Modiv(MDV) - 2018 Q4 - Annual Report

PART I Business The company operates as an externally managed REIT, investing in single-tenant commercial properties under long-term net leases to provide stable cash distributions and preserve stockholder capital - The Company operates as an externally managed REIT, primarily investing in single-tenant commercial properties with long-term net leases to creditworthy tenants[13][14][15] - The company's primary investment objectives are to provide stockholders with attractive and stable cash distributions and to preserve and return their capital contributions[25][28] - As of December 31, 2018, the portfolio included 24 operating properties, one parcel of land, a 72.7% tenant-in-common (TIC) interest in a Santa Clara office property, and a 4.8% interest in an affiliated REIT (REIT I)[54][55] - In 2018, the company acquired six properties leased to tenants including 3M Company, Cummins Inc., 24 Hour Fitness, Texas Health Resources, Bon Secours Health System, and Costco Wholesale Corporation[56][57][59] - The company's borrowing policy intends to utilize up to 50% leverage, with a charter limit of borrowing up to 50% of tangible assets, unless an excess is approved by the conflicts committee[44] Offering Proceeds as of December 31, 2018 | Stock Class | Shares Sold | Gross Proceeds | | :--- | :--- | :--- | | Class C Common Stock | 14,027,968 | $140,507,461 | | Class S Common Stock | 17,588 | $176,604 | Risk Factors The company faces significant risks including limited operating history, reliance on its Advisor, lack of public market for shares, conflicts of interest, and an ongoing SEC investigation - The company has a limited operating history, having commenced its Registered Offering in July 2016, with net real estate investments of $238.9 million as of December 31, 2018[81] - The SEC is conducting a non-public, fact-finding investigation related to the company's advertising and sale of securities, with uncertain duration, scope, and outcome that could have a material adverse effect on the business[89][91] - The offerings are on a "best efforts" basis, meaning there is no guarantee of raising substantial funds, which could limit portfolio diversification and increase risks associated with the performance of a smaller number of properties[83] - The company is considered a "blind pool" as investors do not have the opportunity to evaluate specific investments before they are made, relying entirely on the Advisor's discretion[85] - Significant conflicts of interest exist as executive officers and directors are affiliated with the Advisor and other Brix-sponsored programs, which could influence decisions regarding fees, acquisitions, and other strategic actions[123][127] - There is no public market for the company's shares, and the share repurchase program is subject to significant limitations, including funding availability and volume caps (e.g., 2% of aggregate NAV per month), which restricts stockholder liquidity[148][150] - Failure to maintain qualification as a REIT would subject the company to federal income tax at corporate rates, reducing net earnings available for distribution to stockholders[88][207] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[231] Properties As of December 31, 2018, the company's 100% occupied portfolio comprised 24 operating properties and one land parcel, generating $17.4 million in annualized base lease revenue, with additional interests in a TIC and an affiliated REIT Property Portfolio Summary as of December 31, 2018 | Metric | Value | | :--- | :--- | | Total Operating Properties | 24 | | Total Rentable Square Feet | 1,536,684 | | Occupancy | 100% | | Annualized Base Lease Revenue | $17,372,544 | | Investment in Real Property, Net | $222,637,211 | | Mortgage Financing (Principal) | $125,022,937 | - In 2018, the company acquired six operating properties and one parcel of land, with tenants including 3M, Cummins, 24 Hour Fitness, Texas Health Resources, Bon Secours, and Costco[238][239][241][244][245][246] - The company's lease expirations are staggered, with 12.1% of square footage expiring in 2021 and 29.0% in 2022, and no leases set to expire in 2019 or 2020[236] - The company holds a 72.7% Tenant-in-Common (TIC) interest in a Santa Clara office property and an approximate 4.8% interest in REIT I, an affiliated REIT[253] - REIT I, an affiliate in which the company holds an investment, announced it is exploring strategic alternatives, including a potential sale of its real estate portfolio, prompting the company to form a special committee to evaluate a potential acquisition of REIT I or its portfolio[259] Legal Proceedings The company is involved in an ongoing, non-public SEC investigation regarding the advertising and sale of its securities, with an uncertain outcome - The SEC is conducting an investigation into the advertising and sale of securities by the Company