew A. Hultquist
2020
 $81,250 
 $171,532 
 $252,782 
Director and Head of Acquisitions and Business Development
2019
 $58,272 
 $50,000 
 $108,272 
 
On December 21, 2020, the Company granted an aggregate of 221,069 long-term incentive plan units (“LTIP Units”) in the Operating Partnership to Mr. Hale. Of the total 221,069 LTIP Units granted, 24,116 LTIP Units vested immediately upon the grant date and 196,953 LTIP Units vest over five years.
 
 
10
 
 
 
Also on December 21, 2020, the Company granted an aggregate of 33,744 LTIP Units to Ms. Piscetelli. Of the total 33,744 LTIP Units granted, 10,718 LTIP Units vested immediately upon the grant date and 23,026 LTIP Units vest over two years.
 
Also on December 21, 2020, the Company granted an aggregate of 18,385 LTIP Units to Mr. Hultquist. Of the total 18,385 LTIP Units granted, 5,359 LTIP Units vested immediately upon the grant date and 13,026 LTIP Units vest over two years.
 
The fair value of each grant was $9.33 per share, the estimated net asset value per share of the Company’s common stock as of June 30, 2020.
 
Director Compensation
 
In 2020, we granted $42,000 of share-based compensation in the form of restricted shares of our common stock to certain of our non-employee directors, which vest on December 21, 2021. In 2019, we granted $35,000 of share-based compensation in the form of restricted shares of our common stock to each of our non-employee directors, which vested in September 2020.
 
A description of our 2016 Equity Incentive Plan is incorporated by reference herein from the post-qualification amendment to our Offering Statement on Form 1-A located at: https://www.sec.gov/Archives/edgar/data/1670010/000165495418012065/hcgov_1apos.htm under the caption “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS— HC Government Realty Trust 2016 Long Term Incentive Plan.”
 
Item 4. Security Ownership of Management and Certain Security Holders
 
The table below sets forth, as of the filing of this report, certain information regarding the beneficial ownership of our stock for (1) each person who is the beneficial owner of 10% or more of our outstanding shares of any class of voting stock and (2) each of our directors and executive officers as a group, individually naming each director or executive officer who is the beneficial owner of 10% or more of our outstanding shares of any class of voting stock. Each person named in the table has sole voting and investment power with respect to all of the shares of common stock shown as beneficially owned by such person.
 
The SEC has defined “beneficial ownership” of a security to mean the possession, directly or indirectly, of voting power and/or investment power over such security. A stockholder is also deemed to be, as of any date, the beneficial owner of all securities that such stockholder has the right to acquire within 60 days after that date through (1) the exercise of any option, warrant or right, (2) the conversion of a security, (3) the power to revoke a trust, discretionary account or similar arrangement or (4) the automatic termination of a trust, discretionary account or similar arrangement. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, our shares of common stock subject to options or other rights (as set forth above) held by that person that are exercisable as of the filing of this report or will become exercisable within 60 days thereof, are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person.
 
 
11
 
 
Title of Class
Name and Address
of Beneficial Owner
Amount and Nature of
Beneficial Ownership
  Amount and Nature
of Beneficial
Ownership Acquirable
 
 
Percent
of Class
 
Common Stock
All Executive Officers and Directors1
41,188 Shares
  N/A 
  2.6%
Common Stock
HG Holdings, Inc.2
300,000 Shares
  N/A 
  19.2%
Series B Preferred Stock
All Executive Officers and Directors1
1,025,000 Shares3
  N/A 
  50.0%
Series B Preferred Stock
Steven A. Hale II 4
1,025,000 Shares3
  N/A 
  50.0%
Series B Preferred Stock
Hale Partnership Capital Management 5,6
1,025,000 Shares
  N/A 
  50.0%
Series B Preferred Stock
HG Holdings, Inc.2
1,025,000 Shares
  N/A 
  50.0%
Series B Preferred Stock
The Vanderbilt University7
500,000 Shares
  N/A 
  24.4%
Series B Preferred Stock
International Church of the Foursquare Gospel8
250,000 Shares
  N/A 
  12.2%
Series C Preferred Stock
Equitrust Life Insurance Company9
800,000 Shares
  N/A 
  22.2%
 
1 The address of each beneficial owner is 390 S Liberty Street, Suite 100, Winston-Salem, NC 27101.
 
 
2 The address of HG Holdings, Inc. is 2115 E. 7th Street, Suite 101, Charlotte, NC 27804.
 
 
 
3 Includes the shares of Series B Preferred Stock directed by Hale Partnership Capital Management (“HPCM”).
 
 
4 Includes all shares of the Series B Preferred Stock that Steven A. Hale II controls directly or indirectly through affiliated entities of which Steven A. Hale II disclaims beneficial ownership.
5 The address of HPCM is 3675 Marine Drive, Greenville, NC 27834.
 
