UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA
SEMI-ANNUAL REPORT PURSUANT
TO REGULATION A
For the fiscal
semi-annual period ended June 30, 2021
HC GOVERNMENT REALTY TRUST, INC.
(Exact
name of issuer as specified in its charter)
Maryland
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81-1867397
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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|
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390 S. Liberty Street, Suite 100 Winston-Salem, NC
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27101
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(Address
of principal executive offices)
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(Zip
Code)
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(336) 477-2535
(Issuer’s
telephone number, including area code)
In this semi-annual report,
references to the
“Company,” “we,” “us” or
“our” or similar terms refer to HC Government
Realty Trust, Inc., a Maryland
corporation, together with its consolidated subsidiaries, including
HC Government Realty Holdings, L.P., a Delaware limited
partnership, which we refer to as our Operating Partnership.
We refer to
Holmwood Capital, LLC, a Delaware limited liability company, as
Holmwood or our predecessor, and Holmwood Capital Advisors, LLC, a
Delaware limited liability company, as HCA. As used in this
semi-annual report, an affiliate of,
or person affiliated with, a specified person,
is a person that directly, or indirectly through one or
more intermediaries, controls or is controlled by, or is under
common control with,
the person specified.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We
make statements in this semi-annual report on Form 1-SA that are
forward-looking statements within the meaning of the federal
securities laws. The words “believe,”
“estimate,” “expect,”
“anticipate,” “intend,” “plan,”
“seek,” “may,” and similar expressions or
statements regarding future periods are intended to identify
forward-looking statements. These forward-looking statements
involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from any
predictions of future results, performance or achievements that we
express or imply in this semi-annual report or in the information
incorporated by reference in this semi-annual report.
The forward-looking statements included in this
semi-annual report on Form 1-SA are based upon our current
expectations, plans, estimates, assumptions and beliefs that
involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve, among other things, judgments
with respect to future economic, competitive and market conditions
and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our
control. Although we believe that the expectations reflected in
such forward-looking statements are based on reasonable
assumptions, our actual results and performance could differ
materially from those set forth in the forward-looking statements.
Factors that could have a material adverse effect on our operations
and future prospects include, but are not limited to:
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changes
in economic conditions generally and in the real estate and
securities markets specifically,
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the
ability of our management team to source, originate and acquire
suitable investment opportunities,
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our
expectation that there will be opportunities to acquire additional
properties leased to the United States of America,
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our
expectations regarding demand by the federal government for leased
space,
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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,
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the
impact of changes in real estate needs and financial conditions of
federal, state and local governments,
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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,
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acts of
terrorism and other disasters that are beyond our
control,
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legislative
or regulatory changes impacting our business or our assets,
including changes to the laws governing the taxation of real estate
investment trusts (“REITs”) and Securities and Exchange
Commission (“SEC”) guidance related to Regulation A or
the Jumpstart Our Business Startups Act (the “JOBS
Act”),
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our
ability to raise equity or debt capital,
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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
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changes
to generally accepted account principles, or GAAP.
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Any
of the assumptions underlying forward-looking statements could be
inaccurate. You are cautioned not to place undue reliance on any
forward-looking statements included in this semi-annual report on
Form 1-SA. All forward-looking statements are made as of the date
of this semi-annual report on Form 1-SA and the risk that actual
results will differ materially from the expectations expressed in
this semi-annual report on Form 1-SA will increase with the passage
of time. Except as otherwise required by the federal securities
laws, we undertake no obligation to publicly update or revise any
forward-looking statements after the date of this semi-annual
report on Form 1-SA, whether as a result of new information, future
events, changed circumstances or any other reason. In light of the
significant uncertainties inherent in the forward-looking
statements included in this semi-annual report on Form 1-SA, the
inclusion of such forward-looking statements should not be regarded
as a representation by us or any other person that the objectives
and plans set forth in this semi-annual report on Form 1-SA will be
achieved.
Item 1. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Overview
We
are an 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 in sizes
that range from 5,000 to 50,000 rentable square feet that are in
their first lease term after original construction or
renovation-to-suit date. We further emphasize GSA Properties that
fulfill mission critical or direct citizen service
functions. Leases associated with the GSA Properties in
which our company invests are full faith and credit obligations of
the United States of America. We intend to grow our portfolio
primarily through acquisitions of single-tenanted, federal
government-leased properties in such markets; although, at some
point in the future we may elect to develop, or joint venture with
others in the development of, competitively bid, built-to-suit,
single-tenant, federal government-leased properties, or buy
facilities that are leased to credit-worthy state or municipal
tenants.
As of June 30, 2021, the Company owned 25 GSA Properties, comprised
of 21 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 of
America Government. Our portfolio of GSA Properties, or our
portfolio, contains approximately 463,672 rentable square feet located in 17 states.
As of June 30, 2021, our portfolio properties are 100% leased to
the United States of America Government and occupied by 12
different federal government agencies. Based on net operating
income of each property, our portfolio has a weighted average
remaining lease term of 8.8 years if none of the early termination
rights are exercised and 5.0 years if all of the early termination
rights are exercised.
Our
Operating Partnership, through wholly-owned special purpose
entities, or SPEs, holds substantially all of our assets and
conducts substantially all of our business. As of June 30, 2021, 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 GSA Property, the rights to the profits from, the
leases for, any distributed cash flow from, and all of the benefits
and burdens of ownership, including for federal income tax
purposes, of which were contributed to our Operating Partnership by
Holmwood on May 26, 2017.
Operating Results
For the six months ended June 30, 2021
At
June 30, 2021, our portfolio contained 25 GSA Properties consisting
of 463,672 rentable square feet located in 17 states. Our
properties are 100% leased to the United States of America
Government and occupied by 12 different federal government
agencies. On June 14, 2021, we acquired a 16,000 rentable square
foot, build-to-suit, single-tenant building 100% leased to the
United States of America Government, administered by the GSA, and
occupied by the National Park Service for approximately $3,446,000.
The lease commenced on January 22, 2020 and has a firm term of 10
years.
During
the six months ended June 30, 2021, we earned revenues of
$7,047,255 and incurred property operating costs of $2,161,554. Our
net operating income for the period was $4,885,701. For the six
months ended June 30, 2021, the Company’s net loss was
$3,386,965. Our net loss attributed to our common stockholders was
$2,956,482 after allocating $1,482,608 of the Company’s net
loss to the noncontrolling interest in our Operating Partnership
and after deducting preferred stock dividends of
$1,052,125.
For the six months ended June 30, 2020
At
June 30, 2020, our portfolio contained 21 GSA Properties consisting
of 403,237 rentable square feet located in 13 states. Our
properties were 100% leased to the United States of America
Government and occupied by 11 different federal government
agencies. On April 30, 2020, we acquired a 12,470 rentable square
foot, build-to-suit, single-tenant building 100% leased to the
United States of America Government, administered by the GSA, and
occupied by the Immigration and Customs Enforcement agency, for
approximately $5,213,000. The lease commenced on November 1, 2019
and has a firm term of 15 years.
During
the six months ended June 30, 2020, we earned revenues of
$6,393,219 and incurred property operating costs of $1,936,414. Our
net operating income for the period was $4,456,805. For the six
months ended June 30, 2020, the Company’s net loss was
$2,755,423. Our net loss attributed to our common stockholders was
$2,243,097 after allocating $1,299,894 of the Company’s net
loss to the noncontrolling interest in our Operating Partnership
and after deducting preferred stock dividends of
$787,568.
Calculating Net Operating Income
We
believe that our net operating income, or NOI, a non-GAAP measure,
is a useful measure of our operating performance. We define NOI as
total property revenues less total property operating expenses,
excluding depreciation and amortization, interest expense and asset
management fees. Other REITs may use different methodologies for
calculating NOI, and accordingly, our NOI may not be comparable to
the NOI of other REITs. We believe that NOI, as we calculate it,
provides an operating perspective not immediately apparent from
GAAP operating income or net income. We use NOI to evaluate our
performance on a property-by-property basis, because NOI more
meaningfully reflects the core operations of our properties as well
as their performance by excluding items not related to property
operating performance and by capturing trends in property operating
expenses. However, NOI should only be used as an alternative
measure of our financial performance.
The
following table reflects a reconciliation of NOI to net loss as
computed in accordance with GAAP for the six-month periods ended
June 30, 2021 and 2020:
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For the six months ended June 30,
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Revenues
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$7,047,255
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$6,393,219
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Less:
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Operating
expenses
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2,036,287
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1,820,875
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Property
management fee
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125,267
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115,539
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Total
expenses
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2,161,554
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1,936,414
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Net
operating income
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4,885,701
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4,456,805
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Less:
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Asset
management fee
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-
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128,906
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Corporate
expenses
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905,681
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1,036,633
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Depreciation
and amortization
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2,719,317
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2,416,055
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Interest
expense
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4,341,617
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3,207,778
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Equity-based
compensation
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306,051
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422,856
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Net
loss
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(3,386,965)
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(2,755,423)
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Less:
Net loss attributable to noncontrolling interest
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(1,482,608)
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(1,299,894)
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Net
loss attributed to HC Government Realty Trust, Inc.
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(1,904,357)
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(1,455,529)
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Less:
Preferred stock dividends
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(1,052,125)
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(787,568)
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Net
loss attributed to HC Government Realty Trust, Inc. available to
common shareholders
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$(2,956,482)
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$(2,243,097)
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Liquidity and Capital Resources
Our business model is intended to drive growth
through acquisitions. Our 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 June 30, 2021, we had approximately $3,503,756
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.