in connection with its Registered Offering, which is a non-public, fact-finding inquiry, not an allegation of wrongdoing[261][676] Mine Safety Disclosures This item is not applicable to the company - Not applicable[262] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities There is no public market for the company's common stock, with its NAV per share established at $10.16 as of December 31, 2018, and a limited share repurchase program in place - No public market exists for the company's common stock, and there are no current plans to list the shares on a national securities exchange[266] - On January 11, 2019, the board established an estimated Net Asset Value (NAV) of $10.16 per share as of December 31, 2018, based on analysis provided by the independent third-party firm Cushman & Wakefield[268][269] - The company has a share repurchase program, but it is limited, with repurchases capped at 2% of aggregate NAV per month and 5% per quarter, and the repurchase price is discounted based on the holding period for shares held less than three years[313][319][321] NAV Calculation as of December 31, 2018 | Item | Estimated Value | Per Share NAV | | :--- | :--- | :--- | | Total Assets | $269,524,631 | $20.80 | | Total Liabilities | $136,973,034 | $10.57 | | Preliminary NAV | $132,551,597 | $10.23 | | Subordinated participation fee payable | ($839,050) | ($0.07) | | Total Estimated Value | $131,712,547 | $10.16 | 2018 Distribution Tax Characterization | Tax Characterization | Per Share Amount | | :--- | :--- | | Ordinary income | $0.0352 (5.5%) | | Non-taxable distribution (Return of Capital) | $0.6683 (94.5%) | | Total | $0.7035 | Selected Financial Data Selected financial data for 2015-2018 shows significant growth in total assets and revenues, reaching $252.4 million and $18.0 million respectively in 2018, despite an increased net loss of $1.8 million Selected Balance Sheet Data (in thousands) | | 2018 | 2017 | | :--- | :--- | :--- | | Total real estate investment, net | $238,924 | $149,760 | | Total assets | $252,426 | $157,073 | | Total liabilities | $143,332 | $77,777 | | Total stockholders' equity | $103,093 | $79,250 | Selected Operating and Cash Flow Data (in thousands) | | 2018 | 2017 | | :--- | :--- | :--- | | Total revenues | $17,985 | $7,390 | | Net loss | ($1,802) | ($868) | | Cash flows provided by operations | $5,882 | $3,791 | | Net loss per common share | ($0.16) | ($0.15) | Management's Discussion and Analysis of Financial Condition and Results of Operations The company's 2018 financial performance reflects significant portfolio growth, with revenues increasing to $18.0 million, though expenses also rose, resulting in a net loss of $1.8 million - The company is considered a perpetual-life investment vehicle with no finite liquidation date and intends to conduct continuous offerings of its common stock[335] - Rental income increased by 140% to $14.7 million in 2018 from $6.1 million in 2017, driven by property acquisitions during 2017 and 2018[366] - Interest expense increased by 241% to $5.6 million in 2018, reflecting a rise in the average principal balance of mortgage notes payable to approximately $90.4 million from $30.3 million in 2017[372] - As of December 31, 2018, the company had an outstanding principal balance of $125.0 million in mortgage notes and $9.0 million on its unsecured revolving credit facility[348] - The company's portfolio grew from 18 operating properties at year-end 2017 to 24 at year-end 2018, with total leasable square feet nearly doubling from 785,179 to 1,536,684[382] Cash Flow Summary (Year Ended Dec 31) | (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $5,882 | $3,791 | | Net cash used in investing activities | ($92,020) | ($115,594) | | Net cash provided by financing activities | $90,711 | $112,308 | Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - Not applicable as the Company is a smaller reporting company[420] Financial Statements and Supplementary Data This section refers to the Index to Consolidated Financial Statements, beginning on page F-1 of the report - This section directs the reader to the Index to Consolidated Financial Statements located at page F-1 of the Annual Report[421] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section is not applicable to the company - Not applicable[422] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes identified - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[423] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[426] - No changes in internal control over financial reporting occurred during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, internal controls[428] - The company is an emerging growth company and is therefore not required to include an attestation report from its independent registered public accounting firm regarding internal control over financial reporting[427] Other Information This section is