 
 
6 HPCM serves as investment manager or adviser to commingled funds, group trusts and separate accounts (such investment companies, funds, trusts and accounts, collectively referred to as the “Funds”). In certain cases, HPCM may act as an adviser or sub-adviser to certain Funds. In its role as investment adviser, sub-adviser and/or manager, HPCM may possess voting and/or investment power over the securities of the Company owned by the Funds and may be deemed to be the beneficial owner of these shares. However, all securities reported on the table are owned by the Funds, and HPCM disclaim beneficial ownership of all of the shares shown. HPCM's shares include 500,000 shares beneficially owned by The Vanderbilt University and 250,000 shares beneficially owned by International Church of the Foursquare Gospel, over which HPCM maintains voting control.
7 The address of The Vanderbilt University is 2100 West End Ave, Nashville, TN 37203.
 
 
 
8 The address of International Church of the Foursquare Gospel is 1910 W. Sunset Boulevard, Suite 200, Los Angeles, CA 90026.
 
9 The address of Equitrust Life Insurance Company is 222 W Adams Street, Suite 2150, Chicago, IL 60606.
 
 
 
 Item 5. Interest of Management and Others in Certain Transactions
 
The information included above under the caption “Item 1. Business—2019 Recapitalization Transaction” is hereby incorporated by reference into this Item 5.
 
Series B Preferred Stock Issuances
 
In May 2019, the Company issued 130,000 shares of its Series B Preferred Stock to a Recapitalization Investor, for total proceeds of $1,300,000, to partially finance the acquisition of the property located in Monroe, Louisiana.
 
In April 2020, the Company issued a total of 350,000 shares of its Series B Preferred Stock to a Recapitalization Investor, for total proceeds of $3,500,000, to partially finance the acquisition of the property located in Birmingham, Alabama.
 
In June 2020, the Company issued 475,000 shares of its Series B Preferred Stock to a Recapitalization Investor, for total proceeds of $4,750,000, to partially finance the acquisition of the property located in Columbia, South Carolina.
 
In December 2020, the Company issued 45,000 shares of its Series B Preferred Stock to an investor affiliated with Hale, for total proceeds of $450,000, to partially fund the development project of the property located in Portland, Maine.
 
Mezzanine Loans
 
In May 2019, the Operating Partnership borrowed an additional $1,300,000 term loan under the Loan Agreement to partially finance the acquisition of the property located in Monroe, Louisiana.
 
 
12
 
 
 
In June 2019, the Operating Partnership borrowed an additional $2,000,000 term loan under the Loan Agreement in connection with the refinancing of the mortgage note payable on the property located in San Antonio, Texas that matured in June 2019.
 
In October 2019, the Operating Partnership borrowed an additional $7,000,000 term loan under the Loan Agreement to partially finance the acquisitions of the properties located in Ft. Lauderdale, Florida, Lawrence, Kansas and Oklahoma City, Oklahoma.
 
Real Estate Notes
 
On May 1, 2019, one of our single-purpose entities that is wholly-owned by our Operating Partnership borrowed $2,550,000 from the Hale Partnership Fund, L.P. to partially finance the acquisition of our GSA Property located in Monroe, Alabama. The unsecured loan was subject to a variable interest rate based on one-month LIBOR plus 225 basis points. This loan was fully repaid with proceeds from the KeyBank Transaction. The loan was not subject to any prepayment penalty.
 
On June 5, 2019, one of our single-purpose entities that is wholly-owned by our Operating Partnership borrowed $5,000,000 from the Hale Partnership Fund, L.P. to partially refinance the mortgage on our GSA Property located in San Antonio, Texas. The unsecured loan was subject to a fixed interest rate of 5.50%. This loan was fully repaid with proceeds from the KeyBank Transaction. The loan was not subject to any prepayment penalty.
 