Capital Resources
Our
capital resources are substantially related to (i) the KeyBank
Transaction (as defined below), and (ii) the Series C Offering (as
defined below).
In
October 2019, we 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 the 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
June 30, 2021, we had borrowed $23,000,000 and had $77,000,000
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.
While
there can be no assurance, we believe our Credit Facility and the
proceeds of the Series C Offering will support our Company’s
growth strategy, provide liquidity to recruit and retain qualified
personnel, and enhance purchasing power for goods and services in
connection with the operation of our portfolio
properties.
We
are not aware of any material trends, uncertainties, demands,
commitments or events, favorable or unfavorable, other than the
effect of national economic conditions and the impact of the
COVID-19 pandemic on real estate in general, 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 be indicative of future operating results or our
financial condition.
Item 2. Other Information
None.
Item 3. Financial
Statements
HC Government Realty Trust, Inc.
Consolidated Balance Sheets
June 30, 2021 (unaudited) and December 31, 2020
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ASSETS
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Investment in real
estate, net
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$113,749,765
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$109,066,096
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Cash and cash
equivalents
|
3,503,756
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4,906,679
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Restricted
cash
|
210,752
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192,068
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Rent and other
tenant receivables, net
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2,854,759
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1,339,332
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Leasehold
intangibles, net
|
10,855,463
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11,231,765
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Deposits on
properties under contract
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100,000
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100,000
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Deferred financing,
net
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1,162,741
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1,610,851
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Prepaid expenses
and other assets
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920,080
|
1,016,430
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Total
Assets
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$133,357,316
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$129,463,221
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LIABILTIES
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Revolving credit
facility
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$23,000,000
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$15,650,000
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Mandatorily
redeemable preferred stock, net of unamortized deferred offering
costs
|
86,862,763
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86,667,285
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Mortgages payable,
net of unamortized debt costs
|
9,181,807
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9,277,699
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Declared dividends
and distributions
|
2,518,139
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2,509,506
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Accrued interest
payable
|
140,678
|
134,053
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Accounts
payable
|
467,510
|
1,050,383
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Accrued expenses
and other liabilities
|
1,533,127
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1,130,736
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Deferred
revenue
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1,625,730
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-
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Below-market
leases, net
|
452,957
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551,759
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Total
Liabilities
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125,782,711
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116,971,421
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COMMITMENTS
AND CONTINGENCIES (Note 13)
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-
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-
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STOCKHOLDERS'
EQUITY
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Preferred stock
($0.001 par value, 250,000,000 shares authorized and 2,081,000
shares issued and outstanding at June 30, 2021 and December 31,
2020)
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2,081
|
2,081
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Common stock
($0.001 par value, 750,000,000 shares authorized, 1,560,452 common
shares issued and outstanding at June 30, 2021 and December 31,
2020)
|
1,561
|
1,561
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Additional paid-in
capital
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30,441,959
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30,751,943
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Offering
costs
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(1,221,888)
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(1,271,266)
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Accumulated
deficit
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(14,996,403)
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(13,092,046)
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Accumulated
dividends and distributions
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(7,626,569)
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(6,143,463)
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Total
Stockholders' Equity
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6,600,741
|
10,248,810
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Noncontrolling
interest in operating partnership
|
973,864
|
2,242,990
|
Total
Equity
|
7,574,605
|
12,491,800
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Total
Liabilities and Stockholders' Equity
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$133,357,316
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$129,463,221
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The following table presents the assets and liabilities of the
Company's consolidated variable interest entities as of June 30,
2021 (unaudited) and December 31, 2020 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:
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Buildings
and improvements, net
|
$10,648,515
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$10,842,846
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Intangible
assets, net
|
67,659
|
128,130
|
Prepaids
and other assets
|
509,791
|
418,292
|
Total
Assets
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$11,225,965
|
$11,389,268
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LIABILITIES OF CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH
CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO
THE COMPANY.
|
|
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Mortgages
payable, net
|
$9,181,806
|
$9,277,699
|
Intangible
liabilities, net
|
13,862
|
33,053
|
Accounts
payable and accrued expenses
|
198,328
|
176,964
|
Total
liabilities
|
$9,393,996
|
$9,487,716
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Consolidated Statements of Operations
For the Six Months Ended June 30, 2021 and 2020
(unaudited)
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Revenues
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|
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Rental
revenues
|
$6,796,515
|
$6,161,302
|
Real estate tax
reimbursements and other revenues
|
250,740
|
231,917
|
Total
revenues
|
7,047,255
|
6,393,219
|
|
|
|
Operating
expenses
|
|
|
Depreciation and
amortization
|
2,719,317
|
2,416,055
|
General and
administrative
|
682,858
|
599,253
|
Professional
expenses
|
222,823
|
441,927
|
Real estate and
other taxes
|
659,198
|
612,942
|
Repairs and
maintenance
|
507,498
|
460,430
|
Janitorial
|
352,695
|
294,376
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Utilities
|
309,751
|
246,794
|
Management
fees
|
125,267
|
239,898
|
Insurance
|
135,066
|
125,104
|
Ground
leases
|
49,116
|
47,969
|
Miscellaneous
property expenses
|
22,963
|
33,260
|
Equity-based
compensation
|
306,051
|
422,856
|
Total operating
expenses
|
6,092,603
|
5,940,864
|
|
|
|
Other
expense
|
|
|
Interest
expense
|
4,341,617
|
3,207,778
|
Net
loss
|
(3,386,965)
|
(2,755,423)
|
Less: Net loss
attributable to noncontrolling interest in operating
partnership
|
(1,482,608)
|
(1,299,894)
|
Net loss attributed
to HC Government Realty Trust, Inc.
|
(1,904,357)
|
(1,455,529)
|
Preferred
stock dividends
|
(1,052,125)
|
(787,568)
|
Net loss attributed
to HC Government Realty Trust, Inc. available to common
shareholders
|
$(2,956,482)
|
$(2,243,097)
|
|
|
|
Basic and diluted
loss per share
|
$(1.89)
|
$(1.45)
|
|
|
|
Basic and diluted
weighted-average common shares outstanding
|
1,560,452
|
1,545,806
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Consolidated Statement of Changes in Stockholders’
Equity
For the Six Months Ended June 30, 2021 and 2020
(unaudited)
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|
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Non-Controlling
Interest in Operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Equity-based
compensation long-term incentive plan shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
265,547
|
265,547
|
Equity-based
compensation - restricted stock
|
-
|
-
|
-
|
-
|
-
|
-
|
40,504
|
-
|
-
|
-
|
40,504
|
-
|
40,504
|
Reimbursement
of offering costs
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
49,378
|
|
|
49,378
|
|
49,378
|
Dividends and
distributions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,483,106)
|
(1,483,106)
|
(402,553)
|
(1,885,659)
|
Allocation of
NCI in operating partnership
|
-
|
-
|
-
|
-
|
-
|
-
|
(350,488)
|
-
|
-
|
-
|
(350,488)
|
350,488
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,904,357)
|
-
|
(1,904,357)
|
(1,482,608)
|
(3,386,965)
|
Balance, June
30, 2021
|
31,000
|
$31
|
2,050,000
|
$2,050
|
1,560,452
|
$1,561
|
$30,441,959
|
$(1,221,888)
|
$(14,996,403)
|
$(7,626,569)
|
$6,600,741
|
$973,864
|
$7,574,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2019
|
144,500
|
$144
|
1,180,000
|
$1,180
|
1,438,465
|
$1,438
|
$24,463,133
|
$(1,459,479)
|
$(9,324,626)
|
$(3,478,926)
|
$10,202,864
|
$4,752,606
|
$14,955,470
|
Issuance of
common shares in connection with termination of management
agreement
|
-
|
-
|
-
|
-
|
51,667
|
52
|
370,401
|
-
|
-
|
-
|
370,453
|
-
|
370,453
|
Issuance of
common shares in satisfaction of acquisition fee
payable
|
-
|
-
|
-
|
-
|
55,674
|
56
|
556,683
|
-
|
-
|
-
|
556,739
|
-
|
556,739
|
Proceeds from
issuing preferred shares
|
-
|
-
|
825,000
|
825
|
-
|
-
|
8,249,175
|
-
|
-
|
-
|
8,250,000
|
|
8,250,000
|
Equity-based
compensation long-term incentive plan shares
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
363,501
|
