CIM REAL ESTATE FINANCE TRUST, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2019
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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CIM REAL ESTATE FINANCE TRUST, INC.
(Exact name of registrant as specified in its charter)
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Maryland
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27-3148022
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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2398 East Camelback Road, 4
th
Floor
Phoenix, Arizona 85016
(Address of principal executive offices; zip code)
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(602) 778-8700
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share
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Title of Each Class
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Trading Symbol
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Name of Each Exchange on Which Registered
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None
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None
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None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o
No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
x
No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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There is no established market for the registrant’s shares of common stock. As of June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, there were approximately
311.1 million
shares of common stock held by non-affiliates, for an aggregate market value of
$2.7 billion
, assuming a market value as of that date of $8.65 per share, the most recent estimated per share net asset value of the registrant’s common stock established by the registrant’s board of directors in effect as of that date. Effective March 30, 2020, the estimated per share net asset value of the registrant’s common stock as of December 31, 2019 is
$7.77
per share.
As of
March 16, 2020
, there were approximately
311.2 million
shares of common stock, par value per share of $0.01, of CIM Real Estate Finance Trust, Inc. outstanding.
Documents Incorporated by Reference:
The Registrant incorporates by reference portions of the CIM Real Estate Finance, Inc. Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders (into Items 10, 11, 12, 13 and 14 of Part III).
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TABLE OF CONTENTS
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PART I
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ITEM 1.
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ITEM 1A.
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ITEM 1B.
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ITEM 2.
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ITEM 3.
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ITEM 4.
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PART II
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ITEM 5.
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ITEM 6.
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ITEM 7.
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ITEM 7A.
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ITEM 8.
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ITEM 9.
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ITEM 9A.
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ITEM 9B.
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PART III
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ITEM 10.
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ITEM 11.
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ITEM 12.
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ITEM 13.
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ITEM 14.
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PART IV
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ITEM 15.
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ITEM 16.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K of CIM Real Estate Finance Trust, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution readers not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date this Annual Report on Form 10-K is filed with the U.S. Securities and Exchange Commission (the “SEC”). Additionally, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements:
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We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
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We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties.
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Our properties, intangible assets and other assets may be subject to impairment charges.
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We could be subject to unexpected costs or unexpected liabilities that may arise from dispositions.
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We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties, and we may suffer delays or be unable to acquire, dispose of, or lease properties on advantageous terms.
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We are subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally.
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We have substantial indebtedness, which may affect our ability to pay distributions and expose us to interest rate fluctuation risk and the risk of default under our debt obligations.
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We are subject to risks associated with the incurrence of additional secured or unsecured debt.
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We may not be able to maintain profitability.
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We may not generate cash flows sufficient to pay our distributions to stockholders or meet our debt service obligations.
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We may be affected by risks resulting from losses in excess of insured limits.
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We may fail to remain qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.
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We may be unable to successfully reposition our portfolio, ultimately becoming a mortgage REIT, or list our shares on a national securities exchange, in the timeframe we expect or at all.
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All forward-looking statements should be read in light of the risks identified in Part I, Item 1A. Risk Factors within this Annual Report on Form 10-K.
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Definitions
We use certain defined terms throughout this Annual Report on Form 10-K that have the following meanings:
The phrase “annualized rental income” refers to the straight-line rental revenue under our leases on operating properties owned as of the respective reporting date, which includes the effect of rent escalations and any tenant concessions, such as free rent, and excludes any contingent rent, such as percentage rent. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance.
Under a “net lease,” the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. The tenant generally agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. There are various forms of net leases, most typically classified as either triple-net or double-net. Triple-net leases typically require the tenant to pay all expenses associated with the property (
e.g.
, real estate taxes, insurance, maintenance and repairs, including roof, structure and parking lot). Double-net leases typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property (
e.g.
, real estate taxes, insurance and maintenance).
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PART I
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ITEM 1.
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BUSINESS
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Our Company
CIM Real Estate Finance Trust, Inc. (formerly known as Cole Credit Property Trust IV, Inc.) (the “Company,” “we,” “our” or “us”) is a non-exchange traded REIT formed as a Maryland corporation on July 27, 2010 that elected to be taxed and currently qualifies as a REIT for federal income tax purposes beginning with its taxable year ended December 31, 2012.
Historically, we have primarily acquired core commercial real estate assets principally consisting of necessity retail properties located throughout the United States. We use the term “core” to describe existing properties currently operating and generating income that are leased to creditworthy tenants under long-term net leases and are strategically located. In April of 2019, we announced our intention to pursue a more diversified investment strategy, ultimately transitioning to a mortgage REIT, by balancing our existing portfolio of core commercial real estate assets with future investments in a portfolio of commercial mortgage loans and other real estate-related credit investments that we would originate, acquire, finance and manage.
As of
December 31, 2019
, we owned
396
properties, comprising
19.1 million
rentable square feet of commercial space located in
43
states. As of
December 31, 2019
, the rentable space at these properties was
94.6%
leased, including month-to-month agreements, if any. In addition, our loan portfolio consisted of
12
loans with a net book value of
$301.6 million
as of
December 31, 2019
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Substantially all of our business is conducted through CIM Real Estate Finance Operating Partnership, LP (formerly known as Cole Operating Partnership IV, LP), a Delaware limited partnership (“CMFT OP”), of which we are the sole general partner and own, directly or indirectly,
100%
of the partnership interests, and its subsidiaries.
We commenced our initial public offering in January of 2012 on a “best efforts” basis of up to
$2.975 billion
in shares of common stock (the “Offering”), which offered up to approximately
292.3 million
shares of our common stock at a price of
$10.00
per share, and up to approximately
5.5 million
additional shares allocated to our distribution reinvestment plan (the “DRIP”) under which our stockholders could have elected to have distributions reinvested in additional shares of common stock at a price of
$9.50
per share. At the completion of the Offering in April of 2014, a total of approximately 297.4 million shares of common stock had been issued, including approximately
292.3
million shares of common stock sold to the public pursuant to the primary portion of the Offering and approximately
5.1 million
shares of common stock sold pursuant to the DRIP portion of the Offering.
In addition, we registered $247.0 million in shares of common stock under the DRIP (the “Initial DRIP Offering”) on December 19, 2013. We ceased issuing shares under the Initial DRIP Offering effective as of June 30, 2016. At the completion of the Initial DRIP Offering, a total of approximately
$241.7 million
of common stock had been issued. The remaining
$5.3 million
of unsold shares from the Initial DRIP Offering were deregistered.
We registered an additional
$600.0 million
of shares of common stock under the DRIP (the “Secondary DRIP Offering,” and together with the Initial DRIP Offering, the “DRIP Offerings,” and the DRIP Offerings collectively with the Offering, the “Offerings”), on August 2, 2016. We have issued and will continue to issue shares of common stock under the Secondary DRIP Offering.
As of December 31, 2019, we had issued approximately 358.2 million shares of our common stock in the Offerings, including 59.9 million shares issued in the DRIP Offerings, for gross offering proceeds of $3.5 billion before organization and offering costs, selling commissions and dealer manager fees of $306.0 million.
Our Manager, Investment Advisor and CIM
We are externally managed by CIM Real Estate Finance Management, LLC (formerly known as Cole REIT Management IV, LLC), a Delaware limited liability company (“CMFT Management”), which is an affiliate of CIM Group, LLC (“CIM”). CIM is a community-focused real estate and infrastructure owner, operator, developer and lender with multi-disciplinary expertise, including acquisitions, management, development, leasing, research and capital markets. CIM is headquartered in Los Angeles, California and has offices in Oakland, California; Bethesda, Maryland; Dallas, Texas; New York, New York; Chicago, Illinois; and Phoenix, Arizona.
We have no paid employees and rely upon our manager pursuant to our Amended and Restated Management Agreement dated August 20, 2019 (the “Management Agreement”), as well as its affiliates, including CCO Capital, LLC (“CCO Capital”),
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our dealer manager, CREI Advisors, LLC (“CREI Advisors”), our property manager, and Capital IC Management, LLC (the “Investment Advisor”), our investment advisor with respect to investments in securities, to provide substantially all of our day-to-day management. Our manager, CCO Capital, and CREI Advisors are owned directly or indirectly by CCO Group, LLC. Collectively, CCO Group, LLC, CCO Capital and CREI Advisors serve as our sponsor, which we refer to as our “sponsor” or “CCO Group.” Our Management Agreement is for a three-year term and renews automatically each year thereafter for an additional one-year period unless terminated by our board of directors (our “Board”).
On December 6, 2019, CMFT Securities Investments, LLC (“CMFT Securities”), which is a wholly-owned subsidiary of the Company, entered into an investment advisory and management agreement (the “Investment Advisory and Management Agreement”) with our Investment Advisor. CMFT Securities was formed for the purpose of holding any investments in securities made by the Company. The Investment Advisor, a wholly-owned subsidiary of CIM, is registered as an investment advisor with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Pursuant to the Investment Advisory and Management Agreement, the Investment Advisor will manage the day-to-day business affairs of CMFT Securities and its investments in corporate credit and real estate-related securities, subject to the supervision of the Board. The Investment Advisory and Management Agreement shall continue for a term of three years and shall be deemed renewed automatically each year thereafter for an additional one-year period unless otherwise terminated pursuant to the Investment Advisory and Management Agreement.
In addition, on December 6, 2019, the Investment Advisor entered into a sub-advisory agreement (the “Sub-Advisory Agreement”) with OFS Capital Management, LLC, a Delaware limited liability company (the “Sub-Advisor”), to act as an investment sub-advisor to CMFT Securities. The Sub-Advisor is registered as an investment adviser under the Advisers Act and is an affiliate of the Investment Advisor. The Sub-Advisor is responsible for providing investment management services with respect to the corporate credit-related securities held by CMFT Securities. Either party may terminate the Sub-Advisory Agreement with 30 days’ prior written notice to the other party.
Net Asset Value
Our Board establishes an estimated per share net asset value (“NAV”) of the Company’s common stock for purposes of assisting broker-dealers in meeting their customer account statement reporting obligations under Financial Industry Regulatory Authority (“FINRA”) Rule 2231. The following table summarizes the estimated per share NAV of our common stock for the periods indicated below:
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Valuation Date
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Period Commencing
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Period Ending
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NAV per Share
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August 31, 2015
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October 1, 2015
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November 13, 2016
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$
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9.70
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September 30, 2016
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November 14, 2016
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March 27, 2017
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$
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9.92
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December 31, 2016
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March 28, 2017
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March 28, 2018
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$
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10.08
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December 31, 2017
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March 29, 2018
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March 19, 2019
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$
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9.37
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December 31, 2018
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March 26, 2019
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March 29, 2020
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$
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8.65
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December 31, 2019
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March 30, 2020
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—
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$
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7.77
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For participants in the DRIP, distributions are reinvested in shares of our common stock under the DRIP at the most recent estimated per share NAV as determined by our Board. Commencing on
March 30, 2020
, following our Board’s determination of an updated estimated per share NAV, distributions will be reinvested in shares of our common stock under the DRIP at a price of
$7.77
per share, the estimated per share NAV as of
December 31, 2019
, as determined by our Board. Additionally,
$7.77
per share will serve as the most recent estimated per share NAV for purposes of the share redemption program. See Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Share Redemption Program in this Annual Report on Form 10-K for a discussion of our share redemption program.
Investment Strategy and Objectives
Our investment strategy is to diversify our investments and capital structure, ultimately transitioning to a mortgage REIT, by balancing our existing core portfolio of necessity commercial real estate assets, net leased under long-term leases to creditworthy tenants and which provide current operating cash flows, with real estate related credit investments, including commercial real estate mortgage loans and other real estate related debt and securities investments in which our manager and its affiliates have expertise.
In order to execute on this strategy, we intend, subject to market conditions, to sell a substantial portion of our anchored shopping centers and certain single tenant properties and redeploy the proceeds from those sales into the origination, participation in, and acquisition of our targeted credit investments. Assuming the successful repositioning of our portfolio, we
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then intend to pursue a listing of our common stock on a national securities exchange. We cannot make assurances that we will successfully reposition our portfolio as a mortgage REIT or list our common stock on a national securities exchange within a particular timeframe or at all.
We believe a diversified investment portfolio of net lease real estate assets and other credit investments, combined with our manager’s ability to actively manage those investments, will enable us to generate competitive risk-adjusted returns for our stockholders over time and provide reasonable stable, current income for stockholders through the payment of cash distributions. We expect to adapt our investment strategy over time in order to respond to evolving market conditions and to capitalize on investment opportunities that may arise at different points in the economic and real estate investment cycle.
Investment Guidelines
Our manager and our Investment Advisor are required to manage our business in accordance with certain investment guidelines that were adopted by the valuation, compensation and affiliate transactions committee of our Board, which include:
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not making investments that would cause us to fail to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”);
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not making any investment that would cause us or any of our subsidiaries to be regulated as an investment company under the Investment Company Act;
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our manager seeking to invest our capital in a broad range of investments in or relating to real property and real estate-related credit assets and our Investment Advisor seeking to invest in real estate and corporate credit-related securities;
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prior to the deployment or redeployment of capital, permitting the manager or our Investment Advisor to cause the capital to be investment in short-term investments in money market funds, bank accounts, overnight repurchase agreements with primary federal reserve bank dealers collateralized by direct U.S. government obligations, and other instruments and investments reasonably determined to be of high quality;
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not permitting more than 25% of consolidated equity, as defined in the Management Agreement, to be invested in any individual investment without approval of a majority of the Board or a duly constituted committee thereof; and
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requiring any investment in excess of 10% of consolidated equity, as defined in the Management Agreement, to be approved by the Board or a duly constituted committee thereof.
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Types of Investments — Commercial Real Estate Related Credit Investments
Our investment strategy includes acquiring and originating credit investments, including commercial mortgage loans, mezzanine loans, preferred equity, and other loans and securities related to commercial real estate assets, as well as corporate loan opportunities that are consistent with our investment strategy and objectives:
Commercial Mortgage Loans
. We will invest in, acquire or originate loans secured by a first mortgage lien on commercial properties providing mortgage financing to commercial property developers or owners. These loans will generally have maturity dates ranging from three to ten years and bear interest at a fixed or floating rate, though they are more likely going to be floating rate and have a shorter-duration term. The loans will likely require interest only payments and if these loans do provide for some amortization, they will typically require, in any event, a balloon payment of principal at maturity. These investments may include whole loan participations and/or pari passu participations within such loans.
Mezzanine Loans
. We also expect to invest in or originate loans made to commercial property owners that are secured by pledges of the borrower’s ownership interests in the property and/or the property owner, subordinate to whole mortgage loans secured by a first lien on the property. These mortgage loans are senior to the borrower’s equity in the property. These loans may be tranched into senior and junior mezzanine loans, with junior mezzanine lender secured by a pledge of the equity interests in the more junior mezzanine borrower. Mezzanine lenders typically have different, and at times more limited, rights compared to more senior lenders, including, following a default on the senior loan, the right, for a period of time, to cure defaults under the senior loan and any senior mezzanine loan and purchase the senior loan and any senior mezzanine loan. Subject to the terms negotiated with, and the rights of, the senior lenders, mezzanine lenders typically have the right to foreclose on its equity interest and become the director or indirect owner of the property.
Other Real Estate Related Debt Instruments
. We will opportunistically invest in or originate other commercial real estate-related debt instruments such as subordinated mortgage interests, preferred equity, note financing, unsecured loans to owners and operators of real estate assets, and secured real estate securities such as commercial mortgage-backed securities (“CMBS”) and commercial real estate collateralized loan obligations (“CRE CLOs”).
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Corporate Loans
. We may also invest in or originate certain syndicated corporate loans, often but not necessarily of real estate operating or finance companies.
We will evaluate our credit investment opportunities to ensure that they are in compliance with our investment guidelines, do not cause us to lose our qualification as a REIT under the Internal Revenue Code or cause us or any of our subsidiaries to be an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).
In evaluating prospective loan or other credit investments, CMFT Management will consider factors such as the following:
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the condition and use of the collateral securing the loan;
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current and projected cash flows of the collateral securing the loan;
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expected levels of rental and occupancy rates of the property securing the loan;
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the potential for increased expenses and capital expense requirements;
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the loan to value ratio of the investment;
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the debt service coverage ratio of the investment;
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the degree of liquidity of the investment;
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the quality, experience and creditworthiness of the borrower;
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general economic conditions in the area where the collateral is located;
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the strength and structure and loan covenants; and
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other factors that CMFT Management believes are relevant.
Because the factors considered, including the specific weight we place on each factor, will vary for each prospective investment, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.
Outside of our investment guidelines, we do not have any policies directing the portion of our assets that may be invested in any particular asset type. However, we recognize that certain types of loans, such as mezzanine loans, are subject to more risk than others, such as loans secured by first deeds of trust or first priority mortgages on income-producing, fee-simple properties. CMFT Management will evaluate the risk associated with a loan when evaluating its decision to invest, and in determining the rate of interest on the loan.
Our credit investments may be subject to regulation by federal, state and local authorities and subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, including among other things, regulating credit granting activities, establishing maximum interest rates and finance charges, requiring disclosures to customers, governing secured transactions and setting collection, repossession and claims handling procedures and other trade practices. In addition, certain states have enacted legislation requiring the licensing of mortgage bankers or other lenders and these requirements may affect our ability to effectuate our proposed investments in loans. Commencement of operations in these or other jurisdictions may be dependent upon a finding of our financial responsibility, character and fitness. We may determine not to make loans in any jurisdiction in which the regulatory authority determines that we have not complied in all material respects with applicable requirements.
Types of Investments — Commercial Real Estate Property Investments
We have acquired, and may continue to acquire, income-producing necessity retail properties that are primarily single-tenant properties, which are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States. We consider necessity retail properties to be properties leased to retail tenants that attract consumers for everyday needs, such as pharmacies, home improvement stores, national superstores, restaurants and regional retailers. Our portfolio also includes anchored shopping centers, which are multi-tenant properties that are anchored by one or more large national, regional or local retailers.
We have acquired, and may continue to acquire other income-producing properties, such as office and industrial properties, which may share certain core characteristics with our retail investments, such as a principal creditworthy tenant, a long-term net lease, and a strategic location.
Many of our properties are, and we anticipate that future properties will be, leased to tenants in the chain or franchise retail industry, including, but not limited to, convenience stores, drug stores and restaurant properties, as well as leased to large national retailers as standalone properties or as part of anchored shopping centers, which are anchored by national, regional and local retailers. CMFT Management monitors industry trends and identifies properties on our behalf that serve to provide a favorable return balanced with risk. Our management primarily targets regional or national name brand retail businesses with established track records. We generally intend to hold each property for a period in excess of five years.
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By acquiring a large number of properties, we believe that lower than expected results of operations from one or a few investments will not necessarily preclude our ability to realize our investment objective of generating cash flows from our overall portfolio. Since we acquire properties that are geographically diverse, we expect to minimize the potential adverse impact of economic slowdowns or downturns in local markets.
To the extent feasible, we seek to achieve a well-balanced portfolio diversified by geographic location, age and lease maturities of the various properties. We pursue properties leased to tenants representing a variety of retail industries to avoid concentration in any one industry. We also are diversified between national, regional and local brands. We generally target properties with lease terms in excess of ten years. We have acquired and may continue to acquire properties with shorter lease terms if the property is in an attractive location, if the property is difficult to replace, or if the property has other significant favorable attributes. We expect that these acquisitions will provide long-term value by virtue of their size, location, quality and condition, and lease characteristics.
We expect, in most instances, to continue to acquire properties with existing double-net or triple-net leases. “Net” leases mean leases that typically require tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, maintenance, insurance and building repairs related to the property, in addition to the lease payments. Triple-net leases typically require the tenant to pay all costs associated with a property (e.g., real estate taxes, insurance, maintenance and repairs, including roof, structure and parking lot). Double-net leases typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance). We believe that properties under long-term triple-net and double-net leases offer a distinct investment advantage since these properties generally require less management and operating capital, have less recurring tenant turnover and, with respect to single-tenant properties, often offer superior locations that are less dependent on the financial stability of adjoining tenants. We expect that double-net and triple-net leases will help ensure the predictability and stability of our expenses, which we believe will result in greater predictability and stability of our cash distributions to stockholders. Not all of our properties are, or will be subject to, net leases. In respect of anchored shopping centers, we expect to continue to have a variety of lease arrangements with the tenants of these properties. We have acquired and may continue to acquire properties with tenants subject to “gross” leases. “Gross” leases means leases that typically require the tenant to pay a flat rental amount and we would pay for all property charges regularly incurred as a result of our owning the property. When spaces in a property become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we generally expect to enter into net leases.
There is no limitation on the number, size or type of properties that we may acquire, or on the percentage of net proceeds of the Offerings that may be used to acquire a single property. The number and mix of properties comprising our portfolio will depend upon real estate market conditions and other circumstances existing at the time we acquire properties, and the amount of capital we have available for acquisitions. We will not forgo acquiring a high-quality asset because it does not precisely fit our expected portfolio composition. See “— Other Possible Investments” below for a description of other types of real estate and real estate-related investments we may make.
We incur debt to acquire properties when CMFT Management determines that incurring such debt is in our best interests and in the best interests of our stockholders. In addition, from time to time, we have acquired and may continue to acquire some properties without financing and later incur mortgage debt secured by one or more of such properties if favorable financing terms are available. We use the proceeds from these loans to acquire additional properties. See “— Financing Strategy” below for a more detailed description of our borrowing intentions and limitations.
Underwriting
In evaluating potential property acquisitions consistent with our investment objectives, CMFT Management applies a well-established underwriting process to determine the creditworthiness of potential tenants. We consider a tenant to be creditworthy if we believe that the tenant has sufficient assets, cash flow generation and stability of operations to meet its obligations under the lease. Similarly, CMFT Management applies credit underwriting criteria to possible new tenants when we are leasing properties in our portfolio. Many of the tenants of our properties are, and we expect will continue to be, national or regional retail chains that are creditworthy entities having high net worth and operating income. CMFT Management’s underwriting process includes analyzing the financial data and other available information about the tenant, such as income statements, balance sheets, net worth, cash flows, business plans, data provided by industry credit rating services, and/or other information CMFT Management may deem relevant. Generally, these tenants must have a proven track record in order to meet the credit tests applied by CMFT Management. In addition, we may obtain guarantees of leases by the corporate parent of the tenant, in which case CMFT Management will analyze the creditworthiness of the corporate parent.
8
Acquisition Decisions
CMFT Management has substantial discretion with respect to the selection of our specific acquisitions, subject to our investment guidelines. In pursuing our investment objectives and making investment decisions on our behalf, CMFT Management evaluates the proposed terms of the acquisition against all aspects of the transaction, including the condition and financial performance of the asset, the terms of existing leases and the creditworthiness of the tenant, and property location and characteristics. Because the factors considered, including the specific weight we place on each factor, vary for each potential acquisition, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.
CMFT Management procures and reviews an independent valuation estimate on each and every proposed acquisition. In addition, CMFT Management, to the extent such information is available, considers the following:
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•
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tenant rolls and tenant creditworthiness;
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•
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a property condition report;
|
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•
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unit level store performance;
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•
|
property location, visibility and access;
|
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•
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age of the property, physical condition and curb appeal;
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•
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neighboring property uses;
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•
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local market conditions including vacancy rates and market rents;
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•
|
area demographics, including trade area population and average household income;
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•
|
neighborhood growth patterns and economic conditions;
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•
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presence of nearby properties that may positively or negatively impact store sales at the subject property; and
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•
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lease terms, including length of lease term, scope of landlord responsibilities, presence and frequency of contractual rental increases, renewal option provisions, exclusive and permitted use provisions, co-tenancy requirements and termination options.
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CMFT Management also reviews the terms of each existing lease by considering various factors, including:
•
rent escalations;
•
remaining lease term;
•
renewal option terms;
•
tenant purchase options;
•
termination options;
•
scope of the landlord’s maintenance, repair and replacement requirements;
•
projected net cash flow yield; and
•
projected internal rates of return.
The Board has adopted a policy to prohibit acquisitions from affiliates of CMFT Management unless a majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction determine that the transaction is fair and reasonable to us and certain other conditions are met. See the section captioned “— Acquisition of Properties from Affiliates of CMFT Management” below.
In the purchasing, leasing and development of properties, we are subject to risks generally incident to the ownership of real estate. Refer to Part I, Item 1A. Risk Factors — General Risks Related to Real Estate Assets in this Annual Report on Form 10-K.
Real Estate Dispositions.
We generally intend to hold each property we acquire for an extended period, generally in excess of five years. Holding periods for other real estate-related assets may vary. Circumstances might arise that could cause us to determine to sell an asset before the end of the expected holding period if we believe the sale of the asset would be in the best interests of our stockholders. The determination of whether a particular asset should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing and projected economic conditions, current tenant rolls and tenant creditworthiness, whether we could apply the proceeds from the sale of the asset to acquire other assets, whether disposition of the asset would increase cash flows, and whether the sale of the asset would be a prohibited transaction under the Internal Revenue Code or otherwise impact our status as a REIT for federal income tax purposes. During the year ended December 31, 2019, we sold
497
properties for an aggregate gross sales price of
$1.65 billion
, resulting in net proceeds of
$1.40 billion
and a gain of
$180.7 million
.
9
Financing Strategy
CMFT Management believes that utilizing borrowings to make investments is consistent with our investment objective of maximizing the return to stockholders. By operating on a leveraged basis, we have more funds available for acquiring properties. This allows us to make more investments than would otherwise be possible, potentially resulting in a more diversified portfolio.
The amount of leverage we use is determined by our manager, taking into account a variety of factors, which may include the anticipated liquidity and price volatility of target assets in our investment portfolio, the potential for losses and extension risk in our investment portfolio, the gap between the duration of assets and liabilities, including hedges, the availability and cost of financing the assets, the creditworthiness of our financing counterparties, the health of the global economy and commercial and residential mortgage markets, the outlook for the level, slope, and volatility of interest rate movement, the credit quality of our target assets and the type of collateral underlying such target assets. In utilizing leverage, we seek to enhance equity returns while limiting interest rate exposure. We will seek to match the tenor, currency, and indices of our assets and liabilities, including in certain instances through the use of derivatives. We will also seek to limit the risks associated with recourse borrowing.
As of
December 31, 2019
, our ratio of debt to total gross assets net of gross intangible lease liabilities was
46.3%
(
32.9%
including adjustments to debt for cash and cash equivalents), and our ratio of debt to the fair market value of our gross assets was
45.3%
.
Subject to maintaining our qualification as a REIT, from time to time, we engage in hedging transactions that seek to mitigate the effects of fluctuations in interest rates or currencies on our cash flows. These hedging transactions could take a variety of forms, including interest rate or currency swaps or cap agreements, options, futures contracts, forward rate or currency agreements or similar financial instruments.
Our ability to increase our diversification through borrowing may be adversely impacted if banks and other lending institutions reduce the amount of funds available for borrowing. When interest rates are high or financing is otherwise unavailable on a timely basis, our ability to make additional investments will be restricted and we may not be able to adequately diversify our portfolio. See Part I, Item 1A. Risk Factors — Risks Associated with Debt Financing in this Annual Report on Form 10-K.
Conflicts of Interest
We are subject to various conflicts of interest arising out of our relationship with CMFT Management and its affiliates, including conflicts related to the arrangements pursuant to which we will compensate CMFT Management and its affiliates.
Affiliates of CMFT Management act as advisors to CCPT V, CCIT II, CCIT III and/or CIM Income NAV, all of which are public, non-listed REITs sponsored by our sponsor, CCO Group. All of these programs primarily focus on the acquisition and management of commercial properties subject to long-term net leases to creditworthy tenants and have acquired or may acquire assets similar to ours. CCPT V, like us, focuses primarily on the retail sector, while CCIT II and CCIT III focus primarily on the office and industrial sectors and CIM Income NAV focuses primarily on commercial properties in the retail, office and industrial sectors. Nevertheless, the investment strategy used by each REIT would permit them to acquire certain properties that may also be suitable for our portfolio.
Allocation of Investment Opportunities
Acquisition opportunities will be allocated among the real estate programs sponsored by CCO Group pursuant to an asset allocation policy adopted by our Board. In the event that an acquisition opportunity has been identified that may be suitable for one or more of the other programs sponsored by CCO Group, and for which more than one of such entities has sufficient uninvested funds, then an allocation committee, which is comprised of employees of CIM, CCO Group or their respective affiliates (the “Allocation Committee”), will examine the following factors, among others, in determining the entity for which the acquisition opportunity is most appropriate:
•
the investment objective of each entity;
•
the anticipated operating cash flows of each entity and the cash requirements of each entity;
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•
|
the effect of the acquisition both on diversification of each entity’s investments by type of property, geographic area and tenant concentration;
|
•
the amount of funds available to each program and the length of time such funds have been available to deploy;
•
the policy of each entity relating to leverage of properties;
10
•
the income tax effects of the purchase to each entity; and
•
the size of the investment.
If, in the judgment of the Allocation Committee, the acquisition opportunity may be equally appropriate for more than one program, then the entity that has had the longest period of time elapse since it was allocated an acquisition opportunity of a similar size and type (
e.g
., office, industrial or retail properties) will be allocated such acquisition opportunity.
If a subsequent development, such as a delay in the closing of the acquisition or a delay in the construction of a property, causes any such acquisition opportunity, in the opinion of the Allocation Committee, to be more appropriate for an entity other than the entity that committed to make the acquisition opportunity, the Allocation Committee may determine that another program sponsored by CCO Group will be allocated the acquisition opportunity. In the event that our targeted asset types or investment objectives and criteria cause acquisition opportunities that are suitable for programs sponsored by affiliates of CIM other than CCO Group, our manager will utilize an allocation method similar to the one described above for programs sponsored by CCO Group, or will otherwise ensure that a reasonable method of allocation be adopted with respect to such investment opportunities and fairly apply them to us. The Board has a duty to ensure that the method used for the allocation of the acquisition of properties by other programs sponsored by CCO Group seeking to acquire similar types of properties is applied fairly to us.
We may enter into certain transactions with CMFT Management or its affiliates, including other real estate programs sponsored by CCO Group, which are subject to inherent conflicts of interest. Similarly, joint ventures involving affiliates of CMFT Management also give rise to conflicts of interest. In addition, our Board may encounter conflicts of interest in enforcing our rights against any affiliate of CMFT Management in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and CMFT Management, any of its affiliates or another real estate program sponsored by CCO Group.
Fees and Other Compensation paid to CMFT Management and Its Affiliates
We have incurred, and expect to continue to incur, fees and expenses payable to CMFT Management and its affiliates in connection with the management of our assets.
Management Agreement.
Pursuant to the Management Agreement, in connection with the services provided by our manager, our manager receives a management fee, payable quarterly in arrears, equal to the greater of (a) $250,000 per annum ($62,500 per quarter) and (b) 1.50% per annum (0.375% per quarter) of the Company’s Equity (as defined in the Management Agreement). In addition, our manager shall receive Incentive Compensation (as defined in the Management Agreement), payable with respect to each quarter, which is generally equal to the excess of (a) the product of (i) 20% and (ii) the excess of (A) Core Earnings (as defined in the Management Agreement) of the Company for the previous 12-month period, over (B) the product of (1) the Company’s Consolidated Equity (as defined in the Management Agreement) in the previous 12-month period, and (2) 7% per annum, over (b) the sum of any Incentive Compensation paid to our manager with respect to the first three calendar quarters of such previous 12-month period (or such lesser number of completed calendar quarters preceding the applicable period, if applicable). Following the effective date of the Management Agreement, our manager shall no longer be entitled to receive the Advisory Fee, Acquisition Fees, Subordinated Performance Fee, or Disposition Fees as defined and provided in the prior Advisory Agreement between the Company and the Manager dated January 24, 2012; provided, however, that for the Company’s properties under contract to be sold or specifically identified in a broker agreement as being marketed for sale as of the effective date of the Management Agreement, the Manager may be entitled to receive a Disposition Fee in accordance with the terms of the prior Advisory Agreement. In addition, our manager generally shall continue to be entitled to reimbursement for costs and expenses to the extent incurred on behalf of the Company in accordance with the Management Agreement; provided, however, that the limits on reimbursement for Organization and Offering Expenses, Acquisition Expenses and Operating Expenses as defined and provided in the Prior Advisory Agreement shall no longer be applicable.
The Management Agreement shall continue for a term of three years and shall be deemed renewed automatically each year thereafter for an additional one-year period unless the Company provides 180 days’ written notice to the Manager after the affirmative vote of 2/3 of the Company’s independent directors. If the Management Agreement is terminated without cause, the Manager shall receive a termination fee equal to three times the sum of (a) the average annual Management Fee and (b) the average annual Incentive Compensation during the 24-month period prior to the termination.
Investment Advisory and Management Agreement.
Pursuant to the Investment Advisory and Management Agreement, our Investment Advisor shall receive an investment advisory fee (the “Investment Advisory Fee”), payable quarterly in arrears, equal to (b) 1.50% per annum (0.375% per quarter) of CMFT Securities’ Equity (as defined in the Investment Advisory and Management Agreement). In addition, the Investment Advisor is eligible to receive incentive compensation, as described below. In the event that an Incentive Fee is earned and payable with respect to any quarter under the Management Agreement,
11
our manager will calculate the portion of the Incentive Fee that was attributable to the assets managed by our Investment Advisor and payable to the Investment Advisor. Pursuant to the Investment Advisory and Management Agreement, CMFT Securities will reimburse the Investment Advisor for costs and expenses incurred by the Investment Advisor on its behalf.
The Investment Advisory and Management Agreement shall continue for a term of three years and shall be deemed renewed automatically each year thereafter for an additional one-year period unless CMFT Securities provides 180 days’ written notice to the Investment Advisor after the affirmative vote of 2/3 of the our independent directors, or if the Investment Advisor provides 180 days’ written notice to CMFT Securities. If the Investment Advisory and Management Agreement is terminated without cause by CMFT Securities, the Investment Advisor shall receive a termination fee equal to three times the sum of (a) the average annual Investment Advisory Fee and (b) the average annual Securities Manager Incentive Compensation, as that term is defined in the Investment Advisory and Management Agreement, during the 24-month period prior to the termination. CMFT Securities is not required to pay the termination fee if the Investment Advisor terminates the Investment Advisory and Management Agreement, or if the Investment Advisory and Management Agreement is terminated for cause.
On a quarterly basis, the Investment Advisor shall designate 50% of the sum of its Investment Advisory Fee and any incentive compensation payable to the Investment Advisor, as described above, as sub-advisory fees. The sub-advisory fees shall be paid by our Investment Advisor ratably, as determined pursuant to the Sub-Advisory Agreement, to the Sub-Advisor and any other sub-advisers, if any, that provide services to CMFT Securities. Either party may terminate the Sub-Advisory Agreement with 30 days’ prior written notice to the other party.
Employees
We have no direct employees. The employees of CMFT Management and its affiliates provide services to us related to acquisitions and dispositions, property management, asset management, financing, accounting, stockholder relations and administration. The employees of CCO Capital, the dealer manager for the Offering, provided wholesale brokerage services during the Offering.
Competition
As we purchase properties, we are in competition with other potential buyers for the same properties and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our acquisition criteria. Regarding the leasing efforts of our owned properties, the leasing of real estate is highly competitive in the current market, and we may continue to experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we may also be in competition with sellers of similar properties to locate suitable purchasers for our properties. See the section captioned “— Conflicts of Interest” above.
Similarly, in our lending and investing activities, we compete for opportunities with a variety of institutional lenders and investors, including other REITs, specialty finance companies, public and private, commercial and investment banks, commercial finance and insurance companies and other financial institutions. Several other REITs and other investment vehicles have raised significant amounts of capital, and may have investment objectives that overlap with ours, which may create additional competition for lending and investment opportunities. Some competitors may have a lower cost of funds and access to funding sources, such as the U.S. Government, that are not available to us. Many of our competitors are not subject to the operating constraints associated with REIT compliance or maintenance of an exclusion from regulation under the Investment Company Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of loans and investments, offer more attractive pricing or other terms and establish more relationships than us. Furthermore, competition for originations of and investments in our target assets may lead to the yields of such assets decreasing, which may further limit our ability to generate satisfactory returns.
Available Information
We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the SEC. We also file registration statements, amendments to our registration statements, and/or supplements to our prospectus in connection with any of our offerings with the SEC. Copies of our filings with the SEC are available on our sponsor’s website,
http://www.cimgroup.com
, free of charge. The information on our sponsor’s website is not incorporated by reference into this Annual Report on Form 10-K. Copies of our filings with the SEC may also be obtained from the SEC’s website, at
http://www.sec.gov
. Access to these filings is free of charge.
12
|
ITEM 1A.
|
RISK FACTORS
|
Stockholders should carefully consider the following factors, together with all the other information included in this Annual Report on Form 10-K, in evaluating the Company and our business. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and stockholders may lose all or part of their investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risks Related to Our Business
We currently have not identified all of the credit investments, properties or other real estate-related assets we intend to purchase. For this and other reasons, an investment in our shares is speculative.
We currently have not identified all of the credit investments, properties or other real estate-related assets that we may purchase. We have established policies relating to the types of assets we will acquire and the creditworthiness of tenants of our properties or other investment opportunities, but our advisor has wide discretion in implementing these policies, subject to the oversight of our Board. Additionally, our advisor has discretion to determine the location, number and size of our investments and the percentage of net proceeds we may dedicate to a single investment. As a result, you will not be able to evaluate the economic merit of our future investments until after such investments have been made. Therefore, an investment in our shares is speculative.
Our stockholders should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies that, like us, have not identified all credit investments, properties or real estate-related assets that they intend to purchase. To be successful in this market, we and our advisor must, among other things:
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•
|
identify and make investments that further our investment objectives;
|
|
•
|
rely on our advisor and its affiliates to attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;
|
|
•
|
respond to competition for our targeted credit investments, real estate and other assets;
|
|
•
|
rely on our advisor and its affiliates to continue to build and expand our operations structure to support our business; and
|
|
•
|
be continuously aware of, and interpret, marketing trends and conditions.
|
We may not succeed in achieving these goals, and our failure to do so could cause our stockholders to lose all or a portion of their investment.
Our shares have limited liquidity and we are not required, through our charter or otherwise, to provide for a liquidity event. There is no public trading market for our shares and there may never be one; therefore, it will be difficult for our stockholders to sell their shares. Our stockholders should view our shares only as a long-term investment.
There is no public market for our common stock and there may never be one. In addition, we do not have a fixed date or method for providing stockholders with liquidity. We expect that our Board will make that determination in the future based, in part, upon advice from our advisor. If our stockholders are able to find a buyer for their shares, our stockholders will likely have to sell them at a substantial discount to their purchase price. It also is likely that our stockholders’ shares would not be accepted as the primary collateral for a loan. Therefore, shares of our common stock should be considered illiquid and a long-term investment, and our stockholders must be prepared to hold their shares of our common stock for an indefinite length of time.
Our stockholders are limited in their ability to sell their shares pursuant to our share redemption program and may have to hold their shares for an indefinite period of time.
Our share redemption program includes numerous restrictions that limit our stockholders’ ability to sell their shares. Subject to funds being available, we will generally limit the number of shares redeemed pursuant to our share redemption program to no more than 5% of the weighted average number of shares outstanding during the trailing 12 months prior to the end of the fiscal quarter for which the redemption is being paid. In addition, we intend to limit quarterly redemptions to approximately 1.25% of the weighted average number of shares outstanding during the trailing 12-month period ending on the last day of the fiscal quarter, and funding for redemptions for each quarter generally will be limited to the net proceeds we receive from the sale of shares in the respective quarter under the DRIP. Any of the foregoing limits might prevent us from accommodating all redemption requests made in any fiscal quarter or in any 12-month period. For the past
15
quarters, quarterly redemptions have been honored on a pro rata basis, as requests for redemption have exceeded the quarterly redemption limits described above. The Board may amend the terms of, suspend, or terminate our share redemption program
13
without stockholder approval upon 30 days’ prior notice, and our management may reject any request for redemption. These restrictions severely limit our stockholders’ ability to sell their shares should they require liquidity, and limit our stockholders’ ability to recover the amount they invested or the fair market value of their shares.
Our estimated per share NAV is an estimate as of a given point in time and likely will not represent the amount of net proceeds that would result if we were liquidated or dissolved or completed a merger or other sale of the Company.
Based on the recommendation from the valuation, compensation and affiliate transactions committee of our Board, which is comprised solely of independent directors, our Board, including all of its independent directors, approves and establishes at least annually an updated estimated per share NAV of the Company’s common stock, which is based on an estimated market value of the Company’s assets less the estimated market value of the Company’s liabilities, divided by the number of shares outstanding. The Company provides this updated estimated per share NAV to assist broker-dealers that participated in the Company’s initial public offering in meeting their customer account statement reporting obligations under FINRA Rule 2231.
As with any valuation methodology, the methodology used by our Board in reaching an estimate of the per share NAV of our shares is based upon a number of estimates, assumptions, judgments and opinions that may, or may not, prove to be correct. The use of different estimates, assumptions, judgments or opinions may have resulted in significantly different estimates of the per share NAV of our shares. In addition, our Board’s estimate of per share NAV is not based on the book values of the Company’s real estate, as determined by generally accepted accounting principles, as the Company’s book value for most real estate is based on the amortized cost of the property, subject to certain adjustments. Furthermore, in reaching an estimate of the per share NAV of the Company’s shares, our Board did not include, among other things, a discount for debt that may include a prepayment obligation or a provision precluding assumption of the debt by a third party. As a result, there can be no assurance that:
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•
|
stockholders will be able to realize the estimated per share NAV upon attempting to sell their shares; or
|
|
•
|
the Company will be able to achieve, for its stockholders, the estimated per share NAV upon a listing of the Company’s shares of common stock on a national securities exchange, a merger of the Company, or a sale of the Company’s portfolio.
|
When determining the estimated per share NAV, there are currently no SEC, federal or state rules that establish requirements specifying the methodology to employ in determining an estimated per share NAV. However, pursuant to rules of FINRA, the determination of the estimated per share NAV must be conducted by, or with the material assistance or confirmation of, a third-party valuation expert and must be derived from a methodology that conforms to standard industry practice.
The estimated per share NAV is an estimate as of a given point in time and likely does not represent the amount of net proceeds that would result from an immediate sale of our assets, or in the event that we are liquidated or dissolved or completed a merger or other sale of the Company. The estimated per share NAV of the Company’s shares will fluctuate over time as a result of, among other things, developments related to individual assets and changes in the real estate and capital markets.
We may be unable to pay or maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to our stockholders. Distributions are based primarily on cash flows from operations. The amount of cash available for distributions is affected by many factors, such as the performance of our advisor in selecting investments for us to make, selecting tenants for our properties and securing financing arrangements, our ability to make investments, the amount of income we receive from our investments, and our operating expense levels, as well as many other variables. We may not always be in a position to pay distributions to our stockholders and any distributions we do make may not increase over time. In addition, our actual results may differ significantly from the assumptions used by our Board in establishing the distribution rate to our stockholders. There also is a risk that we may not have sufficient cash flows from operations to fund distributions required to maintain our REIT status.
We have paid, and may continue to pay, some of our distributions from sources other than cash flows from operations, including borrowings and proceeds from asset sales, which may reduce the amount of capital we ultimately deploy in our real estate operations and may negatively impact the value of our common stock. Additionally, distributions at any point in time may not reflect the current performance of our properties or our current operating cash flows.
To the extent that cash flows from operations have been or are insufficient to fully cover our distributions to our stockholders, we have paid, and may continue to pay, some of our distributions from sources other than cash flows from operations. Such sources may include borrowings, proceeds from asset sales or the sale of our securities. We have no limits on the amounts we may use to pay distributions from sources other than cash flows from operations. The payment of distributions from sources other than cash provided by operating activities may
reduce the amount of proceeds available for acquisitions and
14
operations or cause us to incur additional interest expense as a result of borrowed funds, and may cause subsequent holders of our common stock to experience dilution. This may negatively impact the value of our common stock.