Predecessor Payables
 
Our Company had outstanding payables to our predecessor for various expenses paid on our behalf by our predecessor in the amount of $408,514. As of the date of this annual report, this amount remains outstanding.
 
Item 6. Other Information
 
None
 
 
13
 
 
Item 7. Financial Statements
 
Report of Independent Registered Public Accounting Firm
 
 
To the Board of Directors and Stockholders
HC Government Realty Trust, Inc.
Winston-Salem, North Carolina
 
Opinion on the Consolidated Financial Statements
 
We have audited the accompanying consolidated balance sheets of HC Government Reality Trust, Inc. and subsidiaries (collectively, “the Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
 
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
 
/s/ Cherry Bekaert LLP
 
We have served as the Company’s auditor since 2016.
 
Richmond, VA
April 2, 2021
 
 
14
 
 
HC Government Realty Trust, Inc.
Consolidated Balance Sheets
December 31, 2020 and 2019
 
 
 
December 31, 2020
 
 
December 31, 2019
 
ASSETS
 
 
 
 
 
 
Investment in real estate, net
 $109,066,096 
 $96,972,845 
Cash and cash equivalents
  4,906,679 
  3,436,577 
Restricted cash
  192,068 
  120,166 
Rent and other tenant receivables, net
  1,339,332 
  1,136,496 
Leasehold intangibles, net
  11,231,765 
  9,319,030 
Deposits on properties under contract
  100,000 
  - 
Deferred financing, net
  1,610,851 
  2,023,844 
Prepaid expenses and other assets
  1,016,430 
  188,058 
Total Assets
 $129,463,221 
 $113,197,016 
 
    
    
LIABILTIES
    
    
Revolving credit facility
 $15,650,000 
 $60,950,000 
Mandatorily redeemable preferred stock, net of unamortized deferred offering costs
  86,667,285 
 $- 
Mezzanine debt
  - 
  20,800,000 
Mortgages payable, net of unamortized debt costs
  9,277,699 
  9,459,291 
Declared dividends and distributions
  2,509,506 
  721,733 
Accrued interest payable
  134,053 
  267,366 
Accounts payable
  1,050,383 
  591,791 
Accrued expenses and other liabilities
  1,130,736 
  1,289,450 
Accrued management termination fee
  - 
  1,650,000 
Tenant improvement obligation
  - 
  1,201,661 
Acquisition fee payable
  - 
  556,739 
Below-market leases, net
  551,759 
  753,515 
Total Liabilities
  116,971,421 
  98,241,546 
 
    
    
COMMITMENTS AND CONTINGENCIES (Note 14)
  - 
  - 
 
    
    
STOCKHOLDERS' EQUITY
    
    
Preferred stock ($0.001 par value, 250,000,000 shares authorized and 2,081,000 and 1,324,500 shares issued and outstanding at December 31, 2020 and 2019, respectively)
  2,081 
  1,324 
Common stock ($0.001 par value, 750,000,000 shares authorized, 1,560,452 and 1,438,465 common shares issued and outstanding at December 31, 2020 and 2019, respectively)
  1,561 
  1,438 
Additional paid-in capital
  30,751,943 
  24,463,133 
Offering costs
  (1,271,266)
  (1,459,479)
Accumulated deficit
  (13,092,046)
  (9,324,626)
Accumulated dividends and distributions
  (6,143,463)
  (3,478,926)
Total Stockholders' Equity
  10,248,810 
  10,202,864 
Noncontrolling interest in operating partnership
  2,242,990 
  4,752,606 
Total Equity
  12,491,800 
  14,955,470 
Total Liabilities and Stockholders' Equity
 $129,463,221 
 $113,197,016 
 
The following table presents the assets and liabilities of the Company's three consolidated variable interest entities as of December 31, 2020 and 2019 which are included on the Consolidated Balance Sheets above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated variable interest entities. The liabilities in the table below include third-party liabilities of the consolidated variable interest entities only, and for which creditors or beneficial interest holders do not have recourse to the Company, and exclude intercompany balances that eliminate in consolidation.
 
ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE USED TO SETTLE THE OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST ENTITIES:
 
 
 
 
 
 
 
Buildings and improvements, net
 $10,842,846 
 $11,237,144 
Intangible assets, net
  128,130 
  264,538 
Prepaids and other assets
  418,292 
  358,998 
Total Assets
 $11,389,268 
 $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
 $9,277,699 
 $9,459,291 
Intangible liabilities, net
  33,053 
  79,237 
Accounts payable and accrued expenses
  176,964 
  205,862 
Total liabilities
 $9,487,716 
 $9,744,390 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
15
 
 
HC Government Realty Trust, Inc.
Consolidated Statements of Operations
For the years ended December 31, 2020 and 2019
 
 
 
For the years ended
 
 
 
December 31, 2020
 
 
December 31, 2019
 
Revenues
 
 
 
 
 
 
Rental revenues
 $12,655,991 
 $10,441,958 
Real estate tax reimbursements and other revenues
  418,130 
  346,141 
Total revenues
  13,074,121 
  10,788,099 
 
    
    
Operating expenses
    
    
Depreciation and amortization
  5,005,624 
  4,046,413 
General and administrative
  1,271,553 
  885,888 
Professional expenses
  734,609 
  2,299,084 
Real estate and other taxes
  1,226,327 
  1,034,703 
Repairs and maintenance
  881,573 
  720,501 
Janitorial
  600,158 
  498,423 
Utilities
  537,642 
  489,905 
Management fees
  363,458 
  754,654 
Insurance
  248,189 
  172,129 
Ground leases
  95,983 
  91,755 
Miscellaneous property expenses
  54,427 
  52,201 
Management termination fees
  (4,547)
  1,900,002 
Equity-based compensation
  839,949 
  492,654 
Total operating expenses
  11,854,945 
  13,438,312 
 
    
    
Other (income) expense
    
    
Interest expense
  7,210,700 
  5,045,639 
Loss on extinguishment of debt
  933,051 
  966,200 
Gain on involuntary conversion
  - 
  (192,717)
Net other (income) expense
  8,143,751 
  5,819,122 
 
    
    
Net loss
  (6,924,575)
  (8,469,335)
Less: Net loss attributable to noncontrolling interest in operating partnership
  (3,157,155)
  (2,020,305)
Net loss attributed to HC Government Realty Trust, Inc.
  (3,767,420)
  (6,449,030)
Preferred stock dividends
  (1,819,191)
  (1,162,011)
Net loss attributed to HC Government Realty Trust, Inc. available to common shareholders
 $(5,586,611)
 $(7,611,041)
 
    
    
Basic and diluted loss per share
 $(3.67)
 $(5.64)
 
    
    
Basic and diluted weighted-average common shares outstanding
  1,523,719 
  1,348,958 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
16
 
 
HC Government Realty Trust, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2020 and 2019
 
 
 
Preferred Series A
 
 
Preferred Series B
 
 
Common Stock
 
 
Additional
Paid-in
 
 
Offering
 
 
 Accumulated
 
 
Cumulative Dividends and
 
 
Total Stockholders'
 
 
Non-controlling Interest in Operatig
 
 
Total
 
 
 
