Modiv(MDV) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for RW Holdings NNN REIT, Inc. for the quarterly period ended June 30, 2019 It includes the balance sheets as of June 30, 2019, and December 31, 2018, statements of operations, stockholders' equity, and cash flows for the three and six months ended June 30, 2019 and 2018, along with detailed notes to these financial statements Condensed Consolidated Balance Sheets The balance sheet shows a slight decrease in total assets from $252.4 million at year-end 2018 to $250.1 million as of June 30, 2019 This was primarily driven by a reduction in total liabilities from $143.3 million to $123.5 million, while total stockholders' equity increased from $103.1 million to $120.8 million over the same period Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2019 ($) | December 31, 2018 ($) | | :--- | :--- | :--- | | Total real estate investments, net | 233,852,427 | 238,924,160 | | Cash and cash equivalents | 10,635,254 | 5,252,686 | | Total assets | 250,107,646 | 252,425,902 | | Mortgage notes payable, net | 115,032,981 | 122,709,308 | | Total liabilities | 123,532,240 | 143,332,182 | | Total stockholders' equity | 120,812,608 | 103,092,769 | Condensed Consolidated Statements of Operations The company reported a net loss of $1.14 million for the three months ended June 30, 2019, compared to a net loss of $0.21 million for the same period in 2018 For the six-month period, the net loss was $2.05 million in 2019 versus $0.25 million in 2018 The increased loss was driven by higher operating expenses, particularly depreciation and interest expense, which outpaced the growth in rental income Statement of Operations Highlights (Unaudited) | Metric | Three Months Ended June 30, 2019 ($) | Three Months Ended June 30, 2018 ($) | Six Months Ended June 30, 2019 ($) | Six Months Ended June 30, 2018 ($) | | :--- | :--- | :--- | :--- | :--- | | Rental income | 5,896,266 | 4,383,966 | 11,781,711 | 7,841,944 | | Total expenses | 7,246,115 | 4,931,884 | 14,212,136 | 8,843,256 | | Net loss | (1,140,016) | (211,129) | (2,053,174) | (246,454) | | Net loss per share | (0.08) | (0.02) | (0.14) | (0.02) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased from $103.1 million at the end of 2018 to $120.8 million at June 30, 2019 The increase was primarily due to the issuance of common stock, which added $30.0 million in capital, partially offset by a net loss of $2.1 million, distributions declared of $5.0 million, and common stock repurchases of $4.4 million during the first six months of 2019 Changes in Stockholders' Equity (Six Months Ended June 30, 2019) | Description | Amount ($) | | :--- | :--- | | Balance, December 31, 2018 | 103,092,769 | | Issuance of common stock | 30,005,491 | | Repurchase of common stock | (4,443,653) | | Distributions declared | (4,993,962) | | Net loss | (2,053,174) | | Balance, June 30, 2019 | 120,812,608 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2019, net cash provided by operating activities was $2.9 million Net cash used in investing activities was $3.5 million, primarily for tenant improvements Net cash provided by financing activities was $2.6 million, reflecting proceeds from stock issuance offset by debt repayments and stock repurchases This resulted in a net increase in cash of $2.0 million Cash Flow Summary (Six Months Ended) | Cash Flow Activity | June 30, 2019 ($) | June 30, 2018 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | 2,886,131 | 1,318,015 | | Net cash used in investing activities | (3,487,699) | (33,032,691) | | Net cash provided by financing activities | 2,636,940 | 31,813,510 | | Net increase in cash | 2,035,372 | 98,834 | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's business, accounting policies, and financial statement components Key disclosures include the company's business organization and offerings, the adoption of new accounting standards (Topic 842 for leases), details on the real estate portfolio, debt structure, related-party transactions with the Advisor and Sponsor, and commitments and contingencies, including an ongoing SEC investigation - The company primarily invests in single-tenant income-producing properties under long-term net leases As of June 30, 2019, it held 24 operating properties, a parcel of land, a 72.7% TIC interest in an office property, and a 4.8% interest in affiliated REIT I[31][39] - A special committee of the board is evaluating a potential transaction with the affiliated Rich Uncles Real Estate Investment Trust I (REIT I) and has entered an exclusive due diligence process[40][42] - Effective January 1, 2019, the company adopted the new lease accounting standard, Topic 842, which did not have a material impact on the timing or pattern of revenue recognition as the company elected to apply practical expedients[71][72] - The company is subject to an ongoing, non-public SEC investigation related to the advertising and sale of securities and compliance with broker-dealer regulations The company is cooperating with the SEC[154] - Subsequent to the quarter