Because the amount we pay in distributions may exceed our earnings and our cash flows from operations, distributions may not reflect the current performance of our properties or our current operating cash flows. To the extent distributions exceed cash flows from operations, distributions may be treated as a return of our stockholders’ investment and could reduce their basis in our common stock. A reduction in a stockholder’s basis in our common stock could result in the stockholder recognizing more gain upon the disposition of his or her shares, which, in turn, could result in greater taxable income to such stockholder.
The following table presents distributions and the source of distributions for the periods indicated below (dollar amounts in thousands):
|
Year Ended December 31,
|
|||||||||||||
|
2019
|
2018
|
||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||
|
Distributions paid in cash
|
$
|
112,083
|
|
58
|
%
|
$
|
102,822
|
|
53
|
%
|
|||
|
Distributions reinvested
|
82,388
|
|
42
|
%
|
91,764
|
|
47
|
%
|
|||||
|
Total distributions
|
$
|
194,471
|
|
100
|
%
|
$
|
194,586
|
|
100
|
%
|
|||
|
Source of distributions:
|
|||||||||||||
|
Net cash provided by operating activities
(1)
|
$
|
194,471
|
|
(2)
|
100
|
%
|
$
|
194,586
|
|
100
|
%
|
||
____________________________________
|
(1)
|
Net cash provided by operating activities for the years ended
December 31, 2019
and
2018
was
$188.6 million
and
$205.8 million
, respectively.
|
(2) Our distributions covered by cash flows from operating activities include cash flows from prior periods of
$5.9 million
.
We have experienced losses in the past, and we may experience additional losses in the future.
We have experienced net losses in the past (calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”)) and we may not be profitable or realize growth in the value of our assets. Many of our losses can be attributed to start-up costs, general and administrative expenses, depreciation and amortization, as well as acquisition expenses incurred in connection with purchasing properties or making other investments. Our ability to sustain profitability is uncertain and depends on the demand for, and value of, our portfolio of properties. For a further discussion of our operational history and the factors affecting our losses, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K and our accompanying consolidated financial statements and notes thereto.
We may suffer from delays in locating suitable investments, which could adversely affect our ability to pay distributions to our stockholders and the value of their investment.
We could suffer from delays in locating suitable investments. Delays we encounter in the selection of, and/or investment in, income-producing properties or other investments could adversely affect our ability to pay distributions to our stockholders and/or the value of their overall returns. Competition from other real estate investors or lenders increases the risk of delays in investing our net offering proceeds. If our advisor is unable to identify suitable investments, we will hold the cash available for such investment in an interest-bearing account or invest the proceeds in short-term, investment-grade investments, which would provide a significantly lower return to us than the return we expect from our real estate assets.
It may be difficult to accurately reflect material events that may impact the estimated per share NAV between valuations and, accordingly, we may be selling shares in our DRIP and repurchasing shares at too high or too low a price.
Our independent valuation firm calculated estimates of the market value of our principal real estate and real estate-related assets, and our Board determined the net value of our real estate and real estate-related assets and liabilities taking into consideration such estimate provided by the independent valuation firm. The Board is ultimately responsible for determining the estimated per share NAV. Since our Board will determine our estimated per share NAV at least annually, there may be changes in the value of our properties that are not fully reflected in the most recent estimated per share NAV. As a result, the published estimated per share NAV may not fully reflect changes in value that may have occurred since the prior valuation.
Furthermore, our advisor will monitor our portfolio, but it may be difficult to reflect changing market conditions or material events that may impact the value of our portfolio between valuations, or to obtain timely or complete information regarding any such events. Therefore, the estimated per share NAV published before the announcement of an extraordinary
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event may differ significantly from our actual per share NAV until such time as sufficient information is available and analyzed, the financial impact is fully evaluated, and the appropriate adjustment is made to our estimated per share NAV, as determined by our Board. Any resulting disparity may be to the detriment of a purchaser of our shares or a stockholder selling shares pursuant to our share redemption program.
Our future success depends to a significant degree upon certain key personnel of our advisor. If our advisor loses or is unable to attract and retain key personnel, our ability to achieve our investment objectives could be delayed or hindered, which could adversely affect our ability to pay distributions to our stockholders and the value of their investment.
Our success depends to a significant degree upon the contributions of certain executive officers and other key personnel of CCO Group and our advisor. We cannot guarantee that all of these key personnel, or any particular person, will remain affiliated with us, CCO Group and/or our advisor. If any of our key personnel were to cease their affiliation with our advisor, our operating results could suffer. We believe that our future success depends, in large part, upon our advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure our stockholders that CCO Group or our advisor will be successful in attracting and retaining such skilled personnel. If our advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of our stockholders’ investment may decline.
If we seek to internalize our management functions in connection with a listing of our shares of common stock on an exchange or other liquidity event, our stockholders’ interest in us could be diluted, and we could incur other significant costs associated with being self-managed.
In the future, we may undertake a listing of our common stock on an exchange or other liquidity event that may involve internalizing our management functions. If our Board determines that it is in our best interest to internalize our management functions, we may negotiate to acquire our advisor’s assets and personnel. At this time, we cannot be sure of the form or amount of consideration or other terms relating to any such acquisition. Such consideration could take many forms, including cash payments, promissory notes and shares of our common stock. The payment of such consideration could result in dilution of our stockholders’ interests as a stockholder and could reduce the net income per share attributable to their investment.
Internalization transactions involving the acquisition of advisors affiliated with entity sponsors have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims, which would reduce the amount of funds available to operate our business and to pay distributions.
In addition, while we would no longer bear the costs of the various fees and expenses we expect to pay to our advisor under the Management Agreement, our direct expenses would include general and administrative costs, including legal, accounting, and other expenses related to corporate governance, including SEC reporting and compliance. We would also incur the compensation and benefits costs of our officers and other employees and consultants that we now expect will be paid by our advisor or its affiliates. If the expenses we assume as a result of an internalization are higher than the expenses we avoid paying to our advisor, our net income per share would be lower as a result of the internalization than it otherwise would have been, potentially decreasing the amount of funds available to distribute to our stockholders and the value of our shares.
If we internalize our management functions, we could have difficulty integrating these functions as a stand-alone entity and we may fail to properly identify the appropriate mix of personnel and capital needed to operate as a stand-alone entity. Additionally, upon any internalization of our advisor, certain key personnel may not remain with our advisor, but will instead remain employees of CCO Group.
Our participation in a co-ownership arrangement may subject us to risks that otherwise may not be present in other real estate assets.
We may enter into co-ownership arrangements with respect to a portion of the properties we acquire. Co-ownership arrangements involve risks generally not otherwise present with an investment in other real estate assets, such as the following:
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the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
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the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies, objectives or status as a REIT;
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the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the mortgage loan financing documents applicable to the property, which may constitute an event of default under all of the applicable mortgage loan financing documents, result in a foreclosure and the loss of all or a substantial portion of
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the investment made by the co-owner, or allow the bankruptcy court to reject the agreements entered into by the co-owners owning interests in the property;
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the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the applicable mortgage loan financing documents and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
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the risk that a co-owner could breach agreements related to the property, which may cause a default under, and possibly result in personal liability in connection with, any mortgage loan financing documents applicable to the property, violate applicable securities laws, result in a foreclosure or otherwise adversely affect the property and the co-ownership arrangement;
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the risk that we could have limited control and rights, with management decisions made entirely by a third party; and
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the possibility that we will not have the right to sell the property at a time that otherwise could result in the property being sold for its maximum value.
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In the event that our interests become adverse to those of the other co-owners, we may not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.
We might want to sell our co-ownership interests in a given property or other investment at a time when the other co-owners in such property or investment do not desire to sell their interests. Therefore, because we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in an investment than it would be to find a buyer for a property we owned outright, we may not be able to sell our co-ownership interest in a property at the time we would like to sell.
Cybersecurity risks and cyber incidents may adversely affect our business in the event we or our manager, our transfer agent or any other party that provides us with essential services experiences cyber incidents, including system failures, or has a deficiency in cybersecurity that causes a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
We, as well as our manager, our transfer agent and other parties that provide us with services essential to our operations, are vulnerable to service interruptions or damages from any number of sources, including computer viruses, malware, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and stockholder relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced.
We have implemented processes, procedures and internal controls to help mitigate cyber incidents, but these measures do not guarantee that a cyber incident will not occur or that attempted security breaches or disruptions would not be successful or damaging. A cyber incident could materially adversely impact our business, financial condition, results of operations, cash flows, or our ability to satisfy our debt service obligations or to maintain our level of distributions on common stock. There also may be liability for any stolen assets or misappropriated Company funds or confidential information. Any material adverse effect experienced by our manager, our transfer agent and other parties that provide us with services essential to our operations could, in turn, have an adverse impact on us.
Our commercial construction lending may expose us to increased lending risks.
Our commercial construction lending may expose us to increased lending risks. Construction loans generally expose a lender to greater risk of non‑payment and loss than permanent commercial mortgage loans because repayment of the loans often depends on the borrower’s ability to secure permanent take‑out financing, which requires the successful completion of construction and stabilization of the project, or operation of the property with an income stream sufficient to meet operating expenses, including debt service on such replacement financing. For construction loans, increased risks include the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction, all of which may be affected by unanticipated construction delays and cost over‑runs. Such loans typically involve an expectation that the borrower’s sponsors will contribute sufficient equity funds in order to keep the loan in balance, and the sponsors’ failure or inability to meet this obligation could result in delays in construction or an inability to complete construction. Commercial
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construction loans also expose the lender to additional risks of contractor non‑performance, or borrower disputes with contractors resulting in mechanic’s or materialmen’s liens on the property and possible further delay in construction. In addition, since such loans generally entail greater risk than mortgage loans on income producing property, we may need to increase our allowance for loan losses in the future to account for the likely increase in probable incurred credit losses associated with such loans. Further, as the lender under a construction loan, we may be obligated to fund all or a significant portion of the loan at one or more future dates. We may not have the funds available at such future date(s) to meet our funding obligations under the loan. In that event, we would likely be in breach of the loan unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or at all. In addition, many of our construction loans have multiple lenders and if another lender fails to fund we could be faced with the choice of either funding for that defaulting lender or suffering a delay or protracted interruption in the progress of construction.
Our mezzanine loans involve greater risks of loss than senior loans secured by income‑producing properties.
As of
December 31, 2019
, we have acquired and originated
eight
mezzanine loans with a net book value of
$146.1 million
. We may continue to invest in mezzanine loans, which sometimes take the form of subordinated loans secured by second mortgages on the underlying property or more commonly take the form of loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the entity owning the property. These types of assets involve a higher degree of risk than long‑term senior mortgage lending secured by income‑producing real property because the loan may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan‑to‑value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. Significant losses related to our mezzanine loans would result in operating losses for us and may limit our ability to make distributions to our stockholders.
Our loans and investments expose us to risks associated with debt-oriented real estate investments generally.
We have invested in, and will continue to seek to invest in, debt instruments relating to real estate-related assets. As such, we are subject to, among other things, risk of defaults by borrowers in paying debt service on outstanding indebtedness and to other impairments of our loans and investments. Any deterioration of real estate fundamentals could negatively impact our performance by making it more difficult for borrowers of our mortgage loans, or borrower entities, to satisfy their debt payment obligations, increasing the default risk applicable to borrower entities, and/or making it more difficult for us to generate attractive risk-adjusted returns. Changes in general economic conditions will affect the creditworthiness of borrower entities and/or the value of underlying real estate collateral relating to our investments and may include economic and/or market fluctuations, changes in environmental, zoning and other laws, casualty or condemnation losses, regulatory limitations on rents, decreases in property values, changes in the appeal of properties to tenants, changes in supply and demand, fluctuations in real estate fundamentals, the financial resources of borrower entities, energy supply shortages, various uninsured or uninsurable risks, natural disasters, political events, terrorism and acts of war, changes in government regulations, changes in real property tax rates and/or tax credits, changes in operating expenses, changes in interest rates, changes in inflation rates, changes in the availability of debt financing and/or mortgage funds which may render the sale or refinancing of properties difficult or impracticable, increased mortgage defaults, increases in borrowing rates, negative developments in the economy and/or adverse changes in real estate values generally and other factors that are beyond our control.
We cannot predict the degree to which economic conditions generally, and the conditions for real estate debt investing in particular, will improve or decline. Any declines in the performance of the U.S. and global economies or in the real estate debt markets could have a material adverse effect on our business, financial condition, and results of operations.
We operate in a highly competitive market for lending and investment opportunities, which may limit our ability to originate or acquire desirable loans and investments in our target assets.
We operate in a highly competitive market for lending and investment opportunities. A number of entities compete with us to make the types of loans and investments that we seek to make. Our profitability depends, in large part, on our ability to originate or acquire target assets at attractive prices. In originating or acquiring target assets, we compete with a variety of institutional lenders and investors and many other market participants, including specialty finance companies, REITs, commercial banks and thrift institutions, investment banks, insurance companies, hedge funds and other financial institutions. Many competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. Many of our competitors are not subject to the maintenance of an exemption from the Investment Company Act. Furthermore,
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competition for originations of, and investments in, our target assets may lead to the yield of such assets decreasing, which may further limit our ability to generate desired returns. Also, as a result of this competition, desirable loans and investments in specific types of target assets may be limited in the future and we may not be able to take advantage of attractive lending and investment opportunities from time to time. We can offer no assurance that we will be able to identify and originate loans or make any or all of the types of investments that are described herein.
Control may be limited over certain of our loans and investments.
Our ability to manage our portfolio of loans and investments may be limited by the form in which they are made. In certain situations, we:
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acquire investments subject to rights of senior classes, special servicers or collateral managers under intercreditor, servicing agreements or securitization documents;
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pledge our investments as collateral for financing arrangements;
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acquire only a minority and/or a non-controlling participation in an underlying investment;
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co-invest with others through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or
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rely on independent third party management or servicing with respect to the management of an asset.
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In addition, in circumstances where we originate or acquire loans relating to borrowers that are owned in whole or part by CCO Group-sponsored investment vehicles, we often forgo all non-economic rights under the loan, including voting rights, so long as CCO Group-sponsored investment vehicles own such borrowers above a certain threshold. Therefore, we may not be able to exercise control over all aspects of our loans or investments. Such financial assets may involve risks not present in investments where senior creditors, junior creditors, servicers, third-party controlling investors or CCO Group-sponsored investment vehicles are not involved. Our rights to control the process following a borrower default may be subject to the rights of senior or junior creditors or servicers whose interests may not be aligned with ours. A partner or co-venturer may have financial difficulties, resulting in a negative impact on such asset, may have economic or business interests or goals that are inconsistent with ours, or may be in a position to take action contrary to our investment objectives. In addition, we will generally pay all or a portion of the expenses relating to our joint ventures and we may, in certain circumstances, be liable for the actions of our partners or co-venturers.
Commercial real estate-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us.
Commercial real estate debt instruments (e.g., mortgages, mezzanine loans and preferred equity) that are secured by commercial property are subject to risks of delinquency and foreclosure and risks of loss. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things:
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tenant mix and tenant bankruptcies;
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success of tenant businesses;
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property management decisions, including with respect to capital improvements, particularly in older building structures;
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property location and condition;
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competition from other properties offering the same or similar services;
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changes in laws that increase operating expenses or limit rents that may be charged;
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any liabilities relating to environmental matters at the property;
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changes in global, national, regional, or local economic conditions and/or specific industry segments;
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global trade disruption, significant introductions of trade barriers and bilateral trade frictions;
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declines in global, national, regional or local real estate values;
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declines in global, national, regional or local rental or occupancy rates;
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changes in interest rates, foreign exchange rates, and in the state of the credit and securitization markets and the debt and equity capital markets, including diminished availability or lack of debt financing for commercial real estate;
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changes in real estate tax rates, tax credits and other operating expenses;
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changes in governmental rules, regulations and fiscal policies, including income tax regulations and environmental legislation;
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acts of God, terrorism, social unrest and civil disturbances, which may decrease the availability of or increase the cost of insurance or result in uninsured losses; and
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adverse changes in zoning laws.
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In addition, we are exposed to the risk of judicial proceedings with our borrowers and entities we invest in, including bankruptcy or other litigation, as a strategy to avoid foreclosure or enforcement of other rights by us as a lender or investor. In the event that any of the properties or entities underlying or collateralizing our loans or investments experiences any of the foregoing events or occurrences, the value of, and return on, such investments could be reduced, which would adversely affect our results of operations and financial condition.
Our secured debt agreements impose, and additional lending facilities may impose, restrictive covenants, which may restrict our flexibility to determine our operating policies and investment strategy.
We borrow funds under secured debt agreements with various counterparties. The documents that govern these secured debt agreements and the related guarantees contain, and additional lending facilities may contain, customary affirmative and negative covenants, including financial covenants applicable to us that may restrict our flexibility to determine our operating policies and investment strategy. In particular, these agreements may require us to maintain specified minimum levels of capacity under our credit facilities and cash. As a result, we may not be able to leverage our assets as fully as we would otherwise choose, which could reduce our return on assets. If we are unable to meet these collateral obligations, our financial condition and prospects could deteriorate significantly. In addition, lenders may require that our manager or one or more of our manager’s executives continue to serve in such capacity. If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their interests against existing collateral. We may also be subject to cross-default and acceleration rights in our other debt arrangements. Further, this could also make it difficult for us to satisfy the distribution requirements necessary to maintain our qualification as a REIT for U.S. federal income tax purposes.
Difficulty in redeploying the proceeds from repayments of our existing loans and other investments could materially and adversely affect us.
As our loans and other investments are repaid, we may attempt to redeploy the proceeds we receive into new loans and investments and repay borrowings under our secured revolving repurchase agreements and other financing arrangements. It is possible that we will fail to identify reinvestment options that would provide a yield and/or a risk profile that is comparable to the asset that was repaid. If we fail to redeploy the proceeds we receive from repayment of a loan or other investment in equivalent or better alternatives, we could be materially and adversely affected.
In addition, we may also invest in CMBS as part of our investment strategy. Subordinate interests such as CMBS and similar structured finance investments generally are not actively traded and are relatively illiquid investments. Volatility in CMBS trading markets may cause the value of these investments to decline. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral value is available to satisfy interest and principal payments and any other fees in connection with the trust or other conduit arrangement for such securities, we may incur significant losses.
If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer.
We have in the past and may in the future significantly increase the size and/or change the mix of our portfolio of assets. We may be unable to successfully and efficiently integrate newly-acquired assets into our existing portfolio or otherwise effectively manage our assets or our growth effectively. In addition, increases in our portfolio of assets and/or changes in the mix of our assets may place significant demands on our manager’s administrative, operational, asset management, financial and other resources. Any failure to manage increases in size effectively could adversely affect our results of operations and financial condition.
Prepayment rates may adversely affect our financial performance and cash flows and the value of certain of our investments.
Our mortgage loan borrowers may be able to repay their loans prior to their stated maturities. In periods of declining interest rates and/or credit spreads, prepayment rates on loans generally increase. If general interest rates or credit spreads
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decline at the same time, the proceeds of such prepayments received during such periods may not be reinvested for some period of time or may be reinvested by us in comparable assets yielding less than the yields on the assets that were prepaid.
When mortgage loans are not originated or acquired at a premium to par value, prepayment rates do not materially affect the value of such loan assets. However, the value of certain other assets may be affected by prepayment rates. For example, if we acquire fixed rate CRE debt securities investments or other fixed rate mortgage-related securities, or a pool of such fixed rate mortgage-related securities, we anticipate that the mortgage loans underlying these fixed rate securities will prepay at a projected rate generating an expected yield. If we were to purchase these securities at a premium to par value, when borrowers prepay the mortgage loans underlying these securities faster than expected, the increase in corresponding prepayments on these securities will likely reduce the expected yield. Conversely, if we were to purchase these securities at a discount to par value, when borrowers prepay the mortgage loans underlying these securities slower than expected, the decrease in corresponding prepayments on these securities will likely increase the expected yield. In addition, if we were to purchase these securities at a discount to par value, when borrowers prepay the mortgage loans underlying these securities faster than expected, the increase in corresponding prepayments on these securities will likely increase the expected yield.
Prepayment rates on floating rate and fixed rate loans may differ in different interest rate environments, and may be affected by a number of factors, including, but not limited to, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the servicing of the loans, possible changes in tax laws, other opportunities for investment, and other economic, social, geographic, demographic and legal factors, all of which are beyond our control, and structural factors such as call protection. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment risk.
We are subject to additional risks associated with investments in the form of loan participation interests.
We have in the past invested, and may in the future invest, in loan participation interests in which another lender or lenders share with us the rights, obligations and benefits of a commercial mortgage loan made by an originating lender to a borrower. Accordingly, we will not be in privity of contract with a borrower because the other lender or participant is the record holder of the loan and, therefore, we will not have any direct right to any underlying collateral for the loan. These loan participations may be senior,
pari passu
or junior to the interests of the other lender or lenders in respect of distributions from the commercial mortgage loan. Furthermore, we may not be able to control the pursuit of any rights or remedies under the commercial mortgage loan, including enforcement proceedings in the event of default thereunder. In certain cases, the original lender or another participant may be able to take actions in respect of the commercial mortgage loan that are not in our best interests. In addition, in the event that (1) the owner of the loan participation interest does not have the benefit of a perfected security interest in the lender’s rights to payments from the borrower under the commercial mortgage loan or (2) there are substantial differences between the terms of the commercial mortgage loan and those of the applicable loan participation interest, such loan participation interest could be recharacterized as an unsecured loan to a lender that is the record holder of the loan in such lender’s bankruptcy, and the assets of such lender may not be sufficient to satisfy the terms of such loan participation interest. Accordingly, we may face greater risks from loan participation interests than if we had made first mortgage loans directly to the owners of real estate collateral.
If the loans that we originate or acquire do not comply with applicable laws, we may be subject to penalties, which could materially and adversely affect us.
Loans that we originate or acquire may be directly or indirectly subject to U.S. federal, state or local governmental laws. Real estate lenders and borrowers may be responsible for compliance with a wide range of laws intended to protect the public interest, including, without limitation, the Truth in Lending, Equal Credit Opportunity, Fair Housing and Americans with Disabilities Acts and local zoning laws (including, but not limited to, zoning laws that allow permitted non-conforming uses). If we or any other person fails to comply with such laws in relation to a loan that we have originated or acquired, legal penalties may be imposed, which could materially and adversely affect us. Additionally, jurisdictions with “one action,” “security first” and/or “antideficiency rules” may limit our ability to foreclose on a real property or to realize on obligations secured by a real property. In the future, new laws may be enacted or imposed by U.S. federal, state or local governmental entities, and such laws could have a material adverse effect on us.
Risks Related to Conflicts of Interest
We are subject to conflicts of interest arising out of our relationships with our advisor and its affiliates, including the material conflicts discussed below. The “Conflicts of Interest” section of Part I, Item 1 of this Annual Report on Form 10-K provides a more detailed discussion of the conflicts of interest between us and our advisor and its affiliates, and our policies to reduce or eliminate certain potential conflicts.
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Our advisor and its affiliates face conflicts of interest caused by their compensation arrangements with us, including significant compensation that may be required to be paid to our advisor if our advisor is terminated, which could result in actions that are not in the long-term best interests of our stockholders.
Our advisor and its affiliates are entitled to substantial fees from us under the terms of the Management Agreement. These fees could influence the judgment of our advisor and its affiliates in performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:
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the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the Management Agreement;
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property acquisitions from other real estate programs sponsored or operated by CCO Group, which might entitle affiliates of our advisor to real estate commissions and possible success-based sale fees in connection with its services for the seller;
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property acquisitions from third parties, which entitle our advisor to acquisition fees and advisory fees;
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property or asset dispositions, which may entitle our advisor or its affiliates to disposition fees;
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borrowings to acquire properties, which borrowings will increase the acquisition and advisory fees payable to our advisor; and
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how and when to recommend to our Board a proposed strategy to provide our stockholders with liquidity, which proposed strategy, if implemented, could entitle our advisor to the payment of significant fees.
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Our advisor has engaged its sub-advisor to select and manage our investment securities. Our advisor relies on the performance of its sub-advisor in implementing the investment securities portion of our investment strategy.
Our advisor has engaged its sub-advisor to select investment securities pursuant to a sub-advisory agreement between our advisor and its sub-advisor. The sub-advisor has, and will continue to have substantial discretion, within our investment guidelines, to make decisions related to the acquisition, management and disposition of our investment securities. If the sub-advisor does not succeed in implementing the investment securities portion of our investment strategy, our performance will suffer. In addition, even though our advisor has the ability to terminate the sub-advisor at any time, it may be difficult and costly to terminate and replace the sub-advisor.
We do not have a direct contractual relationship with the sub-advisor. Therefore, it may be difficult for us to take enforcement action against the sub-advisor if its actions, performance or non-performance do not comply with the agreement.
We are not a party to the agreement with the sub-advisor pursuant to which the sub-advisor selects investment securities. Therefore, we are dependent upon our advisor to manage and monitor the sub-advisor effectively. The sub-advisor may take actions that are not in our best interest, which could cause our performance to suffer, and as we are not a party to the agreement with the sub-advisor, we are limited in our ability to enforce that agreement.
The acquisition fee payable to our advisor is principally based on the cost of our acquisitions and not on performance, which could result in our advisor taking actions that are not necessarily in the long-term best interests of our stockholders.
The acquisition fee we pay to our advisor is based on the cost of our acquisitions. As a result, our advisor receives this fee regardless of the quality of such acquisitions, the performance of such acquisitions or the quality of our advisor’s services rendered to us in connection with such acquisitions. This creates a potential conflict of interest between us and our advisor, as the interests of our advisor in receiving the acquisition fee may not be aligned with our interest of acquiring real estate that is likely to produce the maximum risk adjusted returns.
Our advisor faces conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Pursuant to the terms of our Management Agreement, our advisor is entitled to a subordinated performance fee that is structured in a manner intended to provide incentives to our advisor to perform in our best interests and in the best interests of our stockholders. However, because our advisor does not maintain a significant equity interest in us and is entitled to receive certain fees regardless of performance, our advisor’s interests are not wholly aligned with those of our stockholders. Furthermore, our advisor could be motivated to recommend riskier or more speculative acquisitions in order for us to generate the specified levels of performance or sales proceeds that would entitle our advisor to performance-based fees. In addition, our advisor will have substantial influence with respect to how and when our Board elects to provide liquidity to our stockholders, and these performance-based fees could influence our advisor’s recommendations to us in this regard. Our advisor also has the right to terminate the Management Agreement upon 60 days’ written notice without cause or penalty which, under certain
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circumstances, could result in our advisor earning a performance fee. This could have the effect of delaying, deferring or preventing a change of control.
Other real estate programs sponsored by CCO Group, as well as CIM and certain of its affiliates, use investment strategies that are similar to ours; therefore, our executive officers and the officers and key personnel of our advisor and its affiliates may face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor.
CCPT V, CCIT II, CCIT III, CIM Income NAV, and CIM and its affiliates may have investment objectives, strategy and criteria, including targeted asset types, substantially similar to ours. As a result, we may be seeking to acquire properties and real estate-related assets, including mortgage loans, at the same time as CIM or its affiliates, or one or more of the other real estate programs sponsored by CCO Group or its affiliates. Certain of our executive officers and certain officers of our advisor also are executive officers of CIM or its affiliates and other programs sponsored by CCO Group or its affiliates, the general partners of other private investment programs sponsored by CCO Group or its affiliates and/or the advisors or fiduciaries of other real estate programs sponsored by CCO Group or its affiliates. Accordingly, there is a risk that the allocation of acquisition opportunities may result in our acquiring a property that provides lower returns to us than a property purchased by another real estate program sponsored by CCO Group or its affiliates.
In addition, we have acquired, and may continue to acquire, properties in geographic areas where CIM or its affiliates or other real estate programs sponsored by CCO Group or its affiliates, own properties. If one of these other real estate programs attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant.
Our officers, certain of our directors and our advisor, including its key personnel and officers, face conflicts of interest related to the positions they hold with affiliated and unaffiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to our stockholders.
Richard S. Ressler, the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, is the chairman of the board, chief executive officer and president of CCIT III and CIM Income NAV, and a director of CCIT II, and vice president of our advisor, CMFT Management. One of our directors, Avraham Shemesh, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, serves as a director of CCIT III and CIM Income NAV, is the chairman of the board, chief executive officer and president of CCIT II and CCPT V, and is president and treasurer of CMFT Management. One of our directors, Elaine Y. Wong, who is also a principal of CIM, serves as a director of CCIT II, CCPT V and CIM Income NAV. One of our independent directors, W. Brian Kretzmer, also serves as a director of CCIT III and CIM Income NAV. One of our independent directors, Howard A. Silver, also serves as an independent director of CCIT III. Our chief financial officer and treasurer, Nathan D. DeBacker, who is also an officer of other real estate programs sponsored by CCO Group, is a vice president of CMFT Management and is an officer of certain of its affiliates. In addition, affiliates of CMFT Management act as advisors to CCPT V, CCIT II, CCIT III and/or CIM Income NAV, all of which are public, non-listed REITs sponsored by our sponsor, CCO Group. In addition, all of these programs primarily focus on the acquisition and management of commercial properties subject to long-term net leases to creditworthy tenants and have acquired or may acquire assets similar to ours. CCPT V focuses primarily on the retail sector, while CCIT II and CCIT III focus primarily on the corporate office and industrial sectors. CIM Income NAV focuses primarily on commercial properties in the retail, office and industrial sectors. Nevertheless, the investment strategy used by each REIT would permit them to purchase certain properties that may also be suitable for our portfolio.
Conflicts with our business and interests are most likely to arise from involvement in activities related to (1) allocation of new acquisition opportunities, management time and operational expertise among us and the other entities, (2) our purchase of properties from, or sale of properties to, affiliated entities, (3) the timing and terms of the acquisition or sale of an asset, (4) development of our properties by affiliates, (5) investments with affiliates of our advisor, (6) compensation to our advisor and its affiliates, and (7) our relationship with, and compensation to, our dealer manager. Even if these persons do not violate their duties to us and our stockholders, they will have competing demands on their time and resources and may have conflicts of interest in allocating their time and resources among us and these other entities and persons. Should such persons devote insufficient time or resources to our business, returns on our investments may suffer.
The officers and affiliates of CMFT Management will try to balance our interests with the interests of CIM and its affiliates and other programs sponsored or operated by our sponsor, CCO Group, which includes CCO Group, LLC, an affiliate of CIM, and certain of its subsidiaries, including our manager, our dealer manager, and our property manager, to whom they owe duties. However, to the extent that these persons take actions that are more favorable to other entities than to us, these actions could have a negative impact on our financial performance and, consequently, on distributions to our stockholders and the value of their investments.
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We may acquire assets and borrow funds from affiliates of our advisor, and sell or lease our assets to affiliates of our advisor, and any such transaction could result in conflicts of interest.
We are permitted to acquire properties from affiliates of our advisor, provided that, pursuant to the Management Agreement, our manager shall not consummate on our behalf any transaction that involves the sale of any real estate or real-estate related asset to, or the acquisition of any such asset from, our manager or its affiliates, including CIM, and any funds managed by CIM or its affiliates, unless such transaction is on terms no less favorable to the us than could have been obtained on an arm's length basis from an unrelated third party and has been approved in advance by a majority of our independent directors. In the event that we acquire a property from an affiliate of our advisor, we may be foregoing an opportunity to acquire a different property that might be more advantageous to us. In addition, we are permitted to borrow funds from affiliates of our advisor, including our sponsor, and to sell and lease our assets to affiliates of our advisor, and we have not established a policy that specifically addresses how we will determine the sale or lease price in any such transaction. Any such borrowings, sale or lease transaction must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in such transaction as being fair and reasonable to us. To the extent that we acquire any properties from affiliates of our advisor, borrow funds from affiliates of our advisor or sell or lease our assets to affiliates of our advisor, such transactions could result in a conflict of interest.
Our advisor faces conflicts of interest relating to joint ventures or other co-ownership arrangements that we may enter into with CIM or its affiliates, or another real estate program sponsored or operated by CCO Group, which could result in a disproportionate benefit to CIM or its affiliates, or another real estate program sponsored by CCO Group.
We may enter into joint ventures or co-ownership arrangements (including co-investment transactions) with CIM or its affiliates, or another real estate program sponsored or operated by CCO Group for the acquisition, development or improvement of properties, as well as the acquisition of real estate-related assets. Since one or more of the officers of our advisor are officers of CIM or its affiliates, including CCO Group and/or the advisors to other real estate programs sponsored by CCO Group, our advisor may face conflicts of interest in determining which real estate program should enter into any particular joint venture or co-ownership arrangement. These persons also may have a conflict in structuring the terms of the relationship between us and any affiliated co-venturer or co-owner, as well as conflicts of interests in managing the joint venture, which may result in the co-venturer or co-owner receiving benefits greater than the benefits that we receive.
In the event we enter into joint venture or other co-ownership arrangements with CIM or its affiliates, or another real estate program sponsored by CCO Group, our advisor and its affiliates may have a conflict of interest when determining when and whether to buy or sell a particular property, or to make or dispose of another real estate-related asset. In addition, if we become listed for trading on a national securities exchange, we may develop more divergent goals and objectives from any affiliated co-venturer or co-owner that is not listed for trading. In the event we enter into a joint venture or other co-ownership arrangement with another real estate program sponsored by CIM or its affiliates, or another real estate investment program sponsored by CCO Group that has a term shorter than ours, the joint venture may be required to sell its properties earlier than we may desire to sell the properties. Even if the terms of any joint venture or other co-ownership agreement between us and CIM or its affiliates, or another real estate program sponsored by CCO Group grants us the right of first refusal to buy such properties, we may not have sufficient funds or borrowing capacity to exercise our right of first refusal under these circumstances. We have adopted certain procedures for dealing with potential conflicts of interest as further described in Part I, Item 1. Business — Conflicts of Interest in this Annual Report on Form 10-K.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results.
An effective system of internal control over financial reporting is necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. As part of our ongoing monitoring of internal controls, we may discover material weaknesses or significant deficiencies in our internal controls that we believe require remediation. If we discover such weaknesses, we will make efforts to improve our internal controls in a timely manner. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and can only provide reasonable, not absolute, assurance that the objectives of the system are met. Any failure to maintain effective internal controls, or implement any necessary improvements in a timely manner, could have a material adverse effect on our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock, or cause us to not meet our reporting obligations. Ineffective internal controls could also cause holders of our securities to lose confidence in our reported financial information, which would likely have a negative effect on our business.
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Risks Related to Our Corporate Structure
Our charter permits our Board to authorize the issuance of stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our Board to authorize the issuance of up to 500,000,000 shares of stock, of which 490,000,000 shares are classified as common stock and 10,000,000 shares are classified as preferred stock. In addition, our Board, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. The Board may classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of any such stock. Shares of our common stock shall be subject to the express terms of any series of our preferred stock. Thus, our Board could authorize the issuance of preferred stock with terms and conditions that have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing the removal of incumbent management or a change of control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium to the purchase price of our common stock for our stockholders.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit our stockholders’ ability to dispose of their shares.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
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any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or
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an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation.
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A person is not an interested stockholder under the statute if our Board approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, our Board may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by our Board.
After the five-year prohibition, any such business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
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two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
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These super-majority vote requirements do not apply if the corporation’s stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by our Board prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our Board has exempted any business combination involving our advisor or any affiliate of our advisor. As a result, our advisor and any affiliate of our advisor may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
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Maryland law also limits the ability of a third party to buy a large percentage of our outstanding shares and exercise voting control in electing directors.
Under its Control Share Acquisition Act, Maryland law also provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights with respect to such shares except to the extent approved by the corporation’s disinterested stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by interested stockholders, that is, by the acquirer, or officers of the corporation or employees of the corporation who are directors of the corporation, are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock that would entitle the acquirer, except solely by virtue of a revocable proxy, to exercise voting control in electing directors within specified ranges of voting control. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition Act any acquisition of shares of our stock by CCO Group, LLC or any affiliate of CCO Group, LLC. This provision may be amended or eliminated at any time in the future. If this provision were amended or eliminated, this statute could have the effect of discouraging offers from third parties to acquire us and increasing the difficulty of successfully completing this type of offer by anyone other than our advisor or any of its affiliates.
Our charter includes a provision that may discourage a stockholder from launching a tender offer for our shares.
Our charter requires that any tender offer, including any “mini-tender” offer, must comply with most of the requirements of Regulation 14D of the Exchange Act. The offering person must provide us notice of the tender offer at least ten business days before initiating the tender offer. If the offering person does not comply with these requirements, our stockholders will be prohibited from transferring any shares to such non-complying person unless they first offered such shares to us at the tender offer price offered by the non-complying person. In addition, the non-complying person shall be responsible for all of our expenses in connection with that person’s noncompliance. This provision of our charter may discourage a person from initiating a tender offer for our shares and prevent our stockholders from receiving a premium to the purchase price for their shares in such a transaction.
If we are required to register as an investment company under the Investment Company Act, we could not continue our current business plan, which may significantly reduce the value of our stockholders’ investment.
We intend to conduct our operations, and the operations of our operating partnership and any other subsidiaries, so that no such entity meets the definition of an “investment company” under Section 3(a)(1) of the Investment Company Act. Under the Investment Company Act, in relevant part, a company is an “investment company” if:
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pursuant to Section 3(a)(1)(A), it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or
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pursuant to Section 3(a)(1)(C), it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the 40% test). “Investment securities” exclude U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
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We intend to monitor our operations and our assets on an ongoing basis in order to ensure that neither we, nor any of our subsidiaries, meet the definition of “investment company” under Section 3(a)(1) of the Investment Company Act. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
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limitations on capital structure;
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restrictions on specified investments;
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prohibitions on transactions with affiliates;
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compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations; and
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potentially, compliance with daily valuation requirements.
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In order for us to not meet the definition of an “investment company” and avoid regulation under the Investment Company Act, we must engage primarily in the business of buying real estate, and these investments must be made within one year after the end of the Offering. To avoid meeting the definition of an “investment company” under Section 3(a)(1) of the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. Similarly, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. Accordingly, our Board may not be able to change our investment policies as they may deem appropriate if such change would cause us to meet the definition of an “investment company.” In addition, a change in the value of any of our assets could negatively affect our ability to avoid being required to register as an investment company. If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court were to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
The Board may change certain of our policies without stockholder approval, which could alter the nature of our stockholders’ investment. If our stockholders do not agree with the decisions of our Board, they only have limited control over changes in our policies and operations and may not be able to change such policies and operations.
The Board determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. The Board may amend or revise these and other policies without a vote of our stockholders. As a result, the nature of our stockholders’ investment could change without their consent. Under the Maryland General Corporation Law and our charter, our stockholders generally have a right to vote only on the following:
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the election or removal of directors;
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an amendment of our charter, except that our Board may amend our charter without stockholder approval to increase or decrease the aggregate number of our shares or the number of our shares of any class or series that we have the authority to issue, to change our name, to change the name or other designation or the par value of any class or series of our stock and the aggregate par value of our stock or to effect certain reverse stock splits; provided, however, that any such amendment does not adversely affect the rights, preferences and privileges of the stockholders;
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our dissolution; and
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a merger or consolidation, a statutory share exchange or the sale or other disposition of all or substantially all of our assets.
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All other matters are subject to the discretion of our Board.
The power of our Board to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
Our organizational documents permit our Board to revoke or otherwise terminate our REIT election, without the approval of our stockholders, if our Board determines that it is no longer in our best interest to continue to qualify as a REIT. In such a case, we would become subject to U.S. federal, state and local income tax on our net taxable income and we would no longer be required to distribute most of our net taxable income to our stockholders, which could have adverse consequences on the total return to holders of our common stock.
Our rights and the rights of our stockholders to recover claims against our officers, directors and our advisor are limited, which could reduce our stockholders’ and our recovery against them if they cause us to incur losses.
The Maryland General Corporation Law provides that a director has no liability in such capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter, in the case of our directors and officers, and the Management Agreement, in the case of our advisor and its affiliates, require us, subject to certain exceptions, to indemnify and advance expenses to our directors, our officers, and our advisor and its affiliates. Our charter permits us to provide such indemnification and advance for expenses to our employees and agents. Additionally, our charter limits, subject to certain exceptions, the liability of our directors and officers to us and our stockholders for monetary damages. Although our charter does not allow us to indemnify our directors or our advisor and its affiliates for any liability or loss suffered by them or hold harmless our directors or our advisor and its affiliates for any loss or liability suffered by us to a greater extent than permitted under Maryland law, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our advisor and its affiliates, than might otherwise exist under common law, which could reduce our stockholders’ and our recovery against them. In addition, our advisor is not required to retain cash to pay potential liabilities and it may not have sufficient cash available to pay liabilities if they arise. If our advisor is held liable for a breach of its fiduciary duty to us, or a breach of its contractual obligations to us, we may not be able to collect the full amount of any
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claims we may have against our advisor. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our advisor in some cases, which would decrease the cash otherwise available for distribution to our stockholders.
Our stockholders’ interest in us will be diluted if we issue additional shares.
Our stockholders do not have preemptive rights to any shares issued by us in the future. Our charter authorizes 500,000,000 shares of stock, of which 490,000,000 shares are classified as common stock and 10,000,000 shares are classified as preferred stock. Subject to any limitations set forth under Maryland law, our Board may amend our charter from time to time to increase the number of authorized shares of stock, increase or decrease the number of shares of any class or series of stock that we have authority to issue, or classify or reclassify any unissued shares into other classes or series of stock without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our Board. Our stockholders will suffer dilution of their equity investment in us, in the event that we (1) continue to issue shares pursuant to our Secondary DRIP Offering, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of our common stock to our advisor, its successors or assigns, in payment of an outstanding fee obligation as set forth under our Management Agreement or (5) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our operating partnership. In addition, the partnership agreement of our operating partnership contains provisions that would allow, under certain circumstances, other entities, including other real estate programs sponsored or operated by CCO Group, to merge into or cause the exchange or conversion of their interest in that entity for interests of our operating partnership. Because the limited partnership interests of our operating partnership may, in the discretion of our Board, be exchanged for shares of our common stock, any merger, exchange or conversion between our operating partnership and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders.
Our Umbrella Partnership Real Estate Investment Trust (“UPREIT”) structure may result in potential conflicts of interest with limited partners in our operating partnership whose interests may not be aligned with those of our stockholders.
Our directors and officers have duties to our corporation and our stockholders under Maryland law in connection with their management of the corporation. At the same time, we, as general partner, have fiduciary duties under Delaware law to our operating partnership and to the limited partners in connection with the management of our operating partnership. If we admit outside limited partners to our operating partnership, our duties as general partner of our operating partnership and its partners may come into conflict with the duties of our directors and officers to the corporation and our stockholders. Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership agreement. The partnership agreement of our operating partnership provides that, for so long as we own a controlling interest in our operating partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners will be resolved in favor of our stockholders.
Additionally, the partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees, will not be liable or accountable to our operating partnership for losses sustained, liabilities incurred or benefits not derived if we or our officers, directors, agents or employees acted in good faith. In addition, our operating partnership is required to indemnify us and our officers, directors, employees, agents and designees to the extent permitted by applicable law from and against any and all claims arising from operations of our operating partnership, unless it is established that: (1) the act or omission was committed in bad faith, was fraudulent or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful.
The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties.
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General Risks Related to Real Estate Assets
Adverse economic, regulatory and geographic conditions that have an impact on the real estate market in general may prevent us from being profitable or from realizing growth in the value of our real estate properties, and could have a significant negative impact on us.
Our operating results will be subject to risks generally incident to the ownership of real estate, including:
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changes in international, national or local economic or geographic conditions (including as a result of the outbreak of the novel strain of coronavirus (“COVID-19”) that began in the fourth quarter of 2019);
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changes in supply of or demand for similar or competing properties in an area;
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changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
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the illiquidity of real estate assets generally;
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changes in tax, real estate, environmental and zoning laws; and
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periods of high interest rates and tight money supply.
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The outbreak of COVID-19 that began in the fourth quarter of 2019 has led to an economic slowdown in the United States and could likely lead to a recession. During periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. The extent to which federal, state or local governmental authorities grant rent relief or other relief or enact amnesty programs applicable to our tenants in response to the COVID-19 outbreak will exacerbate the negative impacts that a slow down or recession will have on us. If we cannot operate our properties so as to meet our financial expectations, because of these or other risks, we may be prevented from being profitable or growing the values of our real estate properties, and our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions to our stockholders may be significantly negatively impacted.