Shares
 
 
Par Value
 
 
Shares
 
 
Par Value
 
 
Shares
 
 
Par Value
 
 
Capital 
 
 
Costs
 
 
 Deficit
 
 
 Distributions
 
 
 Equity
 
 
 Partnership
 
 
 Equity
 
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
  - 
  - 
  - 
  - 
  300,000 
  300 
  2,999,700 
  - 
  - 
  - 
  3,000,000 
  - 
  3,000,000 
Proceeds from issuing preferred shares
  - 
  - 
  1,180,000 
  1,180 
  - 
  - 
  11,798,820 
  - 
  - 
  - 
  11,800,000 
  - 
  11,800,000 
Equity-based compensation long-term incentive plan shares
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  144,499 
  144,499 
Equity-based compensation - restricted stock
  - 
  - 
  - 
  - 
  31,424 
  31 
  247,350 
  - 
  - 
  - 
  247,381 
  - 
  247,381 
Dividends and distributions
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (1,942,218)
  (1,942,218)
  (654,847)
  (2,597,065)
Allocation of NCI in operating partnership
  - 
  - 
  - 
  - 
  - 
  - 
  (1,897,555)
  - 
  - 
  - 
  (1,897,555)
  1,897,555 
  - 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (6,449,030)
  - 
  (6,449,030)
  (2,020,305)
  (8,469,335)
Balance, December 31, 2019
  144,500 
 $144 
  1,180,000 
 $1,180 
  1,438,465 
 $1,438 
 $24,463,133 
 $(1,459,479)
 $(9,324,626)
 $(3,478,926)
 $10,202,864 
 $4,752,606 
 $14,955,470 
Proceeds from issuing preferred shares
  - 
  - 
  870,000 
  870 
  - 
  - 
  8,699,130 
  - 
  - 
  - 
  8,700,000 
  - 
  8,700,000 
Repurchase of preferred shares
  (113,500)
  (113)
  - 
  - 
  - 
  - 
  (2,837,387)
  - 
  - 
  - 
  (2,837,500)
  - 
  (2,837,500)
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 acquisition fee payable
  - 
  - 
  - 
  - 
  55,674 
  56 
  556,683 
  - 
  - 
  - 
  556,739 
  - 
  556,739 
Equity-based compensation long-term incentive plan shares
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  754,640 
  754,640 
Equity-based compensation - restricted stock
  - 
  - 
  - 
  - 
  14,646 
  15 
  85,294 
  - 
  - 
  - 
  85,309 
  - 
  85,309 
Reimbursement of offering costs
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  188,213 
  - 
  - 
  188,213 
  - 
  188,213 
Dividends and distributions
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (2,664,537)
  (2,664,537)
  (692,412)
  (3,356,949)
Allocation of NCI in operating partnership
  - 
  - 
  - 
  - 
  - 
  - 
  (585,311)
  - 
  - 
  - 
  (585,311)
  585,311 
  - 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (3,767,420)
  - 
  (3,767,420)
  (3,157,155)
  (6,924,575)
Balance, December 31, 2020
  31,000 
 $31 
  2,050,000 
 $2,050 
  1,560,452 
 $1,561 
 $30,751,943 
 $(1,271,266)
 $(13,092,046)
 $(6,143,463)
 $10,248,810 
 $2,242,990 
 $12,491,800 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
17
 
 
HC Government Realty Trust, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2020 and 2019
 
 
 
For the years ended December 31,
 
 
 
2020
 
 
2019
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(6,924,575)
 $(8,469,335)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation
  3,755,760 
  3,074,466 
Amortization of acquired lease-up costs
  522,197 
  416,310 
Amortization of in-place leases
  727,667 
  555,637 
Amortization of above/below-market leases, net
  153,952 
  154,375 
Amortization of debt issuance costs
  842,941 
  864,927 
Amortization of deferred offering costs
  145,371 
  - 
Equity-based compensation - long-term incentive plan units
  754,640 
  144,499 
Equity-based compensation - restricted shares
  85,309 
  247,381 
Gain on involuntary conversion
  - 
  (192,717)
Change in assets and liabilities
    
    
Rent and other tenant receivables, net
  (202,836)
  (62,615)
Prepaid expense and other assets
  (838,082)
  552,767 
Deposits on properties under contract
  (100,000)
  224,069 
Accrued interest payable
  (133,313)
  (149,775)
Accounts payable and other accrued expenses
  2,003,784 
  (125,627)
Accrued management termination fee
  (1,279,547)
  1,650,000 
Tenant improvement obligation
  (1,201,661)
  (23,262)
Related party payable, net
  - 
  (73,951)
Net cash used in operating activities
  (1,688,393)
  (1,212,851)
 
    
    
Cash flows from investing activities:
    
    
Capital improvements and development project funding
  (866,949)
  (565,658)
Real estate acquisitions and deposits
  (18,490,659)
  (22,492,920)
Net cash used in investing activities
  (19,357,608)
  (23,058,578)
 
    
    
Cash flows from financing activities:
    
    
Debt issuance costs
  (398,890)
  (2,216,921)
Dividends paid
  (3,084,869)
  (2,254,019)
Proceeds from sale of common stock
  - 
  3,000,000 
Proceeds from sale of preferred stock
  8,700,000 
  11,800,000 
Repurchase of preferred stock
  (2,837,500)
  - 
Borrowings under revolving credit facility
  15,950,000 
  60,950,000 
Repayments under revolving credit facility
  (61,250,000)
  - 
Proceeds from mandatorily redeemable preferred stock
  90,000,000 
  - 
Mandatorily redeemable preferred stock issuance costs
  (3,478,086)
  - 
Mortgage proceeds
  - 
  7,550,000 
Mortgage principal payments
  (212,650)
  (64,265,736)
Proceeds from notes payable
  - 
  20,934,000 
Notes principal repayments
  (20,800,000)
  (1,314,000)
Notes principal repayments - related party
  - 
  (9,518,000)
 