363,501
|
Equity-based
compensation - restricted stock
|
-
|
-
|
-
|
-
|
-
|
-
|
59,355
|
-
|
-
|
-
|
59,355
|
-
|
59,355
|
Reimbursement
of offering costs
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
138,836
|
-
|
-
|
138,836
|
-
|
138,836
|
Dividends and
distributions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,201,932)
|
(1,201,932)
|
(327,423)
|
(1,529,355)
|
Allocation of
NCI in operating partnership
|
-
|
-
|
-
|
-
|
-
|
-
|
(824,542)
|
-
|
-
|
-
|
(824,542)
|
824,542
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,455,529)
|
-
|
(1,455,529)
|
(1,299,894)
|
(2,755,423)
|
Balance, June
30, 2020
|
144,500
|
$144
|
2,005,000
|
$2,005
|
1,545,806
|
$1,546
|
$32,874,205
|
$(1,320,643)
|
$(10,780,155)
|
$(4,680,858)
|
$16,096,244
|
$4,313,332
|
$20,409,576
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2021 and 2020
(unaudited)
|
For the six
months ended June 30,
|
|
|
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$(3,386,965)
|
$(2,755,423)
|
Adjustments to
reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
Depreciation
|
2,019,820
|
1,821,772
|
Amortization of
acquired lease-up costs
|
287,267
|
249,191
|
Amortization of
in-place leases
|
412,230
|
345,092
|
Amortization of
above/below-market leases, net
|
119,540
|
75,505
|
Amortization of
debt issuance costs
|
464,263
|
391,621
|
Amortization of
deferred offering costs
|
195,478
|
-
|
Equity-based
compensation - long-term incentive plan units
|
265,547
|
363,501
|
Equity-based
compensation - restricted shares
|
40,504
|
59,355
|
Net change
in:
|
|
|
Rent and other
tenant receivables, net
|
(1,515,427)
|
(15,888)
|
Prepaid expense and
other assets
|
87,902
|
(379,019)
|
Deposits on
properties under contract
|
-
|
(50,000)
|
Accrued interest
payable
|
6,625
|
(72,092)
|
Accounts payable
and other accrued expenses
|
(179,863)
|
276,325
|
Deferred
revenue
|
1,625,730
|
-
|
Accrued management
termination fee
|
-
|
(1,279,547)
|
Tenant improvement
obligation
|
-
|
(296,133)
|
Net cash provided
by (used in) operating activities
|
442,651
|
(1,265,740)
|
|
|
|
Cash flows from investing activities:
|
|
|
Capital
improvements and development project funding
|
(3,743,627)
|
(86,980)
|
Real estate
acquisitions and deposits
|
(3,492,951)
|
(5,286,625)
|
Net cash used in
investing activities
|
(7,236,578)
|
(5,373,605)
|
|
|
|
Cash flows from financing activities:
|
|
|
Debt issuance
costs
|
-
|
(158,661)
|
Dividends
paid
|
(1,828,267)
|
(1,433,535)
|
Proceeds from sale
of preferred stock
|
-
|
8,250,000
|
Borrowings under
revolving credit facility
|
7,350,000
|
3,950,000
|
Mortgage principal
payments
|
(112,045)
|
(104,906)
|
Net cash provided
from financing activities
|
5,409,688
|
10,502,898
|
|
|
|
Net (decrease)
increase in Cash and cash equivalents and Restricted
cash
|
(1,384,239)
|
3,863,553
|
Cash and cash
equivalents and Restricted cash, beginning of period
|
5,098,747
|
3,556,743
|
Cash and cash
equivalents and Restricted cash, end of period
|
$3,714,508
|
$7,420,296
|
|
|
|
Supplemental cash flow information:
|
|
|
Cash
paid for interest
|
$525,252
|
$2,888,249
|
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
|
$49,378
|
$138,836
|
The accompanying notes are an integral part of the consolidated
financial statements.
HC Government Realty Trust, Inc.
Notes to Consolidated Financial Statements (unaudited)
HC
Government Realty Trust, Inc. (the “REIT”), a Maryland
corporation, was formed on March 11, 2016 to primarily source,
acquire, own and manage built-to-suit and improved-to-suit,
single-tenant properties leased by the United States of America
through the U.S General Services Administration (“GSA
Properties”). The REIT focuses primarily on GSA Properties
within size ranges of 5,000 to 50,000 rentable square feet, and in
their first lease term after original construction or
renovation-to-suit. 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
(the “Operating Partnership” and together with the
REIT, the “Company”). The Operating
Partnership invests through wholly-owned special purpose
limited liability companies, or special purpose entities
(“SPEs”). As of June 30, 2021, 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 June 30, 2021, the financial statements
reflect the operations of 25 GSA Properties representing 463,672
rentable square feet located in 17 states. The properties are 100%
leased to the government of the United States of America and based
on net operating income, have a weighted average remaining lease
term as of June 30, 2021 of 8.8 years if none of the early
termination rights are exercised and 5.0 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 25 SPEs as of June 30, 2021. Of the SPEs,
22 are wholly-owned entities that are consolidated based upon the
Company having a controlling financial interest, and three SPEs are
consolidated variable interest entities based upon
management’s determination that the Operating Partnership has
a variable interest in the entities and is the primary beneficiary.
Intercompany accounts and transactions are eliminated in
consolidation. The results of operations of companies or assets
acquired are included from the dates of
acquisition.
In our
opinion, these statements include all adjustments necessary for a
fair presentation of the results of all interim periods reported
herein. All such adjustments are of a normal recurring nature.
Certain information and footnote disclosures prepared in accordance
with GAAP have been either condensed or omitted pursuant to SEC
rules and regulations. However, we believe that the disclosures
made are adequate for a fair presentation of results of operations
and financial position. Operating results for the interim periods
reported herein may not be indicative of the results expected for
the year. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and
accompanying notes included in our latest Annual Report on Form
1-K.
Use of Estimates - The preparation of the consolidated
financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and
assumptions.
Cash, Cash Equivalents and Restricted
Cash - Cash and cash
equivalents include all cash and liquid investments that mature
three months or less from when they are purchased. Restricted cash
consists of amounts escrowed for future real estate taxes,
insurance, and capital expenditures, as required by certain of the
Company’s mortgage debt agreements. The following table
provides a reconciliation of cash, cash equivalents and restricted
cash reported within the Consolidated Balance Sheets that sum to
the totals of the same such amounts presented in the Consolidated
Statements of Cash Flows:
|
|
|
|
|
|
Cash
and cash equivalents
|
$3,503,756
|
$7,255,132
|
|
210,752
|
165,164
|
Cash,
cash equivalents and restricted cash
|
$3,714,508
|
$7,420,296
|
At
times, the Company’s cash and cash equivalents balance
deposited with financial institutions may exceed federally
insurable limits. The Company maintains separate cash balances at
the Operating Partnership and SPE level. At June 30, 2021, one
account had approximately $2,659,000 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.
Investment in Real Estate, Net –
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 six months ended June 30, 2021 and 2020 was $119,540 and
$75,505, 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, the Company applies 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.
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 in the event the
Company is considered the owner of the improvements. 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. Operating
expenses include repairs and maintenance, cleaning, landscaping and
utilities. 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. 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 suchproperty. For the six months ended June 30, 2021 and 2020, the
Company did not recognize any impairment
charges.
Organizational, Offering and Related Costs
- Organizational and offering costs of the Company are
presented as a reduction of stockholders’ equity within the
Consolidated Balance Sheets and Consolidated Statements of Changes
in Stockholders’ Equity. Organizational and offering costs
represent expenses incurred in connection with the formation of the
Company and the filing of the Company’s securities offering
pursuant to Regulation A.
Revenue Recognition - Revenue includes base rent due from
tenants in accordance with the terms of the respective lease. The
Company recognizes rental income on a straight-line basis over the
non-cancellable term of the respective lease. Revenue also includes
reimbursement income from the recovery of all or a portion of
operating expenses and real estate taxes and 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.
Rents and Other Tenant Receivables, Net
- Rents and other tenant receivables represent amounts billed and
due from tenants. When a portion of the tenants’ receivable
is estimated to be uncollectible, an allowance for doubtful
accounts is recorded. Due to the high credit worthiness of the tenants, there were
no allowances as of June 30, 2021 and December 31, 2020. The
Company had a straight-line rent receivable of $60,100 and $38,200
as of June 30, 2021 and December 31, 2020,
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 June
30, 2021 and December 31, 2020; accordingly, no associated interest
and penalties were required to be accrued at June 30, 2021 and
December 31, 2020.
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
noncontrolling interest in the Operating Partnership was 44.1% at
June 30, 2021 and December 31, 2020.
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 or other extinguishment of debt are written off in the
period of repayment or extinguishment as a loss on extinguishment
of debt.
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.
Deferred Revenue – Deferred
revenue primarily consists of lump sum reimbursements made by
tenants to the Company for landlord improvements in excess of a
tenant improvement allowance. Lump sum reimbursements are recorded
as deferred revenue on the Consolidated Balance Sheets and are
amortized over the non-cancellable lease term through
revenue.
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 unless the effect of such shares
would be anti-dilutive.
The
following securities were not included in the computation of the
Company’s diluted net loss per share as their effect would be
anti-dilutive.
|
|
|
|
|
|
|
Potentially
dilutive securities outstanding
|
|
|
Convertible
common units
|
1,118,416
|
1,118,416
|
Convertible
long-term incentive plan units
|
112,408
|
72,215
|
Convertible
preferred stock
|
2,345,747
|
3,229,874
|
Total
potentially dilutive securities
|
3,576,571
|
4,420,505
|
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 13. Commitments and
Contingencies for more
information regarding the Company’s operating
leases.
Other
accounting standards that have been issued or proposed by the FASB
or other standard-setting bodies are not currently applicable to
the Company or are not expected to have a significant impact on the
Company’s financial position, results of operations and cash
flows.
3.
|
Variable Interest Entities
|
With
respect to the three SPEs where Holmwood assigned to the Operating Partnership all its
rights, title and interest in and to any and all profits, losses
and distributed cash flow, management determined these SPEs to be
variable interest entities (“VIE”) in which the
Operating Partnership has a variable interest and that Holmwood
equity holders lacked the characteristics of a controlling
financial interest. The Company determined in accordance with FASB
Accounting Standards Codification Topic 810
“Consolidation” to consolidate these
SPEs.