We are primarily dependent on single-tenant leases for our revenue and, accordingly, if we are unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire on favorable terms or at all, our financial condition could be adversely affected.
We focus our investment activities on ownership of primarily freestanding, single-tenant commercial properties that are net leased to a single tenant. Therefore, the financial failure of, or other default by, a significant tenant or multiple tenants could cause a material reduction in our revenues and operating cash flows. In addition, to the extent that we enter into a master lease with a particular tenant, the termination of such master lease could affect each property subject to the master lease, resulting in the loss of revenue from all such properties.
We cannot assure our stockholders that our leases will be renewed or that we will be able to lease or re-lease the properties on favorable terms, or at all, or that lease terminations will not cause us to sell the properties at a loss. Any of our properties that become vacant could be difficult to re-lease or sell. We have and may continue to experience vacancies either by the default of a tenant under its lease or the expiration of one of our leases. We typically must incur all of the costs of ownership for a property that is vacant. Upon or pending the expiration of leases at our properties, we may be required to make rent or other concessions to tenants, or accommodate requests for renovations, remodeling and other improvements, in order to retain and attract tenants. Certain of our properties may be specifically suited to the particular needs of a tenant (
e.g.
, a restaurant) and major renovations and expenditures may be required in order for us to re-lease the space for other uses. If the vacancies continue for a long period of time, we may suffer reduced revenues and increased costs, resulting in less cash available for distribution to our stockholders and unitholders of CMFT OP. If we are unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire on favorable terms or at all, our financial condition could be adversely affected.
We are subject to geographic and industry concentrations that make us more susceptible to adverse events with respect to certain geographic areas or industries.
As of
December 31, 2019
, we had derived approximately:
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12%
and
10%
of our
2019
annualized rental income from tenants in
California
and
Georgia
, respectively; and
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13%
,
12%
and
10%
of our
2019
annualized rental income from tenants in the
sporting goods
,
home and garden
and
discount store
industries, respectively.
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Any adverse change in the financial condition of a tenant with whom we may have a significant credit concentration now or in the future, or any downturn of the economy in any state or industry in which we may have a significant credit concentration now or in the future, could result in a material reduction of our cash flows or material losses to us.
If a major tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which could have a material adverse effect on our financial condition and ability to pay distributions to our stockholders.
The bankruptcy or insolvency of our tenants may adversely affect the income produced by our properties. Under bankruptcy law, a tenant cannot be evicted solely because of its bankruptcy and has the option to assume or reject any unexpired lease. If the tenant rejects the lease, any resulting claim we have for breach of the lease (excluding collateral securing the claim) will be treated as a general unsecured claim. Our claim against the bankrupt tenant for unpaid and future rent will be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant that rejects its lease would pay in full amounts it owes us under the lease. Even if a lease is assumed and brought current, we still run the risk that a tenant could condition lease assumption on a restructuring of certain terms, including rent, that would have an adverse impact on us. Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
In addition, the financial failure of, or other default by, one or more of the tenants to whom we have exposure could have an adverse effect on the results of our operations. While we evaluate the creditworthiness of our tenants by reviewing available financial and other pertinent information, there can be no assurance that any tenant will be able to make timely rental payments or avoid defaulting under its lease. If any of our tenants’ businesses experience significant adverse changes, they may fail to make rental payments when due, close a number of stores, exercise early termination rights (to the extent such rights are available to the tenant) or declare bankruptcy. A default by a significant tenant or multiple tenants could cause a material reduction in our revenues and operating cash flows. In addition, if a tenant defaults, we may incur substantial costs in protecting our assets.
If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback might be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our financial condition, cash flows and the amount available for distributions to our stockholders.
If the sale-leaseback were re-characterized as a financing, we would not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, we and our tenant could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the tenant relating to the property.
We have assumed, and in the future may assume, liabilities in connection with our property acquisitions, including unknown liabilities.
In connection with the acquisition of properties, we may assume existing liabilities, some of which may have been unknown or unquantifiable at the time of the transaction. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of tenants or other persons dealing with the sellers prior to our acquisition of the properties, tax liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. If the magnitude of such unknown liabilities is high, either singly or in the aggregate, it could adversely affect our business, financial condition, liquidity and results of operations, cash flows or our ability to satisfy our debt service obligations or maintain our level of distributions on our common stock.
Challenging economic conditions could adversely affect vacancy rates, which could have an adverse impact on our ability to make distributions and the value of an investment in our shares.
Challenging economic conditions, the availability and cost of credit, turmoil in the mortgage market, and declining real estate markets may contribute to increased vacancy rates in the commercial real estate sector. If we experience vacancy rates that are higher than historical vacancy rates, we may have to offer lower rental rates and greater tenant improvements or
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concessions than expected. Increased vacancies may have a greater impact on us, as compared to REITs with other investment strategies, as our investment approach relies on long-term leases in order to provide a relatively stable stream of income for our stockholders. As a result, increased vacancy rates could have the following negative effects on us:
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the values of our commercial properties could decrease below the amount paid for such assets;
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revenues from such properties could decrease due to low or no rental income during vacant periods, lower future rental rates and/or increase tenant improvement expenses or concessions;
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ownership costs could increase;
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revenues from such properties that secure loans could decrease, making it more difficult for us to meet our payment obligations; and/or
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the resale value of such properties could decline.
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All of these factors could impair our ability to make distributions and decrease the value of an investment in our shares.
Uninsured losses or losses in excess of our insurance coverage could materially adversely affect our financial condition and cash flows, and there can be no assurance as to future costs and the scope of coverage that may be available under insurance policies.
We carry comprehensive liability, fire, extended coverage, and rental loss insurance covering all of the properties in our portfolio under one or more blanket insurance policies with policy specifications, limits and deductibles customarily carried for similar properties. In addition, we carry professional liability and directors’ and officers’ insurance, and cyber liability insurance. While we select policy specifications and insured limits that we believe are appropriate and adequate given the relative risk of loss, insurance coverages provided by tenants, the cost of the coverage and industry practice, there can be no assurance that we will not experience a loss that is uninsured or that exceeds policy limits. In addition, we may reduce or discontinue terrorism, earthquake, flood or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. Our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases.
Further, we do not carry insurance for certain losses, including, but not limited to, losses caused by earthquakes, riots or acts of war because such losses may be either uninsurable or not economically insurable. If we experience a loss that is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. In addition, we carry several different lines of insurance, placed with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. As a result of any of the situations described above, our financial condition and cash flows may be materially and adversely affected.
We may be unable to secure funds for future leasing commissions, tenant improvements or capital needs, which could adversely impact our ability to pay cash distributions to our stockholders.
When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for leasing commissions, tenant improvements and tenant refurbishments to the vacated space. In addition, although we expect that our leases with tenants will require tenants to pay routine property maintenance costs, we could be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops. We will use substantially all of the net proceeds from the Offerings to buy real estate and real estate-related assets and to pay various fees and expenses. We intend to reserve only approximately 0.1% of the gross proceeds from the Offerings for future capital needs. Accordingly, if we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain funds from other sources, such as cash flows from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, we may be required to defer necessary improvements to a property, which may cause that property to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased operating cash flows as a result of fewer potential tenants being attracted to the property. If this happens, our assets may generate lower cash flows or decline in value, or both.
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We may be unable to successfully expand our operations into new markets.
Each of the risks described in the previous risk factors that are applicable to our ability to acquire and successfully integrate and operate properties in the markets in which our properties are located are also applicable to our ability to acquire and successfully integrate and operate properties in new markets. In addition to these risks, we may not possess the same level of familiarity with the dynamics and market conditions of certain new markets that we may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a significant market share or achieve a desired return on our assets in new markets. If we are unsuccessful in expanding into new markets, it could have a material adverse effect on our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
Our properties may be subject to impairment charges.
We routinely evaluate our real estate assets for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and lease structure. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. Since our investment focus is on properties net leased to a single tenant, the financial failure of, or other default by, a single tenant under its lease may result in a significant impairment loss. If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded. Management has recorded an impairment charge related to certain properties in the year ended
December 31, 2019
, and may record future impairments based on actual results and changes in circumstances. Negative developments in the real estate market may cause management to reevaluate the business and macro-economic assumptions used in its impairment analysis. Changes in management’s assumptions based on actual results may have a material impact on the Company’s financial statements. See
Note 3 — Fair Value Measurements
to our consolidated financial statements for a discussion of our real estate impairment charge.
We may obtain only limited warranties when we purchase a property and typically have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property.
We may be unable to sell a property if or when we decide to do so, including as a result of uncertain market conditions.
Real estate assets are, in general, relatively illiquid and may become even more illiquid during periods of economic downturn. As a result, we may not be able to sell our properties quickly or on favorable terms in response to changes in the economy or other conditions when it otherwise may be prudent to do so. In addition, certain significant expenditures generally do not change in response to economic or other conditions, including debt service obligations, real estate taxes, and operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced earnings. Further, as a result of the 100% prohibited transactions tax applicable to REITs, we intend to hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be favorable. Therefore, we may be unable to adjust our portfolio promptly in response to economic, market or other conditions, which could adversely affect our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
Some of our leases may not contain rental increases over time, or the rental increases may be less than the fair market rate at a future point in time. When that is the case, the value of the leased property to a potential purchaser may not increase over time, which may restrict our ability to sell that property, or if we are able to sell that property, may result in a sale price less than the price that we paid to purchase the property or the price that could be obtained if the rental was at the then-current market rate.
We expect to hold the various real properties we acquire until such time as we decide that a sale or other disposition is appropriate given our REIT status and business objectives. Our ability to dispose of properties on advantageous terms or at all depends on certain factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. We cannot predict the various market conditions affecting real estate assets which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the disposition of our properties, we cannot assure our stockholders that we will be able to sell such properties at a profit or at all in
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the future. Accordingly, the extent to which our stockholders will receive cash distributions and realize potential appreciation on our real estate assets will depend upon fluctuating market conditions. Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements.
Our properties where the underlying tenant has a below investment grade credit rating, as determined by major credit rating agencies, or has an unrated tenant may have a greater risk of default.
As of
December 31, 2019
, approximately
63.1%
of our tenants were not rated or did not have an investment grade credit rating from a major ratings agency or were not affiliates of companies having an investment grade credit rating. Our properties with such tenants may have a greater risk of default and bankruptcy than properties leased exclusively to investment grade tenants. When we acquire properties where the tenant does not have a publicly available credit rating, we will use certain credit assessment tools as well as rely on our own estimates of the tenant’s credit rating which includes reviewing the tenant’s financial information (
e.g.
, financial ratios, net worth, revenue, cash flows, leverage and liquidity, if applicable). If our ratings estimates are inaccurate, the default or bankruptcy risk for the subject tenant may be greater than anticipated. If our lender or a credit rating agency disagrees with our ratings estimates, we may not be able to obtain our desired level of leverage or our financing costs may exceed those that we projected. This outcome could have an adverse impact on our returns on that asset and hence our operating results.
We are exposed to risks related to increases in market lease rates and inflation, as income from long-term leases is the primary source of our cash flows from operations.
Leases of long-term duration or which include renewal options that specify a maximum rate increase may result in below-market lease rates over time if we do not accurately estimate inflation or market lease rates. Provisions of our leases designed to mitigate the risk of inflation and unexpected increases in market lease rates, such as periodic rental increases, may not adequately protect us from the impact of inflation or unexpected increases in market lease rates. If we are subject to below-market lease rates on a significant number of our properties pursuant to long-term leases and our operating and other expenses are increasing faster than anticipated, our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock could be materially adversely affected.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property or may require us to maintain specified debt levels for a period of years on some properties.
A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions may include terms that provide strong financial disincentives for borrowers to prepay their outstanding loan balance. If a property is subject to a lock-out provision, we may be materially restricted from or delayed in selling or otherwise disposing of or refinancing such property. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change of control even though that disposition or change of control might be in the best interests of our stockholders.
Increased operating expenses could reduce cash flows from operations and funds available to acquire properties or make distributions.
Our properties are subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are payable (or are being paid) in an amount that is insufficient to cover operating expenses that are the landlord’s responsibility under the lease, we could be required to expend funds in excess of such rents with respect to that property for operating expenses. Our properties are subject to increases in tax rates, utility costs, insurance costs, repairs and maintenance costs, administrative costs and other operating and ownership expenses. Some of our property leases may not require the tenants to pay all or a portion of these expenses, in which event we may be responsible for these costs. If we are unable to lease properties on terms that require the tenants to pay all or some of the properties’ operating expenses, if our tenants fail to pay these expenses as required or if expenses we are required to pay exceed our expectations, we could have less funds available for future acquisitions or cash available for distributions to our stockholders.
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The market environment may adversely affect our operating results, financial condition and ability to pay distributions to our stockholders.
Any deterioration of domestic or international financial markets could impact the availability of credit or contribute to rising costs of obtaining credit and therefore, could have the potential to adversely affect the value of our assets, the availability or the terms of financing, our ability to make principal and interest payments on, or refinance, any indebtedness and/or, for our leased properties, the ability of our tenants to enter into new leasing transactions or satisfy their obligations, including the payment of rent, under existing leases. The market environment also could affect our operating results and financial condition as follows:
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Debt Markets
— The debt market is sensitive to the macro environment, such as Federal Reserve policy, market sentiment, or regulatory factors affecting the banking and CMBS industries. Should overall borrowing costs increase, due to either increases in index rates or increases in lender spreads, our operations may generate lower returns.
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Real Estate Markets
— The properties we acquire could substantially decrease in value after we purchase them. Consequently, we may not be able to recover the carrying amount of our properties, which may require us to recognize an impairment charge or record a loss on sale in our earnings.
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Real estate related taxes may increase, and if these increases are not passed on to tenants, our income will be reduced.
Local real property tax assessors may reassess our properties, which may result in increased taxes. Generally, property taxes increase as property values or assessment rates change, or for other reasons deemed relevant by property tax assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. Although some tenant leases may permit us to pass through such tax increases to the tenants for payment, renewal leases or future leases may not be negotiated on the same basis. Tax increases not passed through to tenants could have a materially adverse effect on our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
Covenants, conditions and restrictions may restrict our ability to operate a property.
Many of our properties are or will be subject to significant covenants, conditions and restrictions, known as “CC&Rs,” restricting their operation and any improvements on such properties. Compliance with CC&Rs may adversely affect the types of tenants we are able to attract to such properties, our operating costs and reduce the amount of funds that we have available to pay distributions to our stockholders.
Acquisitions of build-to-suit properties will be subject to additional risks related to properties under development.
We may engage in build-to-suit programs and the acquisition of properties under development. In connection with these acquisitions, we will enter into purchase and sale arrangements with sellers or developers of suitable properties under development or construction. In such cases, we are generally obligated to purchase the property at the completion of construction, provided that the construction conforms to definitive plans, specifications, and costs approved by us in advance. We may also engage in development and construction activities involving existing properties, including the expansion of existing facilities (typically at the request of a tenant) or the development or build-out of vacant space at retail properties. We may advance significant amounts in connection with certain development projects.
As a result, we are subject to potential development risks and construction delays and the resultant increased costs and risks, as well as the risk of loss of certain amounts that we have advanced should a development project not be completed. To the extent that we engage in development or construction projects, we may be subject to uncertainties associated with obtaining permits or re-zoning for development, environmental and land use concerns of governmental entities and/or community groups, and the builder’s ability to build in conformity with plans, specifications, budgeted costs and timetables. If a developer or builder fails to perform, we may terminate the purchase, modify the construction contract or resort to legal action to compel performance (or in certain cases, we may elect to take over the project and pursue completion of the project ourselves). A developer’s or builder’s performance may also be affected or delayed by conditions beyond that party’s control. Delays in obtaining permits or completion of construction could also give tenants the right to terminate preconstruction leases.
We may incur additional risks if we make periodic progress payments or other advances to builders before they complete construction. These and other such factors can result in increased project costs or the loss of our investment. Although we rarely engage in construction activities relating to space that is not already leased to one or more tenants, to the extent that we do so, we may be subject to normal lease-up risks relating to newly constructed projects. We also will rely on rental income and expense projections and estimates of the fair market value of the property upon completion of construction when agreeing upon a price at the time we acquire the property. If these projections are inaccurate, we may pay too much for a property and our return on our investment could suffer. If we contract with a development company for a newly developed property, there is a
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risk that money advanced to that development company for the project may not be fully recoverable if the developer fails to successfully complete the project.
Our operating results may be negatively affected by potential development and construction delays and the resultant increased costs and risks.
If we engage in development or construction projects, we will be subject to uncertainties associated with re-zoning for development, environmental and land use concerns of governmental entities and/or community groups, and our builder’s ability to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder fails to perform, we may resort to legal action to rescind the breached agreements or to compel performance. A builder’s performance may also be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks if we make periodic progress payments or other advances to builders before they complete construction. These and other such factors can result in increased costs of a project or loss of our asset. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our assets could suffer.
We may deploy capital in unimproved real property. Returns from development of unimproved properties are also subject to risks associated with re-zoning the land for development and environmental and land use concerns of governmental entities and/or community groups.
If we purchase an option to acquire a property but do not exercise the option, we likely would forfeit the amount we paid for such option, which would reduce the amount of cash we have available to make other acquisitions.
In determining whether to purchase a particular property, we may obtain an option to purchase such property. The amount paid for an option, if any, normally is forfeited if the property is not purchased and normally is credited against the purchase price if the property is purchased. If we purchase an option to acquire a property but do not exercise the option, we likely would forfeit the amount we paid for such option, which would reduce the amount of cash we have available to make other acquisitions.
Competition with third parties in acquiring, leasing or selling properties and other investments may reduce our profitability and the return on our stockholders’ investment.
We compete with many other entities engaged in real estate acquisition activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, and other entities engaged in real estate acquisition activities, many of which have greater resources than we do. Larger competitors may enjoy significant advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable acquisitions may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties and other assets as a result of competition with third parties without a corresponding increase in tenant lease rates, our profitability will be reduced, and our stockholders may experience a lower return on their investment.
We are also subject to competition in the leasing of our properties. Many of our competitors own properties similar to ours in the same markets in which our properties are located. If one of our properties is nearing the end of the lease term or becomes vacant and our competitors (which could include funds sponsored by affiliates of our advisor) offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer substantial rent concessions in order to retain tenants when such tenants’ leases expire or to attract new tenants.
In addition, if our competitors sell assets similar to assets we intend to sell in the same markets and/or at valuations below our valuations for comparable assets, we may be unable to dispose of our assets at all or at favorable pricing or on favorable terms. As a result of these actions by our competitors, our business, financial condition, liquidity and results of operations may be adversely affected.
Our properties face competition that may affect tenants’ ability to pay rent and the amount of rent paid to us may affect the cash available for distributions to our stockholders and the amount of distributions.
Many of our leases provide for increases in rent as a result of increases in the tenant’s sales volume. There likely will be numerous other retail properties within the market area of such properties that will compete with our tenants for customer business. In addition, traditional retailers face increasing competition from alternative retail channels, including internet-based
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retailers and other forms of e-commerce, factory outlet centers, wholesale clubs, mail order catalogs and television shopping networks, which could adversely impact our retail tenants’ sales volume. Such competition could negatively affect such tenants’ ability to pay rent or the amount of rent paid to us. This could result in decreased cash flows from tenants thus affecting cash available for distributions to our stockholders and the amount of distributions we pay.
Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect our operations.
From time to time, we may acquire multiple properties in a single transaction. Portfolio acquisitions are often more complex and expensive than single-property acquisitions, and the risk that a multiple-property acquisition does not close may be greater than in a single-property acquisition. Portfolio acquisitions may also result in us owning assets in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require that a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we will be required to either pass on the entire portfolio, including the desirable properties or acquire the entire portfolio and operate or attempt to dispose of the unwanted properties. To acquire multiple properties in a single transaction, we may be required to accumulate a large amount of cash. We would expect the returns that we earn on such cash to be less than the ultimate returns on real property, therefore accumulating such cash could reduce our funds available for distributions to our stockholders. Any of the foregoing events may have an adverse impact on our operations.
Terrorist attacks, acts of violence or war or public health crises may affect the markets in which we operate and have a material adverse effect on our financial condition, results of operations and ability to pay distributions to our stockholders.
The strength and profitability of our business depends on demand for and the value of our properties. Terrorist attacks, acts of war and public health crises (including the recent COVID-19 outbreak) may result in declining economic activity, which could harm the demand for and the value of our properties and may negatively affect our operations and our stockholders’ investments. We may acquire real estate assets located in areas that are susceptible to terrorist attacks or acts of war. These attacks may directly impact the value of our assets through damage, destruction, loss or increased security costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Further, certain losses resulting from these types of events are uninsurable or not insurable at reasonable costs.
More generally, any terrorist attack, other act of violence or war, or public health crisis (such as the COVID-19 outbreak) could result in increased volatility in, or damage to, the United States and worldwide financial markets and economy, all of which could adversely affect our tenants’ ability to pay rent on their leases or our ability to borrow money or issue capital stock at acceptable prices, which could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to our stockholders.
Pandemics or other health crises may adversely affect our business and/or operations, our tenants’ financial condition and the profitability of our retail properties.
Our business and/or operations and the businesses of our tenants could be materially and adversely affected by the risks, or the public perception of the risks, related to a pandemic or other health crisis, such as the recent outbreak of COVID-19.
The profitability of our retail properties depends, in part, on the willingness of customers to visit our tenants’ businesses. The risk, or public perception of the risk, of a pandemic or media coverage of infectious diseases could cause employees or customers to avoid our properties, which could adversely affect foot traffic to our tenants’ businesses and our tenants’ ability to adequately staff their businesses. Such events could adversely impact tenants’ sales and/or cause the temporary closure or slowdown of our tenants’ businesses, which could severely disrupt their operations and have a material adverse effect on our business, financial condition and results of operations. Similarly, the potential effects of quarantined employees of office tenants may adversely impact their businesses and affect their ability to pay rent on a timely basis.
We are subject to risks that affect the retail real estate environment generally.
Our business has historically focused on retail real estate. As such, we are subject to certain risks that can affect the ability of our retail properties to generate sufficient revenue to meet our operating and other expenses, including debt service, to make capital expenditures and to make distributions to our shareholders. We face continuing challenges because of changing consumer preferences and because the conditions in the economy affect employment growth and cause fluctuations and variations in retail sales and in business and consumer confidence and consumer spending on retail goods. In general, a number of factors can negatively affect the income generated by a retail property or the value of a property, including: a downturn in the national, regional or local economy; a decrease in employment or consumer confidence or spending; increases in operating
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costs, such as common area maintenance, real estate taxes, utility rates and insurance premiums; higher energy or fuel costs resulting from adverse weather conditions, natural disasters, geopolitical concerns, terrorist activities and other factors; changes in interest rate levels and the cost and availability of financing; a weakening of local real estate conditions, such as an oversupply of, or a reduction in demand for, retail space or retail goods, and the availability and creditworthiness of current and prospective tenants; trends in the retail industry; seasonality; changes in perceptions by retailers or shoppers of the safety, convenience and attractiveness of a retail property; perceived changes in the convenience and quality of competing retail properties and other retailing options such as internet shopping or other strategies, such as using smartphones or other technologies to determine where to make and to assist in making purchases; the ability of our tenants to meet shoppers’ demands for quality, variety, and product availability, which may be impacted by supply chain disruptions; and changes in laws and regulations applicable to real property, including tax and zoning laws. For example, in early 2020, a global outbreak of COVID-19 occurred, leading to travel restrictions and plant shutdowns, all of which have impacted, and could continue to impact, our tenants’ supply chains and, ultimately, retail product availability. Fears related to this COVID-19 outbreak have impacted, and may continue to impact, shoppers’ willingness to visit our retail properties, and the continued spread of the virus has resulted in property shutdowns and may result in additional shutdowns of our retail properties, particularly in certain geographies reporting increasing diagnoses of the virus or related illnesses. The extent of the outbreak and its impact on our tenants and our operations is uncertain, but a prolonged outbreak could continue to have a material impact.
Changes in one or more of the aforementioned factors can lead to a decrease in the revenue or income generated by our properties and can have a material adverse effect on our financial condition and results of operations. Many of these factors could also specifically or disproportionately affect one or more of our tenants, which could decrease operating performance, reduce property revenue and affect our results of operations. If the estimated future cash flows related to a particular property are significantly reduced, we may be required to reduce the carrying value of the property.
Downturns in the retail industry likely will have a direct adverse impact on our revenues and cash flow.
Our retail properties currently owned consist primarily of necessity retail properties and anchored shopping centers. Our retail performance therefore is generally linked to economic conditions in the market for retail space. The market for retail space could be adversely affected by any of the following:
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weakness in the national, regional and local economies, and declines in consumer confidence which could adversely impact consumer spending and retail sales and in turn tenant demand for space and could lead to increased store closings;
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changes in market rental rates;
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changes in demographics (including the number of households and average household income) surrounding our shopping centers;
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adverse financial conditions for anchored shopping centers and other retail, service, medical or restaurant tenants;
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continued consolidation in the retail and grocery sector;
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excess amount of retail space in our markets;
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reduction in the demand by tenants to occupy our shopping centers as a result of reduced consumer demand for certain retail formats;
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increase in e-commerce and alternative distribution channels may negatively affect out tenant sales or decrease the square footage our tenants require and could lead to margin pressure on our anchored shopping centers, which could lead to store closures;
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the impact of an increase in energy costs on consumers and its consequential effect on the number of shopping visits to our centers;
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a pandemic or other health crisis, such as the recent outbreak of COVID-19; and
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consequences of any armed conflict involving, or terrorist attack against, the United States.
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To the extent that any of these conditions occur, they are likely to impact market rents for retail space, occupancy in our retail properties, our ability to sell, acquire or develop retail properties, and our cash available for distributions to stockholders.
Costs of complying with environmental laws and regulations may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws, ordinances and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of hazardous materials, and the remediation of any associated contamination.
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Some of these laws and regulations may impose joint and several liability on tenants, current or previous owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which the property may be used or businesses may be operated, and these restrictions may require substantial expenditures and/or adversely affect the value of the property. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. The presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent such property or to use such property as collateral for future borrowing.
Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our properties may be affected by our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations that we may be required to comply with, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions to our stockholders and may reduce the value of their investment.
Some of these properties may contain at the time of acquisition, or may have contained prior to our acquisition, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. Certain of our properties may be adjacent to or near other properties upon which others have engaged, or may engage in the future, in activities that may release petroleum products or other hazardous or toxic substances.
From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In such an instance, we will estimate the costs of environmental investigation, clean-up and monitoring in determining the purchase price. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
We may not obtain an independent third-party environmental assessment for every property we acquire. In addition, any such assessment that we do obtain may not reveal all environmental liabilities. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims would adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows from operations.
In some instances, we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default on its obligations under the financing, which could negatively impact cash flows from operations. Even in the absence of a purchaser default, the distribution of sale proceeds or their reinvestment in other assets will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.
Our net leases may require us to pay property-related expenses that are not the obligations of our tenants.
Under the terms of the majority of our net leases, in addition to satisfying their rent obligations, our tenants will be responsible for the payment or reimbursement of property expenses such as real estate taxes, insurance and ordinary maintenance and repairs. However, under the provisions of certain existing leases and leases that we may enter into in the future with our tenants, we may be required to pay some or all of the expenses of the property, such as the costs of environmental liabilities, roof and structural repairs, real estate taxes, insurance, certain non-structural repairs and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations may be adversely affected and the amount of cash available to meet expenses and to pay distributions to stockholders may be reduced.
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Changes in accounting standards may adversely impact our financial condition and/or results of operations.
We are subject to the rules and regulations of the Financial Accounting Standards Board related to GAAP.
Various changes to GAAP are constantly being considered, some of which could materially impact our reported financial
condition and/or results of operations. Also, to the extent that public companies in the United States would be required in the
future to prepare financial statements in accordance with International Financial Reporting Standards instead of the current GAAP, this change in accounting standards could materially affect our financial condition or results of operations.
Compliance with the Americans with Disabilities Act of 1990, as amended, and fire, safety and other regulations may require us to make unanticipated expenditures that could significantly reduce the cash available for distributions on our common stock.
Our properties are subject to regulation under federal laws, such as the Americans with Disabilities Act of 1990, as amended (the “ADA”), pursuant to which all public accommodations must meet federal requirements related to access and use by disabled persons. Although we believe that our properties substantially comply with present requirements of the ADA, we have not conducted an audit or investigation of all of our properties to determine our compliance. If one or more of our properties or future properties are not in compliance with the ADA, we might be required to take remedial action, which would require us to incur additional costs to bring the property into compliance. Noncompliance with the ADA could also result in imposition of fines or an award of damages to private litigants.
Additional federal, state and local laws also may require modifications to our properties or restrict our ability to renovate our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation.
In addition, our properties are subject to various federal, state and local regulatory requirements, such as state and local earthquake, fire and life safety requirements. If we were to fail to comply with these various requirements, we might incur governmental fines or private damage awards. If we incur substantial costs to comply with the ADA or any other regulatory requirements, our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock could be materially adversely affected. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties.
Risks Associated with Debt Financing
We have incurred mortgage indebtedness and other borrowings, which may increase our business risks, hinder our ability to make distributions, and decrease the value of our stockholders’ investment.
We have acquired real estate and other real estate-related assets by borrowing new funds. In addition, we have incurred mortgage debt and pledged some of our real properties as security for that debt to obtain funds to acquire additional real properties and other assets and to pay distributions to our stockholders. We may borrow additional funds if we need funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. We may also borrow additional funds if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT for U.S. federal income tax purposes.
Our advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to stockholders. There is no limitation on the amount we may borrow against any individual property or other asset. This factor could limit the amount of cash we have available to distribute to our stockholders and could result in a decline in the value of our stockholders’ investment.
We do not intend to incur mortgage debt on a particular property unless we believe the property’s projected operating cash flows are sufficient to service the mortgage debt. However, if there is a shortfall between the cash flows from a property and the cash flows needed to service mortgage debt on a property, the amount available for distributions to our stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of our stockholders’ investments. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds from the foreclosure. In such event, we may be unable to pay the amount of distributions required in order to maintain our qualification as a REIT. We may give full or partial guarantees to lenders of recourse mortgage debt to the entities that own our properties. If we provide a guaranty on behalf of an entity that
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owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity and with respect to any such property that is vacant, potentially be responsible for any property-related costs such as real estate taxes, insurance and maintenance, which costs will likely increase if the lender does not timely exercise its remedies. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected, which could result in our losing our REIT status and would result in a decrease in the value of our stockholders’ investment.
We intend to rely on external sources of capital to fund future capital needs, and if we encounter difficulty in obtaining such capital, we may not be able to meet maturing obligations or make any additional acquisitions.
In order to maintain our qualification as a REIT under the Internal Revenue Code, we are required, among other things, to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. Because of this dividend requirement, we may not be able to fund from cash retained from operations all of our future capital needs, including capital needed to refinance maturing obligations or make new acquisitions.
The capital and credit markets have experienced extreme volatility and disruption as a result of the global outbreak of COVID-19. We believe that such volatility and disruption are likely to continue into the foreseeable future. Market volatility and disruption could hinder our ability to obtain new debt financing or refinance our maturing debt on favorable terms or at all or to raise debt and equity capital. Our access to capital will depend upon a number of factors, including:
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general market conditions;
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government action or regulation, including changes in tax law;
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the market’s perception of our future growth potential;
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the extent of investor interest;
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analyst reports about us and the REIT industry;
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the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;
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our financial performance and that of our tenants;
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our current debt levels and changes in our credit ratings, if any;
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our current and expected future earnings; and
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our cash flows and cash distributions, including our ability to satisfy the dividend requirements applicable to REITs.
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If we are unable to obtain needed capital on satisfactory terms or at all, we may not be able to meet our obligations and commitments as they mature or make any new acquisitions.
High interest rates may make it difficult for us to finance or refinance assets, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
We run the risk of being unable to finance or refinance our assets on favorable terms or at all. If interest rates are high when we desire to mortgage our assets or when existing loans come due and the assets need to be refinanced, we may not be able to, or may choose not to, finance the assets and we would be required to use cash to purchase or repay outstanding obligations. Our inability to use debt to finance or refinance our assets could reduce the number of assets we can acquire, which could reduce our operating cash flows and the amount of cash distributions we can make to our stockholders. Higher costs of capital also could negatively impact our operating cash flows and returns on our assets.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
We have incurred indebtedness, and in the future may incur additional indebtedness, that bears interest at a variable rate. To the extent that we incur variable rate debt and do not hedge our exposure thereunder, increases in interest rates would increase the amounts payable under such indebtedness, which could reduce our operating cash flows and our ability to pay distributions to our stockholders. In addition, if our existing indebtedness matures or otherwise becomes payable during a period of rising interest rates, we could be required to liquidate one or more of our assets at times that may prevent realization of the maximum return on such assets.
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We may not be able to generate sufficient cash flows to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness, and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash. To a certain extent, our cash flows are subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors, many of which are beyond our control.
We cannot assure our stockholders that our business will generate sufficient cash flows from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.
Additionally, if we incur additional indebtedness in connection with any future deployment of capital or development projects or for any other purpose, our debt service obligations could increase. We may need to refinance all or a portion of our indebtedness before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
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our financial condition and market conditions at the time;
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restrictions in the agreements governing our indebtedness;
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general economic and capital market conditions;
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the availability of credit from banks or other lenders; and
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our results of operations.
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As a result, we may not be able to refinance our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flows from operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity, or delaying any strategic acquisitions and alliances or capital expenditures, any of which could have a material adverse effect on our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or maintain our level of distributions on our common stock.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with providing us financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. In general, our loan agreements restrict our ability to encumber or otherwise transfer our interest in the respective property without the prior consent of the lender. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace CMFT Management as our advisor. These or other limitations imposed by a lender may adversely affect our flexibility and our ability to pay distributions on our common stock.
Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.
We have financed some of our property acquisitions using interest-only mortgage indebtedness and may continue to do so. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon maturity payments will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.
Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the loan on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT. Any of these results would have a significant, negative impact on the value of our common stock.
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To hedge against exchange rate and interest rate fluctuations, we have used, and may continue to use, derivative financial instruments that may be costly and ineffective and may reduce the overall returns on our stockholders’ investment.
We have used, and may continue to use, derivative financial instruments to hedge our exposure to changes in exchange rates and interest rates on loans secured by our assets and investments in CMBS. Derivative instruments may include interest rate swap contracts, interest rate caps or floor contracts, rate lock arrangements, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time.
To the extent that we use derivative financial instruments to hedge against exchange rate and interest rate fluctuations, we will be exposed to credit risk, market risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Market risk includes the adverse effect on the value of the financial instrument resulting from a change in interest rates. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to pay distributions to our stockholders will be adversely affected.
Risks Associated with Real Estate-Related Assets
Investing in mortgage, bridge or mezzanine loans could adversely affect our return on our loan investments.
We have invested, and may continue to invest, in mezzanine loans and may make or acquire mortgage or bridge loans, or participations in such loans, to the extent our advisor determines that it is advantageous for us to do so. However, if we make or invest in mortgage, bridge or mezzanine loans, we will be at risk of defaults on those loans caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. If there are defaults under these loans, we may not be able to repossess and sell quickly any properties securing such loans. An action to foreclose on a property securing a loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of any lawsuit brought in connection with the foreclosure if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the loan, which could reduce the value of our investment in the defaulted loan.
We are subject to risks relating to
real
estate-related securities, including CMBS.
Real estate-related securities are often unsecured and also may be subordinated to other obligations of the issuer. As a result, investments in real estate-related securities may be subject to risks of (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities, (2) substantial market price volatility resulting from changes in prevailing interest rates in the case of traded equity securities, (3) subordination to the prior claims of banks and other senior lenders to the issuer, (4) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets, (5) the possibility that earnings of the issuer or that income from collateral may be insufficient to meet debt service and distribution obligations and (6) the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic slowdown or downturn. These risks may adversely affect the value of outstanding real estate-related securities and the ability of the obliged parties to repay principal and interest or make distribution payments.
CMBS are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, these securities are subject to the risks above and all of the risks of the underlying mortgage loans. CMBS are issued by investment banks and non-regulated financial institutions, and are not insured or guaranteed by the U.S. government. The value of CMBS may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities market as a whole and may be negatively impacted by any dislocation in the mortgage-backed securities market in general.
CMBS are also subject to several risks created through the securitization process. Subordinate CMBS are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes delinquent loans, there is a risk that interest payments on subordinate CMBS will not be fully paid. Subordinate CMBS are also subject to greater credit risk than those CMBS that are more highly rated. In certain instances, third-party guarantees or other forms of credit support can reduce the credit risk.
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U.S. Federal Income and Other Tax Risks
Failure to maintain our qualification as a REIT for U.S. federal income tax purposes would adversely affect our operations and our ability to make distributions.
We are currently taxed as a REIT under the Internal Revenue Code. Our ability to maintain our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets and other tests imposed by the Internal Revenue Code. Future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT. If we fail to continue to qualify as a REIT for any taxable year, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for the acquisition of assets or distribution to our stockholders because of the additional tax liability. In addition, distributions to our stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If we lose our REIT status, we might be required to borrow funds or liquidate some assets in order to pay the applicable tax. Our failure to continue to qualify as a REIT would adversely affect the return on our stockholders’ investment.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders’ investment.
Our ability to dispose of a property during the first few years following its acquisition is restricted to a substantial extent as a result of our REIT status. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. Properties we own, directly or through any subsidiary entity, including CMFT OP, but generally excluding our taxable REIT subsidiaries, may, depending on how we conduct our operations, be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Under applicable provisions of the Internal Revenue Code regarding prohibited transactions by REITs, we would be subject to a 100% tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including CMFT OP, but generally excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Any taxes we pay would reduce our cash available for distribution to our stockholders. Our concern over paying the prohibited transactions tax may cause us to forgo disposition opportunities that would otherwise be advantageous if we were not a REIT. As of December 31, 2019, our dispositions were not subject to the prohibited transaction tax.
Re-characterization of sale-leaseback transactions may cause us to lose our REIT status.
We may purchase properties and lease them back to the sellers of such properties. We would characterize such a sale-leaseback transaction as a “true lease,” which treats the lessor as the owner of the property for U.S. federal income tax purposes. In the event that any sale-leaseback transaction is challenged by the IRS and re-characterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT qualification “asset tests” or the “income tests” and, consequently, lose our REIT status effective with the year of re-characterization. Alternatively, such a re-characterization could cause the amount of our REIT taxable income to be recalculated, which might also cause us to fail to meet the distribution requirement for a taxable year and thus lose our REIT status.
Our stockholders may have current tax liability on distributions they elect to reinvest in our common stock.
If our stockholders participate in our DRIP, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in shares of our common stock that does not represent a return of capital. In addition, our stockholders may be treated, for U.S. federal tax purposes, as having received an additional distribution to the extent the shares are purchased at a discount from fair market value. Such an additional deemed distribution could cause our stockholders to be subject to additional income tax liability. Unless our stockholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability arising as a result of the distributions reinvested in our shares.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income (but under the Tax Cuts and Jobs Act, U.S. stockholders that are individuals, trusts and estates generally may deduct 20% of ordinary dividends from a REIT for taxable years beginning after December 31, 2017, and
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before January 1, 2026). Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability or reduce our operating flexibility, including the recently passed Tax Cuts and Jobs Act.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect our taxation and our ability to continue to qualify as a REIT, or the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their tax advisor with respect to the impact of recent legislation on their investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that acquires real estate to elect to be treated for U.S. federal income tax purposes as a regular corporation. As a result, our charter provides our Board with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. The Board has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
In addition, the Tax Cuts and Jobs Act made significant changes to the U.S. federal income tax rules for taxation of individuals and businesses, generally effective for taxable years beginning after December 31, 2017. The Tax Cuts and Jobs Act made major changes to the Internal Revenue Code, including a number of provisions of the Internal Revenue Code that affect the taxation of REITs and their stockholders. Among the changes made by the Tax Cuts and Jobs Act are permanently reducing the generally applicable corporate tax rate, generally reducing the tax rate applicable to individuals and other noncorporate taxpayers for tax years beginning after December 31, 2017 and before January 1, 2026, eliminating or modifying certain previously allowed deductions (including substantially limiting interest deductibility and, for individuals, the deduction for non-business state and local taxes), and, for taxable years beginning after December 31, 2017 and before January 1, 2026, providing for preferential rates of taxation through a deduction of up to 20% (subject to certain limitations) on most ordinary REIT dividends and certain trade or business income of non-corporate taxpayers. The Tax Cuts and Jobs Act also imposes new limitations on the deduction of net operating losses and requires us to recognize income for tax purposes no later than when we take it into account on our financial statements, which may result in us having to make additional taxable distributions to our stockholders in order to comply with REIT distribution requirements or avoid taxes on retained income and gains. The Tax Cuts and Jobs Act also made numerous large and small changes to the tax rules that do not affect the REIT qualification rules directly but may otherwise affect us or our stockholders.
While the changes in the Tax Cuts and Jobs Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Internal Revenue Code may have unanticipated effects on us or our stockholders. Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short amount of time without hearings and substantial time for review is likely to have led to drafting errors, issues needing clarification and unintended consequences that will have to be revisited in subsequent tax legislation. At this point, it is not clear if or when Congress will address these issues or when the IRS will issue administrative guidance on the changes made in the Tax Cuts and Jobs Act.
We urge our stockholders to consult with their own tax advisor with respect to the status of the Tax Cuts and Jobs Act and other legislative, regulatory or administrative developments and proposals and their potential effect on holding our common stock.
In certain circumstances, we may be subject to certain federal, state and local taxes as a REIT, which would reduce our cash available for distribution to our stockholders.
Even if we maintain our status as a REIT, we may be subject to certain federal, state and local taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Internal Revenue Code) will be subject to a 100% excise tax. Additionally, if we are not able to make sufficient distributions to eliminate our REIT taxable income, we may be subject to tax as a corporation on our undistributed REIT taxable income. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However,
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stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of our operating partnership or at the level of the other entities through which we indirectly own our assets. Any federal, state or local taxes we pay will reduce our cash available for distribution to our stockholders.
If our operating partnership or certain other subsidiaries fail to maintain their status as disregarded entities or partnerships, their income may be subject to taxation, which would reduce the cash available to us for distribution to our stockholders.
We intend to cause CMFT OP, our operating partnership, to maintain its current status as an entity separate from us (a disregarded entity), or in the alternative, a partnership for U.S. federal income tax purposes. Our operating partnership would lose its status as a disregarded entity for U.S. federal income tax purposes if it issues interests to any subsidiary we establish that is not a disregarded entity for tax purposes (a “regarded entity”) or a person other than us. If our operating partnership issues interests to any subsidiary we establish that is a regarded entity for tax purposes or a person other than us, we would characterize our operating partnership as a partnership for U.S. federal income tax purposes. As a disregarded entity or partnership, our operating partnership is not subject to U.S. federal income tax on its income. However, if the IRS were to successfully challenge the status of our operating partnership as a disregarded entity or partnership, CMFT OP would be taxable as a corporation. In such event, this would reduce the amount of distributions that the operating partnership could make to us. This could also result in our losing REIT status, and becoming subject to a corporate-level tax on our income. This would substantially reduce the cash available to us to make distributions to our stockholders and the return on their investment.
In addition, if certain of our other subsidiaries through which CMFT OP owns its properties, in whole or in part, lose their status as disregarded entities or partnerships for U.S. federal income tax purposes, such subsidiaries would be subject to taxation as corporations, thereby reducing cash available for distributions to our operating partnership. Such a re-characterization of CMFT OP’s subsidiaries also could threaten our ability to maintain REIT status.
To maintain our qualification as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.
In order to maintain our qualification as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to U.S. federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which dividends we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years.