    
    
Net cash provided from financing activities
  22,588,005 
  24,665,324 
 
    
    
Net increase in Cash and cash equivalents and Restricted cash
  1,542,004 
  393,895 
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
 $5,098,747 
 $3,556,743 
 
    
    
Supplemental cash flow information:
    
    
Cash paid for interest
 $3,940,819 
 $4,439,279 
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
 $188,213 
 $- 
Capitalized acquisition fees
 $- 
 $51,500 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
18
 
 
HC Government Realty Trust, Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2020 and 2019
 
1.
Organization
 
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 lease term after construction or improvement to post-9/11 standards. Further, the REIT selects GSA Properties that fulfill mission critical or citizen service functions. Leases associated with GSA Properties are full faith and credit obligations of the United States of America and are administered by the U.S. General Services Administration or directly through the occupying federal agencies (collectively, the “GSA”).
 
The REIT owns its properties through the REIT’s subsidiary, HC Government Realty Holdings, L.P., a Delaware limited partnership (“Operating Partnership” and together with the REIT, the “Company”). The Operating Partnership invests through wholly-owned special purpose limited liability companies, or special purpose entities (“SPEs”). As of December 31, 2020, the REIT owned approximately 55.9% of the aggregate common limited partnership interests in our Operating Partnership, or common units, and all of the preferred limited partnership interests in our Operating Partnership, 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 December 31, 2020, the financial statements reflect the operations of 24 GSA Properties representing 447,672 rentable square feet located in 16 states. The properties are 100% leased to the government of the United States of America and based on net operating income, have a weighted average remaining lease term as of December 31, 2020 of 9.2 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 umbrella partnership real estate investment trust, or an UPREIT, and has elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes under the Internal Revenue Code of 1986, as amended, or the Code, beginning with the taxable year ended December 31, 2017.
 
2.
Significant Accounting Policies
 
Basis of Accounting and Consolidation Basis - The accompanying consolidated financial statements are presented on the accrual basis of accounting in accordance with principles generally accepted in the United States of America (“GAAP”) and include the accounts of the REIT, the Operating Partnership and 24 SPEs as of December 31, 2020. Of the SPEs, 21 are wholly-owned entities that are consolidated based upon the Company having a controlling financial interest, and three are consolidated variable interest entities based upon management’s determination that the Operating Partnership has a variable interest in the entities and is the primary beneficiary. Intercompany accounts and transactions are eliminated in consolidation. The results of operations of companies or assets acquired are included from the dates of acquisition.
 
These statements include all adjustments necessary for a fair presentation of the results of all periods reported herein. All such adjustments are of a normal recurring nature.
 
Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
 
 
 
19
 
 
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:
 
 
December 31, 2020
 
 
December 31, 2019
 
Cash and cash equivalents
 $4,906,679 
 $3,436,577 
Restricted cash
  192,068 
  120,166 
Cash, cash equivalents and restricted cash
 $5,098,747 
 $3,556,743 
 
At times, the Company’s cash and cash equivalents balance deposited with financial institutions may exceed federally insurable limits. The Company maintains separate bank accounts at the Operating Partnership and SPE level. At December 31, 2020, one account had approximately $4,345,000 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. 
 
Investments in Real Estate – Investment in real estate, net is comprised of all tangible assets held by the Company for rent or development. Real estate assets are recognized at cost less accumulated depreciation. Maintenance and repair costs are charged to expense as incurred. Costs incurred that extend the useful life of the real estate investment are capitalized. Third party costs related to asset acquisitions are capitalized. Development, re-development and certain costs directly related to the improvement of real properties are capitalized.
 
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-cancellable 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-cancellable term of the lease. Amortization relating to above (below) market leases for the years ended December 31, 2020 and 2019 was $153,952 and $154,375, respectively, and was recorded as a reduction to rental revenues.
 