not applicable to the company - Not applicable[430] PART III Directors, Executive Officers and Corporate Governance This section details biographical information for executive officers and directors, leadership changes, and the company's corporate governance structure, including its Code of Conduct and independent audit committee - Aaron S. Halfacre became CEO, President, and a director on January 1, 2019, succeeding Harold C. Hofer[434][437] - Raymond E. Wirta serves as Chairman of the Board and is a principal of the company's sponsor and advisor[438] - The board has an audit committee and a conflicts committee, both composed of independent directors, with Jeffrey Randolph chairing the audit committee and designated as the "audit committee financial expert"[435][453] - The company has adopted a Code of Business Conduct and Ethics applicable to all employees, officers, and directors[452] Executive Compensation Executive officers are compensated by affiliates, while independent directors receive stock-based compensation, which transitioned from per-meeting awards to quarterly retainers in 2019 - Executive officers are not compensated directly by the Company but by its sponsor, advisor, and/or their affiliates[455] - In 2019, director compensation was changed from a per-meeting stock award to quarterly retainers of $12,500 for each independent director, plus additional retainers for committee service, all payable in Class C common stock[456] 2018 Director Compensation (Stock Awards) | Director | Stock Awards | | :--- | :--- | | David Feinleib | $16,080 | | Vipe Desai | $36,180 | | Jonathan Platt | $41,205 | | Jeffrey Randolph | $53,265 | | John Wang | $21,105 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of February 28, 2019, no single person beneficially owned more than 5% of outstanding stock, with executive officers and directors collectively owning less than 1% - As of February 28, 2019, no person is known to be a beneficial owner of more than 5% of the outstanding Class C or Class S common stock[461] - All directors and executive officers as a group beneficially owned 18,619 shares of Class C common stock, representing less than 1% of the outstanding shares as of February 28, 2019[462] Certain Relationships and Related Transactions and Director Independence The company's related party transactions, including significant fees to its advisor and sponsor, are reviewed by an independent conflicts committee, ensuring fairness - The company is managed by its advisor under an Advisory Agreement, which entitles the advisor to various fees for services such as acquisitions, asset management, and financing[469][470] - The company is obligated to reimburse its sponsor for organizational and offering costs up to 3.0% of gross offering proceeds, with $8.4 million incurred and $4.2 million reimbursed as of December 31, 2018[473] - The board of directors has determined that four of its members (Markman, McWilliams, Nolan, Jr., and Randolph) qualify as Independent Directors under its charter and NYSE standards[467] - All transactions with related persons are reviewed and approved by the conflicts committee, which is composed of independent directors, to ensure fairness to the company[468] Fees Incurred to Advisor/Sponsor for Year Ended Dec 31, 2018 | Fee Type | Amount Incurred | | :--- | :--- | | Asset Management Fees | $2,004,760 | | Subordinated Participation Fees | $839,050 | | Acquisition Fees (Capitalized) | $2,752,339 | | Financing Coordination Fees (Capitalized) | $262,050 | | Property Management Fees | $174,529 | Principal Accounting Fees and Services Squar Milner LLP became the independent accounting firm in May 2018, with total fees billed at $292,639 in 2018, all pre-approved by the audit committee - Squar Milner LLP was appointed as the independent registered public accounting firm in May 2018, succeeding Ernst & Young LLP[488] - The audit committee pre-approves all auditing and permissible non-audit services to ensure auditor independence, with all services in 2017 and 2018 being pre-approved[491][492] Accounting Fees Billed | Fee Type | 2018 | 2017 | | :--- | :--- | :--- | | Audit Fees | $280,279 | $575,160 | | Tax Fees | $12,360 | $66,905 | | Total | $292,639 | $642,065 | PART IV Exhibits, Financial Statement Schedules This section provides an index to the consolidated financial statements, including Schedule III, and a comprehensive list of all exhibits filed with the Form 10-K - This section contains the index to the Consolidated Financial Statements (page F-1) and Schedule III - Real Estate Assets and Accumulated Depreciation and Amortization[494] - A comprehensive list of exhibits filed with the report is provided, including corporate governance documents, material contracts like the Advisory Agreement, and certifications[497][499] Form 10-K Summary The company has elected not to provide a summary of the Form 10-K - None[499]