Further, to maintain our qualification as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities, qualified real estate assets and stock of a taxable REIT subsidiary (“TRS”)) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, qualified real estate assets and stock of a TRS) can consist of the securities of any one issuer, no more than 20% of the value of our total assets can be represented by securities of one or more TRSs and no more than 25% of the value of our total assets can be represented by certain debt securities of publicly offered REITs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
The foregoing requirements could cause us to distribute amounts that otherwise would be spent on real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these dividends or make taxable stock dividends. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings, it is possible that we might not always be able to do so.
Our mezzanine loans may not qualify as real estate assets and could adversely affect our status as a REIT.
We have invested and may continue to invest in mezzanine loans, for which the IRS has provided a safe harbor, but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, the IRS will treat the mezzanine loan as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be
45
treated as qualifying mortgage interest for purposes of the REIT 75% income test. To the extent that any mezzanine loans do not meet all of the requirements for reliance on the safe harbor, such loans may not be real estate assets and could adversely affect our qualification as a REIT.
Non-U.S. stockholders may be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax upon the disposition of our shares.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a “U.S. real property interest” (“USRPI”) under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Our common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe that we are a domestically-controlled qualified investment entity. However, because our common stock is and will be freely transferable, no assurance can be given that we are or will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually or constructively, 10% or less of our common stock at any time during the five-year period ending on the date of the sale.
Distributions to tax-exempt stockholders may be classified as unrelated business taxable income.
If (1) we are a “pension-held REIT,” (2) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold shares of our common stock or (3) a holder of shares of our common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, shares by such tax-exempt stockholder may be subject to U.S. federal income tax as UBTI under the Internal Revenue Code.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or to offset certain other positions, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of one or both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
Investments outside the United States could present additional complications to our ability to satisfy the REIT qualification requirements and may subject us to additional taxes.
Operating in functional currencies other than the U.S. dollar and in environments in which real estate transactions are customarily structured differently than they are in the U.S. or are subject to different legal rules may complicate our ability to structure non-U.S. investments in a manner that enables us to satisfy the REIT qualification requirements. In addition, non-U.S. investments may subject us to various non-U.S. tax liabilities, including withholding taxes.
Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash flows.
Even if we continue to qualify as a REIT for U.S. federal income tax purposes, we will be required to pay some state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase and if any such increase is not reimbursable under the terms of our lease, then our cash flows will be negatively impacted, which in turn could have a material adverse effect on our business, financial condition, results of operations, cash flows or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
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The share transfer and ownership restrictions applicable to REITs and contained in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to continue to qualify as a REIT, five or fewer individuals, as defined in the Internal Revenue Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our Board, for so long as we continue to qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Internal Revenue Code) more than 9.8% in value of the aggregate of our outstanding shares of stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. The Board, in its sole discretion and upon receipt of certain representations and undertakings, may exempt a person (prospectively or retrospectively) from the ownership limits. However, our Board may not, among other limitations, grant an exemption from these ownership restrictions to any proposed transferee whose ownership, direct or indirect, in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our Board determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
If we elect to treat one or more of our subsidiaries as a TRS, it will be subject to corporate-level taxes, and our dealings with our TRSs may be subject to a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A TRS will be subject to applicable U.S. federal, state, local and foreign income tax on its taxable income, including corporate income tax on the TRS’s income, and is, as a result, less tax efficient than with respect to income we earn directly. The after-tax net income of our TRSs would be available for distribution to us. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. In addition, the rules, which are applicable to us as a REIT, as described in the preceding risk factors, also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by one of our TRSs exceeds an arm’s-length rental amount, such amount would be potentially subject to a 100% excise tax. While we intend that all transactions between us and our TRSs would be conducted on an arm’s-length basis, and therefore, any amounts paid by our TRSs to us would not be subject to the excise tax, no assurance can be given that the IRS would not disagree with such conclusion and levy an excise tax on such transactions.
If a stockholder that is an employee benefit plan, individual retirement account (“IRA”), annuity described in Sections 403(a) or (b) of the Internal Revenue Code, Archer Medical Savings Account, health savings account, Coverdell education savings account, or other arrangement that is subject to the Employee Retirement Income Securities Act (“ERISA”) or Section 4975 of the Internal Revenue Code (referred to generally as “Benefit Plans and IRAs”) fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in shares of our common stock, such stockholder could be subject to civil and criminal, if the failure is willful, penalties.
There are special considerations that apply to Benefit Plans and IRAs investing in shares of our common stock. Stockholders that are Benefit Plans and IRAs should consider:
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•
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whether their investment is consistent with the applicable provisions of ERISA and the Internal Revenue Code, or any other applicable governing authority in the case of a plan not subject to ERISA or the Internal Revenue Code;
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•
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whether their investment is made in accordance with the documents and instruments governing the Benefit Plan or IRA, including any investment policy;
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•
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whether their investment satisfies the prudence, diversification and other requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA or any similar rule under other applicable laws or regulations;
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•
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whether their investment will impair the liquidity needs, the minimum and other distribution requirements, or the tax withholding requirements that may be applicable to such Benefit Plan or IRA;
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•
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whether their investment will constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code or any similar rule under other applicable laws or regulations;
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•
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whether their investment will produce or result in
unrelated business taxable income
, as defined in Sections 511 through 514 of the Internal Revenue Code, to the Benefit Plan or IRA;
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•
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whether their investment will impair the Benefit Plan’s or IRA’s need to value its assets annually (or more frequently) in accordance with ERISA, the Internal Revenue Code and the applicable provisions of the Benefit Plan or IRA; and
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•
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whether their investment will cause our assets to be treated as “plan assets” of the Benefit Plan or IRA.
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Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA, the Internal Revenue Code, or other applicable statutory or common law may result in the imposition of civil and criminal (if the violation is willful) penalties, and can subject the fiduciary to equitable remedies. In addition, if an investment in our common stock constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the “party-in-interest” (within the meaning of ERISA) or “disqualified person” (within the meaning of the Internal Revenue Code) who authorized or directed the investment may have to compensate the plan for any losses the plan suffered as a result of the transaction or restore to the plan any profits made by such person as a result of the transaction, or may be subject to excise taxes with respect to the amount involved. In the case of a prohibited transaction involving an IRA, the IRA may be disqualified and all of the assets of the IRA may be deemed distributed and subject to tax.
In addition to considering their fiduciary responsibilities under ERISA and the prohibited transaction rules of ERISA and the Internal Revenue Code, stockholders that are Benefit Plans and IRAs should consider the effect of the plan assets regulation, U.S. Department of Labor Regulation Section 2510.3-101, as modified by ERISA Section 3(42). To avoid our assets from being considered “plan assets” under the plan assets regulation, our Charter prohibits “benefit plan investors” from owning 25% or more of the shares of our common stock prior to the time that the common stock qualifies as a class of publicly-offered securities, within the meaning of the plan assets regulation. However, we cannot assure our stockholders that those provisions in our Charter will be effective in limiting benefit plan investors’ ownership to less than the 25% limit. For example, the limit could be unintentionally exceeded if a benefit plan investor misrepresents its status as a benefit plan investor. If our underlying assets were to be considered “plan assets” of a benefit plan investor subject to ERISA, (i) we would be an ERISA fiduciary and subject to certain fiduciary requirements of ERISA with which it would be difficult for us to comply and (ii) we could be restricted from entering into favorable transactions if the transaction, absent an exemption, would constitute a prohibited transaction under ERISA or the Internal Revenue Code. Even if our assets are not considered to be “plan assets,” a prohibited transaction could occur if we or any of our affiliates is a fiduciary (within the meaning of ERISA) of a Benefit Plan or IRA stockholder.
Due to the complexity of these rules and the potential penalties that may be imposed, it is important that stockholders that are Benefit Plans and IRAs consult with their own advisors regarding the potential applicability of ERISA, the Internal Revenue Code and any similar applicable law.
Specific rules apply to foreign, governmental and church plans.
As a general rule, certain employee benefit plans, including foreign pension plans, governmental plans established or maintained in the United States (as defined in Section 3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA’s requirements and are not “benefit plan investors” for purposes of investing in “plan assets” subject to ERISA’s requirements. Any such plan that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Internal Revenue Code may nonetheless be subject to the prohibited transaction rules set forth in Section 503 of the Internal Revenue Code and, under certain circumstances in the case of church plans, Section 4975 of the Internal Revenue Code. Also, some foreign plans and governmental plans may be subject to foreign, state, or local laws which are, to a material extent, similar to the provisions of ERISA or Section 4975 of the Internal Revenue Code. Each fiduciary of a plan subject to any such similar law should make its own determination as to the need for, and the availability of, any exemption relief.
If stockholders invest in our common stock through an IRA or other retirement plan, they may be limited in their ability to withdraw required minimum distributions.
If stockholders invest in our common stock with assets of a retirement plan or IRA, federal law may require them to withdraw required minimum distributions from such plan or account in the future. Our common stock will be highly illiquid, and our share redemption program only offers limited liquidity. If stockholders require liquidity, they may generally sell their shares, but such sale may be at a price less than the price at which they initially purchased their common stock. If stockholders
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fail to withdraw required minimum distributions from their plan or account, they may be subject to certain taxes and tax penalties.
Our investments in construction loans require us to make estimates about the fair value of land improvements that may be challenged by the IRS.
We have invested, and may continue to invest in construction loans, the interest from which is qualifying income for purposes of the REIT income tests, provided that the loan value of the real property securing the construction loan is equal to or greater than the highest outstanding principal amount of the construction loan during any taxable year. For purposes of construction loans, the loan value of the real property is the fair value of the land plus the reasonably estimated cost of the improvements or developments (other than personal property) that secure the loan and that are to be constructed from the proceeds of the loan. There can be no assurance that the IRS would not challenge our estimate of the loan value of the real property.
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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None.
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ITEM 2.
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PROPERTIES
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See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Information for a discussion of the properties we hold for rental operations and Part IV, Item 15. Exhibits, Financial Statement Schedules — Schedule III — Real Estate and Accumulated Depreciation of this Annual Report on Form 10-K for a detailed listing of such properties.
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ITEM 3.
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LEGAL PROCEEDINGS
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In the ordinary course of business, we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which our properties are the subject.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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Not applicable.
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PART II
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ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market Information
As of
March 16, 2020
, we had approximately
311.2 million
shares of common stock outstanding, held by a total of
58,980
stockholders of record. The number of stockholders is based on the records of DST Systems, Inc., which serves as our registrar and transfer agent.
There is no established trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Unless and until our shares are listed on a national securities exchange, we do not expect that a public market for the shares will develop. Pursuant to the DRIP Offerings, we issue shares of our common stock at the most recently disclosed estimated per share NAV as determined by our Board. As of
December 31, 2019
, the most recent estimated per share NAV was
$8.65
per share, which was established on March 20, 2019 using a valuation date of
December 31, 2018
.
To assist fiduciaries of tax-qualified pension, stock bonus or profit-sharing plans, employee benefit plans and annuities described in Section 403(a) or (b) of the Internal Revenue Code or an individual retirement account or annuity described in Section 408 of the Internal Revenue Code subject to the annual reporting requirements of ERISA and IRA trustees or custodians in preparation of reports relating to an investment in the shares, we will publicly disclose and provide reports, as requested, of the per share estimated value of our common stock to those fiduciaries who request such reports. Furthermore, in order for FINRA members and their associated persons to participate in the Offering, we are required pursuant to FINRA Rule 5110 to disclose in each annual report distributed to stockholders a per share estimated value of the shares, the method by which it was developed and the date of the data used to develop the estimated value. In addition, pursuant to FINRA Rule 2231, we are required to publish an updated estimated per share NAV on at least an annual basis. The Board will make decisions regarding the valuation methodology to be employed, who will perform valuations of our assets and the frequency of such valuations; provided, however, that the determination of the estimated per share NAV must be conducted by, or with the material assistance or confirmation of, a third-party valuation expert and must be derived from a methodology that conforms to standard industry practice. The Board established an updated estimated per share NAV on
March 25, 2020
of
$7.77
per share using a valuation date of
December 31, 2019
, using a methodology that conformed to standard industry practice. However, as set forth above, there is no public trading market for the shares at this time and stockholders may not receive
$7.77
per share if a market did exist.
In determining the estimated per share NAVs as of
December 31, 2018
and
December 31, 2019
, our Board considered information and analysis, including valuation materials that were provided by Duff & Phelps, LLC (“Duff & Phelps”), information provided by CMFT Management, and the estimated per share NAV recommendation made by the valuation, compensation and affiliate transactions committee of our Board, which committee is comprised of all of our independent directors. See our Current Reports on Form 8-K, filed with the SEC on March 26, 2019 and March 30, 2020, for additional information regarding Duff & Phelps and its valuation materials.
Share Redemption Program
The Board has adopted a share redemption program that enables our stockholders to sell their shares to us in limited circumstances, subject to the conditions and limitations described below.
Our common stock is currently not listed on a national securities exchange, and we will not seek to list our stock unless and until such time as our independent directors believe that the listing of our stock would be in the best interest of our stockholders. In order to provide stockholders with the benefit of interim liquidity, stockholders may present all, or a portion, of their shares consisting of at least the lesser of (1)
25%
of the stockholder’s shares; or (2) a number of shares with an aggregate redemption price of at least
$2,500
, to us for redemption at any time in accordance with the procedures outlined below. At that time, we may, subject to the conditions and limitations described below, redeem the shares presented for redemption for cash to the extent that we have sufficient funds available to us to fund such redemption. We will not pay to our
sponsor, our Board, or
advisor or its affiliates any fees to complete any transactions under our share redemption program.
The per share redemption price (other than for shares purchased pursuant to our DRIP and as provided below for redemptions due to a stockholder’s death) depends on the length of time the stockholder has held such shares as follows: after two years from the purchase date,
97.5%
of the most recently determined estimated per share NAV; and after three years from the purchase date,
100%
of the most recently determined estimated per share NAV. During this time period, the redemption price for shares purchased pursuant to our DRIP will be
100%
of the most recently determined estimated per share NAV. In
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each case, the redemption price will be adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock. The estimated per share NAV for purposes of our share redemption program as of
December 31, 2019
was
$8.65
per share, which estimated per share NAV was determined by our Board on March 20, 2019 using a valuation date of
December 31, 2018
. As a result of our Board’s determination of an updated estimated per share NAV of our shares of common stock on
March 25, 2020
, the estimated per share NAV of
$7.77
as of
December 31, 2019
will serve as the most recent estimated per share NAV for purposes of the share redemption program, effective
March 30, 2020
until such time as the Board determines a new estimated per share NAV.
In determining the redemption price, we consider shares to have been redeemed from a stockholder’s account on a first-in, first-out basis. The Board will announce any redemption price adjustment and the time period of its effectiveness as a part of its regular communications with our stockholders. If we have sold a property and have made one or more special distributions to our stockholders of all or a portion of the net proceeds from such sales, the per share redemption price will be reduced by the net sale proceeds per share distributed to stockholders prior to the redemption date. The Board will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While our Board does not have specific criteria for determining a special distribution, we expect that a special distribution will only occur upon the sale of a property and the subsequent distribution of the net sale proceeds.
Upon receipt of a request for redemption, we may conduct a Uniform Commercial Code (“UCC”) search to ensure that no liens are held against the shares. Any costs for conducting the UCC search will be borne by us.
In the event of the death of a stockholder, we must receive notice from the stockholder’s estate within
270
days after the stockholder’s death in order to be eligible for a redemption due to a stockholder’s death. Shares redeemed in connection with a stockholder’s death will be redeemed at a purchase price per share equal to
100%
of the estimated per share NAV.
In the event that a stockholder requests a redemption of all of their shares, and such stockholder is participating in our DRIP, the stockholder will be deemed to have notified us, at the time they submit their redemption request, that such stockholder is terminating its participation in our DRIP, and has elected to receive future distributions in cash. This election will continue in effect even if less than all of such stockholder’s shares are redeemed unless they notify us that they wish to resume their participation in our DRIP.
We will limit the number of shares redeemed pursuant to our share redemption program as follows: (1) we will not redeem in excess of
5%
of the weighted average number of shares outstanding during the trailing
12
months prior to the end of the fiscal quarter for which the redemptions are being paid; and (2) funding for the redemption of shares will be limited, among other things, to the net proceeds we receive from the sale of shares under our DRIP, net of shares redeemed to date. In an effort to accommodate redemption requests throughout the calendar year, we intend to limit quarterly redemptions to approximately
1.25%
of the weighted average number of shares outstanding during the trailing
12
-month period ending on the last day of the fiscal quarter, and funding for redemptions for each quarter generally will be limited, among other things, to the net proceeds we receive from the sale of shares in the respective quarter under our DRIP; however, our management may waive these quarterly limitations in its sole discretion, subject to the
5%
cap on the number of shares we may redeem during the respective trailing
12
-month period. Any of the foregoing limits might prevent us from accommodating all redemption requests made in any quarter, in which case quarterly redemptions will be made pro rata, except as described below. Our management also reserves the right, in its sole discretion at any time, and from time to time, to reject any request for redemption for any reason.
We will redeem our shares no later than the end of the month following the end of each fiscal quarter. Requests for redemption must be received on or prior to the end of the fiscal quarter in order for us to repurchase the shares in the month following the end of that fiscal quarter. A stockholder may withdraw their request to have shares redeemed, but all such requests generally must be submitted prior to the last business day of the applicable fiscal quarter. Any redemption capacity that is not used as a result of the withdrawal or rejection of redemption requests may be used to satisfy the redemption requests of other stockholders received for that fiscal quarter, and such redemption payments may be made at a later time than when that quarter’s redemption payments are made.
We will determine whether we have sufficient funds and/or shares available as soon as practicable after the end of each fiscal quarter, but in any event prior to the applicable payment date. If we cannot purchase all shares presented for redemption in any fiscal quarter, based upon insufficient cash available and/or the limit on the number of shares we may redeem during any quarter or year, we will give priority to the redemption of deceased stockholders’ shares. While deceased stockholders’ shares will be included in calculating the maximum number of shares that may be redeemed in any annual or quarterly period, they will not be subject to the annual or quarterly percentage caps; therefore, if the volume of requests to redeem deceased stockholders’ shares in a particular quarter were large enough to cause the annual or quarterly percentage caps to be exceeded, even if no other redemption requests were processed, the redemptions of deceased stockholders’ shares would be completed in full, assuming sufficient proceeds from the sale of shares under our DRIP, net of shares redeemed to date, were available. If
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sufficient proceeds from the sale of shares under our DRIP, net of shares redeemed to date, were not available to pay all such redemptions in full, the requests to redeem deceased stockholders’ shares would be honored on a pro rata basis. We next will give priority to requests for full redemption of accounts with a balance of
250
shares or less at the time we receive the request, in order to reduce the expense of maintaining small accounts. Thereafter, we will honor the remaining redemption requests on a pro rata basis. Following such quarterly redemption period, if a stockholder would like to resubmit the unsatisfied portion of the prior request for redemption, such stockholder must submit a new request for redemption of such shares prior to the last day of the new quarter. Unfulfilled requests for redemption will not be carried over automatically to subsequent redemption periods.
The Board may choose to amend, suspend or terminate our share redemption program at any time upon
30
days’ notice to our stockholders. Additionally, we will be required to discontinue sales of shares under our Secondary DRIP Offering on the date we sell all of the shares registered for sale under the Secondary DRIP Offering, unless we register additional DRIP shares to be offered pursuant to an effective registration statement with the SEC and applicable states. Because the redemption of shares will be funded with the net proceeds we receive from the sale of shares under our Secondary DRIP Offering, net of shares redeemed to date, the discontinuance or termination of our Secondary DRIP Offering will adversely affect our ability to redeem shares under the share redemption program. We will notify our stockholders of such developments (1) in our next annual or quarterly report or (2) by means of a separate mailing, accompanied by disclosure in a current or periodic report under the Exchange Act.
Our share redemption program is only intended to provide interim liquidity for stockholders until a liquidity event occurs, which may include the sale of the Company, the sale of all or substantially all of our assets, a merger or similar transaction, an
alternative strategy that will result in a significant increase in opportunities for stockholders to redeem their shares or the listing of the shares of our common stock for trading on a national securities exchange. We cannot guarantee that a liquidity event will occur.
The shares we redeem under our share redemption program are canceled and returned to the status of authorized but unissued shares. We do not intend to resell such shares to the public unless they are first registered with the SEC under the Securities Act and under appropriate state securities laws or otherwise sold in compliance with such laws.
We received redemption requests for approximately
20.6 million
shares (or
$178.5 million
) in excess of the net proceeds we received from issuance of shares under the DRIP Offerings during the three months ended
December 31, 2019
. Management, in its discretion, limited the amount of shares redeemed for the three months ended
December 31, 2019
to an amount equal to net proceeds we received from the sale of shares pursuant to the DRIP Offerings during the period. During the year ended
December 31, 2019
, we received valid redemption requests under our share redemption program totaling approximately
88.6 million
shares, of which we redeemed approximately
7.2 million
shares as of
December 31, 2019
for
$62.4 million
(at an average redemption price of
$8.65
per share) and approximately
2.3 million
shares subsequent to
December 31, 2019
for
$19.5 million
(at an average redemption price of
$8.65
per share). The remaining redemption requests relating to approximately
79.1 million
shares went unfulfilled. During the year ended
December 31, 2018
, we received valid redemption requests under our share redemption program totaling approximately 68.2 million shares, of which we redeemed approximately 7.4 million shares as of
December 31, 2018
for $69.5 million (at an average redemption price of $9.37 per share) and approximately 2.3 million shares subsequent to
December 31, 2018
for $21.7 million (at an average redemption price of $9.37 per share). The remaining redemption requests relating to approximately 58.5 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program set forth above. We funded such redemptions with proceeds from our DRIP Offerings. During the years ended
December 31, 2019
and
2018
, we issued approximately
9.3 million
and
9.6 million
shares of common stock, respectively, under the DRIP Offerings, for proceeds of
$82.4 million
and
$91.8 million
, respectively, which were recorded as redeemable common stock on the consolidated balance sheets, net of any redemptions paid.
In general, we redeem shares on a quarterly basis. During the three-month period ended
December 31, 2019
, we redeemed shares, including those redeemable due to death, as follows:
|
Period
|
Total Number
of Shares
Redeemed
|
Average Price
Paid per Share
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
|
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
|
||||||||
|
October 1, 2019 - October 31, 2019
|
7,560
|
|
$
|
8.65
|
|
7,560
|
|
(1)
|
||||
|
November 1, 2019 - November 30, 2019
|
2,342,329
|
|
$
|
8.65
|
|
2,342,329
|
|
(1)
|
||||
|
December 1, 2019 - December 31, 2019
|
338
|
|
$
|
8.65
|
|
338
|
|
(1)
|
||||
|
Total
|
2,350,227
|
|
2,350,227
|
|
(1)
|
|||||||
52
____________________________________
|
(1)
|
A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table.
|
See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Share Redemptions in this Annual Report on Form 10-K, and
Note 13 — Stockholders’ Equity
to our consolidated financial statements in this Annual Report on Form 10-K for additional share redemption information.
Distributions
We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2012. As a REIT, we have made, and intend to continue to make, distributions each taxable year equal to at least
90%
of our taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). One of our primary goals is to pay regular (monthly) distributions to our stockholders.
See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Distributions in this Annual Report on Form 10-K for additional information on distributions.
For federal income tax purposes, distributions to stockholders are characterized as ordinary dividends, capital gain distributions, or nondividend distributions. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, the distribution will be a nontaxable return of capital, reducing the tax basis in each U.S. stockholder’s shares. In addition, the amount of distributions in excess of U.S. stockholders’ tax basis in their shares will be taxable as a capital gain realized from the sale of those shares. See
Note 14 — Income Taxes
to our consolidated financial statements in this Annual Report on Form 10-K for the character of the distributions paid during the years ended
December 31, 2019
,
2018
and
2017
.
The following table shows the distributions declared on a per share basis during the years ended
December 31, 2019
,
2018
and
2017
(in thousands, except per share data):
|
Year Ending December 31,
|
Total Distributions
Declared
|
Distributions Declared
per Common Share
|
||||||
|
2019
|
$
|
194,463
|
|
$
|
0.625
|
|
||
|
2018
|
$
|
194,573
|
|
$
|
0.625
|
|
||
|
2017
|
$
|
194,687
|
|
$
|
0.625
|
|
||
53
|
ITEM 6.
|
SELECTED FINANCIAL DATA
|
The following data should be read in conjunction with our consolidated financial statements and the notes thereto and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. Certain amounts presented below have been reclassified to conform to the current period presentation. See
Note 2 — Summary of Significant Accounting Policies
to our consolidated financial statements in this Annual Report on Form 10-K for a discussion of the various reclassifications. The selected financial data (in thousands, except share and per share amounts) presented below was derived from our consolidated financial statements.
|
Year Ended December 31,
|
||||||||||||||||||||
|
2019
|
2018
|
2017
|
2016
|
2015
|
||||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Total real estate assets, net
|
$
|
2,469,335
|
|
$
|
4,401,153
|
|
$
|
4,627,546
|
|
$
|
4,534,010
|
|
$
|
4,484,326
|
|
|||||
|
Loans held-for-investment and related receivables, net
|
$
|
301,630
|
|
$
|
89,762
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|||||
|
Cash and cash equivalents
|
$
|
466,024
|
|
$
|
10,533
|
|
$
|
4,745
|
|
$
|
9,754
|
|
$
|
26,316
|
|
|||||
|
Assets held for sale
|
$
|
351,897
|
|
$
|
6,780
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|||||
|
Total assets
|
$
|
3,668,623
|
|
$
|
4,617,371
|
|
$
|
4,728,689
|
|
$
|
4,624,335
|
|
$
|
4,582,199
|
|
|||||
|
Credit facility and notes payable, net
|
$
|
1,604,860
|
|
$
|
2,516,914
|
|
$
|
2,471,763
|
|
$
|
2,246,259
|
|
$
|
2,066,563
|
|
|||||
|
Intangible lease liabilities, net
|
$
|
20,523
|
|
$
|
36,418
|
|
$
|
45,572
|
|
$
|
49,075
|
|
$
|
53,822
|
|
|||||
|
Total liabilities
|
$
|
1,697,837
|
|
$
|
2,616,274
|
|
$
|
2,572,024
|
|
$
|
2,357,566
|
|
$
|
2,195,084
|
|
|||||
|
Redeemable common stock and noncontrolling interest
|
$
|
180,838
|
|
$
|
184,247
|
|
$
|
186,453
|
|
$
|
188,938
|
|
$
|
190,561
|
|
|||||
|
Total stockholders’ equity
|
$
|
1,789,948
|
|
$
|
1,816,850
|
|
$
|
1,970,212
|
|
$
|
2,077,831
|
|
$
|
2,196,554
|
|
|||||
|
Operating Data:
|
||||||||||||||||||||
|
Total revenues
|
$
|
413,356
|
|
$
|
431,276
|
|
$
|
424,095
|
|
$
|
407,451
|
|
$
|
367,731
|
|
|||||
|
Total operating expenses
|
$
|
304,810
|
|
$
|
302,246
|
|
$
|
270,900
|
|
$
|
258,267
|
|
$
|
243,531
|
|
|||||
|
Gain (loss) on disposition of real estate, net
|
$
|
180,666
|
|
$
|
6,299
|
|
$
|
17,044
|
|
$
|
2,907
|
|
$
|
(108
|
)
|
|||||
|
Operating income
|
$
|
289,212
|
|
$
|
135,329
|
|
$
|
170,239
|
|
$
|
152,091
|
|
$
|
124,092
|
|
|||||
|
Net income attributable to the Company
|
$
|
182,899
|
|
$
|
37,278
|
|
$
|
79,420
|
|
$
|
71,842
|
|
$
|
64,771
|
|
|||||
|
Cash Flow Data:
|
||||||||||||||||||||
|
Net cash provided by operating activities
|
$
|
188,575
|
|
$
|
205,835
|
|
$
|
198,925
|
|
$
|
192,296
|
|
$
|
182,885
|
|
|||||
|
Net cash provided by (used in) investing activities
|
$
|
1,175,295
|
|
$
|
(43,892
|
)
|
$
|
(223,386
|
)
|
$
|
(187,746
|
)
|
$
|
(673,009
|
)
|
|||||
|
Net cash (used in) provided by financing activities
|
$
|
(910,189
|
)
|
$
|
(156,112
|
)
|
$
|
20,510
|
|
$
|
(21,346
|
)
|
$
|
464,867
|
|
|||||
|
Per Share Data:
|
||||||||||||||||||||
|
Net income - basic and diluted
|
$
|
0.59
|
|
$
|
0.12
|
|
$
|
0.25
|
|
$
|
0.23
|
|
$
|
0.21
|
|
|||||
|
Distributions declared per common share
|
$
|
0.625
|
|
$
|
0.625
|
|
$
|
0.625
|
|
$
|
0.625
|
|
$
|
0.625
|
|
|||||
|
Weighted average shares outstanding - basic and diluted
|
311,302,909
|
|
311,478,665
|
|
311,677,149
|
|
311,863,844
|
|
309,263,576
|
|
||||||||||
54
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part II, Item 6. Selected Financial Data in this Annual Report on Form 10-K and our accompanying consolidated financial statements and notes thereto. See also the Cautionary Note Regarding Forward-Looking Statements section preceding Part I of this Annual Report on Form 10-K. For a comparison of the years ended December 31, 2018 and 2017, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Overview
We were formed on July 27, 2010, and we elected to be taxed, and currently qualify, as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2012. We commenced our principal operations on April 13, 2012, when we satisfied the conditions of our escrow agreement regarding the minimum offering and issued approximately 308,000 shares of our common stock. We have no paid employees and are externally managed by CMFT Management. CIM indirectly owns and/or controls CMFT Management; our dealer manager, CCO Capital; our property manager, CREI Advisors; and CCO Group.
We ceased issuing shares in our Offering on April 4, 2014 and in the Initial DRIP Offering effective as of June 30, 2016, but will continue to issue shares of common stock under the Secondary DRIP Offering until certain liquidity events occur, such as the listing of our shares on a national securities exchange or the sale of our company, or the Secondary DRIP Offering is otherwise terminated by our Board. We expect that property acquisitions in 2020 and future periods will be funded by proceeds from financing of the acquired properties, cash flows from operations and the strategic sale of properties and other asset acquisitions.
Our operating results and cash flows are primarily influenced by rental and other property income from our commercial properties, interest expense on our indebtedness and acquisition and operating expenses. As
94.6%
of our rentable square feet was under lease, including any month-to-month agreements, as of
December 31, 2019
with a weighted average remaining lease term of
8.6
years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors. CMFT Management regularly monitors the creditworthiness of our tenants by reviewing each tenant’s financial results, any available credit rating agency reports on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment and other information for changes and possible trends. If CMFT Management identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property or identifying a possible replacement tenant should the current tenant fail to perform on the lease.
We have primarily acquired core commercial real estate assets principally consisting of necessity retail properties located throughout the United States. As of
December 31, 2019
, we owned
396
properties, comprising
19.1 million
rentable square feet of commercial space located in
43
states.
In April of 2019, we announced our intention to pursue a more diversified investment strategy across the capital structure, ultimately transitioning to a mortgage REIT, by balancing our existing portfolio of core commercial real estate assets with our future investments in a portfolio of commercial mortgage loans and other real estate-related credit investments that we would originate, acquire, finance and manage.
As of
December 31, 2019
, our loan portfolio consisted of
12
loans with a net book value of
$301.6 million
. As of
December 31, 2019
, we had $126.8 million reserved for settlement of broadly syndicated loan purchases included in cash and cash equivalents in the accompanying consolidated balance sheet.
Pursuant to our strategy, during the year ended
December 31, 2019
, we disposed of
497
properties, including nine properties previously owned through a consolidated joint venture arrangement, encompassing approximately 7.5 million gross rentable square feet. As of
December 31, 2019
, our portfolio consisted of 334 retail properties, 59 anchored shopping centers and three industrial properties representing 33 industry sectors. See
Note 4 — Real Estate Assets
to the consolidated financial statements in this Annual Report on Form 10-K for a discussion of the disposition of individual properties during the year ended
December 31, 2019
.
55
Operating Highlights and Key Performance Indicators
2019
Activity
|
•
|
Acquired
one
property for an aggregate purchase price of
$6.2 million
.
|
|
•
|
Acquired
four
senior mezzanine loans with a principal balance of
$62.1 million
and originated
three
senior loans with a principal balance of $154.3 million.
|
|
•
|
Entered into a new revolving credit and security agreement that provides for borrowings up to
$300.0 million
which shall consist primarily of broadly syndicated senior secured loans subject to certain eligibility criteria under the agreement. As of December 31, 2019, we had broadly syndicated loans with a net book value of $2.8 million and $126.8 million reserved for settlement of broadly syndicated loan purchases.
|
|
•
|
Disposed of
497
properties, consisting of
482
retail properties,
one
industrial property and
14
anchored shopping centers, excluding a related outparcel of land, for an aggregate sales price of
$1.65 billion
.
|
|
•
|
Reduced
total debt by
$918.4 million
, from
$2.5 billion
to
$1.6 billion
. In connection with the sale of
444
properties that closed in December 2019, total consideration included the assumption by the Purchaser (as defined in
Note 4 — Real Estate Assets
) of existing mortgage debt totaling
$130.8 million
, the repayment of
$101.3 million
of certain mortgage notes due to the disposition of the underlying properties, the repayment of
$165.0 million
on the unsecured term loan balance and repayment of the
$266.0 million
unsecured revolving loan balance.
|
Portfolio Information
As of
December 31, 2019
, we owned
396
properties located in
43
states, the gross rentable square feet of which was
94.6%
leased, including any month-to-month agreements, with a weighted average lease term remaining of
8.6
years. During the year ended
December 31, 2019
, we disposed of
497
properties, for an aggregate gross sales price of
$1.65 billion
.
The following table shows the property statistics of our real estate assets as of
December 31, 2019
and
2018
:
|
|
As of December 31,
|
|||||
|
|
2019
|
2018
|
||||
|
Number of commercial properties
|
396
|
|
890
|
|
||
|
Rentable square feet (in thousands)
(1)
|
19,103
|
|
26,516
|
|
||
|
Percentage of rentable square feet leased
|
94.6
|
%
|
96.2
|
%
|
||
|
Percentage of investment-grade tenants
(2)
|
36.9
|
%
|
38.6
|
%
|
||
____________________________________
|
(1)
|
Includes square feet of buildings on land parcels subject to ground leases.
|
|
(2)
|
Investment-grade tenants are those with a credit rating of BBB- or higher by Standard & Poor’s or a credit rating of Baa3 or higher by Moody’s. The ratings may reflect those assigned by Standard & Poor’s or Moody’s to the lease guarantor or the parent company, as applicable. The weighted average credit rating is weighted based on annualized rental income and is for only those tenants rated by Standard & Poor’s.
|
The following table summarizes our real estate acquisition activity during the years ended
December 31, 2019
and
2018
:
|
|
Year Ended December 31,
|
|||||||
|
|
2019
|
2018
|
||||||
|
Commercial properties acquired
|
1
|
|
1
|
|
||||
|
Purchase price of acquired properties (in thousands)
|
$
|
6,165
|
|
$
|
11,905
|
|
||
|
Rentable square feet (in thousands)
(1)
|
6
|
|
71
|
|
||||
____________________________________
|
(1)
|
Includes square feet of buildings on land parcels subject to ground leases.
|
56
The following table shows the tenant diversification of our real estate portfolio, based on annualized rental income, as of
December 31, 2019
:
|
2019
|
2019
|
Percentage of
|
|||||||||||||||
|
Total
|
Leased
|
Annualized
|
Annualized
|
2019
|
|||||||||||||
|
Number
|
Square Feet
|
Rental Income
|
Rental Income
|
Annualized
|
|||||||||||||
|
Tenant
|
of Leases
(1)
|
(in thousands)
(2)
|
(in thousands)
|
per Square Foot
(2)
|
Rental Income
|
||||||||||||
|
Academy Sports
|
8
|
|
2,098
|
|
$
|
13,211
|
|
$
|
6.30
|
|
6
|
%
|
|||||
|
Lowe’s
|
14
|
|
1,773
|
|
12,402
|
|
6.99
|
|
5
|
%
|
|||||||
|
CVS
|
42
|
|
529
|
|
11,923
|
|
22.54
|
|
5
|
%
|
|||||||
|
Walgreens
|
25
|
|
368
|
|
8,983
|
|
24.41
|
|
4
|
%
|
|||||||
|
Home Depot
|
5
|
|
652
|
|
8,340
|
|
12.79
|
|
3
|
%
|
|||||||
|
PetSmart
|
26
|
|
462
|
|
7,402
|
|
16.02
|
|
3
|
%
|
|||||||
|
United Oil
|
3
|
|
44
|
|
7,018
|
|
159.50
|
|
3
|
%
|
|||||||
|
LA Fitness
|
8
|
|
359
|
|
7,018
|
|
19.55
|
|
3
|
%
|
|||||||
|
Dick’s Sporting Goods
|
14
|
|
622
|
|
6,951
|
|
11.18
|
|
3
|
%
|
|||||||
|
Cabela’s
|
1
|
|
403
|
|
6,543
|
|
16.24
|
|
3
|
%
|
|||||||
|
Other
|
865
|
|
10,769
|
|
147,688
|
|
13.71
|
|
62
|
%
|
|||||||
|
1,011
|
|
18,079
|
|
$
|
237,479
|
|
$
|
13.14
|
|
100
|
%
|
||||||
____________________________________
|
(1)
|
Includes leases which are master lease agreements.
|
|
(2)
|
Includes square feet of the buildings on land parcels subject to ground leases.
|
The following table shows the tenant industry diversification of our real estate portfolio, based on annualized rental income, as of
December 31, 2019
:
|
2019
|
2019
|
Percentage of
|
|||||||||||||||
|
Total
|
Leased
|
Annualized
|
Annualized
|
2019
|
|||||||||||||
|
Number
|
Square Feet
|
Rental Income
|
Rental Income
|
Annualized
|
|||||||||||||
|
Industry
|
of Leases
(1)
|
(in thousands)
(2)
|
(in thousands)
|
per Square Foot
(2)
|
Rental Income
|
||||||||||||
|
Sporting goods
|
35
|
|
3,498
|
|
$
|
30,891
|
|
$
|
8.83
|
|
13
|
%
|
|||||
|
Home and garden
|
47
|
|
3,065
|
|
28,930
|
|
9.44
|
|
12
|
%
|
|||||||
|
Discount store
|
92
|
|
2,250
|
|
22,883
|
|
10.17
|
|
10
|
%
|
|||||||
|
Pharmacy
|
67
|
|
897
|
|
20,906
|
|
23.31
|
|
9
|
%
|
|||||||
|
Grocery and supermarket
|
35
|
|
1,501
|
|
18,054
|
|
12.03
|
|
8
|
%
|
|||||||
|
Casual dining
|
82
|
|
448
|
|
11,813
|
|
26.37
|
|
5
|
%
|
|||||||
|
Apparel and jewelry
|
74
|
|
694
|
|
10,793
|
|
15.55
|
|
4
|
%
|
|||||||
|
Pet supply
|
40
|
|
638
|
|
10,242
|
|
16.05
|
|
4
|
%
|
|||||||
|
Gas and convenience
|
11
|
|
71
|
|
9,245
|
|
130.21
|
|
4
|
%
|
|||||||
|
Hobby, books and music
|
37
|
|
909
|
|
8,849
|
|
9.73
|
|
4
|
%
|
|||||||
|
Other
|
491
|
|
4,108
|
|
64,873
|
|
15.79
|
|
27
|
%
|
|||||||
|
1,011
|
|
18,079
|
|
$
|
237,479
|
|
$
|
13.14
|
|
100
|
%
|
||||||
____________________________________
|
(1)
|
Includes leases which are master lease agreements.
|
|
(2)
|
Includes square feet of the buildings on land parcels subject to ground leases.
|
57
The following table shows the geographic diversification of our real estate portfolio, based on annualized rental income, as of
December 31, 2019
:
|
2019
|
2019
|
Percentage of
|
|||||||||||||||
|
Total
|
Rentable
|
Annualized
|
Annualized
|
2019
|
|||||||||||||
|
Number of
|
Square Feet
|
Rental Income
|
Rental Income
|
Annualized
|
|||||||||||||
|
Location
|
Properties
|
(in thousands)
(1)
|
(in thousands)
|
per Square Foot
(1)
|
Rental Income
|
||||||||||||
|
California
|
50
|
|
1,006
|
|
$
|
28,037
|
|
$
|
27.87
|
|
12
|
%
|
|||||
|
Georgia
|
22
|
|
2,101
|
|
23,942
|
|
11.40
|
|
10
|
%
|
|||||||
|
Texas
|
35
|
|
1,315
|
|
18,003
|
|
13.69
|
|
8
|
%
|
|||||||
|
Ohio
|
29
|
|
1,593
|
|
17,600
|
|
11.05
|
|
7
|
%
|
|||||||
|
Illinois
|
14
|
|
1,022
|
|
12,348
|
|
12.08
|
|
5
|
%
|
|||||||
|
North Carolina
|
22
|
|
1,015
|
|
11,875
|
|
11.70
|
|
5
|
%
|
|||||||
|
Alabama
|
19
|
|
924
|
|
11,562
|
|
12.51
|
|
5
|
%
|
|||||||
|
Indiana
|
15
|
|
939
|
|
11,338
|
|
12.07
|
|
5
|
%
|
|||||||
|
Florida
|
28
|
|
971
|
|
11,138
|
|
11.47
|
|
5
|
%
|
|||||||
|
Wisconsin
|
12
|
|
779
|
|
10,373
|
|
13.32
|
|
4
|
%
|
|||||||
|
Other
|
150
|
|
7,438
|
|
81,263
|
|
10.93
|
|
34
|
%
|
|||||||
|
396
|
|
19,103
|
|
$
|
237,479
|
|
$
|
12.43
|
|
100
|
%
|
||||||
____________________________________
|
(1)
|
Includes square feet of the buildings on land parcels subject to ground leases.
|
The following table shows the property type diversification of our real estate portfolio, based on annualized rental income, as of
December 31, 2019
:
|
2019
|
2019
|
Percentage of
|
|||||||||||||||
|
Total
|
Rentable
|
Annualized
|
Annualized
|
2019
|
|||||||||||||
|
Number of
|
Square Feet
|
Rental Income
|
Rental Income
|
Annualized
|
|||||||||||||
|
Property Type
|
Properties
|
(in thousands)
(1)
|
(in thousands)
|
per Square Foot
(1)
|
Rental Income
|
||||||||||||
|
Retail
|
334
|
|
8,611
|
|
$
|
115,597
|
|
$
|
13.42
|
|
49
|
%
|
|||||
|
Anchored shopping centers
|
59
|
|
8,873
|
|
113,703
|
|
12.81
|
|
48
|
%
|
|||||||
|
Industrial
|
3
|
|
1,619
|
|
8,179
|
|
5.05
|
|
3
|
%
|
|||||||
|
396
|
|
19,103
|
|
$
|
237,479
|
|
$
|
12.43
|
|
100
|
%
|
||||||
____________________________________
|
(1)
|
Includes square feet of the buildings on land parcels subject to ground leases.
|
Leases
Although there are variations in the specific terms of the leases of our properties, the following is a summary of the general structure of our current leases. Generally, the leases of the properties acquired provide for initial terms of ten or more years and
provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions as the initial lease term. Certain leases also provide that in the event we wish to sell the property subject to that lease, we first must offer the lessee the right to purchase the property on the same terms and conditions as any offer which we intend to accept for the sale of the property. The properties are generally leased under net leases pursuant to which the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance, while certain of the leases require us to maintain the roof, structure and parking areas of the building. Additionally, certain leases provide for increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. The leases of the properties provide for annual rental payments (payable in monthly installments) ranging from
$7,000
to
$8.0 million
(average of
$218,000
). Certain leases provide for limited increases in rent as a result of fixed increases or increases in the consumer price index.