In-place leases are valued based on 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-cancellable 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 Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the future development is probable. For properties under development or redevelopment, the Company capitalizes interest expense, real estate taxes and direct and indirect project costs associated with the development and redevelopment activities. With respect to the capitalization of interest expense, if there is a specific borrowing for the property undergoing development activities, we apply the interest rate of that borrowing to the average accumulated expenditures that do not exceed such borrowing. If there are no specific borrowings, the Company applies its weighted average interest rate on its senior secured revolving credit facility to the average accumulated expenditures. The Company capitalizes costs while development activities are underway until the building is substantially complete and ready for its intended use, at which time rental income recognition can commence and rental operating costs, real estate taxes, insurance, and other subsequent carrying costs are expensed as incurred.
 
 
20
 
 
 
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-cancellable term of the lease and includes a reimbursement for certain operating costs of the property. The operating cost reimbursement is established at lease commencement 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 real estate tax base year. The real estate tax base year is established as the real estate taxes incurred during the first full tax year after lease commencement or otherwise as defined in the lease. 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 years ended December 31, 2020 and 2019, the Company did not recognize any impairment charges.
 
 
21
 
 
 
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 is 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-cancellable 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 December 31, 2020 and 2019. The Company had a straight-line rent receivable of $38,200 and $3,000 as of December 31, 2020 and 2019, respectively.
 
Income Taxes The Company has elected to be taxed as a REIT under Sections 856 through 860 of the 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 cannot 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 the Company 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 at December 31, 2020 and 2019; accordingly, no associated interest and penalties were required to be accrued at December 31, 2020 and 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 outstanding 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 44.1% and 45.3% at December 31, 2020 and 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.
 
 
22
 
 
 
The Company capitalizes certain legal, accounting and other third‑party fees that are directly associated with in‑process equity financings as deferred offering costs until such financings are consummated. In the event an equity financing is no longer considered probable of being consummated, all deferred offering costs are written off in the period such determination is made. For equity financings classified as equity, deferred offering costs are recorded in stockholders’ equity as a reduction of additional paid‑in capital against the offering proceeds. For equity financings required to be classified as a liability, these costs are capitalized and presented as a direct reduction from the gross proceeds from the equity financing within the Consolidated Balance Sheets.
 
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. Forfeitures are recognized as they occur.
 
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 (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares used in the basic earnings (loss) 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 loss per share as their effect would be anti-dilutive.
 
 
 
As of December 31,
 
 
 
2020
 
 
2019
 
Potentially dilutive securities outstanding
 
 
 
 
 
 
Convertible common units
  1,118,416 
  1,118,416 
Convertible long-term incentive plan units
  112,408 
  72,215 
Convertible preferred stock
  2,345,747 
  2,079,246 
Total potentially dilutive securities      
  3,576,571 
  3,269,877 
 
Smaller Reporting Company Disclosure Requirements - 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 14. Commitments and Contingencies for more information regarding the Company’s operating leases.
 
 
23
 
 
 
Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a significant impact on the Company’s financial position, results of operations and cash flows.
 
3.
Recapitalization Transaction
 
On March 19, 2019, the Company consummated a recapitalization transaction (the “Recapitalization Transaction”) with Hale Partnership Capital Management, LLC (“Hale”) and certain affiliated investors (each, 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 Convertible 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 for proceeds of $3,000,000.
 
The Company satisfied $10,698,000 of outstanding notes payable, $68,491 of accrued interest through March 19, 2019 and $381,647 of prepayment penalties on certain notes payable with proceeds from the Recapitalization Transaction. In addition, the Company satisfied four mortgages with an aggregate principal balance, net of escrows for property taxes and insurance, of $8,991,178 with proceeds from the Recapitalization Transaction.
 
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 was employed.
 
4.
Variable Interest Entities
 
With respect to the three SPEs where Holmwood Capital, LLC (“Holmwood”) assigned to the Operating Partnership all its rights, title and interest in and to any and all profits, losses and distributed cash flow, management determined these SPEs to be variable interest entities (“VIE”) in which the Operating Partnership has a variable interest and that Holmwood equity holders lacked the characteristics of a controlling financial interest. The Company determined in accordance with ASC Topic 810 “Consolidation” to consolidate these SPEs.
 