A
summary of the VIEs’ assets and liabilities that are included
within the Company’s Consolidated Balance Sheets at June 30,
2021 and December 31, 2020 is as follows:
|
June 30, 2021
(unaudited)
|
|
Assets:
|
|
|
Buildings
and improvements, net
|
$10,648,515
|
$10,842,846
|
Intangible
assets, net
|
67,659
|
128,130
|
Prepaids
and other assets
|
509,791
|
418,292
|
Total
assets
|
$11,225,965
|
$11,389,268
|
Liabilities:
|
|
|
Mortages
payable, net
|
$9,181,806
|
$9,277,699
|
Intangible
liabilities, net
|
13,862
|
33,053
|
Accounts
payable and accrued expenses
|
198,328
|
176,964
|
Total
liabilities
|
$9,393,996
|
$9,487,716
|
|
|
|
Net
identifiable assets
|
$1,831,969
|
$1,901,552
|
|
|
|
4.
|
Investment in Real Estate
|
The
following is a summary of the Company’s investment in real
estate, net as of June 30, 2021 and December 31, 2020,
respectively:
|
June 30, 2021 (unaudited)
|
|
Land
|
$12,830,558
|
$12,701,648
|
Buildings
and improvements
|
98,552,391
|
93,743,401
|
Site
improvements
|
1,702,226
|
1,463,473
|
Tenant
improvements
|
12,874,200
|
10,338,157
|
Construction
in progress
|
527,449
|
1,545,104
|
|
126,486,824
|
119,791,783
|
Accumulated
depreciation
|
(12,737,059)
|
(10,725,687)
|
Investment
in real estate, net
|
$113,749,765
|
$109,066,096
|
Depreciation
expense related to the Company’s investment in real estate
for the six months ended June 30, 2021 and 2020 was $2,011,372 and
$1,820,297, respectively.
During
the six months ended June 30, 2021, the Company acquired one
operating property. The property was acquired with a lease 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-Cancellable
|
|
Acquisition
|
|
Lease Term at
|
Location
|
Date
|
|
Acquisition Date
|
Van
Buren, Missouri
|
6/14/2021
|
16,000
|
8.6
years
|
During
the six months ended June 30, 2020, the Company acquired one
operating property. The property was acquired with a lease 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-Cancellable
|
|
Acquisition
|
|
Lease Term at
|
Location
|
Date
|
|
Acquisition Date
|
Birmingham,
Alabama
|
4/30/2020
|
12,470
|
14.5
years
|
A
summary of the allocated purchase price, based on estimated fair
values, for the acquisitions completed during the six months ended
June 30, 2021 and 2020 are as follows:
|
|
|
|
|
|
Land
|
$128,910
|
$956,627
|
Buildings
and improvements
|
2,382,987
|
3,087,389
|
Tenant
improvements
|
287,833
|
612,242
|
Site
improvements
|
151,683
|
-
|
Construction
in progress
|
-
|
365,954
|
Acquired
in-place leases
|
180,878
|
264,413
|
Acquired
lease-up costs
|
299,987
|
-
|
|
60,673
|
-
|
Total
|
$3,492,951
|
$5,286,625
|
The
Company included $17,311 of revenues and an inconsequential amount
of net loss in our Consolidated Statements of Operations related to
the operating property acquired during the six months ended June
30, 2021. The Company included $81,249 of revenues and $28,189 of
net income in our Consolidated Statements of Operations related to
the operating property acquired during the six months ended June
30, 2020.
The
intangible assets and liabilities of the acquired properties have
an aggregate weighted average amortization period of 8.6 years and
14.3 years as of June 30, 2021 and 2020, respectively.
The
Company capitalized $3,665,951 of costs with respect to its ongoing
development and tenant improvement projects during the six months
ended June 30, 2021. In June 2021, the Company completed its
development project in Portland, Maine and placed the property into
service.
There
were no such development or tenant improvement projects during the
six months ended June 30, 2020.
The
Company capitalized building and site improvements with respect to
its existing portfolio of $77,676 and $86,980 during the six months
ended June 30, 2021 and 2020, respectively.
5.
|
Leasehold Intangibles, net
|
The
following is a summary of the Company’s leasehold intangibles
as of June 30, 2021 and December 31, 2020:
|
June 30, 2021 (unaudited)
|
|
Acquired
in-place leases
|
$7,315,043
|
$7,134,166
|
Acquired
lease-up costs
|
5,033,123
|
4,733,136
|
Acquired
above-market leases
|
3,907,707
|
3,847,034
|
|
16,255,873
|
15,714,336
|
Accumulated
amortization
|
(5,400,410)
|
(4,482,571)
|
Leasehold
intangibles, net
|
$10,855,463
|
$11,231,765
|
Amortization
of in-place leases and lease-up costs was $699,497 and $594,283 for
the six months ended June 30, 2021 and 2020,
respectively.
Amortization
of acquired above market leases resulted in a reduction to rental
revenue of $218,342 and $174,228 for the six months ended June 30,
2021 and 2020, respectively.
Future
amortization of acquired in-place lease value, acquired lease-up
costs and acquired above market leases as of June 30, 2021 is as
follows:
Year Ended
|
|
For
the remaining six-month period ending December 31,
2021
|
$947,537
|
2022
|
1,602,567
|
2023
|
1,442,993
|
2024
|
1,382,749
|
2025
|
1,291,440
|
2026
|
1,282,949
|
Thereafter
|
2,905,228
|
Total
|
$10,855,463
|
The
weighted-average amortization period is approximately 7.7
years.
6.
|
Below-Market Leases, net
|
The
Company’s intangible liabilities consist of acquired
below-market leases. The following is a summary of the
Company’s intangible liabilities, as of June 30, 2021 and
December 31, 2020:
|
June 30, 2021 (unaudited)
|
|
Acquired
below-market leases
|
$1,241,418
|
$1,241,418
|
Accumulated
amortization
|
(788,461)
|
(689,659)
|
Below-market
leases, net
|
$452,957
|
$551,759
|
|
|
|
Amortization
of below-market leases resulted in an increase in rental revenue of
$98,802 and $98,723 for the six months ended June 30, 2021 and
2020, respectively.
The
future amortization of acquired below market leases as of June 30,
2021 is as follows:
Year Ended
|
|
For
the remaining six-month period ending December 31,
2021
|
$90,475
|
2022
|
143,828
|
2023
|
121,882
|
2024
|
86,050
|
2025
|
3,020
|
2026
|
3,020
|
Thereafter
|
4,682
|
Total
|
$452,957
|
The weighted-average amortization period is approximately 3.1
years.
The
following table summarizes the Company’s outstanding
indebtedness as of June 30, 2021 and December 31,
2020:
|
|
|
|
Loan
|
|
|
June 30, 2021 (unaudited)
|
|
Senior revolving credit facility:
|
|
|
|
|
Senior
revolving credit facility
|
L +
200bps
|
|
$23,000,000
|
$15,650,000
|
Total senior revolving credit facility
|
|
|
23,000,000
|
15,650,000
|
|
|
|
|
|
Mortgage notes payable
|
|
|
|
|
Lorain,
Ohio, Jonesboro, Arkansas and Port Saint Lucie,
Florida
|
5.265%
|
|
9,256,561
|
9,368,605
|
Total
mortgage notes payable
|
|
|
9,256,561
|
9,368,605
|
Less:
Total unamortizd debt issurance costs
|
|
|
(74,754)
|
(90,906)
|
Total mortgage payable, net
|
|
|
9,181,807
|
9,277,699
|
|
|
|
|
|
Total debt
|
|
|
$32,181,807
|
$24,927,699
|
Revolving Credit Facility
In
October 2019, the Company, through the Operating Partnership,
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 the Operating Partnership obtained
revolving loan commitments in an initial amount of $60,000,000,
subject to customary terms and availability conditions. In December
2019, the Credit Facility was increased to provide total
availability of up to $100,000,000, subject to customary terms and
availability conditions. The Credit Facility includes an accordion
feature that will permit the Operating Partnership to further
increase the commitments available to the Operating Partnership up
to $200,000,000, subject to customary terms and conditions. The
Company intends to use the Credit Facility to repay certain
indebtedness, fund acquisitions and capital expenditures and
provide working capital.
The
Company and its subsidiaries that directly own properties included
in the Credit Facility’s borrowing base are guarantors under
the Credit Facility. The Credit Facility matures on October 21,
2022 with a one-time option to extend the maturity date until
October 21, 2023, subject to certain conditions and the payment of
an extension fee.
Borrowings under
the Credit Facility are subject to an interest rate which equals,
at the Company’s option, either (i) a base rate plus an
applicable margin with a range of 100 to 150 basis points or (ii)
LIBOR plus an applicable margin with a range of 200 to 250 basis
points, with the applicable margin depending on the Company’s
consolidated leverage ratio. In addition, the Company will pay an
unused facility fee on the revolving commitments under the Credit
Facility of 0.25% or 0.30% per annum based on the ratio of
aggregate borrowings under the Credit Facility and the aggregate
revolving commitments.