58
The following table shows lease expirations of our real estate portfolio, as of
December 31, 2019
, during each of the next ten years and thereafter, assuming no exercise of renewal options:
|
2019
|
|||||||||||||||||
|
Total
|
Leased
|
Annualized
|
2019
|
Percentage of
|
|||||||||||||
|
Number
|
Square Feet
|
Rental Income
|
Annualized
|
2019
|
|||||||||||||
|
of Leases
|
Expiring
|
Expiring
|
Rental Income
|
Annualized
|
|||||||||||||
|
Year of Lease Expiration
|
Expiring
(1)
|
(in thousands)
(2)
|
(in thousands)
|
per Square Foot
(2)
|
Rental Income
|
||||||||||||
|
2020
|
80
|
|
387
|
|
$
|
5,577
|
|
$
|
14.41
|
|
2
|
%
|
|||||
|
2021
|
119
|
|
1,046
|
|
15,126
|
|
14.46
|
|
7
|
%
|
|||||||
|
2022
|
107
|
|
1,109
|
|
13,317
|
|
12.01
|
|
6
|
%
|
|||||||
|
2023
|
145
|
|
1,585
|
|
23,921
|
|
15.09
|
|
10
|
%
|
|||||||
|
2024
|
137
|
|
1,808
|
|
25,821
|
|
14.28
|
|
11
|
%
|
|||||||
|
2025
|
65
|
|
1,149
|
|
15,077
|
|
13.12
|
|
6
|
%
|
|||||||
|
2026
|
53
|
|
1,029
|
|
11,952
|
|
11.62
|
|
5
|
%
|
|||||||
|
2027
|
42
|
|
1,014
|
|
9,399
|
|
9.27
|
|
4
|
%
|
|||||||
|
2028
|
58
|
|
1,275
|
|
15,082
|
|
11.83
|
|
6
|
%
|
|||||||
|
2029
|
53
|
|
1,065
|
|
14,657
|
|
13.76
|
|
6
|
%
|
|||||||
|
Thereafter
|
152
|
|
6,612
|
|
87,550
|
|
13.24
|
|
37
|
%
|
|||||||
|
1,011
|
|
18,079
|
|
$
|
237,479
|
|
$
|
13.14
|
|
100
|
%
|
||||||
____________________________________
|
(1)
|
Includes leases which are master lease agreements.
|
|
(2)
|
Includes square feet of the buildings on land parcels subject to ground leases.
|
The following table shows the economic metrics of our real estate assets as of and for the years ended
December 31, 2019
and
2018
:
|
2019
|
2018
|
|||
|
Economic Metrics
|
||||
|
Weighted-average lease term (in years)
(1)
|
8.6
|
9.1
|
||
|
Lease rollover
(1)(2)
:
|
||||
|
Annual average
|
7.1%
|
5.1%
|
||
|
Maximum for a single year
|
10.9%
|
9.3%
|
||
____________________________________
|
(1)
|
Based on annualized rental income of our real estate portfolio as of
December 31, 2019
and
2018
.
|
|
(2)
|
Through the end of the next five years as of the respective reporting date.
|
Results of Operations
Overview
We are not aware of any material trends or uncertainties, other than the recent outbreak of COVID-19, and national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact on our results from the acquisition, management and operations of properties other than those listed in Part I, Item 1A — Risk Factors. Due to the recent outbreak of COVID-19 in the United States and globally, our tenants, our operating partners, and we may be impacted. The impact of COVID-19 on our future results could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, the success of action taken to contain or treat COVID-19, and reactions by consumers, companies, governmental entities and capital markets.
For a comparison of the years ended
December 31, 2018
and
2017
, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
59
Same Store Analysis
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate assets. We review our stabilized operating results, measured by net operating income, from properties that we owned for the entirety of both the current and prior year reporting periods, referred to as “same store” properties, and we believe that the presentation of operating results for same store properties provides useful information to stockholders. Net operating income is a supplemental non-GAAP financial measure of a real estate company’s operating performance. Net operating income is considered by management to be a helpful supplemental performance measure, as it enables management to evaluate the impact of occupancy, rents, leasing activity, and other controllable property operating results at our real estate properties, and it provides a consistent method for the comparison of our properties. We define net operating income as operating revenues less operating expenses, which exclude (i) depreciation and amortization, (ii) interest expense and other non-property related revenue and expenses items such as (a) general and administrative expenses, (b) advisory fees, (c) transaction-related expenses and (d) interest income. Our net operating income may not be comparable to that of other REITs and should not be considered to be more relevant or accurate in evaluating our operating performance than the current GAAP methodology used in calculating net income (loss). In determining the same store property pool, we include all properties that were owned for the entirety of both the current and prior reporting periods, except for properties during the current or prior year that were under development or redevelopment.
Comparison of the Years Ended
December 31, 2019
and
2018
The following table reconciles net income, calculated in accordance with GAAP, to net operating income (dollar amounts in thousands):
|
Total
|
|||||||||||
|
For the Year Ended December 31,
|
|||||||||||
|
2019
|
2018
|
Change
|
|||||||||
|
Net income
|
$
|
183,020
|
|
$
|
37,412
|
|
$
|
145,608
|
|
||
|
Loss on extinguishment of debt
|
7,227
|
|
46
|
|
7,181
|
|
|||||
|
Interest expense and other, net
|
98,965
|
|
97,871
|
|
1,094
|
|
|||||
|
Operating income
|
289,212
|
|
135,329
|
|
153,883
|
|
|||||
|
Gain on disposition of real estate, net
|
(180,666
|
)
|
(6,299
|
)
|
(174,367
|
)
|
|||||
|
Impairment
|
72,939
|
|
32,975
|
|
39,964
|
|
|||||
|
Depreciation and amortization
|
107,867
|
|
140,979
|
|
(33,112
|
)
|
|||||
|
Transaction-related
|
2,278
|
|
2,601
|
|
(323
|
)
|
|||||
|
Management and advisory fees and expenses
|
42,339
|
|
43,399
|
|
(1,060
|
)
|
|||||
|
General and administrative
|
13,729
|
|
14,127
|
|
(398
|
)
|
|||||
|
Interest and other income
|
(20,132
|
)
|
(1,640
|
)
|
(18,492
|
)
|
|||||
|
Net operating income
|
$
|
327,566
|
|
$
|
361,471
|
|
$
|
(33,905
|
)
|
||
A total of
392
properties were acquired before January 1,
2018
and represent our “same store” properties during the years ended
December 31, 2019
and
2018
. “Non-same store” properties, for purposes of the table below, includes properties acquired on or after January 1,
2018
.
60
The following table details the components of net operating income broken out between same store and non-same store properties (dollar amounts in thousands):
|
Total
|
Same Store
|
Non-Same Store
(1)
|
|||||||||||||||||||||||||||||||||
|
For the Year Ended December 31,
|
For the Year Ended December 31,
|
For the Year Ended December 31,
|
|||||||||||||||||||||||||||||||||
|
2019
|
2018
|
Change
|
2019
|
2018
|
Change
|
2019
|
2018
|
Change
|
|||||||||||||||||||||||||||
|
Rental and other property income
|
$
|
393,224
|
|
$
|
429,636
|
|
$
|
(36,412
|
)
|
$
|
279,518
|
|
$
|
284,855
|
|
$
|
(5,337
|
)
|
$
|
113,728
|
|
$
|
144,781
|
|
$
|
(31,053
|
)
|
||||||||
|
Property operating expenses
|
33,462
|
|
30,267
|
|
3,195
|
|
27,607
|
|
23,771
|
|
3,836
|
|
5,855
|
|
6,496
|
|
(641
|
)
|
|||||||||||||||||
|
Real estate tax expenses
|
32,196
|
|
37,898
|
|
(5,702
|
)
|
28,188
|
|
26,969
|
|
1,219
|
|
4,008
|
|
10,929
|
|
(6,921
|
)
|
|||||||||||||||||
|
Total property operating expenses
|
65,658
|
|
68,165
|
|
(2,507
|
)
|
55,795
|
|
50,740
|
|
5,055
|
|
9,863
|
|
17,425
|
|
(7,562
|
)
|
|||||||||||||||||
|
Net operating income
|
$
|
327,566
|
|
$
|
361,471
|
|
$
|
(33,905
|
)
|
$
|
223,723
|
|
$
|
234,115
|
|
$
|
(10,392
|
)
|
$
|
103,865
|
|
$
|
127,356
|
|
$
|
(23,491
|
)
|
||||||||
|
(1)
|
Includes income from properties disposed of during the period.
|
Loss on Extinguishment of Debt
The increase in loss on extinguishment of debt of
$7.2 million
for the year ended
December 31, 2019
, as compared to the same period in
2018
, was due to the termination of certain mortgage notes in connection with the disposition of the underlying properties during the year ended
December 31, 2019
.
Interest Expense and Other, Net
Interest expense and other, net also includes amortization of deferred financing costs.
The increase in interest expense and other, net, of
$1.1 million
for the year ended
December 31, 2019
, as compared to the same period in
2018
, was due to increases in the weighted average interest rate during the first half of 2019, as compared to the same period in
2018
, partially offset by debt repayments in connection with the disposition of the underlying properties during the year ended
December 31, 2019
.
Gain on Disposition of Real Estate, Net
The increase in gain on disposition of real estate during the year ended
December 31, 2019
, as compared to the same period in
2018
, was due to the disposition of
497
properties, including the sale of
444
properties that closed in December 2019 pursuant to a purchase and sale agreement further discussed in
Note 4 — Real Estate Assets
. The dispositions resulted in a gain of
$180.7 million
during the year ended
December 31, 2019
compared to the disposition of
21
properties for a gain of
$6.3 million
during the year ended
December 31, 2018
.
Impairment
Impairments increased
$40.0 million
during the year ended
December 31, 2019
, as compared to the same period in
2018
, due to
34
properties that were deemed to be impaired, resulting in impairment charges of
$72.9 million
during the year ended
December 31, 2019
, compared to 22 properties that were deemed to be impaired, resulting in impairment charges of $33.0 million during the year ended
December 31, 2018
.
Depreciation and Amortization
The
decrease
in depreciation and amortization expenses of
$33.1 million
during the year ended
December 31, 2019
, as compared to the same period in
2018
, was primarily due to the disposition of
497
properties.
Transaction-Related Expenses
Through August 20, 2019, we paid CMFT Management or its affiliates acquisition fees of up to 2.0% of: (1) the contract purchase price of each property or asset we acquired; (2) the amount paid in respect of the development, construction or improvement of each asset we acquired; (3) the purchase price of any loan we acquired; and (4) the principal amount of any loan we originated. We also reimbursed CMFT Management or its affiliates for transaction-related expenses incurred in the process of acquiring a property or the origination or acquisition of a loan, so long as the total acquisition fees and expenses relating to the transaction did not exceed 6.0% of the contract purchase price, unless otherwise approved by a majority of our
61
Board, including a majority of our independent directors, as commercially competitive, fair and reasonable to us. Other transaction-related expenses, such as advisor reimbursements for disposition activities, are expensed as incurred.
The
decrease
in transaction-related expenses of
$323,000
during the year ended
December 31, 2019
, as compared to the same period in
2018
, was primarily due to acquisition fees paid to the advisor pursuant to the Prior Advisory Agreement related to the acquisition of
$62.1 million
of loans held-for-investment during the year ended
December 31, 2019
, compared to acquisition fees paid to the advisor related to the origination of
$89.3 million
of loans held-for-investment during the year ended
December 31, 2018
.
Management and Advisory Fees and Expenses
Pursuant to the Prior Advisory Agreement with CMFT Management and based upon the amount of our current invested assets, through August 20, 2019, we were required to pay to CMFT Management a monthly advisory fee equal to one-twelfth of 0.75% of the average invested assets up to $2.0 billion, one-twelfth of 0.70% of the average invested assets over $2.0 billion up to $4.0 billion and one-twelfth of 0.65% of the average invested assets over $4.0 billion. Beginning on August 20, 2019, we pay CMFT Management a management fee pursuant to the Management Agreement, payable quarterly in arrears, equal to the greater of (a) $250,000 per annum ($62,500 per quarter) and (b) 1.50% per annum (0.375% per quarter) of the Company’s Equity (as defined in the Management Agreement). Additionally, we may be required to reimburse certain expenses incurred by CMFT Management in providing advisory services, subject to limitations as set forth in the Management Agreement (as discussed in
Note 11 — Related-Party Transactions and Arrangements
).
The decrease in management and advisory fees and expenses of
$1.1 million
during the year ended
December 31, 2019
, as compared to the same period in
2018
, was due to a decrease in our average invested assets to
$5.0 billion
for the period through August 20, 2019, compared to
$5.4 billion
over the year ended
December 31, 2018
. In addition, beginning on August 20, 2019, we began paying CMFT Management a management fee and ceased paying an advisory fee. During the year ended
December 31, 2019
, we incurred management fees of
$14.6 million
.
General and Administrative Expenses
The primary general and administrative expense items are certain expense reimbursements to our advisor, escrow and trustee fees, state franchise and income taxes, office expenses and accounting fees.
The
decrease
in general and administrative expenses of
$398,000
for the year ended
December 31, 2019
, compared to the same period in
2018
, was primarily due to decreases in operating expense reimbursements to our advisor.
Interest Income
The increase in interest income of
$18.5 million
for the year ended
December 31, 2019
, compared to the same period in
2018
, was due to the acquisition and origination of seven loans held-for-investment during the year ended
December 31, 2019
, compared to the acquisition and origination of four loans held-for-investment in November 2018.
Net Operating Income
Same store property net operating income decreased
$10.4 million
during the year ended
December 31, 2019
, as compared to the same period in
2018
. The decrease was primarily due to the decrease in same store occupancy to
94.6%
from
95.0%
as of
December 31, 2019
and
2018
, respectively. Additionally, tenant bankruptcies at
12
same store properties account for
$3.1 million
of the net decrease in rental income for the year ended
December 31, 2019
.
Non-same store property net operating income decreased
$23.5 million
during the year ended
December 31, 2019
, as compared to the same period in
2018
. The decrease is primarily due to the disposition of
497
properties during the year ended
December 31, 2019
, offset by recognizing a full period of net operating income for the
one
property acquired during the year ended
December 31, 2018
.
62
Distributions
On a quarterly basis, our Board authorizes a daily distribution for the succeeding quarter. Our Board authorized the following daily distribution amounts per share for the periods indicated below:
|
Period Commencing
|
Period Ending
|
Daily Distribution Amount
|
||
|
April 14, 2012
|
December 31, 2012
|
$0.001707848
|
||
|
January 1, 2013
|
December 31, 2015
|
$0.001712523
|
||
|
January 1, 2016
|
December 31, 2016
|
$0.001706776
|
||
|
January 1, 2017
|
December 31, 2019
|
$0.001711452
|
||
|
January 1, 2020
|
March 31, 2020
|
$0.001706776
|
||
As of
December 31, 2019
, we had distributions payable of
$16.5 million
.
Our Board has reaffirmed the declaration and payment of distributions for the month of March 2020 at the rate previously declared on November 5, 2019, which distributions will be paid on or around April 1, 2020. Given the impact of the COVID-19 outbreak, our Board has decided to defer making a determination as to the amount and timing of distributions for the second quarter of 2020 until such time that we have greater visibility into the impact that the COVID-19 outbreak will have on our tenants’ ability to continue to pay rent on their leases on a timely basis or at all, the degree to which federal, state or local governmental authorities grant rent relief or other relief or amnesty programs applicable to our tenants, our ability to access the capital markets, and on the United States and worldwide financial markets and economy.
The following table presents distributions and source of distributions for the periods indicated below (dollar amounts in thousands):
|
Year Ended December 31,
|
|||||||||||||
|
2019
|
2018
|
||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||
|
Distributions paid in cash
|
$
|
112,083
|
|
58
|
%
|
$
|
102,822
|
|
53
|
%
|
|||
|
Distributions reinvested
|
82,388
|
|
42
|
%
|
91,764
|
|
47
|
%
|
|||||
|
Total distributions
|
$
|
194,471
|
|
100
|
%
|
$
|
194,586
|
|
100
|
%
|
|||
|
Source of distributions:
|
|||||||||||||
|
Net cash provided by operating activities
(1)
|
$
|
194,471
|
|
(2)
|
100
|
%
|
$
|
194,586
|
|
100
|
%
|
||
____________________________________
|
(1)
|
Net cash provided by operating activities for the years ended
December 31, 2019
and
2018
was
$188.6 million
and
$205.8 million
, respectively.
|
(2) Our distributions covered by cash flows from operating activities include cash flows from prior periods of
$5.9 million
.
Share Redemptions
Our share redemption program permits our stockholders to sell their shares of common stock back to us, subject to certain conditions and limitations. We will not redeem in excess of
5.0%
of the weighted average number of shares outstanding during the trailing
12
months prior to the end of the fiscal quarter for which the redemptions are being paid. Funding for the redemption of shares will be limited to the cumulative net proceeds we receive from the sale of shares under the Secondary DRIP Offering, net of shares redeemed to date. In addition, we will generally limit quarterly redemptions to approximately
1.25%
of the weighted average number of shares outstanding during the trailing
12
-month period ending on the last day of the fiscal quarter for which the redemptions are being paid, and to the net proceeds we receive from the sale of shares in the respective quarter under the Secondary DRIP Offering. Any of the foregoing limits might prevent us from accommodating all redemption requests made in any fiscal quarter or in any 12-month period. We received redemption requests of approximately
20.6 million
shares for
$178.5 million
in excess of the net proceeds we received from the issuance of shares under the Secondary DRIP Offering during the three months ended
December 31, 2019
. Management, in its discretion, limited the amount of shares redeemed for the three months ended
December 31, 2019
to an amount equal to net proceeds we received from the sale of shares pursuant to the Secondary DRIP Offering during the respective period. During the year ended
December 31, 2019
, we received valid redemption requests under our share redemption program totaling approximately
88.6 million
shares, of which we redeemed approximately
7.2 million
shares as of
December 31, 2019
for
$62.4 million
(at an average redemption price of
$8.65
per share) and approximately
2.3 million
shares subsequent to
December 31, 2019
for
$19.5 million
at an average redemption price of
$8.65
per share. The remaining redemption requests relating to approximately
79.1
63
million
shares went unfulfilled. During the year ended December 31, 2018, we received valid redemption requests under our share redemption program totaling approximately 68.2 million shares, of which we redeemed approximately 7.4 million shares as of December 31, 2018 for $69.5 million (at an average redemption price of $9.37 per share) and approximately 2.3 million shares subsequent to December 31, 2018 for $21.7 million at an average redemption price of $9.37 per share. The remaining redemption requests relating to approximately 58.5 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of our share redemption program then in effect. The share redemptions were funded with proceeds from the Secondary DRIP Offering.
See the discussion of our share redemption program in Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Share Redemption Program in this Annual Report on Form 10-K.
Liquidity and Capital Resources
General
We are continuing to monitor the outbreak of COVID-19 and its impact on our tenants, operating partners and the economy as a whole. The magnitude and duration of the pandemic and its impact on our operations and liquidity is uncertain as of the filing date of our report as this continues to evolve globally. However, if the outbreak continues on its current trajectory, such impacts could grow and become material. To the extent that our tenants and operating partners continue to be impacted by the COVID-19 outbreak, or by the other risks disclosed in our annual report, this could materially disrupt our business operations.
We expect to utilize proceeds from real estate dispositions, cash flows from operations and future proceeds from secured or unsecured financing to complete future acquisitions and for general corporate uses. The sources of our operating cash flows will primarily be provided by the rental and other property income received from current and future leased properties.
As of
December 31, 2019
, we had an unsecured credit facility with JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Facility”) that provided for borrowings of up to
$1.24 billion
, which includes a
$885.0 million
unsecured term loan (the “Term Loan”) and up to
$350.0 million
in unsecured revolving loans. As of
December 31, 2019
, we had
$349.4 million
in unused capacity under the Credit Facility, subject to borrowing availability. We had available borrowings of
$107.1 million
as of
December 31, 2019
. As of
December 31, 2019
, we also had cash and cash equivalents of
$466.0 million
, which included $126.8 million reserved for settlement of investment security purchases.
On
December 31, 2019
(the “Closing Date”), CMFT Corporate Credit Securities, LLC, one of our indirect wholly-owned, bankruptcy-remote subsidiaries, entered into a revolving credit and security agreement (the “Credit and Security Agreement”) with the lenders from time to time parties thereto, Citibank, N.A. (“Citibank”), as administrative agent, CMFT Securities Investments, LLC, a wholly-owned subsidiary of ours, as equityholder and as collateral manager, Citibank (acting through its Agency & Trust division), as both a collateral agent and as a collateral custodian, and Virtus Group, LP, as collateral administrator. The Credit and Security Agreement provides for borrowings in an aggregate principal amount up to
$300.0 million
(the “Credit Securities Revolver”), which may be increased from time to time pursuant to the Credit and Security Agreement. As of
December 31, 2019
, there were no amounts borrowed or outstanding under the Credit Securities Revolver.
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for the acquisition of investment securities, real estate and real estate-related assets and the payment of acquisition-related fees and expenses, operating expenses, distributions, redemptions and interest and principal on current and any future debt financings, including principal repayments of
$165.7 million
within the next 12 months. We expect to meet our short-term liquidity requirements through cash proceeds from real estate asset dispositions, net cash provided by operations and proceeds from the Secondary DRIP Offering, as well as secured or unsecured borrowings from banks and other lenders to finance our future acquisitions and loan originations. Operating cash flows are expected to increase as we complete future acquisitions. We believe that the resources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months.
In connection with the sale of 444 properties during the year ended
December 31, 2019
, total consideration included the assumption by the buyer of existing mortgage debt totaling
$130.8 million
, the repayment of
$101.3 million
of certain mortgage notes due to the disposition of the underlying properties, the repayment of
$165.0 million
on the unsecured term loan balance and repayment of
$266.0 million
on the unsecured revolving loan balance. Management intends to use the remaining proceeds from the sale to, among other things, acquire additional high-quality net-lease properties and credit investments in
64
furtherance of our investment objectives, satisfy potential income tax provisions that may arise in the future, and for other general corporate purposes.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the acquisition of investment securities, real estate and real estate-related assets and the payment of tenant improvements, acquisition-related fees and expenses, operating expenses, distributions and redemptions to stockholders and interest and principal on any current and future indebtedness. Generally, we expect to meet our long-term liquidity requirements through proceeds from cash flows from operations, borrowings on the Credit Facility, proceeds from secured or unsecured borrowings from banks and other lenders, and proceeds raised pursuant to the Secondary DRIP Offering.
We expect that substantially all net cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we have used, and may continue to use, other sources to fund distributions, as necessary, including borrowings on the Credit Facility and/or future borrowings on our unencumbered assets. To the extent that cash flows from operations are lower due to fewer properties being acquired or lower than expected returns on the properties, distributions paid to our stockholders may be lower. We expect that substantially all net cash flows from the Offerings or debt financings will be used to fund acquisitions, loan originations, certain capital expenditures, repayments of outstanding debt or distributions and redemptions to our stockholders.
Contractual Obligations
As of
December 31, 2019
, we had debt outstanding with a carrying value of
$1.6 billion
and a weighted average interest rate of
3.9%
. See
Note 8 — Credit Facilities and Notes Payable
to our consolidated financial statements in this Annual Report on Form 10-K for certain terms of our debt outstanding.
Our contractual obligations as of
December 31, 2019
were as follows (in thousands):
|
|
Payments due by period
(1)
|
|||||||||||||||||||
|
|
Total
|
Less Than 1
Year
|
1-3 Years
|
3-5 Years
|
More Than
5 Years
|
|||||||||||||||
|
Principal payments — fixed rate debt
(2)
|
$
|
726,261
|
|
$
|
165,678
|
|
$
|
126,663
|
|
$
|
433,920
|
|
$
|
—
|
|
|||||
|
Interest payments — fixed rate debt
(3)
|
73,186
|
|
24,190
|
|
38,215
|
|
10,781
|
|
—
|
|
||||||||||
|
Principal payments — credit facility
|
885,000
|
|
—
|
|
885,000
|
|
—
|
|
—
|
|
||||||||||
|
Interest payments — credit facility
(4)
|
77,654
|
|
35,253
|
|
42,401
|
|
—
|
|
—
|
|
||||||||||
|
Total
|
$
|
1,762,101
|
|
$
|
225,121
|
|
$
|
1,092,279
|
|
$
|
444,701
|
|
$
|
—
|
|
|||||
____________________________________
|
(1)
|
The table does not include amounts due to CMFT Management or its affiliates pursuant to our Management Agreement because such amounts are not fixed and determinable.
|
|
(2)
|
Principal payment amounts reflect actual payments based on the face amount of notes payable secured by our wholly-owned properties, which excludes the fair value adjustment, net of amortization, of mortgage notes assumed of
$241,000
as of
December 31, 2019
.
|
|
(3)
|
As of
December 31, 2019
, we had
$60.0 million
of variable rate debt effectively fixed through the use of interest rate swap agreements. We used the effective interest rates fixed under our interest rate swap agreements to calculate the debt payment obligations in future periods.
|
|
(4)
|
As of
December 31, 2019
, the Term Loan outstanding totaled
$885.0 million
,
$811.7 million
of which is subject to interest rate swap agreements (the “Swapped Term Loan”). As of
December 31, 2019
, the weighted average all-in interest rate for the Swapped Term Loan was
4.0%
. The remaining
$73.3 million
outstanding under the Credit Facility had a weighted average interest rate of
3.8%
as of
December 31, 2019
.
|
We expect to incur additional borrowings in the future to acquire additional properties and other real estate-related assets. There is no limitation on the amount we may borrow against any single improved property. Consistent with CMFT Management’s approach toward the moderate use of leverage, our Board has adopted a policy to further limit our borrowings to 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets, unless excess borrowing is approved by a majority of the independent directors and disclosed to our stockholders in the next quarterly report along with a justification for such excess borrowing. As of
December 31, 2019
, our ratio of debt to total gross assets net of gross intangible lease liabilities was
46.3%
and our ratio of debt to the fair market value of our gross assets net of gross intangible lease liabilities was
45.3%
. Fair market value is based on the estimated market value of our real estate assets as
65
of
December 31, 2018
that were used to determine our estimated per share NAV, and for those assets acquired from
January 1, 2019
through
December 31, 2019
is based on the purchase price.
Our management reviews net debt as part of its management of our overall liquidity, financial flexibility, capital structure and leverage, and we therefore believe that the presentation of net debt provides useful information to stockholders. Net debt is a non-GAAP measure used to show our outstanding principal debt balance, excluding certain GAAP adjustments, such as premiums or discounts, financing and issuance costs, and related accumulated amortization, less all cash and cash equivalents. As of
December 31, 2019
, our net debt leverage ratio, which is the ratio of net debt to total gross real estate and related assets net of gross intangible lease liabilities, was
32.9%
.
The following table provides a reconciliation of the notes payable and credit facility, net balance, as reported on our consolidated balance sheet, to net debt as of
December 31, 2019
(dollar amounts in thousands):
|
|
Balance as of December 31, 2019
|
|||
|
Credit facilities and notes payable, net
|
$
|
1,604,860
|
|
|
|
Deferred costs and net premiums
(1)
|
6,401
|
|
||
|
Less: Cash and cash equivalents
|
(466,024
|
)
|
||
|
Net debt
|
$
|
1,145,237
|
|
|
|
Gross real estate and related assets, net
(2)
|
$
|
3,483,029
|
|
|
|
Net debt leverage ratio
|
32.9
|
%
|
||
______________________
(1) Deferred costs relate to mortgage notes payable and the term portion of the Credit Facility.
(2) Net of gross intangible lease liabilities. Includes gross assets held for sale and loans held-for-investment principal balance of
$297.4 million
.
Cash Flow Analysis
Year Ended December 31,
2019
Compared to Year Ended December 31,
2018
Operating Activities.
Net cash
provided by
operating activities decreased by
$17.3 million
for the
year ended
December 31, 2019
, as compared to the same period in
2018
. The change was primarily due to lower net income after non-cash adjustments due to the disposition of
497
properties subsequent to
December 31, 2018
. See “— Results of Operations” for a more complete discussion of the factors impacting our operating performance.
Investing Activities.
Net cash
provided by
investing activities increased by
$1.2 billion
for the
year ended
December 31, 2019
, as compared to the same period in
2018
. The change was primarily due to an increase in proceeds from the disposition of real estate assets of
$1.3 billion
and principal payments received on loans held-for-investment of
$17.2 million
during the
year ended
December 31, 2019
, compared to the same period in
2018
. These changes were offset by the origination and acquisition of seven loans for an aggregate cost of
$217.0 million
and the investment in broadly syndicated loans of
$2.8 million
during the
year ended
December 31, 2019
.
Financing Activities.
Net cash
used in
financing activities increased by
$754.1 million
for the
year ended
December 31, 2019
, as compared to the same period in
2018
. The change was primarily due to an increase in net repayments on the Credit Facility and notes payable of
$753.3 million
in connection with the sale of
497
properties during the
year ended
December 31, 2019
.
Election as a REIT
We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2012. To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains).
If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the
66
four taxable years following the year during which qualification was lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying consolidated financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying consolidated financial statements.
Inflation
We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. There are, and we expect that there will continue to be, provisions in many of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps and clauses enabling us to receive payment of additional rent calculated as a percentage of the tenant’s gross sales above pre-determined thresholds. In addition, most of our leases require the tenant to pay all or a majority of the property’s operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs. However, because of the long-term nature of leases for real property, such leases may not reset frequently enough to adequately offset the effects of inflation.
Related-Party Transactions and Agreements
We have entered into agreements with CMFT Management or its affiliates whereby we agree to pay certain fees to, or reimburse certain expenses of, CMFT Management or its affiliates such as acquisition and advisory fees and expenses, organization and offering costs, leasing fees and reimbursement of certain operating costs. See
Note 11 — Related-Party Transactions and Arrangements
to our consolidated financial statements in this Annual Report on Form 10-K for a discussion of the various related-party transactions, agreements and fees.
Conflicts of Interest
Richard S. Ressler, the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, is the chairman of the board, chief executive officer and president of CCIT III and CIM Income NAV, a director of CCIT II and vice president of CMFT Management. One of our directors, Avraham Shemesh, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates, serves as the chairman of the board of CCIT II and CCPT V and as a director of CCIT III and CIM Income NAV, and is president and treasurer of CMFT Management. One of our directors, Elaine Y. Wong, who is also a principal of CIM, also serves as a director of CCIT II, CCPT V and CIM Income NAV. One of our independent directors, W. Brian Kretzmer, also serves as an independent director of CCIT III and CIM Income NAV. Another one of our independent directors, Howard A. Silver, also serves as an independent director of CCIT III. Nathan D. DeBacker, our chief financial officer and treasurer, who is also an officer of other real estate programs sponsored by CCO Group, is a vice president of CMFT Management and is an officer of certain of its affiliates. In addition, affiliates of CMFT Management act as an advisor to CCPT V, CCIT II, CCIT III and CIM Income NAV, all of which are public, non-listed REITs sponsored or operated by CCO Group. As such, there may be conflicts of interest where CMFT Management or its affiliates, while serving in the capacity as sponsor, general partner, officer, director, key personnel and/or advisor for CIM or another real estate program sponsored or operated by CIM or CCO Group, including other real estate offerings in registration, may be in conflict with us in connection with providing services to other real estate-related programs related to property acquisitions, property dispositions, and property management, among others. The compensation arrangements between affiliates of CMFT Management and these other real estate programs sponsored or operated by CCO Group could influence the advice provided to us. See Part I, Item 1. Business — Conflicts of Interest of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of
December 31, 2019
and
2018
, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.
67
Critical Accounting Policies and Significant Accounting Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in
Note 2 — Summary of Significant Accounting Policies
to our consolidated financial statements in this Annual Report on Form 10-K.
Recoverability of Real Estate Assets
We acquire real estate assets and subsequently monitor those assets quarterly for impairment, including the review of real estate properties subject to direct financing leases, if applicable. Additionally, we record depreciation and amortization related to our assets. The risks and uncertainties involved in applying the principles related to real estate assets include, but are not limited to, the following:
|
•
|
The estimated useful lives of our depreciable assets affects the amount of depreciation and amortization recognized on our assets;
|
|
•
|
The review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the carrying value of assets held and used to a fair value estimated by management and recognize an impairment loss;
|
|
•
|
The fair value of held for sale assets is estimated by management. This estimated value could result in a reduction of the carrying value of the asset; and
|
|
•
|
Changes in assumptions based on actual results may have a material impact on our financial results.
|
Allocation of Purchase Price of Real Estate Assets
In connection with our acquisition of properties, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their respective relative fair values. Tangible assets consist of land, buildings, fixtures and tenant improvements. Intangible assets consist of above- and below-market lease values and the value of in-place leases. Our purchase price allocations are developed utilizing third-party appraisal reports, industry standards and management experience. The risks and uncertainties involved in applying the principles related to purchase price allocations include, but are not limited to, the following:
|
•
|
The value allocated to land, as opposed to buildings, fixtures and tenant improvements, affects the amount of depreciation expense we record. If more value is attributed to land, depreciation expense is lower than if more value is attributed to buildings, fixtures and tenant improvements;
|
|
•
|
Intangible lease assets and liabilities can be significantly affected by estimates including market rent, lease terms including renewal options at rental rates below estimated market rental rates, carrying costs of the property during a hypothetical expected lease-up period, and current market conditions and costs, including tenant improvement allowances and rent concessions; and
|
|
•
|
We determine whether any financing assumed is above- or below-market based upon comparison to similar financing terms for similar types of debt financing with similar maturities.
|
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are described in
Note 2 — Summary of Significant Accounting Policies
to our consolidated financial statements in this Annual Report on Form 10-K.
68
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market Risk
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
Interest Rate Risk
As of
December 31, 2019
, we had variable rate debt of
$73.3 million
, excluding any debt subject to interest rate swap agreements, and therefore, we are exposed to interest rate changes in the London Interbank Offered Rate (“LIBOR”). As of
December 31, 2019
, an increase or decrease of 50 basis points in interest rates would result in an increase or decrease in interest expense of
$367,000
per year.
As of
December 31, 2019
, we had
three
interest rate swap agreements outstanding, which mature on various dates from
March 2021
through
July 2021
, with an aggregate notional amount of
$871.7 million
and an aggregate fair value of the net derivative liability of
$3.9 million
. The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of
December 31, 2019
, an increase of 50 basis points in interest rates would result in a change of
$5.1 million
to the fair value of the net derivative liability, resulting in a net derivative asset of
$1.2 million
. A decrease of 50 basis points in interest rates would result in a
$5.2 million
change to the fair value of the net derivative liability, resulting in a net derivative liability of
$9.1 million
.
As the information presented above includes only those exposures that existed as of
December 31, 2019
, it does not consider exposures or positions arising after that date. The information presented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs and assume no other changes in our capital structure.
In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to U.S. dollar LIBOR in derivatives and other financial contracts. We are not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
We have interest rate swap agreements maturing on various dates from March 2021 through July 2021, as further discussed above, that are indexed to LIBOR. As such, we are monitoring and evaluating the related risks, which include interest on loans or amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans, or derivative instruments tied to LIBOR could also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the respective counterparty.
If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our contracts is likely to vary by contract. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected.
While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.
69
Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in economic conditions. We are subject to tenant, geographic and industry concentrations. Any downturn of the economic conditions in one or more of these tenants, states or industries could result in a material reduction of our cash flows or material losses to us.
The factors considered in determining the credit risk of our tenants include, but are not limited to: payment history; credit status and change in status (credit ratings for public companies are used as a primary metric); change in tenant space needs (
i.e.
, expansion/downsize); tenant financial performance; economic conditions in a specific geographic region; and industry specific credit considerations. We believe that the credit risk of our portfolio is reduced by the high quality of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants and mitigation options.
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements and supplementary data filed as part of this report are set forth beginning on page F-1 in this Annual Report on Form 10-K.
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
There were no changes in or disagreements with our independent registered public accountants during the
year ended
December 31, 2019
.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that no controls and procedures, no matter how well designed and operated, can provide absolute assurance of achieving the desired control objectives.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of
December 31, 2019
was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of
December 31, 2019
, were effective at a reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of
December 31, 2019
.
70
Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended
December 31, 2019
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|
ITEM 9B.
|
OTHER INFORMATION
|
None.
71
PART III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The
information required by this Item will be presented in our definitive proxy statement for our
2020
annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2019
, and is incorporated herein by reference.
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
The
information required by this Item will be presented in our definitive proxy statement for our
2020
annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2019
, and is incorporated herein by reference.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The
information required by this Item will be presented in our definitive proxy statement for our
2020
annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2019
, and is incorporated herein by reference.
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|
The
information required by this Item will be presented in our definitive proxy statement for our
2020
annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2019
, and is incorporated herein by reference.
|
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
The
information required by this Item will be presented in our definitive proxy statement for our
2020
annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2019
, and is incorporated herein by reference.
72
PART IV
|
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
Financial Statements
The list of the consolidated financial statements contained herein is set forth on page F-1 hereof.
Financial Statement Schedules
Schedule III – Real Estate Assets and Accumulated Depreciation is set forth beginning on page S-1 hereof.
Schedule IV – Mortgage Loans on Real Estate is set forth beginning on page S-27 hereof.
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
Exhibits
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended
December 31, 2019
(and are numbered in accordance with Item 601 of Regulation S-K).
|
Exhibit No.
|
Description
|
|
|
3.1
|
||
|
3.2
|
||
|
4.1*
|
||
|
4.2
|
||
|
10.1
|
||
|
10.2
|
||
|
10.3
|
|
|
|
10.4
|
|
|
|
10.5
|
||
|
10.6
|
||
|
10.7
|
||
|
10.8
|
||
|
10.9
|
||
|
21.1*
|
||
|
23.1*
|
||
|
31.1*
|
||
|
31.2*
|
||
|
32.1**
|
||
|
101.INS*
|
XBRL Instance Document.
|
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document.
|
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
____________________________________
|
*
|
Filed herewith.
|
|
**
|
In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
|
|
ITEM 16.
|
FORM 10-K SUMMARY
|
None.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized this 30
th
day of March, 2020.
|
|
CIM Real Estate Finance Trust, Inc.
|
|
|
(Registrant)
|
||
|
By:
|
/s/ NATHAN D. DEBACKER
|
|
|
Nathan D. DeBacker
|
||
|
Chief Financial Officer and Treasurer
|
||
|
(Principal Financial Officer)
|
||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
||
|
|
|
|
|
|
||
|
|
||||||
|
/s/ RICHARD S. RESSLER
|
|
Chairman of the Board of Directors, Chief Executive Officer and President
|
|
March 30, 2020
|
||
|
Richard S. Ressler
|
(Principal Executive Officer)
|
|||||
|
/s/ NATHAN D. DEBACKER
|
|
Chief Financial Officer and Treasurer
|
|
March 30, 2020
|
||
|
Nathan D. DeBacker
|
(Principal Financial Officer)
|
|||||
|
/s/ JEFFREY R. SMITH
|
Vice President of Accounting
|
March 30, 2020
|
||||
|
Jeffrey R. Smith
|
(Principal Accounting Officer)
|
|||||
|
|
||||||
|
/s/ T. PATRICK DUNCAN
|
|
Independent Director
|
|
March 30, 2020
|
||
|
T. Patrick Duncan
|
||||||
|
/s/ LAWRENCE S. JONES
|
|
Independent Director
|
|
March 30, 2020
|
||
|
Lawrence S. Jones
|
||||||
|
/s/ ALICIA K. HARRISON
|
|
Independent Director
|
|
March 30, 2020
|
||
|
Alicia K. Harrison
|
||||||
|
|
||||||
|
/s/ W. BRIAN KRETZMER
|
|
Independent Director
|
|
March 30, 2020
|
||
|
W. Brian Kretzmer
|
||||||
|
/s/ HOWARD A. SILVER
|
Independent Director
|
March 30, 2020
|
||||
|
W. Howard A. Silver
|
||||||
|
/s/ AVRAHAM SHEMESH
|
|
Director
|
|
March 30, 2020
|
||
|
Avraham Shemesh
|
||||||
|
/s/ ELAINE Y. WONG
|
|
Director
|
|
March 30, 2020
|
||
|
Elaine Y. Wong
|
||||||
74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Financial Statements
|
Page
|
|
|
|
||
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of CIM Real Estate Finance Trust, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CIM Real Estate Finance Trust, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Phoenix, Arizona
March 30, 2020
We have served as the Company’s auditor since 2010.
