Modiv(MDV) - 2020 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited Q1 2020 financial statements show a $48.8 million net loss, driven by $43.7 million in impairment charges, reflecting COVID-19 impact and the REIT I merger Condensed Consolidated Balance Sheets Total assets decreased to $442.6 million from $490.9 million by March 31, 2020, primarily due to goodwill and real estate impairments, leading to a $48.9 million equity decline Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total real estate investments, net | $401,037 | $413,924 | ($12,887) | | Goodwill, net | $17,321 | $50,588 | ($33,267) | | Total assets | $442,632 | $490,917 | ($48,285) | | Total liabilities | $241,661 | $236,675 | $4,986 | | Total equity | $191,295 | $240,173 | ($48,878) | Condensed Consolidated Statements of Operations Q1 2020 net loss surged to $48.8 million from $0.9 million in 2019, primarily due to $43.7 million in COVID-19 related impairment charges on assets Key Operating Results (Three Months Ended March 31, in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Rental income | $11,054,409 | $5,885,445 | | Impairment of real estate | $9,157,068 | $0 | | Impairment of goodwill & intangibles | $34,572,403 | $0 | | Reserve for loan guarantee | $3,129,290 | $0 | | Net loss | ($48,823,286) | ($913,158) | | Net loss per share | ($2.05) | ($0.07) | Condensed Consolidated Statements of Cash Flows Q1 2020 saw $1.9 million net cash from operations, offset by $3.4 million used in investing and $1.0 million in financing, resulting in a $2.5 million net cash decrease Cash Flow Summary (Three Months Ended March 31, 2020, in thousands) | Activity | Amount | | :--- | :--- | | Net cash provided by operating activities | $1,947,505 | | Net cash used in investing activities | ($3,446,225) | | Net cash used in financing activities | ($1,002,536) | | Net decrease in cash | ($2,501,256) | - Financing activities included $6.9 million in proceeds from stock issuance, $4.3 million in borrowings from the unsecured credit facility, and $4.0 million from mortgage notes. These inflows were offset by $9.1 million in common stock repurchases, $3.8 million in short-term note repayments, and $1.4 million in distributions paid[27] Notes to Condensed Consolidated Financial Statements Notes detail the company's self-management transition, significant Q1 2020 impairment charges due to COVID-19, debt structure, and subsequent NAV and distribution cuts Note 1. Business and Organization The company, a self-managed REIT with 45 properties, suspended offerings and cut NAV to $7.00/share due to COVID-19, resuming sales at the new price - On December 31, 2019, the Company completed a merger with REIT I and a self-management transaction, becoming self-managed[35] - As of March 31, 2020, the Company's portfolio included 45 operating properties (20 retail, 16 office, 9 industrial), one parcel of land, and a 72.7% TIC interest in an office property[44] - Due to COVID-19 impacts, the board suspended primary offerings on May 7, 2020, and on May 20, 2020, approved an updated NAV per share of $7.00, down from $10.27. Offerings resumed on June 1, 2020, at the new price[42] Note 3. Merger and Self-Management Transaction The December 2019 merger and self-management led to $50.6 million goodwill and $7.7 million intangibles, subsequently impaired by $34.6 million in Q1 2020 due to COVID-19 - The merger with REIT I on December 31, 2019 was accounted for as an asset acquisition, adding 20 properties to the portfolio[93][94] - The self-management transaction on December 31, 2019 was accounted for as a business combination, resulting in the recognition of $50.6 million in goodwill and $7.7 million in intangible assets[99][112][117] - In Q1 2020, due to the COVID-19 pandemic's impact, the Company recorded impairment charges of $33,267,143 against goodwill and $1,305,260 against intangible assets (investor list)[120][125] Note 4. Real Estate Investments, Net The 45-property portfolio incurred $9.2 million in Q1 2020 impairment charges on three properties, primarily due to tenant bankruptcy and COVID-19 impacts Real Estate Impairment Charges (Q1 2020, in thousands) | Property | Location | Amount | | :--- | :--- | :--- | | Dana | Cedar Park, TX | $2,184,395 | | 24 Hour Fitness | Las Vegas, NV | $5,664,517 | | Dinan Cars | Morgan Hill, CA | $1,308,156 | | Total | | $9,157,068 | - The impairment of the 24 Hour Fitness property was triggered by the tenant's closure due to COVID-19, non-payment of rent, and subsequent lease rejection in bankruptcy proceedings in June 2020[133] - As of March 31, 2020, future minimum contractual rent payments under non-cancellable operating leases totaled $186.4 million[143] Note 7. Debt Total debt was $211.5 million as of March 31, 2020, with compliance concerns for a 24 Hour Fitness property mortgage due to tenant bankruptcy Total Debt Principal as of March 31, 2020 (in thousands) | Debt Type | Principal Amount | | :--- | :--- | | Mortgage Notes Payable | $198,429,236 | | Unsecured Credit Facility | $12,000,000 | | Short-term Notes Payable | $1,024,750 | | Total | $211,453,986 | - The Company believes it is no longer in compliance with the mortgage covenants for the 24 Hour Fitness property following the tenant's lease rejection in its Chapter 11 bankruptcy proceeding[173] - On March 2, 2020, the Company borrowed $4.0 million from its Chairman, Ray Wirta, secured by two Chevron properties at an 8% interest rate[185] Note 11. Subsequent Events Post-Q1, the company cut NAV to $7.00/share and distributions by 50% due to COVID-19, while collecting over 90% of Q2 rents despite a tenant bankruptcy - On May 22, 2020, the Company announced a new estimated NAV per share of $7.00, a significant decrease from the previous $10.27, reflecting the impact of the COVID-19 pandemic[227] - The annualized distribution rate was reduced to $0.35 per share (5.0% yield on the new NAV) from $0.70 per share, effective May 22, 2020[223] - A subsidiary received a $517,000 loan under the Paycheck Protection Program (PPP) on April 20, 2020[231] - The Company has collected over 90% of rents due for the second quarter of 2020, but one tenant, 24 Hour Fitness, formally rejected its lease in a Chapter 11 bankruptcy proceeding[230] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2020 rental income growth to portfolio expansion, but a $48.8 million net loss resulted from COVID-19 related impairments and increased G&A post-self-management Overview and Strategy The company, a self-managed UPREIT, focuses on acquiring single-tenant, net-leased properties, with a 97% occupancy rate and 6.3-year weighted average lease term as of Q1 2020 - The Company became self-managed on December 31, 2019, after merging with REIT I and internalizing its external advisor, BrixInvest[240] - The portfolio as of March 31, 2020, included 45 operating properties with a 97% occupancy rate and a weighted average remaining lease term of approximately 6.3 years[252][253] - The Company operates as a perpetual-life UPREIT, intending to conduct continuous offerings and hold assets long-term[236][244] Liquidity and Capital Resources COVID-19 severely impacted capital raising, decreasing proceeds by 42% and increasing share repurchases, while a major tenant's bankruptcy poses foreclosure risk despite 90% Q2 rent collection - The COVID-19 pandemic severely impacted capital raising, with a 42% decrease in proceeds from January-April 2020 vs. the same period in 2019. Share repurchases increased from $3.4 million to $9.1 million over the same period[268] - The company's subsidiary, which owns the 24 Hour Fitness property, faces a potential foreclosure after the tenant rejected the lease in bankruptcy. A loan guarantee of $3.1 million was reserved for this risk[264][266] - On March 27, 2020, the board approved an increase in the maximum leverage from 50% to 55% of tangible asset value. As of March 31, 2020, the leverage ratio was 48%[256] Results of Operations Q1 2020 rental income grew 88% to $11.1 million, but a $48.8 million net loss was driven by $43.7 million in COVID-19 related impairments and a 374% rise in G&A expenses Comparison of Operating Results (Three Months Ended March 31, in thousands) | Item | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Rental Income | $11,054,409 | $5,885,445 | +88% | | General & Administrative | $2,555,005 | $539,505 | +374% | | Depreciation & Amortization | $4,635,524 | $2,391,496 | +94% | | Interest Expense | $3,904,656 | $2,160,350 | +81% | | Impairment Charges (Total) | $43,729,471 | $0 | N/A | - The increase in rental income is primarily due to the 20 properties acquired in the REIT I merger and one other 2019 acquisition[279] - The increase in G&A expenses reflects the costs of self-management, including personnel, occupancy, and technology, following the termination of the Advisory Agreement on Dec 31, 2019[281] Distributions Q1 2020 distributions of $4.2 million were covered by operating cash flow, but the annualized rate was subsequently halved to $0.35 per share due to COVID-19 impacts Distributions Declared vs. Cash Flow from Operations (in thousands) | Period | Distributions Declared | Cash Flows Provided by Operating Activities | | :--- | :--- | :--- | | Q1 2020 | $4,189,102 | $1,947,505 | | Q1 2019 | $2,388,694 | $773,736 | - Subsequent to the quarter end, the annualized distribution rate was cut by 50% to $0.35 per share, effective May 22, 2020[223] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the Company is a smaller reporting company - The company is a smaller reporting company and is not required to provide this disclosure[319] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2020[321] - No material changes in internal control over financial reporting occurred during the first quarter of 2020[322] PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to any material legal proceedings, but notes a lawsuit against its Former Advisor by a former employee - A lawsuit was filed against the Company's Former Advisor by a former employee in September 2019. The Company itself is not a party to this lawsuit[220][323] Item 1A. Risk Factors COVID-19 poses material risks to the business, including tenant financial health, rent collection, capital access, and compliance with financial covenants - The COVID-19 outbreak may continue to adversely affect the business, tenants' financial condition, and profitability, especially for retail properties, due to closures and reduced customer traffic[326] - The pandemic is negatively impacting the Company's ability to collect rent, with many tenants requesting deferrals or abatements, which could impact the ability to pay distributions[330][332] - The pandemic has created difficulty in accessing debt and equity capital on attractive terms and could negatively impact compliance with financial covenants[331] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued unregistered shares to board members and through its DRIP, raised $188.9 million from offerings, and repurchased 895,216 shares in Q1 2020 - Through March 31, 2020, the Company sold an aggregate of 18.8 million shares of Class C common stock in its registered offerings for gross proceeds of $188.9 million[337] - During Q1 2020, the Company repurchased 895,216 shares of Class C common stock for an average price of approximately $10.16 per share[346] Item 6. Exhibits This section indexes all exhibits filed with the Form 10-Q, including merger agreements, corporate documents, and officer certifications - The Exhibit Index lists key corporate and transactional documents, including the Agreement and Plan of Merger (2.1), Contribution Agreement (2.2), Amended and Restated Share Repurchase Programs (4.4, 4.6), and officer certifications (31.1, 31.2, 32.1)[350][353]