The
Credit Facility also contains certain customary financial
covenants, as follows: (i) the maximum ratio of consolidated total
indebtedness to total asset value (each as defined in the credit
agreement) may not exceed 60.0%, (ii) the minimum ratio of adjusted
consolidated EBITDA to consolidated fixed charges (each as defined
in the credit agreement) may not be less than (A) 1.25 to 1.00
beginning with the earlier of (i) the fiscal quarter-end to occur
after the termination of the adjustment period (as defined in the
credit agreement) or the fiscal quarter ending March 31, 2022
through the fiscal quarter ending September 30, 2022 and (B) 1.40
to 1.00 for each fiscal quarter ending on and after December 31,
2022, (iii) the minimum ratio of adjusted consolidated EBITDA to
consolidated total indebtedness (each as defined in the credit
agreement) may not be less than 12% during the adjustment period,
(iv) the minimum total liquidity (as defined in the credit
agreement) may not be less than $15,000,000 during the adjustment
period, and (v) the minimum consolidated tangible net worth (as
defined in the credit agreement) may not be less than the sum of an
amount equal to 85.0% of consolidated tangible net worth as of the
closing date of the Credit Facility plus an amount equal to 85.0%
of the aggregate net proceeds received from subsequent issuances of
the Company’s stock after the closing date of the Credit
Facility.
The
Credit Facility also includes other customary covenants, including
limits on the percentage of the Company’s total asset value
that may be invested in unimproved land, unconsolidated joint
ventures, redevelopment and development assets and loans, advances
or extensions of credit and require that the Company obtain consent
for mergers in which the Company is not the surviving entity. The
Company’s dividends and distributions are not permitted to
exceed 95% of funds from operations (as defined in the credit
agreement) following March 31, 2022.
These
financial and restrictive covenants may limit the investments the
Company may make and the Company’s ability to make dividends
and distributions. As of June 30, 2021, the Company is in
compliance with all financial and restrictive covenants under the
Credit Facility. The occurrence of an event of default under the
Credit Facility could result in the termination of the commitments
thereunder and in all loans and other obligations becoming
immediately due and payable.
As of
June 30, 2021 and December 31, 2020, the Company had $23,000,000
and $15,650,000 outstanding, respectively, and $77,000,000 and
$84,350,000 committed and undrawn under the Credit Facility,
respectively. The weighted average interest rate on the outstanding
borrowings was 2.10% and 2.16% as of June 30, 2021 and December 31,
2020, respectively. The fair value of the Credit Facility
approximates its carrying value.
Mezzanine Debt
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”). In connection with the closing of the
Recapitalization Transaction, the Company, through the Operating
Partnership, entered into a loan agreement (as amended, the
“Loan Agreement”) pursuant to which certain of the
Recapitalization Investors, as lenders (the “Lenders”),
provided a $10,500,000 senior secured term loan to the Operating
Partnership (the “Mezzanine Loan”), with an option to
fund up to an additional $10,000,000 in term loans, subject to
customary terms and conditions, pursuant to which all such debt
would accrue interest and mature on the same terms (collectively,
the “Mezzanine Debt”). The Loan Agreement was amended
in October 2019 to increase the additional amount available to the
Operating Partnership to $13,500,000. The Mezzanine Debt was
subordinate to the Credit Facility.
The
Mezzanine Debt accrued interest at a rate of fourteen percent (14%)
per annum. Such interest was to be paid in monthly, interest-only
cash payments payable in arrears at a rate of twelve percent (12%)
per annum plus (i) a cash payment at a rate of two percent (2%) per
annum, (ii) an increase in the principal of the Mezzanine Debt
equal to two percent (2%) per annum or (iii) a combination of both
(i) and (ii) above, which such combined amount was to be equal to
two percent (2%) per annum. The Operating Partnership was required
to repay all outstanding principal and any accrued but unpaid
interest on or before April 22, 2023.
On
August 14, 2020, the Company used a portion of the net proceeds
from the Series C Offering to repay an aggregate amount of
$21,846,295 of the Company’s Mezzanine Debt outstanding under
the Loan Agreement, including accrued interest and make-whole
payments.
As
of June 30, 2021 and December 31, 2020, the Company had no
Mezzanine Debt outstanding.
Mortgage Notes Payable
The
Company’s fixed rate mortgage notes payable balances,
excluding unamortized debt issuance costs, were $9,256,561 and
$9,368,605 as of June 30, 2021 and December 31, 2020, respectively.
There were no variable rate mortgage notes payable as of June 30,
2021 and December 31, 2020.
As of
June 30, 2021 and December 31, 2020, the Company had unamortized
debt issuance costs of $74,754 and $90,906, respectively, in
connection with its mortgage notes payables.
The
mortgage notes payable are collateralized by the specific
properties to which the mortgage notes payable pertain. The
carrying amount of real estate that serves as collateral for these
mortgages as of June 30, 2021 and December 31, 2020 was $10,648,515
and $10,842,846, respectively.
The
following table summarizes the Company’s aggregate debt
maturities based on outstanding principal as of June 30,
2021:
|
Future
Principal
Payments
|
For
the remaining six months ending December 31, 2021
|
$117,821
|
2022
|
23,245,134
|
2023
|
8,893,606
|
Total
|
$32,256,561
|
8.
|
Mandatorily Redeemable Preferred Stock
|
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”) at $25.00 per share 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, and Regulation D promulgated thereunder, for an aggregate
purchase price of $90,000,000 (the “Series C
Offering”). Net proceeds from the Series C Offering
were $86,521,914, after deducting the placement agent fee and legal
and other professional fees paid in connection with the Series C
Offering, and are presented on the Company’s Consolidated
Balance Sheets as mandatorily redeemable preferred stock, net of
unamortized deferred offering costs.
The
Company used the net proceeds from the Series C Offering primarily
to acquire new GSA Properties, repay a portion of the indebtedness
outstanding under the Credit Facility, fully repay the
Company’s Mezzanine Debt, purchase existing shares of the
Company’s 7.00% Series A Cumulative Convertible Preferred
Stock (“Series A Preferred Stock”) and for general
corporate purposes.
The
mandatorily redeemable preferred stock has an aggregate liquidation
preference of $90,000,000, plus any accrued and unpaid dividends
thereon. The Series C Preferred Stock is senior to the
Company’s common stock, Series A Preferred Stock and 10.00%
Series B Cumulative Convertible Preferred Stock (the “Series
B Preferred Stock”) and any class or series of capital stock
expressly designated as ranking junior to the Series C Preferred
Stock as to distribution rights and rights upon liquidation,
dissolution or winding up. The Series C Preferred Stock ranks on a
parity with any class or series of the Company’s capital
stock expressly designated as ranking on a parity with the Series C
Preferred Stock as to distribution rights and rights upon
liquidation, dissolution or winding up.
The
Series C Preferred Stock is mandatorily redeemable by the Company
on August 14, 2027 (“Mandatory Redemption Date”) at a
redemption price equal to the $25.00 liquidation preference per
share, plus the amount of any accrued and unpaid dividends on the
Series C Preferred Stock. The Series C Preferred Stock is not
redeemable prior to August 14, 2023 except (i) in order to preserve
the Company’s qualification as a REIT, (ii) within 120 days
after the date on which a Change of Control (as defined in the
Articles Supplementary classifying and designating the Series C
Preferred Stock) occurs and (iii) at any time that the aggregate
distributions to the holders of Series C Preferred Stock result in
a multiple on invested capital equal to the $25.00 liquidation
preference per share plus the product of (x) the dividend rate of
7.0% per annum of the $25.00 liquidation preference per share and
(y) three.
The
Company may, at its option, redeem the Series C Preferred Stock, in
whole or in part, at any time on or after August 14, 2023 at a
redemption price equal to $25.00 per share, plus the amount of any
accrued and unpaid dividends (whether or not
declared).
Holders
of the Series C Preferred Stock generally have no voting rights.
However, the affirmative vote of at least two-thirds of the
outstanding shares of the Series C Preferred Stock (voting as a
separate class) is required to amend the Company’s charter
(including the Articles Supplementary classifying and designating
the Series C Preferred Stock) in a manner that materially and
adversely affects the rights of the holders of the Series C
Preferred Stock.
If the
Company fails to redeem the Series C Preferred Stock by the
Mandatory Redemption Date, and such non-compliance remains uncured
by the Company on the nine-month anniversary following the
Mandatory Redemption Date (a “Failed Redemption”),
holders of a majority of the outstanding shares of Series C
Preferred Stock shall have the right at any time after such date to
elect a majority of the members of the Company’s Board of
Directors (the “Board”). The number of directors will
be automatically increased to such number as is necessary to enable
the holders of Series C Preferred Stock to exercise such right. If,
at any time following a Failed Redemption, the Company completes
the redemption, the terms of any and all directors elected by the
holders of Series C Preferred Stock will automatically expire
immediately following such redemption and the number of directors
will be automatically decreased by a corresponding
number.
In
accordance with ASC Topic No. 480, “Distinguishing Liability
from Equity”, the Company has classified the Series C
Preferred Stock as a liability as it has characteristics that
require liability classification. The Series C Preferred Stock is
presented as mandatorily redeemable preferred stock, net of
unamortized deferred offering costs, on the Company’s
Consolidated Balance Sheets. Further, the related dividend payments
are recorded as a component of interest expense in the Consolidated
Statements of Operations.
The
Series C Preferred Stock is entitled to a dividend of 7.00% per
annum, accruing from the date of issuance, on a cumulative basis,
quarterly in arrears. Dividends continue to accrue even if not
authorized, declared or paid. Refer
to Note 11. Stockholders’
Equity for further
discussion of dividends on the Series C Preferred
Stock.
