Modiv(MDV) - 2020 Q4 - Annual Report

Part I Business The company is a self-managed REIT with a diversified commercial real estate portfolio and a focus on fintech/proptech investments - Modiv became a self-managed REIT on December 31, 2019, after merging with REIT I and acquiring its former sponsor, BrixInvest[17][26][52] - As of December 31, 2020, the portfolio comprised 40 commercial properties totaling over 2.3 million square feet of leasable space[17] - In 2021, the company sponsored a Special Purpose Acquisition Company (SPAC), Modiv Acquisition Corp (MACS), to acquire a business in the fintech and proptech sectors[18][19][20] - A 1:3 reverse stock split was effected on February 1, 2021, with all share and per-share data adjusted accordingly[27] - The Follow-on Offering was terminated on January 27, 2021, after selling 6.6 million Class C shares for $197.5 million and 63,711 Class S shares for $1.9 million[37][42] Completion of the Merger and the Self-Management Transaction The company became a self-managed REIT on December 31, 2019, through a merger with REIT I and the acquisition of its sponsor - On December 31, 2019, the company merged with REIT I, issuing 2,680,740.5 shares of Class C common stock to REIT I shareholders[46][47] - Concurrently, the company acquired its former sponsor, BrixInvest, by issuing 657,949.5 Class M OP Units, completing its self-management transition[26][49][52] Class M OP Unit Conversion Ratio Hurdles | Fiscal Year | AUM Target | AFFO Per Share Target ($) | Class M Conversion Ratio (to Class C OP Units) | | :--- | :--- | :--- | :--- | | Initial | N/A | N/A | 1:1.6667 | | 2021 | $860,000,000 | $1.770 | 1:1.9167 | | 2022 | $1,175,000,000 | $1.950 | 1:2.5000 | | 2023 | $1,551,000,000 | $2.100 | 1:3.0000 | Investment Objectives and Strategies The company's primary objectives are providing cash distributions, preserving capital, and achieving NAV appreciation - The company's primary investment objectives include providing attractive cash distributions, preserving stockholder capital, and realizing appreciation in Net Asset Value (NAV)[63][68] - The investment strategy focuses on a diversified portfolio of income-generating commercial real estate and potential acquisitions of other non-listed REITs[62][65][67] - A key strategic focus is on real estate-related fintech and proptech companies that are disrupting capital markets and investment management[69][71] General Acquisition and Investment Policies The company employs a discretionary acquisition approach guided by its board, focusing on tenant quality and long-term net leases - The company's charter limits total borrowing to 300% of net assets, but internal policy targets leverage not to exceed 55% of tangible asset value[86] - The company primarily acquires single-tenant properties with existing triple-net or double-net leases, typically with remaining lease terms of 5 to 15 years[83] - Due to the COVID-19 pandemic, the company did not acquire any operating properties in 2020, instead selling five properties for gross proceeds of $31.1 million to enhance liquidity[98][101] Risk Factors The company faces risks from its limited operating history, lack of a public market, and the impacts of the COVID-19 pandemic - The company has a limited operating history and is a "blind pool," creating reliance on management's discretion for future investments[117][120][125] - Risks related to the COVID-19 pandemic are significant, including adverse effects on tenants' financial conditions and business operations[119][190][266] - No public market exists for the company's stock, and liquidity depends on a share repurchase program with significant limitations[119][170] - Failure to maintain REIT qualification would result in corporate income tax, reducing cash available for distributions[119][126][231] - The company faces risks from its sponsorship of a SPAC (MACS), including the potential loss of its entire investment if a business combination fails[120][155] - The company's reliance on tenants for revenue creates risk from tenant bankruptcies or lease defaults, particularly for single-tenant properties[119][196][209] Unresolved Staff Comments The company has no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[272] Properties As of December 31, 2020, the company owned a diversified portfolio of 36 operating properties across 14 states Property Portfolio Summary (as of Dec 31, 2020) | Property Type | Number of Properties | Rentable Square Feet | % of Total Leased