F-2
CIM REAL ESTATE FINANCE TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
December 31, 2019
|
December 31, 2018
|
||||||
|
ASSETS
|
|||||||
|
Real estate assets:
|
|||||||
|
Land
|
$
|
700,210
|
|
$
|
1,172,449
|
|
|
|
Buildings, fixtures and improvements
|
1,830,101
|
|
3,271,592
|
|
|||
|
Intangible lease assets
|
313,127
|
|
554,868
|
|
|||
|
Total real estate assets, at cost
|
2,843,438
|
|
4,998,909
|
|
|||
|
Less: accumulated depreciation and amortization
|
(374,103
|
)
|
(597,756
|
)
|
|||
|
Total real estate assets, net
|
2,469,335
|
|
4,401,153
|
|
|||
|
Loans held-for-investment and related receivables, net
|
301,630
|
|
89,762
|
|
|||
|
Cash and cash equivalents
|
466,024
|
|
10,533
|
|
|||
|
Restricted cash
|
7,331
|
|
9,141
|
|
|||
|
Rents and tenant receivables
|
58,374
|
|
81,686
|
|
|||
|
Interest receivable, prepaid expenses and other assets
|
11,731
|
|
16,229
|
|
|||
|
Deferred costs, net
|
2,301
|
|
2,087
|
|
|||
|
Assets held for sale
|
351,897
|
|
6,780
|
|
|||
|
Total assets
|
$
|
3,668,623
|
|
$
|
4,617,371
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Credit facilities and notes payable, net
|
$
|
1,604,860
|
|
$
|
2,516,914
|
|
|
|
Accrued expenses and accounts payable
|
22,038
|
|
25,014
|
|
|||
|
Due to affiliates
|
14,458
|
|
5,156
|
|
|||
|
Intangible lease liabilities, net
|
20,523
|
|
36,418
|
|
|||
|
Distributions payable
|
16,510
|
|
16,518
|
|
|||
|
Deferred rental income, derivative liability and other liabilities
|
19,448
|
|
16,254
|
|
|||
|
Total liabilities
|
1,697,837
|
|
2,616,274
|
|
|||
|
Commitments and contingencies
|
|
|
|||||
|
Redeemable common stock and noncontrolling interest
|
180,838
|
|
184,247
|
|
|||
|
STOCKHOLDERS’ EQUITY
|
|||||||
|
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized, none issued and outstanding
|
—
|
|
—
|
|
|||
|
Common stock, $0.01 par value per share; 490,000,000 shares authorized, 311,207,725 and 311,381,396 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively
|
3,112
|
|
3,114
|
|
|||
|
Capital in excess of par value
|
2,606,925
|
|
2,607,330
|
|
|||
|
Accumulated distributions in excess of earnings
|
(816,181
|
)
|
(804,617
|
)
|
|||
|
Accumulated other comprehensive (loss) income
|
(3,908
|
)
|
11,023
|
|
|||
|
Total stockholders’ equity
|
1,789,948
|
|
1,816,850
|
|
|||
|
Total liabilities, redeemable common stock, noncontrolling interest and stockholders’ equity
|
$
|
3,668,623
|
|
$
|
4,617,371
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CIM REAL ESTATE FINANCE TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
|
Year Ended December 31,
|
||||||||||||
|
|
2019
|
2018
|
2017
|
|||||||||
|
Revenues:
|
||||||||||||
|
Rental and other property income
|
$
|
393,224
|
|
$
|
429,636
|
|
$
|
424,095
|
|
|||
|
Interest income
|
20,132
|
|
1,640
|
|
—
|
|
||||||
|
Total revenues
|
413,356
|
|
431,276
|
|
424,095
|
|
||||||
|
Operating expenses:
|
||||||||||||
|
General and administrative
|
13,729
|
|
14,127
|
|
13,716
|
|
||||||
|
Property operating
|
33,462
|
|
30,267
|
|
29,777
|
|
||||||
|
Real estate tax
|
32,196
|
|
37,898
|
|
37,489
|
|
||||||
|
Management and advisory fees and expenses
|
42,339
|
|
43,399
|
|
44,072
|
|
||||||
|
Transaction-related
|
2,278
|
|
2,601
|
|
1,599
|
|
||||||
|
Depreciation and amortization
|
107,867
|
|
140,979
|
|
141,392
|
|
||||||
|
Impairment
|
72,939
|
|
32,975
|
|
2,855
|
|
||||||
|
Total operating expenses
|
304,810
|
|
302,246
|
|
270,900
|
|
||||||
|
Gain on disposition of real estate, net
|
180,666
|
|
6,299
|
|
17,044
|
|
||||||
|
Operating income
|
289,212
|
|
135,329
|
|
170,239
|
|
||||||
|
Other expense:
|
||||||||||||
|
Interest expense and other, net
|
(98,965
|
)
|
(97,871
|
)
|
(89,792
|
)
|
||||||
|
Loss on extinguishment of debt
|
(7,227
|
)
|
(46
|
)
|
(896
|
)
|
||||||
|
Total other expense
|
(106,192
|
)
|
(97,917
|
)
|
(90,688
|
)
|
||||||
|
Net income
|
183,020
|
|
37,412
|
|
79,551
|
|
||||||
|
Net income allocated to noncontrolling interest
|
121
|
|
134
|
|
131
|
|
||||||
|
Net income attributable to the Company
|
$
|
182,899
|
|
$
|
37,278
|
|
$
|
79,420
|
|
|||
|
Weighted average number of common shares outstanding:
|
||||||||||||
|
Basic and diluted
|
311,302,909
|
|
311,478,665
|
|
311,677,149
|
|
||||||
|
Net income per common share:
|
||||||||||||
|
Basic and diluted
|
$
|
0.59
|
|
$
|
0.12
|
|
$
|
0.25
|
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CIM REAL ESTATE FINANCE TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
Year Ended December 31,
|
|||||||||||
|
|
2019
|
2018
|
2017
|
|||||||||
|
Net income
|
$
|
183,020
|
|
$
|
37,412
|
|
$
|
79,551
|
|
|||
|
Other comprehensive (loss) income
|
||||||||||||
|
Unrealized (loss) gain on interest rate swaps
|
(11,456
|
)
|
8,210
|
|
4,551
|
|
||||||
|
Amount of (gain) loss reclassified from other comprehensive income into income as interest expense and other, net
|
(3,475
|
)
|
(4,305
|
)
|
3,103
|
|
||||||
|
Total other comprehensive (loss) income
|
(14,931
|
)
|
3,905
|
|
7,654
|
|
||||||
|
Comprehensive income
|
168,089
|
|
41,317
|
|
87,205
|
|
||||||
|
Comprehensive income allocated to noncontrolling interest
|
121
|
|
134
|
|
131
|
|
||||||
|
Comprehensive income attributable to the Company
|
$
|
167,968
|
|
$
|
41,183
|
|
$
|
87,074
|
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CIM REAL ESTATE FINANCE TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
|
|
Common Stock
|
Capital in
Excess
of Par Value
|
Accumulated
Distributions in Excess of Earnings
|
Accumulated Other Comprehensive Income (Loss)
|
Total
Stockholders’
Equity
|
|||||||||||||||||
|
|
Number of
Shares
|
Par Value
|
||||||||||||||||||||
|
Balance, January 1, 2017
|
311,817,004
|
|
$
|
3,118
|
|
$
|
2,607,304
|
|
$
|
(531,567
|
)
|
$
|
(1,024
|
)
|
$
|
2,077,831
|
|
|||||
|
Issuance of common stock
|
10,095,437
|
|
101
|
|
101,243
|
|
—
|
|
—
|
|
101,344
|
|
||||||||||
|
Distributions declared on common stock — $0.625 per common share
|
—
|
|
—
|
|
—
|
|
(194,687
|
)
|
—
|
|
(194,687
|
)
|
||||||||||
|
Redemptions of common stock
|
(10,330,122
|
)
|
(103
|
)
|
(103,572
|
)
|
—
|
|
—
|
|
(103,675
|
)
|
||||||||||
|
Changes in redeemable common stock
|
—
|
|
—
|
|
2,325
|
|
—
|
|
—
|
|
2,325
|
|
||||||||||
|
Comprehensive income
|
—
|
|
—
|
|
—
|
|
79,420
|
|
7,654
|
|
87,074
|
|
||||||||||
|
Balance, December 31, 2017
|
311,582,319
|
|
$
|
3,116
|
|
$
|
2,607,300
|
|
$
|
(646,834
|
)
|
$
|
6,630
|
|
$
|
1,970,212
|
|
|||||
|
Cumulative effect of accounting changes
|
—
|
|
—
|
|
—
|
|
(488
|
)
|
488
|
|
—
|
|
||||||||||
|
Issuance of common stock
|
9,615,850
|
|
96
|
|
91,668
|
|
—
|
|
—
|
|
91,764
|
|
||||||||||
|
Equity-based compensation
|
14,008
|
|
—
|
|
33
|
|
—
|
|
—
|
|
33
|
|
||||||||||
|
Distributions declared on common stock — $0.625 per common share
|
—
|
|
—
|
|
—
|
|
(194,573
|
)
|
—
|
|
(194,573
|
)
|
||||||||||
|
Redemptions of common stock
|
(9,830,781
|
)
|
(98
|
)
|
(93,732
|
)
|
—
|
|
—
|
|
(93,830
|
)
|
||||||||||
|
Changes in redeemable common stock
|
—
|
|
—
|
|
2,061
|
|
—
|
|
—
|
|
2,061
|
|
||||||||||
|
Comprehensive income
|
—
|
|
—
|
|
—
|
|
37,278
|
|
3,905
|
|
41,183
|
|
||||||||||
|
Balance, December 31, 2018
|
311,381,396
|
|
$
|
3,114
|
|
$
|
2,607,330
|
|
$
|
(804,617
|
)
|
$
|
11,023
|
|
$
|
1,816,850
|
|
|||||
|
Issuance of common stock
|
9,335,895
|
|
93
|
|
82,295
|
|
—
|
|
—
|
|
82,388
|
|
||||||||||
|
Equity-based compensation
|
18,499
|
|
—
|
|
138
|
|
—
|
|
—
|
|
138
|
|
||||||||||
|
Distributions declared on common stock — $0.625 per common share
|
—
|
|
—
|
|
—
|
|
(194,463
|
)
|
—
|
|
(194,463
|
)
|
||||||||||
|
Redemptions of common stock
|
(9,528,065
|
)
|
(95
|
)
|
(83,993
|
)
|
—
|
|
—
|
|
(84,088
|
)
|
||||||||||
|
Changes in redeemable common stock
|
—
|
|
—
|
|
1,155
|
|
—
|
|
—
|
|
1,155
|
|
||||||||||
|
Comprehensive income (loss)
|
—
|
|
—
|
|
—
|
|
182,899
|
|
(14,931
|
)
|
167,968
|
|
||||||||||
|
Balance, December 31, 2019
|
311,207,725
|
|
$
|
3,112
|
|
$
|
2,606,925
|
|
$
|
(816,181
|
)
|
$
|
(3,908
|
)
|
$
|
1,789,948
|
|
|||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CIM REAL ESTATE FINANCE TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
|
Year Ended December 31,
|
|||||||||||
|
|
2019
|
2018
|
2017
|
||||||||
|
Cash flows from operating activities:
|
|||||||||||
|
Net income
|
$
|
183,020
|
|
$
|
37,412
|
|
$
|
79,551
|
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|||||||||||
|
Depreciation and amortization, net
|
106,262
|
|
139,330
|
|
139,253
|
|
|||||
|
Amortization of deferred financing costs
|
5,167
|
|
5,351
|
|
5,313
|
|
|||||
|
Amortization of fair value adjustments of mortgage notes payable assumed
|
(90
|
)
|
(88
|
)
|
(86
|
)
|
|||||
|
Amortization and accretion on deferred loan fees
|
(2,441
|
)
|
(268
|
)
|
—
|
|
|||||
|
Capitalized interest income
|
(8,546
|
)
|
—
|
|
—
|
|
|||||
|
Equity-based compensation
|
138
|
|
33
|
|
—
|
|
|||||
|
Straight-line rental income, net
|
(5,612
|
)
|
(7,555
|
)
|
(8,174
|
)
|
|||||
|
Gain on disposition of real estate assets, net
|
(180,666
|
)
|
(6,299
|
)
|
(17,044
|
)
|
|||||
|
Amortization of gain on swap termination
|
(18
|
)
|
—
|
|
—
|
|
|||||
|
Impairment of real estate assets
|
72,939
|
|
32,975
|
|
2,855
|
|
|||||
|
Fair value adjustment to contingent consideration
|
—
|
|
—
|
|
(337
|
)
|
|||||
|
Ineffectiveness of interest rate swaps
|
—
|
|
—
|
|
(488
|
)
|
|||||
|
Write-off of deferred financing costs
|
2,271
|
|
46
|
|
896
|
|
|||||
|
Changes in assets and liabilities:
|
|||||||||||
|
Rents and tenant receivables
|
16,034
|
|
(2,432
|
)
|
862
|
|
|||||
|
Prepaid expenses and other assets
|
(6,456
|
)
|
(833
|
)
|
(67
|
)
|
|||||
|
Accrued expenses and accounts payable
|
(1,742
|
)
|
14
|
|
(192
|
)
|
|||||
|
Deferred rental income and other liabilities
|
(987
|
)
|
4,921
|
|
(70
|
)
|
|||||
|
Due from affiliates
|
—
|
|
56
|
|
2
|
|
|||||
|
Due to affiliates
|
9,302
|
|
3,172
|
|
(3,349
|
)
|
|||||
|
Net cash provided by operating activities
|
188,575
|
|
205,835
|
|
198,925
|
|
|||||
|
Cash flows from investing activities:
|
|||||||||||
|
Investment in broadly syndicated loans
|
(2,750
|
)
|
—
|
|
—
|
|
|||||
|
Investment in real estate assets
|
(6,165
|
)
|
(11,905
|
)
|
(307,385
|
)
|
|||||
|
Capital expenditures
|
(17,722
|
)
|
(7,297
|
)
|
(13,315
|
)
|
|||||
|
Origination and acquisition of loans held-for-investment, net
|
(217,014
|
)
|
(89,295
|
)
|
—
|
|
|||||
|
Principal payments received on loans held-for-investment
|
17,186
|
|
—
|
|
—
|
|
|||||
|
Origination and exit fees received on loans held-for-investment
|
1,697
|
|
185
|
|
—
|
|
|||||
|
Investment in revenue bonds
|
—
|
|
—
|
|
(2,081
|
)
|
|||||
|
Net proceeds from disposition of real estate assets
|
1,399,953
|
|
64,180
|
|
99,013
|
|
|||||
|
Payment of property escrow deposits
|
(350
|
)
|
(1,100
|
)
|
(11,472
|
)
|
|||||
|
Refund of property escrow deposits
|
350
|
|
1,100
|
|
11,722
|
|
|||||
|
Proceeds from the settlement of insurance claims
|
110
|
|
240
|
|
132
|
|
|||||
|
Net cash provided by (used in) investing activities
|
1,175,295
|
|
(43,892
|
)
|
(223,386
|
)
|
|||||
|
Cash flows from financing activities:
|
|||||||||||
|
Redemptions of common stock
|
(84,088
|
)
|
(93,830
|
)
|
(103,675
|
)
|
|||||
|
Distributions to stockholders
|
(112,083
|
)
|
(102,822
|
)
|
(93,310
|
)
|
|||||
|
Proceeds from credit facility and notes payable
|
424,500
|
|
268,000
|
|
1,572,706
|
|
|||||
|
Repayments of credit facility and notes payable, net of swap termination payments received
|
(1,137,022
|
)
|
(227,181
|
)
|
(1,341,617
|
)
|
|||||
|
Payment of loan deposits
|
—
|
|
—
|
|
(1,139
|
)
|
|||||
|
Refund of loan deposits
|
—
|
|
—
|
|
1,064
|
|
|||||
|
Deferred financing costs paid
|
(1,211
|
)
|
—
|
|
(13,228
|
)
|
|||||
|
Distributions to noncontrolling interest
|
(285
|
)
|
(279
|
)
|
(291
|
)
|
|||||
|
Net cash (used in) provided by financing activities
|
(910,189
|
)
|
(156,112
|
)
|
20,510
|
|
|||||
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
453,681
|
|
5,831
|
|
(3,951
|
)
|
|||||
|
Cash and cash equivalents and restricted cash, beginning of period
|
19,674
|
|
13,843
|
|
17,794
|
|
|||||
|
Cash and cash equivalents and restricted cash, end of period
|
$
|
473,355
|
|
$
|
19,674
|
|
$
|
13,843
|
|
||
|
Reconciliation of cash and cash equivalents and restricted cash to the consolidated balance sheets:
|
|||||||||||
|
Cash and cash equivalents
|
$
|
466,024
|
|
$
|
10,533
|
|
$
|
4,745
|
|
||
|
Restricted cash
|
7,331
|
|
9,141
|
|
9,098
|
|
|||||
|
Total cash and cash equivalents and restricted cash
|
$
|
473,355
|
|
$
|
19,674
|
|
$
|
13,843
|
|
||
F-7
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BUSINESS
CIM Real Estate Finance Trust, Inc. (formerly known as Cole Credit Property Trust IV, Inc.)
(the “Company”) is a non-exchange traded real estate investment trust (“REIT”) formed as a Maryland corporation on July 27, 2010, that elected to be taxed, and currently qualifies, as a REIT for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2012. The Company operates a diversified portfolio of core commercial real estate assets primarily consisting of net leased properties located throughout the United States. As of
December 31, 2019
, the Company owned
396
properties, comprising
19.1 million
rentable square feet of commercial space located in
43
states. As of
December 31, 2019
, the rentable square feet at these properties was
94.6%
leased, including month-to-month agreements, if any. As of
December 31, 2019
, there were
29
properties identified as held for sale. See
Note 4 — Real Estate Assets
to the consolidated financial statements in this Annual Report on Form 10-K for a discussion of the held for sale properties as of
December 31, 2019
. The Company intends to pursue a more diversified investment strategy across the capital structure by balancing the Company’s existing core of necessity commercial real estate assets leased to creditworthy tenants under long-term net leases with a portfolio of commercial mortgage loans and other credit investments in which the Company’s sponsor and its affiliates have expertise. As of
December 31, 2019
, the Company’s loan portfolio consisted of
12
loans with a net book value of
$301.6 million
.
Substantially all of the Company’s business is conducted through CIM Real Estate Finance Operating Partnership, LP (formerly known as Cole Operating Partnership IV, LP), a Delaware limited partnership, of which the Company is the sole general partner and owns, directly or indirectly,
100%
of the partnership interests.
The Company is externally managed by CIM Real Estate Finance Management, LLC (formerly known as Cole REIT Management IV, LLC), a Delaware limited liability company (“CMFT Management”), which is an affiliate of CIM Group, LLC (“CIM”). CIM is a community-focused real estate and infrastructure owner, operator, developer and lender with multi-disciplinary expertise, including acquisitions, management, development, leasing, research and capital markets. CIM is headquartered in Los Angeles, California and has offices in Oakland, California; Bethesda, Maryland; Dallas, Texas; New York, New York; Chicago, Illinois; and Phoenix, Arizona.
CCO Group, LLC owns and controls CMFT Management, the Company’s advisor, and is the indirect owner of CCO Capital, LLC (“CCO Capital”), the Company’s dealer manager, and CREI Advisors, LLC (“CREI Advisors”), the Company’s property manager. CCO Group, LLC and its subsidiaries (collectively, “CCO Group”) serve as the Company’s sponsor and as a sponsor to Cole Credit Property Trust V, Inc. (“CCPT V”), Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”), Cole Office & Industrial REIT (CCIT III), Inc. (“CCIT III”) and CIM Income NAV, Inc. (“CIM Income NAV”).
On
January 26, 2012
, the Company commenced its initial public offering on a “best efforts” basis of up to a maximum of
$2.975 billion
in shares of common stock (the “Offering”). The Company ceased issuing shares in the Offering on April 4, 2014. At the completion of the Offering, a total of approximately
297.4 million
shares of common stock had been issued, including approximately
292.3 million
shares of common stock sold to the public pursuant to the primary portion of the Offering and approximately
5.1 million
shares of common stock issued pursuant to the DRIP portion of the Offering. The remaining approximately
404,000
unsold shares from the Offering were deregistered.
The Company registered
$247.0 million
of shares of common stock under a distribution reinvestment plan (the “DRIP”) (the “Initial DRIP Offering”), which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 19, 2013 and automatically became effective with the SEC upon filing. The Company ceased issuing shares under the Initial DRIP Offering effective as of June 30, 2016. At the completion of the Initial DRIP Offering, a total of approximately
$241.7 million
of common stock had been issued. The remaining
$5.3 million
of unsold shares from the Initial DRIP Offering were deregistered.
The Company registered an additional
$600.0 million
of shares of common stock under the DRIP (the “Secondary DRIP Offering,” and together with the Initial DRIP Offering, the “DRIP Offerings,” and the DRIP Offerings collectively with the Offering, the “Offerings”), which was filed with the SEC on August 2, 2016 and automatically became effective with the SEC upon filing. The Company began to issue shares under the Secondary DRIP Offering on August 2, 2016 and will continue to issue shares under the Secondary DRIP Offering.
The Company’s board of directors (the “Board”) establishes an updated estimated per share net asset value (“NAV”) of the Company’s common stock on at least an annual basis for purposes of assisting broker-dealers that participated in the Offering in meeting their customer account reporting obligations under Financial Industry Regulatory Authority Rule 2231. Distributions are reinvested in shares of the Company’s common stock under the DRIP at the estimated per share NAV as determined by the Board. Additionally, the estimated per share NAV as determined by the Board serves as the per share NAV for purposes of the
F-8
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
share redemption program. As of
December 31, 2019
, the estimated per share NAV was
$8.65
per share, which was established on March 20, 2019 using a valuation date of December 31, 2018. On
March 25, 2020
, the Board established an updated estimated per share NAV of the Company’s common stock, using a valuation date of December 31, 2019. Commencing on March 30, 2020, distributions are reinvested in shares of the Company’s common stock under the DRIP at a price of
$7.77
per share. The Board previously established per share NAVs as of August 31, 2015, September 30, 2016, December 31, 2016, December 31, 2017 and December 31, 2018. The Company’s estimated per share NAVs are not audited or reviewed by its independent registered public accounting firm.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE’s operations.
For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a VIE.
A VIE must be consolidated by its primary beneficiary, which is generally defined as the party who has a controlling financial interest in the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE and the difference between consolidating the VIE and accounting for it using the equity method could be material to the Company’s consolidated financial statements. The Company continually evaluates the need to consolidate any VIEs based on standards set forth in GAAP as described above.
As of December 31,
2018
, the Company determined that it had a controlling interest in
nine
properties owned through a consolidated joint venture arrangement (the “Consolidated Joint Venture”) and therefore met the GAAP requirements for consolidation. During the year ended
December 31, 2019
, the Company disposed of the
nine
properties previously owned through the Consolidated Joint Venture and therefore determined it no longer had a controlling financial interest in the Consolidated Joint Venture as of
December 31, 2019
. See
Note 4 — Real Estate Assets
for a further discussion of this disposition.
Reclassifications
Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation.
The Company combined rental income of
$371.2 million
and tenant reimbursement income of
$58.4 million
for the year ended
December 31, 2018
, and rental income of
$371.9 million
and tenant reimbursement income of
$52.2 million
for the year
F-9
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
ended
December 31, 2017
, into a single financial statement line item, rental and other property income, in the consolidated statements of operations.
The Company has chosen to break out loss on extinguishment of debt of
$46,000
from interest expense and other, net for the year ended
December 31, 2018
, and loss on extinguishment of debt of
$896,000
from interest expense and other, net for the year ended
December 31, 2017
, which was previously reported in total as
$97.9 million
and
$90.7 million
in the Company’s consolidated statements of operations for the years ended
December 31, 2018
and 2017, respectively.
The Company has chosen to break out capital expenditures of
$7.3 million
from investment in real estate assets of
$11.9 million
for the year ended
December 31, 2018
, and capital expenditures of
$13.3 million
from investment in real estate assets of
$307.4 million
for the year ended
December 31, 2017
, which was previously reported in total as
$19.2 million
and
$320.7 million
in the Company’s consolidated statements of cash flows for the years ended
December 31, 2018
and 2017, respectively.
Additionally, the Company is combining bad debt expense of
$522,000
and straight-line rental income of
$8.1 million
for the year ended
December 31, 2018
, and bad debt expense of
$1.9 million
and straight-line rental income of
$10.1 million
for the year ended
December 31, 2017
into a single line item, straight-line rental income, net, in the consolidated statements of cash flows.
Use of Estimates
The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. The Company considers the period of future benefit of each respective asset to determine the appropriate useful life. The estimated useful lives of the Company’s real estate assets by class are generally as follows:
|
Buildings
|
40 years
|
|
Site improvements
|
15 years
|
|
Tenant improvements
|
Lesser of useful life or lease term
|
|
Intangible lease assets
|
Lease term
|
Recoverability of Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to: bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors; a significant decrease in a property’s revenues due to lease terminations; vacancies; co-tenancy clauses; reduced lease rates; changes in anticipated holding periods; or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value is determined using a discounted cash flow analysis and recent comparable sales transactions. During the year ended
December 31, 2019
, as part of the Company’s quarterly impairment review procedures, the Company recorded impairment charges of
$72.9 million
related to
27
properties with revised expected holding periods and
seven
properties with vacancies. The Company’s impairment assessment as of
December 31, 2019
was based on the most current information available to the Company, including expected holding periods. If the Company’s expected holding periods for assets change, subsequent tests for impairment could result in additional impairment charges in the future. The Company cannot provide any assurance that material impairment charges with respect to the Company’s real estate assets will not occur during 2020 or future periods. During the year ended
December 31, 2018
, the Company recorded impairment charges of
$33.0 million
related to
20
properties with revised expected holding periods and
two
properties with vacancies. During the year ended
December 31, 2017
, the Company recorded impairment charges of
$2.9 million
related to
four
properties as a result of delinquent rental payments and
two
tenants who had previously filed for bankruptcy. The assumptions and uncertainties utilized in the evaluation of the impairment of real estate assets are
F-10
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
discussed in detail in
Note 3 — Fair Value Measurements
. See also
Note 4 — Real Estate Assets
for further discussion regarding real estate investment activity. Within the next 24 months, the Company expects to sell a substantial portion of its anchored shopping center portfolio and certain single tenant properties. These will be sold in pools or on a standalone basis. As of
December 31, 2019
, the Company intended to sell properties with a net book value of at least
$1.7 billion
, subject to market conditions.
Assets Held for Sale
When a real estate asset is identified by the Company as held for sale, the Company will cease recording depreciation and amortization of the assets related to the property and estimate its fair value, net of selling costs. If, in management’s opinion, the fair value, net of selling costs, of the asset is less than the carrying amount of the asset, an adjustment to the carrying amount is then recorded to reflect the estimated fair value of the property, net of selling costs. As of
December 31, 2019
, the Company identified
29
properties with a carrying value of
$351.9 million
as held for sale,
12
of which were sold subsequent to
December 31, 2019
. The Company has mortgage notes payable of
$126.7 million
that are related to the held for sale properties, which the Company expects to repay in connection with the disposition of the underlying held for sale properties. As of
December 31, 2018
, the Company identified
one
property with a carrying value of
$6.8 million
as held for sale, which was sold subsequent to
December 31, 2018
.
Disposition of Real Estate Assets
Gains and losses from dispositions are recognized once the various criteria relating to the terms of sale and any subsequent involvement by the Company with the asset sold are met. A discontinued operation includes only the disposal of a component of an entity and represents a strategic shift that has (or will have) a major effect on an entity’s financial results. The disposition of
497
and
21
of the Company’s individual properties during the years ended
December 31, 2019
and
2018
, respectively, did not qualify for discontinued operations presentation and thus, the results of the properties that were sold will remain in operating income, and any associated gains or losses from the disposition are included in gain on disposition of real estate, net. See
Note 4 — Real Estate Assets
to the consolidated financial statements in this Annual Report on Form 10-K for a discussion of the disposition of individual properties during the year ended
December 31, 2019
.
Allocation of Purchase Price of Real Estate Assets
Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings and improvements, and to identified intangible assets and liabilities, consisting of the value of above- and below-market leases and the value of in-place leases and other intangibles, based in each case on their relative fair values. The Company utilizes independent appraisals to assist in the determination of the fair values of the tangible assets of an acquired property (which includes land and buildings). The information in the appraisal, along with any additional information available to the Company’s management, is used in estimating the amount of the purchase price that is allocated to land. Other information in the appraisal, such as building value and market rents, may be used by the Company’s management in estimating the allocation of purchase price to the building and to intangible lease assets and liabilities. The appraisal firm has no involvement in management’s allocation decisions other than providing this market information.
The fair values of above- and below-market lease intangibles are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) an estimate of fair market lease rates for the corresponding in-place leases, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease including, for below-market leases, any bargain renewal periods. The above- and below-market lease intangibles are capitalized as intangible lease assets or liabilities, respectively. Above-market leases are amortized as a reduction to rental income over the remaining terms of the respective leases. Below-market leases are amortized as an increase to rental income over the remaining terms of the respective leases, including any bargain renewal periods. In considering whether or not the Company expects a tenant to execute a bargain renewal option, the Company evaluates economic factors and certain qualitative factors at the time of acquisition, such as the financial strength of the tenant, the remaining lease term, the tenant mix of the leased property, the Company’s relationship with the tenant and the availability of competing tenant space. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above- or below-market lease intangibles relating to that lease would be recorded as an adjustment to rental income.
The fair values of in-place leases include estimates of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rental and other property income, which are avoided by acquiring a property with an in-place lease. Direct costs associated with obtaining a new tenant include leasing commissions, legal and other related expenses and are estimated in part by utilizing information obtained from independent appraisals and management’s consideration of current
F-11
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
market costs to execute a similar lease. The intangible values of opportunity costs, which are calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease, are capitalized as intangible lease assets and are amortized to expense over the remaining term of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
The Company has acquired, and may continue to acquire, certain properties subject to contingent consideration arrangements that may obligate the Company to pay additional consideration to the seller based on the outcome of future events. Additionally, the Company may acquire certain properties for which it funds certain contingent consideration amounts into an escrow account pending the outcome of certain future events. The outcome may result in the release of all or a portion of the escrowed funds to the Company or the seller or a combination thereof. Prior to the adoption of ASU 2017-01 (as defined below) in April 2017, contingent consideration arrangements, including amounts funded through an escrow account, were recorded upon acquisition of the respective property at their estimated fair value, and any changes to the estimated fair value subsequent to acquisition were reflected in the accompanying consolidated statements of operations in acquisition-related fees and expenses. Upon adoption of ASU 2017-01 in April 2017, contingent consideration arrangements for asset acquisitions are recognized when the contingency is resolved. The determination of the amount of contingent consideration arrangements is based on the probability of several possible outcomes as identified by management.
The Company estimates the fair value of assumed mortgage notes payable based upon indications of current market pricing for similar types of debt financing with similar maturities. Assumed mortgage notes payable are initially recorded at their estimated fair value as of the assumption date, and any difference between such estimated fair value and the mortgage note’s outstanding principal balance is amortized or accreted to interest expense over the term of the respective mortgage note payable.
The determination of the fair values of the real estate assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables. The use of alternative estimates may result in a different allocation of the Company’s purchase price, which could materially impact the Company’s results of operations.
In April 2017, the Company elected to early adopt Accounting Standards Update (“ASU”) No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”), which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Beginning in April 2017, all real estate acquisitions qualified as asset acquisitions, and as such, acquisition-related fees and certain acquisition-related expenses related to these asset acquisitions are now capitalized and allocated to tangible and intangible assets and liabilities as described above. Other acquisition-related expenses, such as advisor reimbursements, continue to be expensed as incurred and are included in transaction-related expenses in the accompanying consolidated statements of operations. Prior to the adoption of ASU 2017-01 in April 2017, all of the Company’s real estate acquisitions were accounted for as business combinations and, as such, acquisition-related expenses related to these business combination acquisitions were expensed as incurred. Prior to April 2017, acquisition-related expenses included within transaction-related expenses in the Company’s consolidated statements of operations primarily consisted of legal, deed transfer and other costs related to real estate purchase transactions, including costs incurred for deals that were not consummated. The Company expects its future acquisitions to qualify as asset acquisitions and, as such, the Company will allocate the purchase price to acquired tangible assets and identified intangible assets and liabilities on a relative fair value basis.
Redeemable Noncontrolling Interest in Consolidated Joint Venture
On
June 27, 2014
, the Company completed the formation of the Consolidated Joint Venture. Pursuant to the joint venture agreement, the joint venture partner has a right to exercise an option (the “Option”), which became effective on June 27, 2016, whereby the Company will be required to purchase the ownership interest of the joint venture partner at fair market value. From June 2014 to December 2019, the Company determined it had a controlling interest in the Consolidated Joint Venture and, therefore, met the GAAP requirements for consolidation. The Company recorded net income of
$121,000
and paid distributions of
$285,000
related to the noncontrolling interest during the year ended
December 31, 2019
. During the year ended
December 31, 2019
, the Company disposed of its interest in the underlying properties previously owned through the Consolidated Joint Venture, as further discussed in
Note 4 — Real Estate Assets
. Therefore, the Company determined it no longer had a controlling financial interest as of
December 31, 2019
. The Company recorded the noncontrolling interest of
$2.3 million
as of
December 31, 2018
, as temporary equity in the mezzanine section of the consolidated balance sheets, due to the ability to exercise the Option being outside the control of the Company.
F-12
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash in bank accounts, as well as investments in highly-liquid money market funds. The Company deposits cash with several high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company (“FDIC”) up to an insurance limit of
$250,000
. At times, the Company’s cash and cash equivalents may exceed federally insured levels. Although the Company bears risk on amounts in excess of those insured by the FDIC, it has not experienced and does not anticipate any losses due to the high quality of the institutions where the deposits are held. Included in cash and cash equivalents was
$126.8 million
reserved for settlement of broadly syndicated loan purchases as of
December 31, 2019
, as further discussed in
Note 10 — Commitments and Contingencies
.
The Company had
$7.3 million
and
$9.1 million
in restricted cash as of
December 31, 2019
and
December 31, 2018
, respectively. Included in restricted cash was
$3.1 million
and
$3.4 million
held by lenders in lockbox accounts, as of
December 31, 2019
and
2018
, respectively. As part of certain debt agreements, rents from certain encumbered properties are deposited directly into a lockbox account, from which the monthly debt service payment is disbursed to the lender and the excess is disbursed to the Company. Also included in restricted cash was
$4.2 million
and
$5.7 million
held by lenders in escrow accounts for real estate taxes and other lender reserves for certain properties, in accordance with the associated lender’s loan agreement as of
December 31, 2019
and
2018
, respectively.
Loans Held-for-Investment
The Company has acquired, and may continue to acquire, loans related to real estate assets. Additionally, we may invest in first and second lien mortgage loans, mezzanine loans, bridge loans, wraparound mortgage loans, construction mortgage loans on real property, loans on leasehold interest mortgages and broadly syndicated loans. The Company intends to hold the loans held-for-investment for the foreseeable future or until maturity. Loans held-for-investment are carried on the Company’s consolidated balance sheets at amortized cost, net of any allowance for loans receivable losses. Discounts or premiums, origination fees and exit fees are amortized as a component of interest income using the effective interest method over the life of the respective loans. Loan acquisition fees paid to CMFT Management or its affiliates are expensed as incurred and are included in transaction-related expenses in the accompanying consolidated statements of operations.
Interest earned is either received in cash or capitalized to loans held-for-investment and related receivables, net in the Company’s consolidated balance sheets. Interest is capitalized when certain conditions are met as specified in each loan agreement. For the year ended
December 31, 2019
, the Company recorded
$20.1 million
in interest income, of which
$8.5 million
was capitalized to loans held-for-investment and related receivables, net.
Accrual of interest income is suspended on nonaccrual loans. Loans that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual. Interest collected is recognized on a cash basis by crediting income when received. Loans may be restored to accrual status when all principal and interest are current and full repayment of the remaining contractual principal and interest are reasonably assured.
As of
December 31, 2019
, the Company’s
eight
mezzanine loans with a net book value of
$146.1 million
were nonaccrual loans.
Generally, an allowance for loan losses is provided when management determines that the Company will be unable to collect any remaining amounts due under the loan agreement. The Company evaluates the collectability of its loans held-for-investment at least quarterly. The evaluation of collectability involves judgment, estimates, and a review of the ability of the borrower to make principal and interest payments and the underlying collateral. For the year ended
December 31, 2019
, the Company recorded
no
impairment on its loans held-for-investment.
Deferred Financing Costs
Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These costs are amortized to interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. Unamortized deferred financing costs are written off when the associated debt is extinguished or repaid before maturity. The presentation of all deferred financing costs, other than those associated with the revolving loan portion of the credit facilities, are classified such that the debt issuance costs related to a recognized debt liability are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability rather than as an asset. Debt issuance costs related to securing a revolving line of credit are presented as an asset and amortized ratably over the term of the line of credit arrangement. As such, the Company’s current and corresponding prior period total deferred costs, net in the accompanying consolidated balance sheets relate only to the revolving loan portion of the credit facilities and the historical presentation, amortization and treatment of unamortized costs are still
F-13
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
applicable. As of
December 31, 2019
and
2018
, the Company had
$2.3 million
and
$2.1 million
, respectively, of deferred financing costs, net of accumulated amortization, related to the revolving loan portion of the credit facilities. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined the financing will not close.
Due to Affiliates
CMFT Management, and certain of its affiliates, received and will continue to receive, fees, reimbursements and compensation in connection with services provided relating to the Offerings and the acquisition, management, financing and leasing of the properties of the Company.
Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments at fair value. Accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the designation of the derivative instrument. The change in fair value of the derivative instrument that is designated as a hedge is recorded as other comprehensive income. The changes in fair value for derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria are recorded as a gain or loss to operations.
Redeemable Common Stock
Under the Company’s share redemption program, the Company’s obligation to redeem shares of its outstanding common stock is limited, among other things, to the net proceeds received by the Company from the sale of shares under the DRIP, net of shares redeemed to date. The Company records the maximum amount that is redeemable under the share redemption program as redeemable common stock outside of permanent equity in its consolidated balance sheets. Changes in the amount of redeemable common stock from period to period are recorded as an adjustment to capital in excess of par value.
Leases
The Company adopted ASU No. 2016-02,
Leases, (Topic 842)
(“ASC 842”), on January 1, 2019 using the optional alternative transition method for financial information and related disclosures. The Company elected the “package of practical expedients,” which permits the Company to not reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. The Company has lease agreements with lease and non-lease components. The Company has elected to not separate non-lease components from lease components for all classes of underlying assets (primarily real estate assets) and will account for the combined components as rental and other property income. Non-lease components included in rental and other property income include certain tenant reimbursements for maintenance services (including common-area maintenance services or “CAM”), real estate taxes, insurance and utilities paid for by the lessor but consumed by the lessee. As a lessor, the Company has further determined that this policy will be effective only on a lease that has been classified as an operating lease and the revenue recognition pattern and timing is the same for both types of components. The Company is not a party to any material leases where it is the lessee.
Significant judgments and assumptions are inherent in not only determining if a contract contains a lease, but also the lease classification, terms, payments, and, if needed, discount rates. Judgments include the nature of any options, including if they will be exercised, evaluation of implicit discount rates and the assessment and consideration of “fixed” payments for straight-line rent revenue calculations.
The Company has an investment in a real estate property that is subject to a ground lease, for which a lease liability and right of use (“ROU”) asset of
$2.6 million
was recorded as of
December 31, 2019
. See
Note 15 — Leases
for a further discussion regarding this ground lease.
Lease costs represent the initial direct costs incurred in the origination, negotiation and processing of a lease agreement. Such costs include outside broker commissions and other independent third-party costs and are amortized over the life of the lease on a straight-line basis. Costs related to salaries and benefits, supervision, administration, unsuccessful origination efforts and other activities not directly related to completed lease agreements are expensed as incurred. Leasing commissions subsequent to successful lease execution are capitalized.
Revenue Recognition
Revenue from leasing activities
Rental and other property income is primarily derived from fixed contractual payments from operating leases and, therefore, is generally recognized on a straight-line basis over the term of the lease, which typically begins the date the tenant
F-14
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
takes control of the space. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purpose of this calculation. Variable rental and other property income consists primarily of tenant reimbursements for recoverable real estate taxes and operating expenses which are included in rental and other property income in the period when such costs are incurred, with offsetting expenses in real estate taxes and property operating expenses, respectively, within the consolidated statements of operations. The Company defers the recognition of variable rental and other property income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
The Company continually reviews whether collection of lease-related receivables, including any straight-line rent, and current and future operating expense reimbursements from tenants are probable. The determination of whether collectability is probable takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Upon the determination that the collectability of a receivable is not probable, the Company will record a reduction to rental and other property income for amounts previously recorded and a decrease in the outstanding receivable. Revenue from leases where collection is deemed to be less than probable is recorded on a cash basis until collectability becomes probable. Management’s estimate of the collectability of lease-related receivables is based on the best information available to management at the time of evaluation. The Company does not use a general reserve approach and lease-related receivables are adjusted and taken against rental and other property income only when collectability becomes not probable.
Revenue from lending activities
Interest income from our loans held-for-investment is comprised of interest earned on loans and the accretion and amortization of net loan origination fees and discounts. Interest income on loans is accrued as earned, with the accrual of interest suspended when the related loan becomes a nonaccrual loan. Interest income on the Company’s broadly syndicated loans is accrued as earned beginning on the settlement date.
Income Taxes
The Company elected to be taxed, and currently qualifies, as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2012. The Company will generally not be subject to federal corporate income tax to the extent it distributes its taxable income to its stockholders, and so long as it, among other things, distributes at least
90%
of its annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the Company maintains its qualification for taxation as a REIT, it or its subsidiaries may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.
Earnings (Loss) and Distributions Per Share
Earnings (loss) per share are calculated based on the weighted average number of common shares outstanding during each period presented. Diluted income (loss) per share considers the effect of any potentially dilutive share equivalents, of which the Company had none for each of the years ended
December 31, 2019
,
2018
or
2017
. Distributions per share are calculated based on the authorized daily distribution rate.
Reportable Segment
The Company’s commercial real estate assets consist of income-producing necessity retail properties that are primarily single-tenant or anchored shopping centers, which are leased to creditworthy tenants under long-term net leases. The commercial properties are geographically diversified throughout the United States and have similar economic characteristics. The Company’s management evaluates operating performance on an overall portfolio level; therefore, the Company’s properties are
one
reportable segment.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on the Company’s accounting and reporting. Except as otherwise stated below, the Company is currently evaluating the effect that certain new accounting requirements may have on the Company’s accounting and related reporting and disclosures in the Company’s consolidated financial statements.
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-13,
Financial Instruments - Credit Losses
(Topic 326)
(“ASU 2016-13”), which was subsequently amended by ASU No. 2018-19,
Codification
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CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Improvements to Topic 326,
Financial Instruments - Credit Losses
(“ASU 2018-19”), in November 2018. Subsequently, the FASB issued ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10 and ASU No. 2019-11 to provide additional guidance on the credit losses standard. ASU 2016-13 and the related updates are intended to improve financial reporting requiring more timely recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology under current GAAP. ASU 2018-19 clarified that receivables arising from operating leases are not within the scope of Topic 326. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842,
Leases.
ASU 2016-13 and ASU 2018-19 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company will adopt this ASU during the first quarter of fiscal year 2020 and does not expect it will have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,
Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU 2018-13”). This ASU amends and removes several disclosure requirements including the valuation processes for Level 3 fair value measurements. ASU 2018-13 also modifies some disclosure requirements and requires additional disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and requires the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The provisions of ASU 2018-13 are effective January 1, 2020 using a prospective transition method for amendments effecting changes in unrealized gains and losses, significant unobservable inputs used to develop Level 3 fair value measurements and narrative description on uncertainty of measurements. The remaining provisions of ASU 2018-13 are to be applied retrospectively, and early adoption is permitted.
The Company will adopt this ASU during the first quarter of fiscal year 2020 and does not expect it will have a material impact on its consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-16,
Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
(“ASU 2018-16”). The amendments in this ASU permit the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes or another acceptable benchmark. The SOFR is a volume-weighted median interest rate that is calculated daily based on overnight transactions from the prior day’s activity in specified segments of the U.S. Treasury repo market. It has been selected as the preferred replacement for the U.S. dollar London Interbank Offered Rate (“LIBOR”), which will be phased out by the end of 2021. ASU 2018-16 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2018-16 is required to be adopted on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Company currently uses LIBOR as its benchmark interest rate in the Company’s interest rate swaps associated with the Company’s LIBOR-based variable rate borrowings. The Company has not entered into any new or redesignated hedging relationships on or after the date of adoption of ASU 2018-16. The Company evaluated the effect of this new benchmark interest rate option, and does not believe this ASU will have a material impact on its consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
. The guidance changes the guidance for determining whether a decision-making fee is a variable interest. Under the new ASU, indirect interests held through related parties under common control will now be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. Such indirect interests were previously treated the same as direct interests. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is evaluating the impact of this ASU’s adoption, and does not believe this ASU will have a material impact on its consolidated financial statements.
NOTE 3 — FAIR VALUE MEASUREMENTS
GAAP defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
F-16
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 — Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:
Credit facilities and notes payable
— The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of the measurement date. Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs. These financial instruments are valued using Level 2 inputs. As of
December 31, 2019
, the estimated fair value of the Company’s debt was
$1.60 billion
, compared to the carrying value of
$1.61 billion
. The estimated fair value of the Company’s debt as of
December 31, 2018
was
$2.46 billion
, compared to the carrying value of
$2.53 billion
.
Derivative instruments
— The Company’s derivative instruments are comprised of interest rate swaps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the respective counterparties.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. However, as of
December 31, 2019
and
2018
, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Revenue bonds
— The Company’s revenue bonds were acquired in connection with the purchase of an anchored shopping center. The bonds have a
9.0%
interest rate and mature on November 1, 2044. These investments are initially recognized in
interest receivable, prepaid expenses and other assets
on the consolidated balance sheets and are subsequently measured using amortized cost. The fair value estimates of the Company’s revenue bonds are based on assumptions that management believes market participants would use in pricing, using widely accepted valuation techniques including discounted cash flow analysis. This analysis reflects the contractual terms of the bonds, including the period to maturity, and uses unobservable market-based inputs, including discount rates ranging from
7.75%
to
9.0%
. As a result, the Company has determined that its revenue bonds are classified in Level 3 of the fair value hierarchy. As of
December 31, 2019
, the estimated fair value of the Company’s revenue bonds was
$2.0 million
. The Company has these investments classified as held-to-maturity securities. The Company’s investments in revenue bonds are reviewed for impairment, including the evaluation of changes in events or circumstances that may indicate that the carrying amount of the investment may not be recoverable.
Loans held-for-investment
— The Company’s loans held-for-investment are recorded at cost upon origination and adjusted by net loan origination fees and discounts. The Company estimates the fair value of its loans held-for-investment by performing a present value analysis for the anticipated future cash flows using an appropriate market discount rate taking into consideration the credit risk. As a result, the Company has determined that its loans held-for-investment are classified in Level 3 of the fair value hierarchy. As of
December 31, 2019
, the estimated fair value of the Company’s loans held-for-investment was
$302.0 million
, compared to its carrying value of
$301.6 million
. As of December 31, 2018, the Company determined that the estimated fair value of its loans held-for-investment was equal to its carrying value given that the loans were originated during the fourth quarter of 2018.
Other financial instruments
— The Company considers the carrying values of its cash and cash equivalents, restricted cash, tenant receivables, accounts payable and accrued expenses, other liabilities, due to affiliates and distributions payable to approximate their fair values because of the short period of time between their origination and their expected realization as well
F-17
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
as their highly-liquid nature. Due to the short-term maturities of these instruments, Level 1 inputs are utilized to estimate the fair value of these financial instruments.
Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, upon disposition of the financial assets and liabilities. As of
December 31, 2019
and
2018
, there have been
no
transfers of financial assets or liabilities between fair value hierarchy levels.