The
Company incurred $3,478,086 in placement agent fees and legal and
other professional fees related to the Series C Offering. These
costs are recorded as deferred offering costs on the Consolidated
Balance Sheets as a direct deduction from the carrying amount of
the mandatorily redeemable preferred stock liability and are being
amortized using the effective interest method over the mandatory
redemption period.
As of
June 30, 2021, the Company had 3,600,000 shares of the Series C
Preferred Stock issued and outstanding.
For the
six months ended June 30, 2021, the Company amortized $195,478 of
deferred offering costs related to the Series C Preferred Stock in
interest expense in the Consolidated Statements of Operations.
Accumulated amortization of the deferred offering costs was
$340,849 and $145,372 as of June 30, 2021 and December 31, 2020,
respectively.
Preferred Stock
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 of the
property located in Portland, Maine.
Mezzanine Debt
On
August 14, 2020, the Company used a portion of the net proceeds
from the Series C Offering to repay all of its outstanding
Mezzanine Debt.
Our
rental properties are subject to generally non-cancellable
operating leases generating future minimum contractual rent
payments due from tenants. Occupancy of the operating properties
was at 100% at June 30, 2021 and December 31, 2020. Remaining
non-cancellable lease terms range from 0.5 to 13.3 years as of June
30, 2021. The future minimum rents under non-cancellable leases as
of June 30, 2021 are as follows:
|
|
Year Ended
|
|
For
the remaining six months ending December 31, 2021
|
$10,696,893
|
2022
|
11,567,117
|
2023
|
9,995,220
|
2024
|
9,015,276
|
2025
|
8,147,209
|
2026
|
8,110,646
|
Thereafter
|
22,023,011
|
Total
|
$79,555,372
|
The
properties are 100% leased to the United States of America
Government and administered by either the GSA or occupying
agency. At June 30, 2021, the weighted average non-cancellable
lease term is 5.0 years if the GSA elects to exercise all of its
early termination rights and the weighted average total remaining
contractual lease term is 8.8 years if none of the early
termination rights are exercised.
Series A Cumulative Convertible Preferred Stock
In
2016, the Company issued 144,500 shares of its Series A Preferred
Stock to various investors in exchange for a total of $3,612,500,
or $25.00 per share. The Series A Preferred Stock will
automatically convert into common stock upon the occurrence of the
Company’s listing on a national securities exchange. Holders
of the Series A Preferred Stock may, at their option, at any time,
convert all, but not less than all, of their outstanding shares of
Series A Preferred Stock into common stock. The shares of Series A
Preferred Stock are convertible into common shares in accordance
with the following formula:
Conversion Amount = (($25.00*X1)
+ X2)/$10.00)
+ 0.2*(($25.00*X1)/$10.00)
where:
“X1”
means the number of shares of Series A Preferred Stock held by the
applicable holder; and
“X2”
means the aggregate accrued but unpaid dividends on the
holder’s shares of Series A Preferred Stock as of the
applicable conversion date.
On
August 21, 2020, the Company offered to repurchase all of its
outstanding shares of Series A Preferred Stock for $25.00 per share
(the “Repurchase Price”), using a portion of the net
proceeds from the Series C Offering (the “Series A Repurchase
Offer”). The Repurchase Price was equal to the liquidation
preference per share of Series A Preferred Stock. The Series A
Repurchase Offer expired on September 11, 2020. The Series A
Repurchase Offer was designed to provide liquidity to holders of
the Company’s Series A Preferred Stock, for which there is no
public market, and to lower the Company’s costs of
operations. The Company repurchased 113,500 shares of Series A
Preferred Stock for an aggregate repurchase price of $2,837,500. As
of June 30, 2021 and December 31, 2020, there were 31,000 shares of
Series A Preferred Stock outstanding.
Series B Cumulative Convertible Preferred Stock
On March 19, 2019, the Company issued 1,050,000
shares of its Series B Preferred Stock in connection with the
Recapitalization Transaction in exchange for total proceeds of
$10,500,000, or $10.00 per share. The Series B Preferred
Stock will automatically convert into common stock upon the
occurrence of the Company’s
listing on a national securities exchange. Holders of the Series B
Preferred Stock may, at their option, at any time, convert
all, but not less than all, of their outstanding shares of Series B
Preferred Stock into common stock. Upon conversion, a holder of
shares of Series B Preferred Stock will receive a number of shares
of common stock equal to the original issue price of the Series B
Preferred Stock (plus any accrued and unpaid dividends) divided by
the lesser of (i) $9.10 or (ii) the fair market value of the common
stock.
As
of June 30, 2021 and December 31, 2020, there were 2,050,000 shares
of Series B Preferred Stock outstanding.
Common Stock
On
November 7, 2016, the Company’s offering statement on Form
1-A filed in connection with its securities offering pursuant to
Regulation A (the “Regulation A Offering”), was
qualified by the SEC. The Regulation A Offering’s minimum and
maximum offering amounts were $3,000,000 and $30,000,000,
respectively, at an offering price of $10.00 per share. The initial
purchase of common stock with respect to the Regulation A Offering
occurred on May 18, 2017. In November 2019, the Regulation A
Offering expired and the Company did not file a post-qualification
amendment to extend the Regulation A Offering.
In connection with the former asset management
agreement (the “Management Agreement”) with Holmwood
Capital Advisors, LLC, our former advisor (“HCA”), the
Company issued 55,674 shares of common stock to HCA for a total
value of $556,740 in satisfaction of the Acquisition Fee (as
defined below) due to HCA on March 31, 2020. Refer
to Note 13. Commitments and
Contingencies for further
discussion.
Further, in connection with the termination of the
former Management Agreement, the Company issued 51,677 shares of
common stock to HCA for a total value of $370,453 on March 31,
2020. Refer to Note 13. Commitments and
Contingencies for further
discussion.
Equity-Based Stock Awards
On
December 21, 2020, the Company granted an aggregate of 9,004
restricted shares of common stock to certain of its non-employee
directors valued at $9.33 per share, the estimated net asset value
per share of the Company’s common stock as of June 30, 2020.
The shares pay dividends on the number of shares issued without
regard to the number of shares vested. For the six months ended
June 30, 2021, the Company recognized $40,504 of equity-based
compensation related to this grant. The shares related to this
grant will vest on December 21, 2021.
On
October 22, 2019, the Company granted an aggregate of 14,646
restricted shares of common stock to its non-employee directors
valued at $7.17 per share, the then-current estimated net asset
value per share of the Company’s common stock. The shares pay
dividends on the number of shares issued without regard to the
number of shares vested. For the six months ended June 30, 2020,
the Company recognized $59,355 of equity-based compensation related
to this grant. The shares related to this grant vested in September
2020.
Operating Partnership Common Units (“OP
Units”)
OP
Units are a class of limited partnership interest in the Operating
Partnership. Holders of OP Units have
the right to require the Operating Partnership to redeem their OP
Units. The Operating Partnership has the discretion to redeem such
OP Units for either (i) an amount of cash per OP Unit equal to the
value of one share of the REIT’s common stock, or (ii) shares
of the REIT’s common stock at a 1:1 ratio.
As of June 30, 2021 and December 31, 2020, there
were 1,118,416 OP Units outstanding. The Company did not
issue any OP Units during the six months ended June 30, 2021. In
addition, no OP Units were redeemed during the six months ended
June 30, 2021.
Long-Term Incentive Plan Units
LTIP Units are a special class of partnership
interest in the Operating Partnership. Each LTIP Unit is
convertible into an OP Unit of the Operating Partnership at a 1:1
ratio which can then be further exchanged into shares of the
REIT’s common stock at a 1:1 ratio. No LTIP Units were
exchanged into OP Units or shares of common stock of the REIT
during the six months ended June 30, 2021.
Pursuant to the Management Agreement, HCA was
granted LTIP Units concurrent with each sale of the REIT’s
common stock under the Regulation A Offering. The Company granted a
total of 72,215 LTIP Units to HCA at a fair value of $10.00 per
share. The LTIP Units vested over five years unless the Company
terminated the Management Agreement with HCA, in which case, the
vesting accelerated as of the termination date. Effective March 31,
2020, the Company terminated the Management Agreement with HCA and
HCA’s LTIP Units became fully vested. As such, the Company
recognized the remaining equity-based compensation expense
related to these grants during the six months ended June 30, 2020
in the amount of $363,501.
On December 21, 2020, the Company granted an
aggregate of 273,198 LTIP Units to certain officers and employees
of the Company. Of the total 273,198 LTIP Units granted, 40,193
LTIP Units vested immediately upon the grant date, 36,052 LTIP
Units vest over two years and 196,953 LTIP Units vest over five
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.
As of
June 30, 2021 and December 31, 2020, the Company had granted a
total of 345,413 LTIP Units, respectively. For the six months ended June 30,
2021 and 2020, the Company recognized a total of $265,547 and
$363,501 of equity-based compensation expense,
respectively.
The
remaining equity-based compensation expense to be recognized in
future periods is approximately $1,892,000.
Dividends and Distributions
During
the six months ended June 30, 2021 and 2020, the REIT declared
dividends on its Series A Preferred Stock of $27,125 and
$126,438, respectively. As of
June 30, 2021 and December 31, 2020, accrued, unpaid preferred
stock dividends on the Series A Preferred Stock were
$13,563.