A summary of the VIE’s assets and liabilities that are included within the Company’s Consolidated Balance Sheets at December 31, 2020 and 2019 is as follows:
 
 
 
December 31, 2020
 
 
December 31, 2019
 
Assets:
 
 
 
 
 
 
Buildings and improvements, net
 $10,842,846 
 $11,237,144 
Intangible assets, net
  128,130 
  264,538 
Prepaids and other assets
  418,292 
  358,998 
Total assets
 $11,389,268 
 $11,860,680 
Liabilities:
    
    
Mortages payable, net
 $9,277,699 
 $9,459,291 
Intangible liabilities, net
  33,053 
  79,237 
Accounts payable and accrued expenses
  176,964 
  205,862 
Total liabilities
 $9,487,716 
 $9,744,390 
 
    
    
Net identifiable assets
 $1,901,552 
 $2,116,290 
 
  
 
24
 
 
5.
Investment in Real Estate
 
The following is a summary of the Company’s investment in real estate, net as of December 31, 2020 and 2019:
 
 
 
December 31, 2020
 
 
December 31, 2019
 
Land
 $12,701,648 
 $10,092,020 
Buildings and improvements
  93,743,401 
  83,785,235 
Site improvements
  1,463,473 
  1,463,473 
Tenant improvements
  10,338,157 
  8,611,754 
Construction in progress
  1,545,104 
  - 
 
  119,791,783 
  103,952,482 
Accumulated depreciation
  (10,725,687)
  (6,979,637)
Investment in real estate, net
 $109,066,096 
 $96,972,845 
 
Depreciation expense for the years ended December 31, 2020 and 2019 was $3,746,050 and $3,074,466, respectively.
 
During the year ended December 31, 2020, the Company acquired three operating properties. These acquisitions were acquired with leases in place with the United States of America. The following is a summary of the property location, acquisition date, rentable square feet and the remaining non-cancellable lease term at the time of acquisition:
 
 
 
 
 
 
 
 Remaining
 
 
 
 
 
 
 Non-Cancelable
 
 
Acquisition
 
Rentable
 
  Lease Term at
Location
 
Date
 
Sq Ft
 
 Acquisition Date
Birmingham, Alabama
 
4/30/2020
 
12,470
 
14.5 years
Columbia, South Carolina
 
9/22/2020
 
19,368
 
9.9 years
Lakewood, Washington
 
12/17/2020
 
9,567
 
8.2 years
 
Pursuant to a purchase and sale agreement dated October 6, 2020 (as amended, “the Agreement”) and further with respect to our Lakewood, Washington Property, the Company funded an additional $323,000 into an escrow account at closing in connection with a potential purchase price adjustment pending the resolution of certain lease provisions. Upon resolution of the lease provisions, all or a portion of the escrow amount shall be released to the seller and any balance shall be released to the Company. As of December 31, 2020, the $323,000 escrow amount is recorded in prepaid expenses and other assets on the Consolidated Balance Sheets.
 
On October 16, 2020, the Company acquired one property that is under development in Portland, Maine with a lease in place with the United States of America. Upon completion of the development project, the 10-year non-cancellable lease will commence. The project is expected to be completed in June 2021.
 
During the year ended December 31, 2019, the Company acquired four operating properties with leases in place with the United States of America. The following is a summary of the property location, acquisition date, rentable square feet and the remaining non-cancellable lease term at the time of acquisition:
 
 
 
 
 
 
 
 Remaining
 
 
 
 
 
 
 Non-Cancelable
 
 
Acquisition
 
Rentable
 
  Lease Term at
Location
 
Date
 
Sq Ft
 
 Acquisition Date
Monroe, Louisiana
 
5/1/2019
 
21,124
 
4.4 years
Ft Lauderdale, Florida
 
10/22/2019
 
16,000
 
8.5 years
Lawrence, Kansas
 
10/22/2019
 
16,000
 
13.4 years
Oklahoma City, Oklahoma
 
10/22/2019
 
16,991
 
9.2 years
 
 
 
25
 
 
A summary of the allocated purchase price, based on estimated fair values, for the acquisitions completed during the years ended December 31, 2020 and 2019 is as follows:
 
 
 
December 31, 2020
 
 
December 31, 2019
 
Land
 $2,609,628 
 $2,605,465 
Buildings and improvements
  10,012,672 
  14,753,313 
Tenant improvements
  1,648,196 
  2,649,748 
Construction in progress
  765,137 
  - 
Acquired in-place leases
  1,879,736 
  1,547,143 
Acquired lease-up costs
  924,708 
  817,750 
Above market leases
  713,863 
  229,380 
Below market leases
  - 
  (58,379)
Acquisition fee payable
  - 
  (51,500)
 
    
    
Total
 $18,553,940