Square Feet | | :--- | :--- | :--- | :--- | | Retail | 11 | 220,553 | 10.4% | | Office | 14 | 853,963 | 40.1% | | Industrial | 11 | 1,053,779 | 49.5% | | Total | 36 | 2,128,295 | 100.0% | Lease Expiration Schedule by Annualized Base Rent (as of Dec 31, 2020) | Year of Expiration | % of Annualized Base Rent Expiring | | :--- | :--- | | 2021 | 3.1% | | 2022 | 12.2% | | 2023 | 10.9% | | 2024 | 3.8% | | 2025 | 24.8% | | Thereafter | 45.2% | - In addition to the main portfolio, the company holds an approximate 72.7% Tenant-in-Common (TIC) interest in a 91,740 sq ft office property in Santa Clara, CA[279] Legal Proceedings The company is not a party to a lawsuit filed against its Former Advisor by a former employee - A lawsuit was filed against the company's Former Advisor, BrixInvest, by a former employee alleging retaliatory termination; the company is not a party to this lawsuit[819] Mine Safety Disclosures This item is not applicable to the company - Not applicable[281] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities No public market exists for the company's stock, with liquidity provided through a limited Share Repurchase Program - No public market exists for the company's common stock; liquidity is primarily available through the Share Repurchase Program (SRP)[285][170] - The company plans to pay a potential 13th distribution for the year ending December 31, 2021, if AFFO exceeds regular distributions[300][402] Historical Estimated NAV per Share (Adjusted for 1:3 split) | Effective Date of Valuation | Estimated NAV per Share (Unaudited) | | :--- | :--- | | December 31, 2020 | $23.03 | | April 30, 2020 | $21.01 | | December 31, 2019 | $30.81 | | December 31, 2018 | $30.48 | Sources of Distribution Payments | Period | Total Distributions Declared | % from Net Rental Income | % from Offering Proceeds | | :--- | :--- | :--- | :--- | | 2020 | $11,701,828 | 100% | 0% | | 2019 | $10,585,519 | 100% | 0% | Share Repurchases (Q4 2020) | Month | Value of Repurchase Requests Received | Value of Shares Repurchased | | :--- | :--- | :--- | | October 2020 | $5,907,195 | $1,537,198 | | November 2020 | $6,169,549 | $1,491,664 | | December 2020 | $4,304,962 | $2,980,560 | Selected Financial Data This section provides a five-year summary of key financial data, reflecting the 2019 merger and 2020 pandemic-related impairments - The significant increase in net loss in 2020 was primarily due to impairment charges of $44.9 million on real estate, goodwill, and intangible assets[335][336] Selected Balance Sheet Data (in thousands) | As of December 31, | 2020 | 2019 | | :--- | :--- | :--- | | Real estate investments, net | $339,459 | $413,924 | | Total assets | $407,433 | $490,917 | | Total liabilities | $217,181 | $236,675 | | Total equity | $182,887 | $240,173 | Selected Operating Data (in thousands, except per share data) | For the Year Ended December 31, | 2020 | 2019 | | :--- | :--- | :--- | | Total revenues | $38,903 | $24,545 | | Net loss | $(49,142) | $(4,416) | | Net loss per common share | $(6.14) | $(0.88) | | Cash flows from operations | $5,577 | $4,749 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the transition to a self-managed REIT and the significant financial impact of the COVID-19 pandemic in 2020 - The company became self-managed on December 31, 2019, and its 2020 results reflect the full-year impact of this change and the REIT I merger[346][410] - The COVID-19 pandemic led to impairment charges of $44.9 million on real estate, goodwill, and intangible assets during 2020[420][421] - To manage liquidity, the company sold five properties for net proceeds of $13.5 million and refinanced three mortgages for net proceeds of $6.9 million[381][383] - In March 2021, the company entered into a new $22 million credit facility with Banc of California, increasing its credit line by $10 million[360][375] FFO and AFFO Reconciliation (Year Ended Dec 31, 2020) | Metric | Amount (in millions) | Per Share (Basic/Diluted) | | :--- | :--- | :--- | | Net Loss | $(49.1) | $(6.14) | | FFO | $8.1 | $0.88 (Diluted) | | AFFO | $10.1 | $1.26 (Basic) | Results of Operations Rental income grew due to the 2019 merger, but a net loss was driven by self-management costs and significant impairment charges - The increase in rental income was primarily due to the full-year contribution of 20 properties acquired through the merger with REIT I[412] - The company recorded impairment charges totaling $44.8 million in 2020 due to the negative impacts of the