During
the six months ended June 30, 2021 and 2020, the REIT declared dividends on its Series B
Preferred Stock of $1,025,000 and $661,130 respectively. As of June
30, 2021 and December 31, 2020, accrued, unpaid preferred stock
dividends on the Series B Preferred Stock were $512,500 and
$503,248, respectively.
During
the six months ended June 30, 2021,
the REIT declared dividends on its Series C Preferred Stock of
$3,150,000. As of June 30, 2021 and December 31, 2020, accrued,
unpaid preferred stock dividends on the Series C Preferred Stock
were $1,575,000.
During
the six months ended June 30, 2021 and 2020, the REIT declared
dividends on its common stock of $430,981 and $414,365, respectively. As of June 30, 2021
and December 31, 2020, accrued, unpaid common stock dividends were
$215,800 and $216,419, respectively.
During
the six months ended June 30, 2021 and 2020, the Operating
Partnership declared distributions of $402,553 and $327,424 with respect to its OP Units and
LTIP Units. As of June 30, 2021 and December 31, 2020, accrued,
unpaid distributions were $201,277.
12.
|
Noncontrolling Interest
|
The
Company’s noncontrolling interest represents the portion of
common units in the Company’s Operating Partnership not
attributable to the Company. The Company’s noncontrolling
interest was 44.1% at June 30, 2021 and December 31,
2020.
The
Company’s predecessor and HCA own an aggregate 41.2% of the
non-controlling interest in the Operating Partnership as of June
30, 2021 and December 31, 2020.
13.
|
Commitments and Contingencies
|
Leases
The
property located in Port Canaveral, Florida was purchased subject
to a ground lease. The ground lease has an extended term of 30
years and expires in December 2045 with one 10-year renewal option.
The Company made ground lease payments of $38,969 during the six
months ended June 30, 2021 and 2020.
The
Company has two parking lot leases in connection with its property
located in San Antonio, Texas. These leases commenced on June 1,
2015 and have an initial term of 10 years with two 5-year renewal
options. The Company made payments of $9,000 on these leases during
the six months ended June 30, 2021 and 2020.
The
Company has an office lease for its Corporate office in
Winston-Salem, North Carolina. The lease commenced on February 15,
2019 and has a term of 3 years. The Company made payments of
$12,000 on this lease during the six months ended June 30, 2021 and
2020.
Future
minimum rent payments for the ground lease, parking lot leases and
corporate office lease subsequent to June 30, 2021 are as
follows:
Year Ended
|
|
For
the remaining six months ending December 31, 2021
|
$59,969
|
2022
|
98,872
|
2023
|
95,938
|
2024
|
95,938
|
2025
|
85,438
|
2026
|
77,938
|
Thereafter
|
1,475,823
|
Total
|
$1,989,916
|
Management Fees
In connection with the Recapitalization
Transaction, on March 14, 2019, the Company provided notice to HCA,
pursuant to the resolution of the Board, that the Company elected
to not renew the Management Agreement with HCA under its terms,
effective March 31, 2020. With respect to the Management Agreement,
the Company had contracted with HCA to provide asset
management, acquisition and leasing services for the Company,
subject to the direction and supervision of the Board.
Through
March 31, 2020, HCA earned an asset management fee equal to 1.5% of
the stockholders’ equity payable, subject to certain
adjustments, in arrears and on a quarterly basis. The Company
incurred asset management fees of $128,906 for the six months ended
June 30, 2020. There were no outstanding asset management fees at
June 30, 2021 and December 31, 2020.
HCA
earned a fee based on 1% of the acquisition cost
(“Acquisition Fee”) of each real estate investment made
by HCA on behalf of the Company for services with respect to the
identification of an investment, arrangement of the purchase, and
coordination of closing. HCA’s discretion to make additional
acquisitions following the Recapitalization Transaction was made
subject to approval by the Board. No such Acquisition Fees were
earned by HCA following the Recapitalization Transaction other than
in connection with the Monroe, Louisiana Property, which, as of the
Recapitalization Transaction, was subject to a binding agreement to
purchase previously executed by HCA.
The
Acquisition Fee was to be paid in common stock or other equity
securities of the Company. The Acquisition Fee was to be accrued
and unpaid until the earlier of the date on which the
Company’s common stock was initially listed with a national
securities exchange or on March 31, 2020. On March 31, 2020, the
Company paid Acquisition Fees to HCA through the issuance of 55,674
shares of common stock of the Company at a per share price of
$10.00.
In accordance with the terms of the Management
Agreement, the Company was required to pay HCA a termination fee
upon the effective date of the termination. The termination fee is
calculated as a multiple of the sum of the asset management fees,
acquisition fees and leasing fees earned by HCA during the 24-month
period ending as of the most recently completed fiscal quarter
prior to the effective date of the termination. The appropriate
multiple is dependent on the stockholders’ equity, as defined
by the Management Agreement, of the Company at the time of
termination. The Company had the option to pay the termination fee
in cash, common stock, or with the consent of HCA, other equity
securities of the Company or Operating Partnership, including
without limitation LTIP Units, or a combination thereof. On
March 31, 2020, the Management Agreement with HCA terminated. In
connection with the termination, the Company paid a total
termination fee of $1,645,453. The termination fee payable was
satisfied with $1,275,000 in cash and $370,453 in shares of common
stock of the Company at a per share price of $7.17 for a total of
51,667 shares.
The
Company contracts with third party property managers to provide
property management services at its properties. The third-party
property management fee is due and payable on a monthly basis at
the beginning of each month. The Company incurred third party
property management fees of $125,267 and $115,540 for the six
months ended June 30, 2021 and 2020, respectively. Accrued third
party property management fees were $7,875 and $9,774 at June 30,
2021 and December 31, 2020, respectively.
Legal Proceedings
The
Company can be party to or otherwise be involved in legal
proceedings arising in the normal and ordinary course of business.
Other than the following, we are not aware of any proceeding,
threatened or pending, against us which, if determined adversely,
would have a material effect on our business, results of
operations, cash flows or financial position.
On
May 14, 2020, HCA and Holmwood filed suit in the Delaware Chancery
Court against the REIT and the Operating Partnership. The suit
alleges that the Company: (1) improperly calculated the termination
fee and other amounts due to HCA under its Management Agreement
with the Company; (2) improperly paid portions of the termination
fee and other amounts in common stock (as opposed to other common
equity interests in the Company); (3) failed to repay loans
allegedly made to the Company by the plaintiffs; and, (4)
improperly denied HCA powers granted by the Management Agreement to
control the day-to-day business and affairs of the REIT and the
Operating Partnership. The suit also alleges that the Company
cannot recoup certain expenses to which the Company claims
entitlement. The Company intends to vigorously defend against the
claims and has brought counterclaims in the matter. Because the
litigation is in its very early stages, at this time, the Company
cannot estimate the financial impact of the litigation on the
Company, if any.
Dividends and Distributions
On July
6, 2021, the REIT paid accrued common dividends and preferred
dividends of $201,041 and $2,101,063, respectively. On July 10,
2021, the Operating Partnership paid aggregate distributions on its
OP Units and LTIP Units of $191,347.
Property Acquisitions
On
September 10, 2021, the Operating Partnership acquired real
property located in Houston, Texas (the “Houston
Property”), pursuant to a Real Estate Purchase and Sale
Agreement for a purchase price of approximately $6,075,000. The
Houston Property consists of 21,019 rentable square foot,
build-to-suit single-tenant, one-story office building, fully
renovated in 2021. The Houston Property is 100% leased by the
United States of America, administered by the U.S. General Services
Administration, and occupied by the Social Security Administration
on a single tenant/user basis. The lease commenced on February 20,
2020 with a non-cancellable lease term of 10 years and a total
lease term of 15 years. This acquisition was funded with borrowings
on the Credit Facility.
Item 4. Exhibits
The following exhibits are filed as part of this semi-annual report
on Form 1-SA:
Exhibit
Number
|
|
Description
|
|
|
|
|
|
Articles
of Incorporation of HC Government Realty Trust, Inc., incorporated
by reference to Exhibit 2.1 to the Company’s Offering
Statement on Form 1-A filed on June 15, 2016
|
|
|
Articles
Supplementary of HC Government Realty Trust, Inc., incorporated by
reference to Exhibit 2.2 to the Company’s Offering Statement
on Form 1-A filed on June 15, 2016
|
|
|
Articles
Supplementary of HC Government Realty Trust, Inc., incorporated by
reference to Exhibit 1.1 to the Company’s Current Report on
Form 1-U filed on March 19, 2019
|
|
|
Articles Supplementary of HC Government Realty Trust, Inc.,
incorporated by reference to Exhibit 2.1 to the Company’s
Current Report on Form 1-U filed on August 18, 2020
|
|
|
Amended
and Restated Bylaws of HC Government Realty Trust, Inc.,
incorporated by reference to Exhibit 1.2 to the Company’s
Current Report on Form 1-U filed on March 19, 2019
|
|
|
Certificate
of Correction to the Articles Supplementary classifying and
designating the 7.00% Series A Cumulative Convertible Preferred
Stock of HC Government Realty Trust, Inc.
|
|
|
Certificate
of Correction to the Articles Supplementary classifying and
designating the 10.00% Series B Cumulative Convertible Preferred
Stock of HC Government Realty Trust, Inc.