Items Measured at Fair Value on a Recurring Basis
In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of
December 31, 2019
and
2018
(in thousands):
|
Balance as of
December 31, 2019 |
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||||||
|
Financial assets:
|
|||||||||||||||
|
Interest rate swaps
|
261
|
|
—
|
|
261
|
|
—
|
|
|||||||
|
Total financial assets
|
$
|
261
|
|
$
|
—
|
|
$
|
261
|
|
$
|
—
|
|
|||
|
Financial liability:
|
|||||||||||||||
|
Interest rate swap
|
$
|
(4,181
|
)
|
$
|
—
|
|
$
|
(4,181
|
)
|
$
|
—
|
|
|||
|
Total financial liability
|
$
|
(4,181
|
)
|
$
|
—
|
|
$
|
(4,181
|
)
|
$
|
—
|
|
|||
|
|
Balance as of
December 31, 2018 |
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||
|
Financial assets:
|
|||||||||||||||
|
Interest rate swaps
|
$
|
10,993
|
|
$
|
—
|
|
$
|
10,993
|
|
$
|
—
|
|
|||
|
Total financial assets
|
$
|
10,993
|
|
$
|
—
|
|
$
|
10,993
|
|
$
|
—
|
|
|||
Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)
Certain financial and nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The Company’s process for identifying and recording impairment related to real estate assets and intangible assets is discussed in
Note 2 — Summary of Significant Accounting Policies
.
As discussed in
Note 4 — Real Estate Assets
, during the year ended
December 31, 2019
, real estate assets related to
34
properties were deemed to be impaired and their carrying values were reduced to an estimated fair value of
$384.4 million
, resulting in impairment charges of
$72.9 million
. During the year ended
December 31, 2018
, real estate assets related to
22
properties were deemed to be impaired and their carrying values were reduced to an estimated fair value of
$332.4 million
, resulting in impairment charges of
$33.0 million
. During the year ended
December 31, 2017
, real estate assets related to
four
properties were deemed to be impaired and their carrying values were reduced to an estimated fair value of
$4.3 million
, resulting in impairment charges of
$2.9 million
. The Company estimates fair values using Level 3 inputs and using a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and to make certain key assumptions, including, but not limited to, the following: (1) terminal capitalization rates; (2) discount rates; (3) the number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions, including the number of months to re-lease, market rental income and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and the future performance and sustainability of the Company’s tenants.
For the Company’s impairment tests for the real estate assets during the
year ended
December 31, 2019
, the Company used a range of discount rates from
7.4%
to
9.5%
and terminal capitalization rates from
5.5%
to
9.2%
.
F-18
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the impairment charges by asset class recorded during the years ended
December 31, 2019
,
2018
and
2017
(in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2019
|
2018
|
2017
|
||||||||||
|
Asset class impaired:
|
||||||||||||
|
Land
|
$
|
12,648
|
|
$
|
6,436
|
|
$
|
725
|
|
|||
|
Buildings, fixtures and improvements
|
56,572
|
|
25,299
|
|
1,734
|
|
||||||
|
Intangible lease assets
|
4,056
|
|
1,385
|
|
396
|
|
||||||
|
Intangible lease liabilities
|
(337
|
)
|
(145
|
)
|
—
|
|
||||||
|
Total impairment loss
|
$
|
72,939
|
|
$
|
32,975
|
|
$
|
2,855
|
|
|||
NOTE 4 — REAL ESTATE ASSETS
2019
Property Acquisition
During the year ended
December 31, 2019
, the Company acquired a
100%
interest in
one
commercial property for an aggregate purchase price of
$6.2 million
(the “
2019
Property Acquisition”), which includes
$165,000
of external acquisition-related expenses that were capitalized. The Company funded the 2019 Property Acquisition with proceeds from real estate dispositions and available borrowings.
The following table summarizes the purchase price allocation for the
2019
Property Acquisition (in thousands):
|
2019 Property Acquisition
|
|||
|
Land
|
$
|
1,501
|
|
|
Buildings, fixtures and improvements
|
3,804
|
|
|
|
Acquired in-place leases and other intangibles
(1)
|
860
|
|
|
|
Total purchase price
|
$
|
6,165
|
|
|
(1)
|
The amortization period for acquired in-place leases and other intangibles is
20.1
years.
|
2019
Property Dispositions and Real Estate Assets Held for Sale
On September 3, 2019, certain subsidiaries of the Company entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with Realty Income Corporation (NYSE: O) (the “Purchaser”), an unaffiliated company, to sell approximately
452
single-tenant properties, including
nine
properties previously owned through the Consolidated Joint Venture, encompassing approximately
5.1 million
gross rentable square feet of commercial space across 41 states. Pursuant to the Purchase and Sale Agreement, the sale of
444
properties closed in December 2019 for total consideration of
$1.2 billion
, including the assumption by the Purchaser of existing mortgage debt totaling
$130.8 million
and the repayment of
$532.3 million
in debt, as further discussed in
Note 8 — Credit Facilities and Notes Payable
. The remaining properties closed subsequent to December 31, 2019, for consideration of
$26.3 million
, as discussed in
Note 17 — Subsequent Events
.
During the
year ended
December 31, 2019
, the Company disposed of a total of
497
properties, consisting of
482
retail properties,
one
industrial property and
14
anchored shopping centers, excluding a related outparcel of land, for an aggregate gross sales price of
$1.65 billion
, resulting in net proceeds of
$1.40 billion
after closing costs and disposition fees due to CMFT Management or its affiliates, and a gain of
$180.7 million
. The Company has no continuing involvement with these properties. The gain on sale of real estate is included in gain on disposition of real estate, net in the consolidated statements of operations. The disposition of these properties did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of these disposed properties are reflected in the Company’s results from continuing operations for all periods presented through their respective date of disposition.
As of
December 31, 2019
, there were
29
properties classified as held for sale with a carrying value of
$351.9 million
included in assets held for sale in the consolidated balance sheets. The Company has mortgage notes payable of
$126.7 million
that are related to the held for sale properties, which the Company expects to repay in connection with the disposition of the underlying held for sale properties.
F-19
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2019
Impairment
The Company performs quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate that the carrying value of certain of its real estate assets may not be recoverable. See
Note 2 — Summary of Significant Accounting Policies
for a discussion of the Company’s accounting policies regarding impairment of real estate assets.
During the
year ended
December 31, 2019
,
34
properties totaling approximately
3.4 million
square feet with a carrying value of
$457.3 million
were deemed to be impaired and their carrying values were reduced to an estimated fair value of
$384.4 million
, resulting in impairment charges of
$72.9 million
, which were recorded in the consolidated statements of operations. See
Note 3 — Fair Value Measurements
for a further discussion regarding these impairment charges.
2018
Property Acquisition
During the year ended
December 31, 2018
, the Company acquired a
100%
interest in
one
commercial property for an aggregate purchase price of
$11.9 million
(the “
2018
Acquisition”), which includes
$277,000
of external acquisition-related expenses that were capitalized in accordance with ASU 2017-01. Prior to the adoption of ASU 2017-01, costs related to property acquisitions were expensed as incurred. The Company funded the 2018 Acquisition with net cash provided by operations and available borrowings.
The following table summarizes the purchase price allocation for the
2018
Acquisition (in thousands):
|
2018 Acquisition
|
|||
|
Land
|
$
|
2,107
|
|
|
Buildings, fixtures and improvements
|
9,044
|
|
|
|
Acquired in-place leases and other intangibles
(1)
|
1,392
|
|
|
|
Intangible lease liabilities
(2)
|
(638
|
)
|
|
|
Total purchase price
|
$
|
11,905
|
|
|
(1)
|
The amortization period for acquired in-place leases and other intangibles is
19.0
years.
|
|
(2)
|
The amortization period for acquired intangible lease liabilities is
19.0
years.
|
2018
Property Dispositions
During the
year ended
December 31, 2018
, the Company disposed of
21
properties, consisting of
19
retail properties and
two
anchored shopping centers, excluding a related outparcel of land, for an aggregate gross sales price of
$66.6 million
, resulting in net proceeds of
$49.1 million
after closing costs and the repayment of the
$15.0 million
variable rate debt secured by one of the disposed properties and a gain of
$6.3 million
. During the year ended
December 31, 2018
,
$478,000
was incurred for disposition fees to CMFT Management or its affiliates in connection with the sale of the properties and the Company has no continuing involvement with these properties. The gain on sale of real estate is included in gain on disposition of real estate, net in the consolidated statements of operations. The disposition of these properties did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of these disposed properties are reflected in the Company’s results from continuing operations for all periods presented through their respective date of disposition.
2018
Impairment
During the
year ended
December 31, 2018
,
22
properties totaling approximately
2.3 million
square feet with a carrying value of
$365.4 million
were deemed to be impaired and their carrying values were reduced to an estimated fair value of
$332.4 million
, resulting in impairment charges of
$33.0 million
, which were recorded in the consolidated statements of operations. See
Note 3 — Fair Value Measurements
for a further discussion regarding these impairment charges.
2017
Property Acquisitions
During the
year ended
December 31, 2017
, the Company acquired
42
commercial properties for an aggregate purchase price of
$307.4 million
(the “
2017
Acquisitions”), of which
38
were determined to be asset acquisitions and
four
were accounted for as business combinations as they were acquired prior to the Company’s adoption of ASU 2017-01 in April 2017. The Company funded the 2017 Acquisitions with net cash provided by operations and available borrowings.
F-20
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the consideration transferred for the properties purchased during the year ended
December 31, 2017
(in thousands):
|
2017 Acquisitions
|
||||
|
Real estate assets:
|
||||
|
Purchase price of asset acquisitions
|
$
|
251,999
|
|
|
|
Purchase price of business combinations
|
55,386
|
|
||
|
Total purchase price of real estate assets acquired
(1)
|
$
|
307,385
|
|
|
____________________________________
|
(1)
|
The weighted average amortization period for the
2017
Acquisitions was
16.9
years for acquired in-place leases and other intangibles,
13.6
years for acquired above-market leases and
8.5
years for acquired intangible lease liabilities.
|
During the year ended
December 31, 2017
, the Company acquired a
100%
interest in
38
commercial properties for an aggregate purchase price of
$252.0 million
, which were accounted for as asset acquisitions (the “2017 Asset Acquisitions”). The aggregate purchase price includes
$6.1 million
of external acquisition-related expenses that were capitalized in accordance with ASU 2017-01. Prior to the adoption of ASU 2017-01, costs related to property acquisitions were expensed as incurred.
The following table summarizes the purchase price allocation for the 2017 Asset Acquisitions purchased during the year ended
December 31, 2017
(in thousands):
|
2017 Asset Acquisitions
|
||||
|
Land
|
$
|
32,919
|
|
|
|
Buildings, fixtures and improvements
|
177,682
|
|
||
|
Acquired in-place leases and other intangibles
|
39,257
|
|
||
|
Acquired above-market leases
|
3,624
|
|
||
|
Revenue bonds
|
2,081
|
|
||
|
Intangible lease liabilities
|
(3,564
|
)
|
||
|
Total purchase price
|
$
|
251,999
|
|
|
During the year ended
December 31, 2017
, the Company acquired a
100%
interest in
four
commercial properties for an aggregate purchase price of
$55.4 million
, which were accounted for as business combinations (the “2017 Business Combination Acquisitions”). The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocations for the 2017 Business Combination Acquisitions purchased during the year ended December 31, 2017 (in thousands):
|
2017 Business Combination Acquisitions
|
||||
|
Land
|
$
|
9,873
|
|
|
|
Buildings, fixtures and improvements
|
41,186
|
|
||
|
Acquired in-place leases and other intangibles
|
5,974
|
|
||
|
Acquired above-market leases
|
988
|
|
||
|
Intangible lease liabilities
|
(2,635
|
)
|
||
|
Total purchase price
|
$
|
55,386
|
|
|
The Company recorded revenue for the year ended
December 31, 2017
of
$5.1 million
and net income for the year ended
December 31, 2017
of
$708,000
related to the 2017 Business Combination Acquisitions. In addition, the Company recorded
$1.3 million
of acquisition-related expenses for the year ended
December 31, 2017
, which is included in transaction-related expenses on the consolidated statements of operations.
F-21
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes selected financial information of the Company as if all of the 2017 Business Combination Acquisitions were completed on January 1, 2016 for each period presented below. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the years ended
December 31, 2017
and 2016 (in thousands):
|
Year Ended December 31,
|
|||||||
|
|
2017
|
2016
|
|||||
|
Pro forma basis (unaudited):
|
|||||||
|
Revenue
|
$
|
424,416
|
|
$
|
412,883
|
|
|
|
Net income
|
$
|
80,912
|
|
$
|
71,301
|
|
|
The unaudited pro forma information for the year ended
December 31, 2017
was adjusted to exclude
$1.3 million
of acquisition-related fees and expenses recorded during the year ended
December 31, 2017
related to the 2017 Business Combination Acquisitions. Accordingly, these costs were instead recognized in the unaudited pro forma information for the year ended December 31, 2016.
The unaudited pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2016, nor does it purport to represent the results of future operations.
2017
Property Dispositions
During the
year ended
December 31, 2017
, the Company disposed of
14
retail properties and
one
industrial property for an aggregate gross sales price of
$100.6 million
, resulting in net proceeds of
$65.9 million
after closing costs and the repayment of the
$33.0 million
variable rate debt secured by one of the disposed properties and a gain of
$17.0 million
.
No
disposition fees were paid to CMFT Management or its affiliates in connection with the sale of the properties and the Company has no continuing involvement with these properties. The gain on sale of real estate is included in gain (loss) on disposition of real estate, net in the consolidated statements of operations. The disposition of these properties did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of these disposed properties are reflected in the Company’s results from continuing operations for all periods presented through their respective date of disposition.
2017
Impairment
During the year ended
December 31, 2017
,
four
properties totaling approximately
33,000
square feet with a carrying value of
$7.2 million
were deemed to be impaired and their carrying values were reduced to an estimated fair value of
$4.3 million
, resulting in impairment charges of
$2.9 million
, which were recorded in the consolidated statements of operations. See
Note 3 — Fair Value Measurements
for a further discussion regarding these impairment charges.
NOTE 5 — INTANGIBLE LEASE ASSETS AND LIABILITIES
Intangible lease assets and liabilities consisted of the following as of
December 31, 2019
and
2018
(in thousands, except weighted average life remaining):
|
As of December 31,
|
|||||||
|
2019
|
2018
|
||||||
|
Intangible lease assets:
|
|||||||
|
In-place leases and other intangibles, net of accumulated amortization of $111,670 and $184,532, respectively (with a weighted average life remaining of 10.4 years and 10.1 years, respectively)
|
$
|
164,724
|
|
$
|
307,895
|
|
|
|
Acquired above-market leases, net of accumulated amortization of $19,310 and $27,979, respectively (with a weighted average life remaining of 7.9 years and 8.4 years, respectively)
|
17,423
|
|
34,462
|
|
|||
|
Total intangible lease assets, net
|
$
|
182,147
|
|
$
|
342,357
|
|
|
|
Intangible lease liabilities:
|
|||||||
|
Acquired below-market leases, net of accumulated amortization of $25,800 and $34,732, respectively (with a weighted average life remaining of 7.3 years and 7.2 years, respectively)
|
$
|
20,523
|
|
$
|
36,418
|
|
|
F-22
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Amortization of the above-market leases is recorded as a reduction to rental and other property income, and amortization expense for the in-place leases and other intangibles is included in depreciation and amortization in the accompanying consolidated statements of operations. Amortization of below-market leases is recorded as an increase to rental and other property income in the accompanying consolidated statements of operations.
The following table summarizes the amortization related to the intangible lease assets and liabilities for the years ended
December 31, 2019
,
2018
, and
2017
(in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2019
|
2018
|
2017
|
||||||||||
|
In-place lease and other intangible amortization
|
$
|
32,058
|
|
$
|
45,559
|
|
$
|
46,602
|
|
|||
|
Above-market lease amortization
|
$
|
4,315
|
|
$
|
6,740
|
|
$
|
7,304
|
|
|||
|
Below-market lease amortization
|
$
|
6,253
|
|
$
|
8,448
|
|
$
|
9,503
|
|
|||
As of
December 31, 2019
, the estimated amortization relating to the intangible lease assets and liabilities is as follows (in thousands):
|
Amortization
|
||||||||||||
|
Year Ending December 31,
|
In-Place Leases and Other Intangibles
|
Above-Market Leases
|
Below-Market Leases
|
|||||||||
|
2020
|
$
|
20,943
|
|
$
|
2,753
|
|
$
|
4,746
|
|
|||
|
2021
|
$
|
18,544
|
|
$
|
2,175
|
|
$
|
2,907
|
|
|||
|
2022
|
$
|
17,458
|
|
$
|
2,005
|
|
$
|
2,495
|
|
|||
|
2023
|
$
|
15,593
|
|
$
|
1,768
|
|
$
|
2,126
|
|
|||
|
2024
|
$
|
13,901
|
|
$
|
1,326
|
|
$
|
1,601
|
|
|||
|
Thereafter
|
$
|
78,285
|
|
$
|
7,396
|
|
$
|
6,648
|
|
|||
|
Total
|
$
|
164,724
|
|
$
|
17,423
|
|
$
|
20,523
|
|
|||
NOTE 6 — LOANS HELD-FOR-INVESTMENT
The Company’s loans held-for-investment consisted of the following as of
December 31, 2019
and
2018
(dollar amounts in thousands):
|
As of December 31,
|
||||||||
|
2019
|
2018
|
|||||||
|
Mezzanine loans
|
$
|
146,060
|
|
$
|
89,762
|
|
||
|
Senior loans
|
152,820
|
|
—
|
|
||||
|
Total CRE loans-held-for-investment
|
298,880
|
|
89,762
|
|
||||
|
Broadly syndicated loans
|
2,750
|
|
—
|
|
||||
|
Total loans-held-for-investment and related receivable, net
|
$
|
301,630
|
|
|
$
|
89,762
|
|
|
During the year ended
December 31, 2019
, the Company acquired
four
mezzanine loans, originated
three
senior loans and acquired
one
broadly syndicated loan. As of
December 31, 2019
, the Company had
$16.2 million
of unfunded commitments related to Commercial Real Estate (“CRE”) loans held-for-investment, the funding of which is subject to satisfaction of borrower milestones. These commitments are not reflected in the accompanying consolidated balance sheet. During the year ended
December 31, 2019
, the borrower on the Company’s
eight
mezzanine loans, which represent approximately
4.0%
of total assets as of
December 31, 2019
, became delinquent on certain required reserve payments. To the extent that the delinquencies remain outstanding and uncured, subsequent tests for impairments could result in impairment charges in the future.
F-23
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table details overall statistics for the Company’s CRE loans held-for-investment as of
December 31, 2019
(dollar amounts in thousands):
|
As of December 31,
|
||||||||
|
2019
|
2018
|
|||||||
|
Number of loans
|
11
|
|
4
|
|
||||
|
Principal balance
(1)
|
$
|
297,357
|
|
$
|
89,679
|
|
||
|
Net book value
|
$
|
298,880
|
|
$
|
89,762
|
|
||
|
Weighted-average interest rate
(1)
|
8.9
|
%
|
17.2
|
%
|
||||
|
Weighted-average maximum years to maturity
(2)
|
2.9
|
|
2.4
|
|
||||
____________________________________
|
(1)
|
As of
December 31, 2019
,
100%
of the Company’s loans by principal balance earned a floating rate of interest, primarily indexed to U.S. dollar LIBOR.
|
|
(2)
|
Maximum maturity date assumes all extension options are exercised by the borrowers; however, the Company’s loans may be repaid prior to such date.
|
Activity relating to the Company’s CRE loans held-for-investment portfolio was as follows for the years ended
December 31, 2019
and
2018
(dollar amounts in thousands):
|
Principal Balance
|
Deferred Fees / Other Items
(1)
|
Loan Fees Receivable
|
Net Book Value
|
|||||||||||||
|
Balance, January 1, 2018
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||
|
Loan fundings
|
89,295
|
|
(6,623
|
)
|
6,623
|
|
89,295
|
|
||||||||
|
Capitalized interest
(2)
|
384
|
|
—
|
|
—
|
|
384
|
|
||||||||
|
Deferred fees and other items
|
—
|
|
(185
|
)
|
—
|
|
(185
|
)
|
||||||||
|
Accretion and amortization of fees and other items
|
—
|
|
268
|
|
—
|
|
268
|
|
||||||||
|
Balance, December 31, 2018
|
$
|
89,679
|
|
$
|
(6,540
|
)
|
$
|
6,623
|
|
$
|
89,762
|
|
||||
|
Loan fundings
|
216,318
|
|
(389
|
)
|
1,085
|
|
217,014
|
|
||||||||
|
Principal repayments received
|
(17,186
|
)
|
—
|
|
—
|
|
(17,186
|
)
|
||||||||
|
Capitalized interest
(2)
|
8,546
|
|
—
|
|
—
|
|
8,546
|
|
||||||||
|
Deferred fees and other items
|
—
|
|
(1,531
|
)
|
(166
|
)
|
(1,697
|
)
|
||||||||
|
Accretion and amortization of fees and other items
|
—
|
|
2,441
|
|
—
|
|
2,441
|
|
||||||||
|
Balance, December 31, 2019
|
$
|
297,357
|
|
|
$
|
(6,019
|
)
|
|
$
|
7,542
|
|
$
|
298,880
|
|
||
|
(1)
|
Other items primarily consist of purchase discounts or premiums, accretion of exit fees and deferred origination expenses.
|
|
(2)
|
Represents accrued interest on loans whose terms do not require a current cash payment of interest.
|
NOTE 7 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risk. During the year ended
December 31, 2019
,
one
of the Company’s interest rate swap agreements matured. In addition,
three
of the Company’s interest rate swap agreements were terminated prior to the maturity date due to the disposition of the underlying properties, resulting in a gain of
$118,000
. The gain was recorded as a decrease to interest expense and other, net included in the accompanying consolidated statements of operations. As of
December 31, 2019
, the Company had
three
executed interest rate swap agreements.
F-24
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the terms of the Company’s executed interest rate swap agreements designated as hedging instruments as of
December 31, 2019
and
2018
(dollar amounts in thousands):
|
|
|
Outstanding Notional
|
|
|
Fair Value of Assets (Liability)
|
||||||||||||||
|
Balance Sheet
|
Amount as of
|
Interest
|
Effective
|
Maturity
|
December 31,
|
December 31,
|
|||||||||||||
|
Location
|
December 31, 2019
|
Rates
(1)
|
Dates
|
Dates
|
2019
|
2018
|
|||||||||||||
|
Interest Rate Swaps
|
Interest receivable, prepaid expenses and other assets
|
$
|
60,000
|
|
2.55% to 3.62%
|
3/14/2016 to 6/29/2016
|
4/5/2021 to 7/1/2021
|
$
|
261
|
|
$
|
10,993
|
|
||||||
|
Interest Rate Swap
|
Deferred rental income, derivative liability and other liabilities
|
$
|
811,666
|
|
4.02%
|
8/15/2018
|
3/15/2021
|
$
|
(4,181
|
)
|
$
|
—
|
|
||||||
____________________________________
|
(1)
|
The interest rates consist of the underlying index swapped to a fixed rate and the applicable interest rate spread as of
December 31, 2019
.
|
Additional disclosures related to the fair value of the Company’s derivative instruments are included in
Note 3 — Fair Value Measurements
. The notional amount under the interest rate swap agreements is an indication of the extent of the Company’s involvement in each instrument, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges in order to hedge the variability of the anticipated cash flows on its variable rate debt. The change in fair value of the derivative instruments that are designated as hedges is recorded in
other comprehensive (loss) income
, with a portion of the amount subsequently reclassified to interest expense as interest payments are made on the Company’s variable rate debt. For the years ended
December 31, 2019
and
2018
, the amount of gains reclassified from
other comprehensive (loss) income
as a decrease to interest expense was
$3.5 million
and
$4.3 million
, respectively. For the year ended
December 31, 2017
, the amount of loss reclassified from
other comprehensive (loss) income
as an increase to interest expense was
$3.1 million
. During the next 12 months, the Company estimates that
$3.1 million
will be reclassified from
other comprehensive (loss) income
as
an increase
to interest expense. The Company includes cash flows from interest rate swap agreements in net cash flows provided by operating activities on its consolidated statements of cash flows, as the Company’s accounting policy is to present cash flows from hedging instruments in the same category in its consolidated statements of cash flows as the category for cash flows from the hedged items.
The Company has agreements with each of its derivative counterparties that contain provisions whereby if the Company defaults on certain of its unsecured indebtedness, the Company could also be declared in default on its derivative obligations, resulting in an acceleration of payment. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value, inclusive of interest payments and accrued interest of
$4.3 million
as of
December 31, 2019
. In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the credit quality of the Company and the respective counterparty. There were no termination events or events of default related to the interest rate swaps as of
December 31, 2019
.
NOTE 8 — CREDIT FACILITIES AND NOTES PAYABLE
As of
December 31, 2019
, the Company had
$1.6 billion
of debt outstanding, including net deferred financing costs, with a weighted average years to maturity of
2.4
years and a weighted average interest rate of
3.9%
. The weighted average years to maturity is computed using the scheduled repayment date as specified in each loan agreement where applicable. The weighted average interest rate is computed using the interest rate in effect until the scheduled repayment date. Should a loan not be repaid by its scheduled repayment date, the applicable interest rate will increase as specified in the respective loan agreement.
F-25
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the debt balances as of
December 31, 2019
and
2018
, and the debt activity for the
year ended
December 31, 2019
(in thousands):
|
During the Year Ended December 31, 2019
|
|||||||||||||||||||
|
|
Balance as of December 31, 2018
|
Debt Issuances & Assumptions
(1)
|
Repayments & Modifications
|
Accretion & (Amortization)
|
Balance as of December 31, 2019
|
||||||||||||||
|
Fixed rate debt
|
$
|
1,178,166
|
|
$
|
—
|
|
$
|
(451,905
|
)
|
(2)
|
$
|
—
|
|
$
|
726,261
|
|
|||
|
Variable rate debt
|
20,500
|
|
—
|
|
(20,500
|
)
|
—
|
|
—
|
|
|||||||||
|
Credit facility
|
1,331,000
|
|
424,500
|
|
(870,500
|
)
|
—
|
|
885,000
|
|
|||||||||
|
Total debt
|
2,529,666
|
|
424,500
|
|
(1,342,905
|
)
|
—
|
|
1,611,261
|
|
|||||||||
|
Net premiums
(3)
|
331
|
|
—
|
|
—
|
|
(90
|
)
|
241
|
|
|||||||||
|
Deferred costs – credit facility
(4)
|
(6,731
|
)
|
(19
|
)
|
745
|
|
(5)
|
2,072
|
|
(3,933
|
)
|
||||||||
|
Deferred costs – fixed rate debt
|
(6,352
|
)
|
—
|
|
1,526
|
|
(5)
|
2,117
|
|
(2,709
|
)
|
||||||||
|
Total debt, net
|
$
|
2,516,914
|
|
$
|
424,481
|
|
$
|
(1,340,634
|
)
|
$
|
4,099
|
|
$
|
1,604,860
|
|
||||
____________________________________
|
(1)
|
Includes deferred financing costs incurred during the period.
|
|
(2)
|
Includes the assumption of
$205.8 million
of fixed rate debt related to property dispositions during the
year ended
December 31, 2019
.
|
|
(3)
|
Net premiums on mortgage notes payable were recorded upon the assumption of the respective debt instruments. Amortization of these net premiums is recorded as a reduction to interest expense over the remaining term of the respective debt instruments using the effective-interest method.
|
|
(4)
|
Deferred costs related to the term portion of the Credit Facility (as defined below).
|
|
(5)
|
Represents deferred financing costs written off during the period resulting from debt repayments prior to the respective maturity dates.
|
Notes Payable
As of
December 31, 2019
, the fixed rate debt outstanding of
$726.3 million
included
$60.0 million
of variable rate debt that is fixed through interest rate swap agreements, which has the effect of fixing the variable interest rates per annum through the maturity date of the variable rate debt. The fixed rate debt has interest rates ranging from
2.6%
to
5.0%
per annum. The fixed rate debt outstanding matures on various dates from
April 1, 2020
through
May 10, 2024
. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the fixed rate debt outstanding was
$1.3 billion
as of
December 31, 2019
. Each of the mortgage notes payable, comprising the fixed rate debt, is secured by the respective properties on which the debt was placed. Subsequent to
December 31, 2019
, the Company repaid
$97.0 million
of mortgage notes due to the disposition of the underlying properties, as discussed in
Note 17 — Subsequent Events
. With respect to the Company’s
$115.2 million
of debt maturing within the next 12 months following the date these financial statements are issued, the Company believes cash on hand, proceeds from real estate asset dispositions, net cash provided by operations, borrowings available under the Credit Facility or the entry into new financing arrangements will be sufficient in order to meet its debt obligations.
Pursuant to the Purchase and Sale Agreement described in
Note 4 — Real Estate Assets
, total consideration for the sale of
444
properties during the year ended
December 31, 2019
included the assumption by the Purchaser of existing mortgage debt totaling
$130.8 million
, the repayment of
$101.3 million
of certain mortgage notes due to the disposition of the underlying properties, the repayment of
$165.0 million
on the unsecured term loan balance and repayment of
$266.0 million
on the unsecured revolving loan balance.
Credit Facilities
The Company has a second amended and restated unsecured credit agreement (the “Second Amended and Restated Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent (“JPMorgan Chase”), and the other lenders party thereto that provided for borrowings of up to
$1.24 billion
as of
December 31, 2019
, which included a
$885.0 million
unsecured term loan (the “Term Loan”) and up to
$350.0 million
in unsecured revolving loans (the “Revolving Loans” and collectively, with the Term Loan, the “Credit Facility”). The Term Loan matures on
March 15, 2022
and the Revolving Loans mature on
March 15, 2021
; however, the Company has the right to extend the maturity date of the Revolving Loans to
March 15, 2022
.
F-26
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Depending upon the type of loan specified and overall leverage ratio, the Credit Facility bears interest at (i) the one-month, two-month, three-month or six-month LIBOR multiplied by the statutory reserve rate (the “Eurodollar Rate”) plus an interest rate spread ranging from
1.65%
to
2.25%
or (ii) a base rate, ranging from
0.65%
to
1.25%
, plus the greater of: (a) JPMorgan Chase’s Prime Rate; (b) the Federal Funds Effective Rate (as defined in the Second Amended and Restated Credit Agreement) plus
0.50%
; or (c) the one-month LIBOR multiplied by the statutory reserve rate plus
1.00%
. As of
December 31, 2019
, there were
no
amounts outstanding under the Revolving Loans. As of
December 31, 2019
, the Term Loan outstanding totaled
$885.0 million
,
$811.7 million
of which is subject to interest rate swap agreements (the “Swapped Term Loan”). The interest rate swap agreements had the effect of fixing the Eurodollar Rate per annum of the Swapped Term Loan at an all-in rate of
4.0%
. As of
December 31, 2019
, the Company had
$885.0 million
outstanding under the Credit Facility at a weighted average interest rate of
4.0%
and
$349.4 million
in unused capacity, subject to borrowing availability. The Company had available borrowings of
$107.1 million
as of
December 31, 2019
.
The Second Amended and Restated Credit Agreement contains provisions with respect to covenants, events of default and remedies customary for facilities of this nature. In particular, the Second Amended and Restated Credit Agreement requires the Company to maintain a minimum consolidated net worth greater than or equal to the sum of (i)
$2.0 billion
plus (ii)
75%
of the equity issued minus (iii) the aggregate amount of any redemptions or similar transaction from the date of the Second Amended and Restated Credit Agreement, a leverage ratio less than or equal to
60%
, a fixed charge coverage ratio greater than
1.50
, an unsecured debt to unencumbered asset value ratio equal to or less than
60%
, an unsecured debt service coverage ratio greater than
1.75
, a secured debt ratio equal to or less than
40%
and the amount of secured debt that is recourse debt at no greater than
15%
of total asset value. The Company believes it was in compliance with the financial covenants under the Second Amended and Restated Credit Agreement, as well as the financial covenants under the Company’s various fixed and variable rate debt agreements, as of
December 31, 2019
, with the exception of one mortgage note where the Company failed to meet the debt service coverage ratio covenant under the mortgage at
December 31, 2019
. Pursuant to the loan agreement, non-compliance with the debt service coverage ratio covenant triggers a cash sweep of the underlying property’s operating cash flow. As of
December 31, 2019
, a cash sweep of the underlying property’s operating cash flow had not been initiated.
On
December 31, 2019
(the “Closing Date”), CMFT Corporate Credit Securities, LLC, an indirect wholly-owned, bankruptcy-remote subsidiary of the Company, entered into a revolving credit and security agreement (the “Credit and Security Agreement”) with the lenders from time to time parties thereto, Citibank, N.A. (“Citibank”), as administrative agent, CMFT Securities Investments, LLC, a wholly-owned subsidiary of the Company, as equityholder and as collateral manager, Citibank (acting through its Agency & Trust division), as both a collateral agent and as a collateral custodian, and Virtus Group, LP, as collateral administrator. The Credit and Security Agreement provides for borrowings in an aggregate principal amount up to
$300.0 million
(the “Credit Securities Revolver”), which may be increased from time to time pursuant to the Credit and Security Agreement. As of
December 31, 2019
, there were no amounts borrowed or outstanding under the Credit Securities Revolver.
Borrowings under the Credit and Security Agreement will bear interest equal to the three-month LIBOR for the relevant interest period, plus an applicable rate. The applicable rate is
1.70%
per annum during the reinvestment period and
2.00%
per annum during the amortization period (and, in each case, an additional
2.00%
per annum following an event of default under the Credit and Security Agreement). The reinvestment period begins on the Closing Date and concludes on the earlier of (i) the date that is three years after the Closing Date, (ii) the final maturity date and (iii) the date on which the total assets under management of the Company and its wholly-owned subsidiaries is less than
$1.25 billion
(the “Reinvestment Period”). The final maturity date is the earliest to occur of: (i) the date that the Credit Securities Revolver is paid down and (ii) the second anniversary after the Reinvestment Period concludes.
Maturities
The following table summarizes the scheduled aggregate principal repayments for the Company’s outstanding debt as of
December 31, 2019
for each of the five succeeding fiscal years and the period thereafter (in thousands):
F-27
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
Year Ending December 31,
|
Principal Repayments
|
||||
|
2020
|
$
|
165,678
|
|
||
|
2021
|
97,701
|
|
|||
|
2022
|
913,962
|
|
|||
|
2023
|
366,155
|
|
|||
|
2024
|
67,765
|
|
|||
|
Thereafter
|
—
|
|
|||
|
Total
|
$
|
1,611,261
|
|
||
NOTE 9 — SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the years ended
December 31, 2019
,
2018
and
2017
are as follows (in thousands):
|
Year Ended December 31,
|
|||||||||||
|
2019
|
2018
|
2017
|
|||||||||
|
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
|
|||||||||||
|
Distributions declared and unpaid
|
$
|
16,510
|
|
$
|
16,518
|
|
$
|
16,531
|
|
||
|
Accrued capital expenditures
|
$
|
1,165
|
|
$
|
557
|
|
$
|
192
|
|
||
|
Interest income capitalized to loans held-for-investment
|
$
|
8,546
|
|
$
|
384
|
|
$
|
—
|
|
||
|
Common stock issued through distribution reinvestment plan
|
$
|
82,388
|
|
$
|
91,764
|
|
$
|
101,344
|
|
||
|
Change in fair value of interest rate swaps
|
$
|
(14,913
|
)
|
$
|
3,875
|
|
$
|
7,654
|
|
||
|
Mortgage notes assumed by buyer in real estate disposition
|
$
|
(205,765
|
)
|
$
|
—
|
|
$
|
—
|
|
||
|
Supplemental Cash Flow Disclosures:
|
|||||||||||
|
Interest paid
|
$
|
97,418
|
|
$
|
93,424
|
|
$
|
85,140
|
|
||
|
Cash paid for taxes
|
$
|
1,218
|
|
$
|
1,475
|
|
$
|
1,555
|
|
||
NOTE 10 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation and claims. The Company is not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which the Company’s properties are the subject.
Unfunded Commitments
As of
December 31, 2019
, the Company had
$16.2 million
of unfunded commitments related to loans held-for-investment. These commitments are not reflected in the accompanying consolidated balance sheet.
Unsettled Broadly Syndicated Loans
As of
December 31, 2019
, the Company had
$126.8 million
reserved for settlement of broadly syndicated loan purchases included in cash and cash equivalents in the accompanying consolidated balance sheet, of which
$122.9 million
settled subsequent to
December 31, 2019
.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. In addition, the Company may own or acquire certain properties that are subject to environmental remediation. Generally, the seller of the property, the tenant of the property and/or another third party is responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify the Company against future remediation costs. The Company also carries environmental liability insurance on its properties that provides limited coverage for any remediation
F-28
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
liability and/or pollution liability for third-party bodily injury and/or property damage claims for which the Company may be liable. The Company is not aware of any environmental matters which it believes are reasonably likely to have a material effect on its results of operations, financial condition or liquidity.
NOTE 11 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred fees and expenses payable to CMFT Management and certain of its affiliates in connection with the acquisition, management and disposition of its assets. On August 20, 2019, the Company and CMFT Management entered into an Amended and Restated Management Agreement (the “Management Agreement”), which amended and restated that certain Advisory Agreement between the parties dated January 24, 2012, as amended (the “Prior Advisory Agreement”). Following the effective date of the Management Agreement, CMFT Management is no longer entitled to receive the advisory fee, acquisition fees, subordinated performance fee, or disposition fees pursuant to the Prior Advisory Agreement, as described below; provided, however, that for the Company’s properties under contract to be sold or specifically identified in a broker agreement as being marketed for sale as of the effective date of the Management Agreement, CMFT Management may be entitled to receive a disposition fee in accordance with the terms of the Prior Advisory Agreement. In addition, CMFT Management generally shall continue to be entitled to reimbursement for costs and expenses to the extent incurred on behalf of the Company in accordance with the Management Agreement; provided, however, that the limits on reimbursement for organization and offering expenses, acquisition expenses and operating expenses as defined and provided in the Prior Advisory Agreement shall no longer be applicable.
Management fees
Pursuant to the Management Agreement, beginning on August 20, 2019, the Company pays CMFT Management a management fee, payable quarterly in arrears, equal to the greater of (a)
$250,000
per annum (
$62,500
per quarter) and (b)
1.50%
per annum (
0.375%
per quarter) of the Company’s Equity (as defined in the Management Agreement).
Incentive compensation
Pursuant to the Management Agreement, beginning on August 20, 2019, CMFT Management is entitled to receive incentive compensation, payable with respect to each quarter, which is generally equal to the excess of (a) the product of (i)
20%
and (ii) the excess of (A) Core Earnings (as defined in the Management Agreement) of the Company for the previous 12-month period, over (B) the product of (1) the Company’s Consolidated Equity (as defined in the Management Agreement) in the previous 12-month period, and (2)
7%
per annum, over (b) the sum of any incentive compensation paid to CMFT Management with respect to the first three calendar quarters of such previous 12-month period (or such lesser number of completed calendar quarters preceding the applicable period, if applicable). During the year ended
December 31, 2019
,
no
incentive compensation fees were incurred.
Acquisition fees and expenses
Pursuant to the Prior Advisory Agreement, through August 20, 2019, the Company paid CMFT Management or its affiliates acquisition fees of up to
2.0%
of: (1) the contract purchase price of each property or asset the Company acquired; (2) the amount paid in respect of the development, construction or improvement of each asset the Company acquired; (3) the purchase price of any loan the Company acquired; and (4) the principal amount of any loan the Company originated. In addition, the Company reimbursed CMFT Management or its affiliates for acquisition-related expenses incurred in the process of acquiring properties, so long as the total acquisition fees and expenses relating to the transaction do not exceed
6.0%
of the contract purchase price, unless otherwise approved by a majority of the Board, including a majority of the Company’s independent directors, as commercially competitive, fair and reasonable to the Company. Other transaction-related expenses, such as advisor reimbursements for disposition activities, are expensed as incurred and are included in transaction-related expenses on the consolidated statements of operations.
Advisory fees and expenses
Pursuant to the Prior Advisory Agreement, through August 20, 2019, the Company paid CMFT Management a monthly advisory fee based upon the Company’s monthly average invested assets, which, effective January 1, 2019, was based on the estimated market value of such assets used to determine the Company’s estimated per share NAV as of December 31, 2018, as discussed in
Note 1 — Organization and Business
, and for those assets acquired subsequent to December 31, 2018, was based on the purchase price. The monthly advisory fee was equal to the following amounts: (1) an annualized rate of
0.75%
paid on the Company’s average invested assets that are between
$0
and
$2.0 billion
; (2) an annualized rate of
0.70%
paid on the Company’s average invested assets that are between
$2.0 billion
and
$4.0 billion
; and (3) an annualized rate of
0.65%
paid on the Company’s average invested assets that are over
$4.0 billion
.
F-29
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Operating expenses
The Company reimburses CMFT Management or its affiliates for certain expenses CMFT Management or its affiliates paid or incurred in connection with the services provided to the Company. Through August 20, 2019, such reimbursements were subject to the limitation that the Company would not reimburse CMFT Management or its affiliates for any amount by which the operating expenses (including the advisory fee) at the end of the four preceding fiscal quarters exceeded the greater of: (1)
2.0%
of average invested assets, or (2)
25.0%
of net income excluding any additions to reserves for depreciation or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Pursuant to the Management Agreement, beginning on August 20, 2019, such limits are no longer applicable. The Company will reimburse CMFT Management or its affiliates for salaries and benefits paid to personnel who provide services to the Company including the Company’s executive officers and any portfolio management, acquisitions or investment professionals.
Disposition fees
Pursuant to the Prior Advisory Agreement, through August 20, 2019, if CMFT Management or its affiliates provided a substantial amount of services (as determined by a majority of the Company’s independent directors) in connection with the sale of one or more properties (or the Company’s entire portfolio), the Company paid CMFT Management or its affiliates a disposition fee in an amount equal to up to one-half of the real estate or brokerage commission paid by the Company to third parties on the sale of such property, not to exceed
1.0%
of the contract price of the property sold; provided, however, in no event would the total disposition fees paid to CMFT Management, its affiliates and unaffiliated third parties exceed the lesser of the customary competitive real estate commission or an amount equal to
6.0%
of the contract sales price. For the Company’s properties under contract to be sold or specifically identified in a broker agreement as being marketed for sale as of August 20, 2019, CMFT Management may be entitled to receive a disposition fee in accordance with the terms of the Prior Advisory Agreement.
Subordinated performance fees
Pursuant to the Prior Advisory Agreement, through August 20, 2019, if the Company was sold or its assets were liquidated, CMFT Management was entitled to receive a subordinated performance fee equal to
15.0%
of the net sale proceeds remaining after stockholders received, from regular distributions plus special distributions paid from proceeds of such sale, a return of their net capital invested and an
8.0%
annual cumulative, non-compounded return. Alternatively through August 20, 2019, if the Company’s shares were listed on a national securities exchange, CMFT Management was entitled to a subordinated performance fee equal to
15.0%
of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing, exceeded the sum of the total amount of capital raised from stockholders and the amount of distributions necessary to generate an
8.0%
annual cumulative, non-compounded return to stockholders. As an additional alternative, upon termination of the Prior Advisory Agreement, CMFT Management was entitled to a subordinated performance fee similar to the fee to which CMFT Management would have been entitled had the portfolio been liquidated (based on an independent appraised value of the portfolio) on the date of termination. During each of the years ended
December 31, 2019
,
2018
and
2017
,
no
subordinated performance fees were incurred related to any such events.