end, on August 9, 2019, the Advisory Agreement was amended to remove the subordinated participation fee and was renewed through December 31, 2019[160] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, financial condition, and strategic initiatives The increase in revenue for Q2 and H1 2019 compared to 2018 is attributed to properties acquired in 2018 However, higher expenses, including depreciation and interest, led to a larger net loss The company details its liquidity sources, primarily from stock offerings and debt, and its investment strategy focused on single-tenant net-leased properties Management also addresses market conditions, noting a competitive environment and economic uncertainties - The company considers itself a perpetual-life investment vehicle with no finite liquidation date, intending to conduct continuous offerings of its common stock[165] - The company's investment strategy is to acquire single-tenant retail, office, and industrial real estate leased to creditworthy tenants on long-term leases, with an ideal portfolio mix of 40% office, 40% industrial, and 20% retail[183] Comparison of Results of Operations (Six Months Ended June 30) | Metric | 2019 ($) | 2018 ($) | Change (%) | | :--- | :--- | :--- | :--- | | Rental Income | 11,781,711 | 7,841,944 | +50.2% | | Total Expenses | 14,212,136 | 8,843,256 | +60.7% | | Net Loss | (2,053,174) | (246,454) | +733.1% | - Distributions for 2018 and the first half of 2019 were fully funded from net rental income received, with no use of offering proceeds or fee waivers/deferrals from the Advisor[225] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable to the company for this reporting period The company states that this disclosure is not required because it qualifies as a Smaller Reporting Company - The company is a Smaller Reporting Company and is therefore not required to provide Quantitative and Qualitative Disclosures About Market Risk[246] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2019 There were no material changes in internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[248] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[249] PART II - OTHER INFORMATION Legal Proceedings This section incorporates by reference the disclosure from Note 9 of the financial statements, which details an ongoing, non-public investigation by the SEC related to the company's securities offerings and compliance with broker-dealer regulations - The company is subject to an ongoing SEC investigation concerning its securities offerings and broker-dealer regulations The company is cooperating with the inquiry[154][251] Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes have occurred to the risk factors disclosed in the company's 2018 Annual Report on Form 10-K[252] Unregistered Sales of Equity Securities and Use of Proceeds This section details the issuance of unregistered equity securities and the use of proceeds from registered sales During Q2 2019, the company issued unregistered Class C shares to independent directors and Class S shares to non-U.S. persons Net proceeds from all offerings through June 30, 2019, were approximately $164.1 million, which were substantially used for real estate investments The company also provides a table detailing its share repurchase activity for the quarter - During Q2 2019, the company issued 33,931 shares of Class S common stock for gross proceeds of $344,745 in unregistered sales under Regulation S[254] - Through June 30, 2019, net offering proceeds of approximately $164.1 million were used to make approximately $251.7 million of investments in real estate, with the difference funded by debt[259] Class C Common Stock Repurchases (Q2 2019) | Month | Total Shares Repurchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | April 2019 | 118,460 | 9.97 | | May 2019 | 49,822 | 9.93 | | June 2019 | 54,279 | 9.98 | | Total | 222,561 | N/A | Other Information This section discloses key events that occurred after the quarter-end On August 7, 2019, the board amended the share repurchase program to require a 90-day holding period for Class C shares and approved a new indemnification agreement for officers and directors On August 9, 2019, the advisory agreement was amended to remove the subordinated participation fee and was renewed through December 31, 2019 - On August 7, 2019, the board amended the Class C share repurchase program to require a 90-day holding period before shares are eligible for repurchase[266] - On August 9, 2019, the Advisory Agreement was amended to eliminate the subordinated participation fee and was renewed until December 31, 2019[268] Exhibits This section provides an index of the exhibits filed with or incorporated by reference into the quarterly report Key new exhibits include an amendment to the advisory agreement and the form of the director and officer indemnification agreement - The report includes several exhibits, notably Amendment No. 2 to the Advisory Agreement and the Form of Director and Officer Indemnification Agreement, along with standard certifications[273]