COVID-19 pandemic[420][421] - A net gain of $4.1 million was recognized from the sale of five properties during 2020 to support liquidity[410][425] Comparison of Operations (Years Ended Dec 31) | Item | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Rental Income | $38,903,430 | $24,544,958 | +58.5% | | General & Administrative | $10,399,194 | $2,711,573 | +283.5% | | Depreciation & Amortization | $17,592,253 | $9,848,130 | +78.6% | | Interest Expense | $11,460,747 | $7,382,610 | +55.2% | | Impairment Charges | $44,840,028 | $0 | N/A | | Net Loss | $(49,141,910) | $(4,415,992) | +1012.8% | Liquidity and Capital Resources The company managed liquidity through asset sales and debt refinancing, securing a new $22 million credit facility in March 2021 - In March 2021, the company entered into a new $22 million credit facility with Banc of California, replacing its previous $12 million facility[360][375] - During 2020, the company sold five properties for net proceeds of $13.5 million and refinanced three mortgages for net proceeds of $6.9 million[381][383] - The company's subsidiary received a $517,000 PPP loan in April 2020, which was fully forgiven in February 2021[377][378] - The company's leverage ratio was 47% as of December 31, 2020, within its board-approved maximum of 55%[365] Critical Accounting Policies Key policies include revenue recognition, valuation of real estate, impairment testing, and fair value measurement of derivatives - The company adopted Topic 842 (Leases) and uses a practical expedient to combine lease and non-lease components for revenue recognition[459][460] - Real estate acquisitions are valued at fair value, with the purchase price allocated to tangible and intangible assets based on significant management assumptions[477][478][483] - The company monitors for impairment indicators, which in 2020 led to significant impairment charges due to the COVID-19 pandemic[485][487] - The company uses derivative instruments (interest rate swaps) to hedge interest rate risk, which are recorded at fair value[637][782] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable as the company is a smaller reporting company - Not applicable as the Company is a smaller reporting company[495] Financial Statements and Supplementary Data This section directs the reader to the complete financial statements located at page F-1 of the report - The full financial statements and supplementary data are available starting at page F-1 of the report[496] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company for the reporting period - Not applicable[497] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[500] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective[502] - As an emerging growth company, the report does not include an auditor attestation on internal control over financial reporting[503] Other Information The company entered into a new $22 million credit facility with Banc of California in March 2021 - On March 29, 2021, the company secured a new $22 million credit facility with Banc of California, maturing on March 30, 2023[507] - The new facility provides a $17 million revolving line for real estate acquisitions and a $5 million line for working capital[507] - The interest rate is variable at prime + 1.00% with a floor of 4.75%, and the facility is secured by substantially all company assets[507][508] Part III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2021 annual meeting of stockholders[511] Executive Compensation Information is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2021 annual meeting of stockholders[512] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2021 annual meeting of stockholders[513] Certain Relationships and Related Transactions and Director Independence Information is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2021 annual meeting of stockholders[514] Principal Accounting Fees and Services Information is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2021 annual meeting of stockholders[515] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the report, including key corporate and financial agreements - This section lists all exhibits filed with the report, including key agreements such as the Merger Agreement and Contribution Agreement[524][526] - Financial Statement Schedule III - Real Estate Assets and Accumulated Depreciation and Amortization is included in the report[519] Form 10-K Summary This item is not applicable to the company - None[529] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm The independent auditor issued an unqualified opinion on the 2020 and 2019 consolidated financial statements - Baker Tilly US, LLP issued an unqualified opinion on the consolidated financial statements, stating they are presented fairly in conformity with U.S. GAAP[536] - The company is not required to have an audit of its internal control over financial reporting, and the auditors expressed no opinion on its effectiveness[538] Consolidated Financial Statements The financial statements show a decrease in assets and a significant net loss in 2020 driven by large impairment charges Consolidated Balance Sheet Highlights (as of Dec 31) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Total Real Estate Investments, Net | $364.0 | $413.9 | | Goodwill, Net | $17.3 | $50.6 | | Total Assets | $407.4 | $490.9 | | Total Mortgage Notes Payable, Net | $185.0 | $194.0 | | Total Liabilities | $217.2 | $236.7 | | Total Equity | $182.9 | $240.2 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Rental Income | $38.9 | $24.5 | | Total Expenses | $91.5 | $29.6 | | Impairment Charges (included in expenses) | $44.8 | $0.0 | | Gain on Real Estate Investments, Net | $4.1 | $0.0 | | Net Loss | $(49.1) | $(4.4) | Consolidated Cash Flow Summary (Year Ended Dec 31) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $5.6 | $4.7 | | Net Cash from (used in) Investing Activities | $24.8 | $(29.6) | | Net Cash (used in) from Financing Activities | $(28.9) | $23.0 | Notes to Consolidated Financial Statements Note 3: Merger and Self-Management Transaction This note details the accounting for the 2019 merger and self-management transaction, including subsequent goodwill impairment - The merger with REIT I was accounted for as an asset acquisition with a total purchase price of $81.7 million[672][676] - The Self-Management Transaction was a business combination resulting in the recognition of $50.6 million in goodwill and $7.7 million in intangible assets[691][692][695] - Due to the COVID-19 pandemic, the company recorded impairment charges in Q1 2020, reducing goodwill by $33.3 million and intangible assets by $1.3 million[697][703] Note 4: Real Estate Investments This note details the real estate portfolio, including $10.3 million in 2020 impairment charges and $31.1 million in property sales - In 2020, the company sold five properties for a total contract price of $31.1 million, realizing a net gain of $4.1 million[720] - As of December 31, 2020, four retail properties were classified as held for sale[741] - Future minimum contractual rent payments due under noncancelable operating leases total $151.3 million as of December 31, 2020[733] Real Estate Impairment Charges (Year Ended Dec 31, 2020) | Property | Location | Impairment Charge | | :--- | :--- | :--- | | 24 Hour Fitness | Las Vegas, NV | $5,664,517 | | Dana | Cedar Park, TX | $2,184,395 | | Dinan Cars | Morgan Hill, CA | $1,308,156 | | Other (3 properties) | Various | $1,110,557 | | Total | | $10,267,625 | Note 7: Debt As of year-end 2020, the company had total debt of $182.9 million and was in compliance with all debt covenants - In August 2020, the company amended its unsecured credit facility, extending the maturity of the remaining $6.0 million balance to October 2021[760] - The company was in compliance with all financial loan covenants as of December 31, 2020[772] - In March 2021, the company entered into a new $22 million credit facility, which was used to repay and replace the existing $6 million facility[765] Debt Summary (as of Dec 31, 2020) | Debt Instrument | Principal Balance | | :--- | :--- | | Mortgage Notes Payable | $176,948,438 | | Unsecured Credit Facility | $6,000,000 | | Economic Relief Note Payable (PPP) | $517,000 | | Total Principal | $183,465,438 | Note 11: Subsequent Events The company reported numerous significant events post-year-end, including asset sales, refinancing, and sponsoring a SPAC - In Q1 2021, the company sold three properties held for sale for total net proceeds of $10.6 million[833][834][835] - On March 5, 2021, the company refinanced four mortgage notes with an aggregate principal of $10.1 million, replacing them with new loans totaling $12.1 million[836] - The company is sponsoring a SPAC (MACS) and deposited $4.5 million in escrow to purchase warrants upon the SPAC's IPO[847][848] - On January 25, 2021, the company granted 360,000 Class R OP Units to employees as incentive compensation, which vest in March 2024[845]