|
|
|
Form of
Subscription Agreement, incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 1-U filed on December
21, 2017
|
|
|
Form of
Series B Preferred Stock Subscription Agreement, incorporated by
reference to Exhibit 4.1 to the Company’s Current Report on
Form 1-U filed on March 19, 2019
|
|
|
Form of
Common Stock Subscription Agreement, incorporated by reference to
Exhibit 4.2 to the Company’s Current Report on Form 1-U filed
on March 19, 2019
|
4.4
|
|
Form of Series C Preferred Stock Subscription Agreement,
incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 1-U filed on August 18, 2020
|
|
|
Agreement
of Limited Partnership of HC Government Realty Holdings, L.P.,
incorporated by reference to Exhibit 6.1 to the Company’s
Offering Statement on Form 1-A filed on June 15, 2016
|
|
|
First
Amendment to the Agreement of Limited Partnership of HC Government
Realty Holdings, L.P., incorporated by reference to Exhibit 6.2 to
the Company’s Offering Statement on Form 1-A filed on June
15, 2016
|
|
|
Limited
Liability Company Agreement of Holmwood Portfolio Holdings, LLC,
incorporated by reference to Exhibit 6.3 to the Company’s
Offering Statement on Form 1-A filed on June 15, 2016
|
|
|
Contribution
Agreement by and between Holmwood Capital, LLC and HC Government
Realty Holdings, L.P., incorporated by reference to Exhibit 6.4 to
the Company’s Pre-Qualification Amendment No. 2 to its
Offering Statement on Form 1-A filed on September 16,
2016
|
|
|
Form of
Tax Protection Agreement by and between Holmwood Capital, LLC and
HC Government Realty Holdings, L.P., incorporated by reference to
Exhibit 6.5 to the Company’s Pre-Qualification Amendment No.
1 to its Offering Statement on Form 1-A filed on July 29,
2016
|
|
|
Form of
Registration Rights Agreement by and between Holmwood Capital, LLC
and HC Government Realty Trust, Inc., incorporated by reference to
Exhibit 6.6 to the Company’s Pre-Qualification Amendment No.
4 to its Offering Statement on Form 1-A filed on October 24,
2016
|
|
|
Form of
Registration Rights Agreement by and between Holmwood Capital
Advisors, LLC and HC Government Realty Trust, Inc., incorporated by
reference to Exhibit 6.7 to the Company’s Pre-Qualification
Amendment No. 4 to its Offering Statement on Form 1-A filed on
October 24, 2016
|
|
|
Management
Agreement by and among Holmwood Capital Advisors, LLC, HC
Government Realty Trust, Inc. and HC Government Realty Holdings,
L.P., incorporated by reference to Exhibit 6.8 to the
Company’s Offering Statement on Form 1-A filed on June 15,
2016
|
|
|
Form of
Independent Director Agreement, incorporated by reference to
Exhibit 6.9 to the Company’s Offering Statement on Form 1-A
filed on June 15, 2016
|
|
|
Form of
Independent Director Indemnification Agreement, incorporated by
reference to Exhibit 6.10 to the Company’s Offering Statement
on Form 1-A filed on June 15, 2016
|
6.11 |
|
Form of
Officer/Director Indemnification Agreement, incorporated by
reference to Exhibit 6.11 to the Company’s Pre-Qualification
Amendment No. 1 to its Offering Statement on Form 1-A filed on July
29, 2016
|
6.12 |
|
2016 HC Government Realty Trust, Inc. Equity Incentive Plan,
incorporated by reference to Exhibit 6.12 to the Company’s
Pre-Qualification Amendment No. 4 to its Offering Statement on Form
1-A filed on October 24, 2016
|
|
|
First
Amendment to Contribution Agreement by and between Holmwood
Capital, LLC and HC Government Realty Holdings, L.P., dated as of
June 10, 2016, incorporated by reference to Exhibit 6.25 to the
Company’s Pre-Qualification Amendment No. 2 to its Offering
Statement on Form 1-A filed on September 16, 2016
|
|
|
Second
Amendment to Contribution Agreement by and between Holmwood
Capital, LLC and HC Government Realty Holdings, L.P., dated as of
May 26, 2017, incorporated by reference to Exhibit 6.1 to the
Company’s Current Report on Form 1-U filed on June 2,
2017
|
6.15
|
|
First
Amendment to 2016 HC Government Realty Trust, Inc. Equity Incentive
Plan
|
|
|
Second Amendment to the Amended and Restated Limited Partnership
Agreement of HC Government Realty Holdings, L.P., dated March 14,
2019, incorporated by reference to Exhibit 6.1 to the
Company’s Current Report on Form 1-U filed on March 19,
2019
|
|
|
Loan
Agreement, dated March 19, 2019, by and between HC Government
Holdings, L.P., the Lenders Party thereto and HCM Agency, LLC, as
Collateral Agent, incorporated by reference to Exhibit 6.2 to the
Company’s Current Report on Form 1-U filed on March 19,
2019
|
|
|
Holding
Company Guaranty Agreement, dated March 19, 2019, by HC Government
Realty Trust, Inc. and Holmwood Portfolio Holdings, LLC for the
benefit of HCM Agency, LLC, as Collateral Agent and the Lenders,
incorporated by reference to Exhibit 6.3 to the Company’s
Current Report on Form 1-U filed on March 19, 2019
|
|
|
Security
and Pledge Agreement, dated March 19, 2019, by and among HC
Government Realty Holdings, L.P., Holmwood Portfolio Holdings, LLC,
HC Government Realty Trust, Inc., HCM Agency, LLC, as Collateral
Agent and the Lenders, incorporated by reference to Exhibit 6.4 to
the Company’s Current Report on Form 1-U filed on March 19,
2019
|
|
|
Credit
Agreement, dated October 22, 2019, by and among HC Government
Realty Holdings, L.P., as Borrower, HC Government Realty Trust,
Inc, Holmwood Portfolio Holdings, LLC and certain subsidiaries of
HC Government Realty Holdings, L.P., as Guarantors, KeyBank
National Association, as syndication agent and administrative
agent, KeyBanc Capital Markets, Inc., as sole bookrunner and lead
arranger, and the lenders from time to time party thereto,
incorporated by reference to Exhibit 6.20 to the Company’s
Annual Report on Form 1-K filed on April 3, 2020
|
|
|
Second
Amendment to Loan Agreement, dated October 22, 2019, by and between
HC Government Holdings, L.P., the Lenders Party thereto and HCM
Agency, as Collateral Agent, incorporated by reference to Exhibit
6.21 to the Company’s Annual Report on Form 1-K filed on
April 3, 2020
|
|
|
Increase
Agreement and Amendment No. 1 to Credit Agreement, dated as of
December 20, 2019, by an among HC Government Realty Holdings, L.P.,
as Borrower, HC Government Realty Trust, Inc., as Parent Guarantor,
and Holmwood Portfolio Holdings, LLC and certain subsidiaries of HC
Government Realty Holdings, L.P., as Guarantors, KeyBank National
Association, as syndication agent, administrative agent and Lender,
and IberiaBank and Synovus Bank, as Augmenting Lender, incorporated
by reference to Exhibit 6.22 to the Company’s Annual Report
Form 1-K filed on April 3, 2020
|
|
|
Limited Consent and Second Amendment to Credit Agreement, dated
August 14, 2020, by and among HC Government Realty Holdings, L.P.,
as Borrower, HC Government Realty Trust, Inc., as Parent Guarantor,
and Holmwood Portfolio Holdings, LLC and certain subsidiaries of HC
Government Realty Holdings, L.P., as Guarantors, KeyBank National
Association, as an administrative agent and Lender, and each of the
other Lenders party thereto
|
|
|
Third Amendment to the Agreement of Limited Partnership of HC
Government Realty Holdings, L.P., dated August 12, 2020,
incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 1-U filed on August 18, 2020
|
|
|
Form
of Escrow Agreement by and among Branch Banking & Trust
Company, HC Government Realty Trust, Inc., and Orchard Securities,
LLC, incorporated by reference to Exhibit 8.1 to the
Company’s Pre-Qualification Amendment No. 4 to its Offering
Statement on Form 1-A filed on October 24, 2016
|
|
|
Assignment
of Escrow Agreement by and among HC Government Realty Trust, Inc.,
Branch Banking & Trust Company, Orchard Securities, LLC and
SANDLAPPER Securities, LLC, dated as of April 10, 2017,
incorporated by reference to Exhibit 8.1 to the Company’s
Current Report on Form 1-U filed on April 25, 2017
|
|
|
Assignment of Escrow Agreement by and among HC Government Realty
Trust, Inc., Branch Banking & Trust Company, Boustead
Securities, LLC and SANDLAPPER Securities, LLC, dated as of
December 20, 2017, incorporated by reference to Exhibit 8.1
to the Company’s Current Report on Form 1-U filed on December
21, 2017.
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Pursuant to the requirements of Regulation A, the issuer has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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HC GOVERNMENT REALTY TRUST, INC.
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By:
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/s/ Steven
A. Hale II
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Steven A. Hale II
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Date:
September 17, 2021
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Chairman, Chief Executive Officer and President
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Pursuant to the requirements of Regulation A, this report has been
signed by the following persons in the capacities and on the dates
indicated.
Name
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Title
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Date
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/s/
Steven A. Hale II
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Chairman,
Chief Executive Officer and President
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September
17, 2021
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Steven
A. Hale II
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(principal
executive officer)
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/s/
Jacqlyn Piscetelli
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Chief
Financial Officer
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September
17, 2021
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Jacqlyn
Piscetelli
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(principal
finance officer and principal accounting officer)
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