The Company recorded fees and expense reimbursements as shown in the table below for services provided by CMFT Management or its affiliates related to the services described above during the periods indicated (in thousands):
|
Year Ended December 31,
|
||||||||||||
|
|
2019
|
2018
|
2017
|
|||||||||
|
Management fees and expenses
|
$
|
16,350
|
|
(1
|
)
|
$
|
—
|
|
$
|
—
|
|
|
|
Acquisition fees and expenses
|
$
|
2,110
|
|
$
|
2,749
|
|
$
|
6,532
|
|
|||
|
Disposition fees
|
$
|
3,967
|
|
$
|
478
|
|
$
|
—
|
|
|||
|
Advisory fees and expenses
|
$
|
25,989
|
|
$
|
43,399
|
|
$
|
44,072
|
|
|||
|
Operating expenses
|
$
|
3,594
|
|
$
|
5,163
|
|
$
|
4,494
|
|
|||
|
(1)
|
Includes advisor reimbursements incurred subject to the Management Agreement.
|
Of the amounts shown above,
$14.5 million
and
$5.2 million
had been incurred, but not yet paid, for services provided by CMFT Management or its affiliates in connection with the acquisition, disposition and operating activities during the years ended
December 31, 2019
and
2018
, respectively, and such amounts were recorded as liabilities of the Company as of such dates.
F-30
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Due to Affiliates
As of
December 31, 2019
and
2018
,
$14.5 million
and
$5.2 million
, respectively, had been incurred primarily for management fees, disposition fees and operating expenses by CMFT Management or its affiliates, but had not yet been reimbursed by the Company. These amounts were included in due to affiliates in the consolidated balance sheets for such periods.
NOTE 12 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged and may in the future engage CMFT Management or its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company including accounting services and stockholder relations. As a result of these relationships, the Company is dependent upon CMFT Management or its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.
NOTE 13 — STOCKHOLDERS’ EQUITY
As of December 31, 2019, 2018 and 2017, the Company was authorized to issue
$600.0 million
of shares of common stock under the Secondary DRIP Offering. All shares of such stock have a par value of
$0.01
per share. The par value of stockholder proceeds raised from the DRIP Offerings is classified as common stock, with the remainder allocated to capital in excess of par value.
On August 11, 2010, the Company sold
20,000
shares of common stock, at
$10.00
per share, to Cole Holdings Corporation (“CHC”). On April 5, 2013, the ownership of such shares was transferred to CREInvestments, LLC, an affiliate of CMFT Management. On February 7, 2014, the ownership of such shares was transferred to VEREIT Operating Partnership, L.P. (“VEREIT OP”), a former affiliated entity of the Company’s sponsor. On February 1, 2018, the ownership of such shares was transferred by VEREIT OP to CMFT Management.
Distribution Reinvestment Plan
Pursuant to the DRIP, the Company allows stockholders to elect to have their distributions reinvested in additional shares of the Company’s common stock at the most recent estimated per share NAV as determined by the Board. The Board may terminate or amend the Secondary DRIP Offering at the Company’s discretion at any time upon
ten
days’ prior written notice to the stockholders. During the years ended
December 31, 2019
,
2018
and
2017
, approximately
9.3 million
,
9.6 million
and
10.1 million
shares were purchased under the DRIP Offerings for approximately
$82.4 million
,
$91.8 million
and
$101.3 million
, respectively, which were recorded as redeemable common stock on the consolidated balance sheets.
Share Redemption Program
The Company’s share redemption program permits its stockholders to sell their shares back to the Company after they have held them for at least
one
year, subject to the significant conditions and limitations described below.
The share redemption program provides that the Company will redeem shares of its common stock from requesting stockholders, subject to the terms and conditions of the share redemption program. The Company will limit the number of shares redeemed pursuant to the share redemption program as follows: (1) the Company will not redeem in excess of
5%
of the weighted average number of shares outstanding during the trailing
12
months prior to the end of the fiscal quarter for which the redemptions are being paid; and (2) funding for the redemption of shares will be limited, among other things, to the net proceeds the Company receives from the sale of shares under the DRIP Offerings, net of shares redeemed to date. In an effort to accommodate redemption requests throughout the calendar year, the Company intends to limit quarterly redemptions to approximately
1.25%
of the weighted average number of shares outstanding during the trailing
12
-month period ending on the last day of the fiscal quarter, and funding for redemptions for each quarter generally will be limited to the net proceeds the Company receives from the sale of shares in the respective quarter under the DRIP Offerings.
Except for redemptions due to a stockholder’s death, bankruptcy or other exigent circumstances, the redemption price per share will equal the per share value shown on the stockholder’s most recent customer account statement. The redemption price will be adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the Company’s common stock if any such event is not already reflected in the per share value shown on the stockholder’s most recent customer account statement. See the discussion of the updated estimated per share NAV of the Company’s common stock effective
March 25, 2020
in
Note 17 — Subsequent Events
.
F-31
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Upon receipt of a request for redemption, the Company may conduct a Uniform Commercial Code search to ensure that no liens are held against the shares. If the Company cannot purchase all shares presented for redemption in any fiscal quarter, based upon insufficient cash available and/or the limit on the number of shares the Company may redeem during any quarter or year, the Company will give priority to the redemption of deceased stockholders’ shares. The Company next will give priority to requests for full redemption of accounts with a balance of
250
shares or less at the time the Company receives the request, in order to reduce the expense of maintaining small accounts. Thereafter, the Company will honor the remaining quarterly redemption requests on a pro rata basis. Following such quarterly redemption period, the unsatisfied portion of the prior redemption request must be resubmitted, prior to the last day of the new quarter. Unfulfilled requests for redemption will not be carried over automatically to subsequent redemption periods.
The Company redeems shares no later than the end of the month following the end of each fiscal quarter. Requests for redemption must be received on or prior to the end of the fiscal quarter in order for the Company to repurchase the shares in the month following the end of that fiscal quarter. The Board may amend, suspend or terminate the share redemption program at any time upon
30
days’ prior written notice to the stockholders. During the years ended
December 31, 2019
,
2018
and
2017
, the Company redeemed approximately
9.5 million
,
9.8 million
and
10.3 million
shares, respectively, under the share redemption program for
$84.1 million
,
$93.8 million
and
$103.7 million
, respectively. During the year ended
December 31, 2019
, redemption requests relating to approximately
79.1 million
shares went unfulfilled.
Distributions Payable and Distribution Policy
The Board authorized a daily distribution, based on 365 days in the calendar year, of
$0.001711452
per share for stockholders of record as of the close of business on each day of the period commencing on January 1, 2018 and ending on December 31, 2019. The Board authorized a daily distribution, based on 366 days in the calendar year, of
$0.001706776
per share for stockholders of record as of the close of business on each day of the period commencing on
January 1, 2020
and ending on
March 31, 2020
. As of
December 31, 2019
, the Company had distributions payable of
$16.5 million
.
Subsequent to
December 31, 2019
, the Board reaffirmed the declaration and payment of distributions for the month of March 2020 at the rate previously declared on November 5, 2019, which distributions will be paid on or around April 1, 2020. Given the impact of the novel strain of coronavirus (“COVID-19”) outbreak, the Board has decided to defer making a determination as to the amount and timing of distributions for the second quarter of 2020 until such time that the Company has greater visibility into the impact that the COVID-19 outbreak will have on the Company’s tenants’ ability to continue to pay rent on their leases on a timely basis or at all, the degree to which federal, state or local governmental authorities grant rent relief or other relief or amnesty programs applicable to the Company’s tenants, the Company’s ability to access the capital markets, and on the United States and worldwide financial markets and economy.
Equity-Based Compensation
On August 10, 2018, the Board approved the adoption of the Company’s 2018 Equity Incentive Plan (the “Plan”), under which
400,000
of the Company’s common shares were reserved for issuance and share awards of approximately
367,500
are available for future grant at
December 31, 2019
. Under the Plan, the Board or a committee designated by the Board has the authority to grant restricted stock awards or deferred stock awards to non-employee directors of the Company, which will further align such directors’ interests with the interests of the Company’s stockholders. The Board or committee also has the authority to determine the terms of any award granted pursuant to the Plan, including vesting schedules, restrictions and acceleration of any restrictions. The Plan may be amended or terminated by the Board at any time. The Plan expires on August 9, 2028.
As of
December 31, 2019
, the Company has granted awards of approximately
6,500
restricted shares to each of the independent members of the Board (approximately
32,500
restricted shares in aggregate) under the Plan. As of
December 31, 2019
,
14,000
of the restricted shares had vested based on
one
year of continuous service. The remaining
18,500
restricted shares issued had not vested or been forfeited as of
December 31, 2019
. The fair value of the Company’s share awards is determined using the Company’s NAV per share on the date of grant. Compensation expense related to the restricted shares is recognized over the vesting period. The Company recorded compensation expense of
$138,000
and
$33,000
for the years ended
December 31, 2019
and
2018
, respectively, related to the restricted shares included in general and administrative expenses in the accompanying consolidated statement of operations. As of
December 31, 2019
, there was
$120,000
of total unrecognized compensation expense related to shares, which will be recognized ratably over the remaining period of service prior to October 2020.
F-32
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 14 — INCOME TAXES
For federal income tax purposes, distributions to stockholders are characterized as ordinary dividends, capital gain distributions, or nondividend distributions. Nondividend distributions will reduce U.S stockholders’ basis (but not below zero) in their shares.
The following table shows the character of the distributions the Company paid on a percentage basis for the years ended
December 31, 2019
,
2018
and
2017
:
|
Year Ended December 31,
|
|||||||||
|
Character of Distributions:
|
2019
|
2018
|
2017
|
||||||
|
Ordinary dividends
|
39
|
%
|
52
|
%
|
51
|
%
|
|||
|
Nondividend distributions
|
7
|
%
|
48
|
%
|
42
|
%
|
|||
|
Capital gain distributions
|
54
|
%
|
—
|
%
|
7
|
%
|
|||
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
|||
During the years ended
December 31, 2019
,
2018
and
2017
, the Company incurred state and local income and franchise taxes of
$1.5 million
,
$1.4 million
, and
$1.6 million
, respectively, which were recorded in general and administrative expenses in the consolidated statements of operations.
The Company had
no
unrecognized tax benefits as of or during the years ended
December 31, 2019
and
2018
. Any interest and penalties related to unrecognized tax benefits would be recognized within the provision for income taxes in the accompanying consolidated statements of operations. The Company files income tax returns in the U.S. federal jurisdiction, as well as various state jurisdictions, and is subject to routine examinations by the respective tax authorities.
NOTE 15 — LEASES
The Company’s real estate assets are leased to tenants under operating leases for which the terms, expirations and extension options vary. The Company’s operating leases do not convey to the lessee the right to purchase the underlying asset upon expiration of the lease period. To determine whether a contract contains a lease, the Company reviews contracts to determine if the agreement conveys the right to control the use of an asset. The Company adopted ASC 842, using the optional alternative transition method and used the effective date as the date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. The Company elected the “package of practical expedients,” which permits the Company to not reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. The Company elected to apply the practical expedient for all of the Company’s leases to account for the lease and non-lease components as a single, combined operating lease component under ASC 842. Non-lease components primarily consist of maintenance services, including CAM, real estate taxes, insurance and utilities paid for by the lessor but consumed by the lessee. Non-lease components are considered to be variable rental and other property income and are recognized in the period incurred.
As of
December 31, 2019
, the leases had a weighted-average remaining term of
8.6
years. Certain leases include provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other negotiated terms and conditions. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As of
December 31, 2019
, the future minimum rental income from the Company’s real estate assets under non-cancelable operating leases, assuming no exercise of renewal options for the succeeding five fiscal years and thereafter, was as follows (in thousands):
|
Year Ending December 31,
|
Future Minimum Rental Income
|
|||
|
2020
|
$
|
232,207
|
|
|
|
2021
|
219,740
|
|
||
|
2022
|
206,813
|
|
||
|
2023
|
186,798
|
|
||
|
2024
|
162,585
|
|
||
|
Thereafter
|
1,051,702
|
|
||
|
Total
|
$
|
2,059,845
|
|
|
F-33
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, Topic 840, the following table summarizes the future minimum rental income from the Company’s real estate assets under non-cancelable operating leases, assuming no exercise of renewal options for the succeeding five fiscal years and thereafter, as of December 31, 2018 (in thousands):
|
Year Ending December 31,
|
Future Minimum Rental Income
|
|||
|
2019
|
$
|
352,699
|
|
|
|
2020
|
343,991
|
|
||
|
2021
|
327,661
|
|
||
|
2022
|
311,858
|
|
||
|
2023
|
284,510
|
|
||
|
Thereafter
|
1,718,650
|
|
||
|
Total
|
$
|
3,339,369
|
|
|
A certain amount of the Company’s rental and other property income is from tenants with leases which are subject to contingent rent provisions. These contingent rents are subject to the tenant achieving periodic revenues in excess of specified levels. For the years ended
December 31, 2019
,
2018
and
2017
, the amount of the contingent rent earned by the Company was not significant.
Rental and other property income during years ended
December 31, 2019
,
2018
and
2017
consisted of the following (in thousands):
|
Year Ended December 31,
|
|||||||||||
|
|
2019
|
2018
|
2017
|
||||||||
|
Fixed rental and other property income
(1)
|
$
|
342,453
|
|
$
|
368,847
|
|
$
|
371,139
|
|
||
|
Variable rental and other property income
(2)
|
50,771
|
|
$
|
60,789
|
|
$
|
52,956
|
|
|||
|
Total rental and other property income
|
$
|
393,224
|
|
$
|
429,636
|
|
$
|
424,095
|
|
||
__________________________________
|
(1)
|
Consists primarily of fixed contractual payments from operating leases with tenants recognized on a straight-line basis over the lease term, including amortization of acquired above- and below-market leases.
|
|
(2)
|
Consists primarily of tenant reimbursements for recoverable real estate taxes and property operating expenses, and percentage rent, net of bad debt expense.
|
The Company has one property subject to a non-cancelable operating ground lease with a remaining term of
13.7
years. Upon initial adoption of ASC 842, the Company recognized a lease liability (in deferred rental income and other liabilities) and a related ROU asset (in prepaid expenses, derivative assets and other assets) of
$2.7 million
in the consolidated balance sheets. The lease liability and ROU asset were initially measured at the present value of the future minimum lease payments using a discount rate of
4.3%
. This reflects the Company’s incremental borrowing rate, which was calculated based on the interest rate the Company would incur to borrow on a fully collateralized basis over a term similar to the lease.
The Company recognized
$250,000
of ground lease expense during the year ended
December 31, 2019
, of which
$242,000
was paid in cash during the period it was recognized. As of
December 31, 2019
, the Company’s scheduled future minimum rental payments related to its operating ground lease is approximately
$250,000
annually for 2020 through 2024, and
$2.2 million
thereafter through the maturity date of the lease in August 2033.
NOTE 16 — QUARTERLY RESULTS (UNAUDITED)
Presented below is a summary of the unaudited quarterly financial information for the years ended
December 31, 2019
and
2018
(in thousands, except for per share amounts). In the opinion of management, the information for the interim periods presented includes all adjustments which are of a normal and recurring nature, necessary to present a fair presentation of the results for each period.
F-34
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
December 31, 2019
|
||||||||||||||||
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|||||||||||||
|
Revenues
|
$
|
109,260
|
|
$
|
105,529
|
|
$
|
105,479
|
|
$
|
93,088
|
|
||||
|
Net income
|
$
|
8,851
|
|
$
|
9,006
|
|
$
|
2,573
|
|
$
|
162,590
|
|
||||
|
Net income attributable to the Company
|
$
|
8,817
|
|
$
|
8,973
|
|
$
|
2,541
|
|
$
|
162,568
|
|
||||
|
Basic and diluted net income per common share
(1)
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
0.52
|
|
||||
____________________________________
|
(1)
|
The Company calculates net income per share based on the weighted-average number of outstanding shares of common stock during the reporting period. The average number of shares fluctuates throughout the year and can therefore produce a full year result that does not agree to the sum of the individual quarters.
|
|
December 31, 2018
|
||||||||||||||||
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|||||||||||||
|
Revenues
|
$
|
109,503
|
|
$
|
107,395
|
|
$
|
105,705
|
|
$
|
108,673
|
|
||||
|
Net income (loss)
|
$
|
19,073
|
|
$
|
17,825
|
|
$
|
14,905
|
|
$
|
(14,391
|
)
|
||||
|
Net income (loss) attributable to the Company
|
$
|
19,039
|
|
$
|
17,792
|
|
$
|
14,872
|
|
$
|
(14,425
|
)
|
||||
|
Basic and diluted net income (loss) per common share
(1)
|
$
|
0.06
|
|
$
|
0.06
|
|
$
|
0.05
|
|
$
|
(0.05
|
)
|
||||
____________________________________
|
(1)
|
The Company calculates net income (loss) per share based on the weighted-average number of outstanding shares of common stock during the reporting period. The average number of shares fluctuates throughout the year and can therefore produce a full year result that does not agree to the sum of the individual quarters.
|
NOTE 17 — SUBSEQUENT EVENTS
Subsequent to
December 31, 2019
, there was a global outbreak of COVID-19. The global and domestic response to the COVID-19 outbreak continues to rapidly evolve. Thus far, certain responses to the COVID-19 outbreak have included mandates from federal, state and/or local authorities that required temporary closure of or imposed limitations on the operations of certain non-essential retailers. The COVID-19 outbreak and associated responses could negatively impact future tenant sales and operations at the Company’s properties, which could result in material impact to the Company’s future results of operations, cash flows and financial condition. The Company is unable to estimate the impact the novel coronavirus will have on its financial results at this time.
Redemption of Shares of Common Stock
Subsequent to
December 31, 2019
, the Company redeemed approximately
2.3 million
shares pursuant to the Company’s share redemption program for
$19.5 million
(at an average price per share of
$8.65
). Management, in its discretion, limited the amount of shares redeemed for the three months ended
December 31, 2019
to an amount equal to net proceeds the Company received from the sale of shares in the DRIP Offerings during the respective period. The remaining redemption requests received during the three months ended
December 31, 2019
totaling approximately
20.6 million
shares went unfulfilled.
Property Dispositions
Subsequent to
December 31, 2019
, the Company disposed of
12
properties for an aggregate gross sales price of
$129.0 million
, including
seven
properties disposed of for
$26.3 million
pursuant to the Purchase and Sales Agreement discussed in
Note 4 — Real Estate Assets
. The property dispositions resulted in proceeds of
$127.0 million
after closing costs and disposition fees to CMFT Management or its affiliates and a gain of approximately
$13.1 million
. The Company has no continuing involvement with these properties.
Notes Payable
Subsequent to
December 31, 2019
, the Company repaid
$97.0 million
of mortgage note due to the disposition of the underlying properties.
Broadly Syndicated Loans
Subsequent to
December 31, 2019
, the Company settled
$328.8 million
of broadly syndicated loans.
F-35
CIM REAL ESTATE FINANCE TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Credit Securities Revolver
Subsequent to
December 31, 2019
, the Company received borrowings under the Credit Securities Revolver in an aggregate principal amount of
$100.0 million
. The Credit Securities Revolver bears interest equal to the three-month LIBOR for the relevant interest period, plus an applicable rate of
1.70%
per annum during the Reinvestment Period and
2.00%
per annum during the amortization period, as discussed in
Note 8 — Credit Facilities and Notes Payable
.
Estimated Per Share NAV
On
March 25, 2020
, the Board established an updated estimated per share NAV of the Company’s common stock as of
December 31, 2019
, of
$7.77
per share. Commencing on
March 30, 2020
, distributions will be reinvested in shares of the Company’s common stock under the Secondary DRIP Offering at a price of
$7.77
per share. Pursuant to the terms of the Company’s share redemption program, commencing on
March 30, 2020
, the updated estimated per share NAV of
$7.77
, as of
December 31, 2019
, will serve as the most recent estimated value for purposes of the share redemption program going forward, until such time as the Board determines a new estimated per share NAV.
F-36
CIM REAL ESTATE FINANCE TRUST , INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
At December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
Real Estate Held for Investment:
|
|||||||||||||||||||||||||||||
|
10Box Cost-Plus:
|
|||||||||||||||||||||||||||||
|
Conway, AR
|
(h)
|
|
$
|
733
|
|
$
|
1,654
|
|
$
|
—
|
|
$
|
2,387
|
|
$
|
118
|
|
9/5/2017
|
1989
|
||||||||||
|
Russellville, AR
|
(h)
|
|
990
|
|
1,470
|
|
—
|
|
2,460
|
|
130
|
|
3/20/2017
|
1989
|
|||||||||||||||
|
Academy Sports:
|
|||||||||||||||||||||||||||||
|
Clarksville, TN
|
(h)
|
|
1,811
|
|
6,603
|
|
—
|
|
8,414
|
|
993
|
|
6/17/2014
|
2014
|
|||||||||||||||
|
Cookeville, TN
|
(h)
|
|
—
|
|
23,847
|
|
73,371
|
|
97,218
|
|
9,604
|
|
9/30/2014
|
2015
|
|||||||||||||||
|
Douglasville, GA
|
(h)
|
|
1,360
|
|
8,593
|
|
—
|
|
9,953
|
|
1,276
|
|
6/12/2014
|
2014
|
|||||||||||||||
|
Flowood, MS
|
(h)
|
|
1,534
|
|
7,864
|
|
—
|
|
9,398
|
|
1,251
|
|
6/27/2014
|
2014
|
|||||||||||||||
|
Greenville, NC
|
(h)
|
|
1,968
|
|
7,054
|
|
—
|
|
9,022
|
|
633
|
|
1/12/2017
|
2016
|
|||||||||||||||
|
McDonough, GA
|
(h)
|
|
1,846
|
|
5,626
|
|
—
|
|
7,472
|
|
891
|
|
4/24/2014
|
2010
|
|||||||||||||||
|
Valdosta, GA
|
$
|
5,838
|
|
2,482
|
|
5,922
|
|
—
|
|
8,404
|
|
1,167
|
|
5/10/2013
|
2012
|
||||||||||||||
|
Advance Auto:
|
|||||||||||||||||||||||||||||
|
Mattoon, IL
|
(h)
|
|
261
|
|
1,063
|
|
—
|
|
1,324
|
|
107
|
|
12/4/2015
|
2015
|
|||||||||||||||
|
Willmar, MN
|
(h)
|
|
200
|
|
1,279
|
|
—
|
|
1,479
|
|
155
|
|
3/25/2015
|
2014
|
|||||||||||||||
|
Albany Square:
|
|||||||||||||||||||||||||||||
|
Albany, GA
|
4,600
|
|
1,606
|
|
7,113
|
|
373
|
|
9,092
|
|
1,382
|
|
2/26/2014
|
2013
|
|||||||||||||||
|
Almeda Crossing:
|
|||||||||||||||||||||||||||||
|
Houston, TX
|
(h)
|
|
4,738
|
|
26,245
|
|
(3,163
|
)
|
27,820
|
|
503
|
|
8/7/2014
|
2006
|
|||||||||||||||
|
AutoZone:
|
|||||||||||||||||||||||||||||
|
Sheffield, OH
|
(h)
|
|
815
|
|
—
|
|
770
|
|
1,585
|
|
99
|
|
10/15/2014
|
2014
|
|||||||||||||||
|
Bass Pro Shops:
|
|||||||||||||||||||||||||||||
|
Tallahassee, FL
|
(h)
|
|
945
|
|
5,713
|
|
—
|
|
6,658
|
|
1,028
|
|
8/20/2013
|
2013
|
|||||||||||||||
|
Beavercreek Shopping Center:
|
|||||||||||||||||||||||||||||
|
Beavercreek, OH
|
—
|
|
5,504
|
|
25,178
|
|
554
|
|
31,236
|
|
4,419
|
|
10/31/2013
|
2013
|
|||||||||||||||
|
Bed Bath & Beyond/La-Z-Boy:
|
|||||||||||||||||||||||||||||
|
Schaumburg, IL
|
7,300
|
|
4,786
|
|
6,149
|
|
(1,065
|
)
|
9,870
|
|
219
|
|
3/8/2013
|
1997
|
|||||||||||||||
|
Bob Evans:
|
|||||||||||||||||||||||||||||
|
Akron, OH
|
(h)
|
|
447
|
|
1,537
|
|
—
|
|
1,984
|
|
129
|
|
4/28/2017
|
2007
|
|||||||||||||||
|
Anderson, IN
|
(h)
|
|
912
|
|
1,455
|
|
—
|
|
2,367
|
|
124
|
|
4/28/2017
|
1984
|
|||||||||||||||
|
Austintown, OH
|
(h)
|
|
305
|
|
1,426
|
|
—
|
|
1,731
|
|
128
|
|
4/28/2017
|
1995
|
|||||||||||||||
|
Birch Run, MI
|
(h)
|
|
733
|
|
1,192
|
|
—
|
|
1,925
|
|
105
|
|
4/28/2017
|
2008
|
|||||||||||||||
|
Blue Ash, OH
|
(h)
|
|
628
|
|
1,429
|
|
—
|
|
2,057
|
|
139
|
|
4/28/2017
|
1994
|
|||||||||||||||
|
Chardon, OH
|
(h)
|
|
333
|
|
682
|
|
—
|
|
1,015
|
|
65
|
|
4/28/2017
|
2003
|
|||||||||||||||
|
Chillicothe, OH
|
(h)
|
|
557
|
|
1,524
|
|
—
|
|
2,081
|
|
133
|
|
4/28/2017
|
1998
|
|||||||||||||||
|
Columbus, OH
|
—
|
|
523
|
|
1,376
|
|
—
|
|
1,899
|
|
124
|
|
4/28/2017
|
2003
|
|||||||||||||||
|
Dayton, OH
|
(h)
|
|
325
|
|
1,438
|
|
—
|
|
1,763
|
|
133
|
|
4/28/2017
|
1998
|
|||||||||||||||
|
Eldersburg, MD
|
(h)
|
|
557
|
|
876
|
|
—
|
|
1,433
|
|
75
|
|
4/28/2017
|
2000
|
|||||||||||||||
|
Florence, KY
|
(h)
|
|
496
|
|
1,876
|
|
—
|
|
2,372
|
|
170
|
|
4/28/2017
|
1991
|
|||||||||||||||
|
Holland, MI
|
(h)
|
|
314
|
|
1,367
|
|
—
|
|
1,681
|
|
123
|
|
4/28/2017
|
2004
|
|||||||||||||||
|
Huntersville, NC
|
(h)
|
|
751
|
|
657
|
|
—
|
|
1,408
|
|
57
|
|
4/28/2017
|
2008
|
|||||||||||||||
|
Hurricane, WV
|
(h)
|
|
297
|
|
1,654
|
|
—
|
|
1,951
|
|
135
|
|
4/28/2017
|
1993
|
|||||||||||||||
|
Milford, OH
|
(h)
|
|
271
|
|
1,498
|
|
—
|
|
1,769
|
|
136
|
|
4/28/2017
|
1987
|
|||||||||||||||
|
Monroeville, PA
|
(h)
|
|
1,340
|
|
848
|
|
—
|
|
2,188
|
|
70
|
|
4/28/2017
|
1995
|
|||||||||||||||
|
Nicholasville, KY
|
(h)
|
|
731
|
|
693
|
|
—
|
|
1,424
|
|
59
|
|
4/28/2017
|
1989
|
|||||||||||||||
|
North Canton, OH
|
(h)
|
|
859
|
|
1,393
|
|
—
|
|
2,252
|
|
126
|
|
4/28/2017
|
2006
|
|||||||||||||||
|
Ripley, WV
|
(h)
|
|
269
|
|
1,304
|
|
—
|
|
1,573
|
|
114
|
|
4/28/2017
|
1988
|
|||||||||||||||
|
Tipp City, OH
|
(h)
|
|
554
|
|
1,120
|
|
—
|
|
1,674
|
|
104
|
|
4/28/2017
|
1989
|
|||||||||||||||
S-1
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
At December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
Bob Evans (continued):
|
|||||||||||||||||||||||||||||
|
Warsaw, IN
|
(h)
|
|
$
|
684
|
|
$
|
1,222
|
|
$
|
—
|
|
$
|
1,906
|
|
$
|
106
|
|
4/28/2017
|
1993
|
||||||||||
|
Boston Commons:
|
|||||||||||||||||||||||||||||
|
Springfield, MA
|
(h)
|
|
3,101
|
|
7,042
|
|
280
|
|
10,423
|
|
1,085
|
|
8/19/2014
|
2004
|
|||||||||||||||
|
Bottom Dollar Grocery:
|
|||||||||||||||||||||||||||||
|
Ambridge, PA
|
$
|
—
|
|
519
|
|
2,985
|
|
—
|
|
3,504
|
|
471
|
|
11/5/2013
|
2012
|
||||||||||||||
|
Bryan Crossing:
|
|||||||||||||||||||||||||||||
|
Kodak, TN
|
4,958
|
|
863
|
|
6,523
|
|
(7,386
|
)
|
(i)
|
—
|
|
—
|
|
9/9/2014
|
2008
|
||||||||||||||
|
Cabela’s:
|
|||||||||||||||||||||||||||||
|
Acworth, GA
|
(h)
|
|
4,979
|
|
18,775
|
|
—
|
|
23,754
|
|
1,179
|
|
9/25/2017
|
2014
|
|||||||||||||||
|
Avon, OH
|
(h)
|
|
2,755
|
|
10,751
|
|
—
|
|
13,506
|
|
686
|
|
9/25/2017
|
2016
|
|||||||||||||||
|
La Vista, NE
|
(h)
|
|
3,260
|
|
16,923
|
|
—
|
|
20,183
|
|
1,022
|
|
9/25/2017
|
2006
|
|||||||||||||||
|
Sun Prairie, WI
|
(h)
|
|
3,373
|
|
14,058
|
|
—
|
|
17,431
|
|
931
|
|
9/25/2017
|
2015
|
|||||||||||||||
|
Caliber Collision Center:
|
|||||||||||||||||||||||||||||
|
Frisco, TX
|
(h)
|
|
1,484
|
|
2,038
|
|
—
|
|
3,522
|
|
310
|
|
9/16/2014
|
2014
|
|||||||||||||||
|
Las Cruces, NM
|
(h)
|
|
673
|
|
1,949
|
|
—
|
|
2,622
|
|
285
|
|
3/21/2014
|
2014
|
|||||||||||||||
|
Midwest City, OK
|
(h)
|
|
259
|
|
1,165
|
|
—
|
|
1,424
|
|
177
|
|
2/21/2014
|
2013
|
|||||||||||||||
|
Denver, CO
|
(h)
|
|
855
|
|
658
|
|
—
|
|
1,513
|
|
94
|
|
6/25/2014
|
1975
|
|||||||||||||||
|
San Antonio, TX
|
(h)
|
|
622
|
|
832
|
|
—
|
|
1,454
|
|
118
|
|
6/4/2014
|
2014
|
|||||||||||||||
|
Wylie, TX
|
(h)
|
|
816
|
|
2,690
|
|
—
|
|
3,506
|
|
377
|
|
2/10/2015
|
2014
|
|||||||||||||||
|
Camping World:
|
|||||||||||||||||||||||||||||
|
Pensacola, FL
|
(h)
|
|
2,152
|
|
3,831
|
|
(1,307
|
)
|
4,676
|
|
19
|
|
4/29/2014
|
2014
|
|||||||||||||||
|
Canton Marketplace:
|
|||||||||||||||||||||||||||||
|
Canton, GA
|
32,000
|
|
8,310
|
|
48,667
|
|
(56,977
|
)
|
(i)
|
—
|
|
—
|
|
3/28/2013
|
2009
|
||||||||||||||
|
Carlisle Crossing:
|
|||||||||||||||||||||||||||||
|
Carlisle, PA
|
—
|
|
4,491
|
|
15,817
|
|
14
|
|
20,322
|
|
2,527
|
|
9/18/2014
|
2006
|
|||||||||||||||
|
Chase:
|
|||||||||||||||||||||||||||||
|
Hanover Township, NJ
|
(h)
|
|
2,192
|
|
—
|
|
—
|
|
2,192
|
|
—
|
|
12/18/2013
|
2012
|
|||||||||||||||
|
Chestnut Square:
|
|||||||||||||||||||||||||||||
|
Brevard, NC
|
(h)
|
|
425
|
|
5,037
|
|
(5,462
|
)
|
(i)
|
—
|
|
—
|
|
6/7/2013
|
2008
|
||||||||||||||
|
Chick-fil-A:
|
|||||||||||||||||||||||||||||
|
Dickson City, PA
|
—
|
|
1,113
|
|
7,946
|
|
(7,817
|
)
|
1,242
|
|
194
|
|
6/30/2014
|
2013
|
|||||||||||||||
|
Costco:
|
|||||||||||||||||||||||||||||
|
Tallahassee, FL
|
5,146
|
|
9,497
|
|
—
|
|
—
|
|
9,497
|
|
—
|
|
12/11/2012
|
2006
|
|||||||||||||||
|
Cottonwood Commons:
|
|||||||||||||||||||||||||||||
|
Albuquerque, NM
|
19,250
|
|
4,986
|
|
28,881
|
|
196
|
|
34,063
|
|
4,928
|
|
7/19/2013
|
2013
|
|||||||||||||||
|
Coventry Crossing:
|
|||||||||||||||||||||||||||||
|
Coventry, RI
|
6,000
|
|
3,462
|
|
5,899
|
|
(2,291
|
)
|
7,070
|
|
—
|
|
9/12/2013
|
2008
|
|||||||||||||||
|
Crosspoint:
|
|||||||||||||||||||||||||||||
|
Hagerstown, MD
|
(h)
|
|
12,285
|
|
14,359
|
|
(1,024
|
)
|
25,620
|
|
2,522
|
|
9/30/2014
|
2000
|
|||||||||||||||
|
Crossroads Annex:
|
|||||||||||||||||||||||||||||
|
Lafayette, LA
|
(h)
|
|
1,659
|
|
7,091
|
|
(8,750
|
)
|
(i)
|
—
|
|
—
|
|
12/4/2013
|
2013
|
||||||||||||||
|
Crossroads Commons:
|
|||||||||||||||||||||||||||||
|
Plover, WI
|
(h)
|
|
1,000
|
|
4,515
|
|
(5,515
|
)
|
(i)
|
—
|
|
—
|
|
12/10/2013
|
2012
|
||||||||||||||
|
CVS:
|
|||||||||||||||||||||||||||||
|
Arnold, MO
|
(h)
|
|
2,043
|
|
2,367
|
|
—
|
|
4,410
|
|
368
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Asheville, NC
|
(h)
|
|
1,108
|
|
1,084
|
|
—
|
|
2,192
|
|
220
|
|
4/26/2012
|
1998
|
|||||||||||||||
|
Austin, TX
|
(h)
|
|
1,076
|
|
3,475
|
|
—
|
|
4,551
|
|
537
|
|
12/13/2013
|
2013
|
|||||||||||||||
S-2
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
At December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
CVS (continued):
|
|||||||||||||||||||||||||||||
|
Bloomington, IN
|
(h)
|
|
$
|
1,620
|
|
$
|
2,957
|
|
$
|
—
|
|
$
|
4,577
|
|
$
|
460
|
|
12/13/2013
|
2012
|
||||||||||
|
Blue Springs, MO
|
(h)
|
|
395
|
|
2,722
|
|
—
|
|
3,117
|
|
423
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Bridgeton, MO
|
(h)
|
|
2,056
|
|
2,362
|
|
—
|
|
4,418
|
|
367
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Charleston, SC
|
(h)
|
|
869
|
|
1,009
|
|
—
|
|
1,878
|
|
205
|
|
4/26/2012
|
1998
|
|||||||||||||||
|
Chesapeake, VA
|
(h)
|
|
1,044
|
|
3,053
|
|
—
|
|
4,097
|
|
484
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Chicago, IL
|
(h)
|
|
1,832
|
|
4,255
|
|
—
|
|
6,087
|
|
722
|
|
3/20/2013
|
2008
|
|||||||||||||||
|
Cicero, IN
|
(h)
|
|
487
|
|
3,099
|
|
—
|
|
3,586
|
|
481
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Corpus Christi, TX
|
(h)
|
|
648
|
|
2,557
|
|
—
|
|
3,205
|
|
501
|
|
4/19/2012
|
1998
|
|||||||||||||||
|
Danville, IN
|
(h)
|
|
424
|
|
2,105
|
|
76
|
|
2,605
|
|
312
|
|
7/16/2014
|
1998
|
|||||||||||||||
|
Eminence, KY
|
(h)
|
|
872
|
|
2,511
|
|
—
|
|
3,383
|
|
385
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Goose Creek, SC
|
(h)
|
|
1,022
|
|
1,980
|
|
—
|
|
3,002
|
|
305
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Greenwood, IN
|
(h)
|
|
912
|
|
3,549
|
|
61
|
|
4,522
|
|
580
|
|
7/11/2013
|
1999
|
|||||||||||||||
|
Hanover Township, NJ
|
(h)
|
|
4,746
|
|
—
|
|
—
|
|
4,746
|
|
—
|
|
12/18/2013
|
2012
|
|||||||||||||||
|
Hazlet, NJ
|
(h)
|
|
3,047
|
|
3,610
|
|
—
|
|
6,657
|
|
558
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Honesdale, PA
|
(h)
|
|
1,206
|
|
3,342
|
|
—
|
|
4,548
|
|
532
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Independence, MO
|
(h)
|
|
359
|
|
2,242
|
|
—
|
|
2,601
|
|
349
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Indianapolis, IN
|
(h)
|
|
1,110
|
|
2,484
|
|
—
|
|
3,594
|
|
386
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Irving, TX
|
(h)
|
|
745
|
|
3,034
|
|
—
|
|
3,779
|
|
562
|
|
10/5/2012
|
2000
|
|||||||||||||||
|
Janesville, WI
|
(h)
|
|
736
|
|
2,545
|
|
—
|
|
3,281
|
|
395
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Katy, TX
|
(h)
|
|
1,149
|
|
2,462
|
|
—
|
|
3,611
|
|
374
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Lincoln, NE
|
(h)
|
|
2,534
|
|
3,014
|
|
—
|
|
5,548
|
|
467
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
London, KY
|
(h)
|
|
1,445
|
|
2,661
|
|
—
|
|
4,106
|
|
431
|
|
9/10/2013
|
2013
|
|||||||||||||||
|
Middletown, NY
|
(h)
|
|
665
|
|
5,483
|
|
—
|
|
6,148
|
|
840
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
North Wilkesboro, NC
|
(h)
|
|
332
|
|
2,369
|
|
73
|
|
2,774
|
|
373
|
|
10/25/2013
|
1999
|
|||||||||||||||
|
Poplar Bluff, MO
|
(h)
|
|
1,861
|
|
2,211
|
|
—
|
|
4,072
|
|
345
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Salem, NH
|
(h)
|
|
3,456
|
|
2,351
|
|
—
|
|
5,807
|
|
362
|
|
11/18/2013
|
2013
|
|||||||||||||||
|
San Antonio, TX
|
(h)
|
|
1,893
|
|
1,848
|
|
—
|
|
3,741
|
|
291
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Sand Springs, OK
|
(h)
|
|
1,765
|
|
2,283
|
|
—
|
|
4,048
|
|
357
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Santa Fe, NM
|
(h)
|
|
2,243
|
|
4,619
|
|
—
|
|
6,862
|
|
706
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Sedalia, MO
|
(h)
|
|
466
|
|
2,318
|
|
—
|
|
2,784
|
|
361
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
St. John, MO
|
(h)
|
|
1,546
|
|
2,601
|
|
—
|
|
4,147
|
|
404
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Temple Hills, MD
|
(h)
|
|
1,817
|
|
2,989
|
|
—
|
|
4,806
|
|
476
|
|
9/30/2013
|
2001
|
|||||||||||||||
|
Vineland, NJ
|
(h)
|
|
813
|
|
2,926
|
|
—
|
|
3,739
|
|
469
|
|
12/13/2013
|
2010
|
|||||||||||||||
|
Waynesboro, VA
|
(h)
|
|
986
|
|
2,708
|
|
—
|
|
3,694
|
|
421
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
West Monroe, LA
|
(h)
|
|
1,738
|
|
2,136
|
|
—
|
|
3,874
|
|
334
|
|
12/13/2013
|
2013
|
|||||||||||||||
|
Darien Towne Center:
|
|||||||||||||||||||||||||||||
|
Darien, IL
|
(h)
|
|
6,718
|
|
11,951
|
|
915
|
|
19,584
|
|
2,713
|
|
12/17/2013
|
1994
|
|||||||||||||||
|
Decatur Commons:
|
|||||||||||||||||||||||||||||
|
Decatur, AL
|
$
|
7,000
|
|
2,478
|
|
9,333
|
|
861
|
|
12,672
|
|
1,773
|
|
7/10/2013
|
2004
|
||||||||||||||
|
Dick’s PetSmart Center:
|
|||||||||||||||||||||||||||||
|
Oshkosh, WI
|
(h)
|
|
1,445
|
|
6,599
|
|
(1,667
|
)
|
6,377
|
|
—
|
|
9/23/2016
|
2015
|
|||||||||||||||
|
Dick’s Sporting Goods:
|
|||||||||||||||||||||||||||||
|
Oklahoma City, OK
|
5,858
|
|
685
|
|
10,587
|
|
—
|
|
11,272
|
|
2,077
|
|
12/31/2012
|
2012
|
|||||||||||||||
|
Dollar General:
|
|||||||||||||||||||||||||||||
|
Akron, OH
|
(h)
|
|
112
|
|
1,099
|
|
—
|
|
1,211
|
|
190
|
|
11/1/2013
|
2013
|
|||||||||||||||
S-3
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
At December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
Dollar General (continued):
|
|||||||||||||||||||||||||||||
|
Buffalo, NY
|
(h)
|
|
$
|
122
|
|
$
|
1,099
|
|
$
|
—
|
|
$
|
1,221
|
|
$
|
148
|
|
12/5/2014
|
2014
|
||||||||||
|
Columbus, OH
|
(h)
|
|
279
|
|
1,248
|
|
—
|
|
1,527
|
|
216
|
|
11/7/2013
|
2013
|
|||||||||||||||
|
Des Moines, IA
|
(h)
|
|
166
|
|
943
|
|
—
|
|
1,109
|
|
162
|
|
8/9/2013
|
2012
|
|||||||||||||||
|
Houston, TX
|
(h)
|
|
255
|
|
1,393
|
|
—
|
|
1,648
|
|
223
|
|
10/18/2013
|
2013
|
|||||||||||||||
|
Kansas City, MO
|
(h)
|
|
283
|
|
1,068
|
|
—
|
|
1,351
|
|
178
|
|
10/18/2013
|
2013
|
|||||||||||||||
|
Kansas City, MO
|
(h)
|
|
233
|
|
1,054
|
|
—
|
|
1,287
|
|
174
|
|
11/1/2013
|
2013
|
|||||||||||||||
|
Lamesa, TX
|
(h)
|
|
75
|
|
803
|
|
(878
|
)
|
(i)
|
—
|
|
—
|
|
7/31/2014
|
2014
|
||||||||||||||
|
Lansing, MI
|
(h)
|
|
232
|
|
939
|
|
—
|
|
1,171
|
|
133
|
|
6/25/2014
|
2014
|
|||||||||||||||
|
Leicester, NC
|
(h)
|
|
134
|
|
800
|
|
(934
|
)
|
(i)
|
—
|
|
—
|
|
6/17/2013
|
2013
|
||||||||||||||
|
Mission, TX
|
(h)
|
|
182
|
|
858
|
|
—
|
|
1,040
|
|
123
|
|
9/5/2014
|
2014
|
|||||||||||||||
|
Mobile, AL
|
(h)
|
|
410
|
|
1,059
|
|
—
|
|
1,469
|
|
190
|
|
6/17/2013
|
2013
|
|||||||||||||||
|
Nashville, MI
|
(h)
|
|
103
|
|
1,255
|
|
(1,358
|
)
|
(i)
|
—
|
|
—
|
|
1/24/2014
|
2013
|
||||||||||||||
|
Parchment, MI
|
(h)
|
|
168
|
|
1,162
|
|
—
|
|
1,330
|
|
164
|
|
6/25/2014
|
2014
|
|||||||||||||||
|
Pueblo, CO
|
(h)
|
|
144
|
|
909
|
|
—
|
|
1,053
|
|
163
|
|
1/4/2013
|
2012
|
|||||||||||||||
|
Ravenna, MI
|
(h)
|
|
199
|
|
958
|
|
(1,157
|
)
|
(i)
|
—
|
|
—
|
|
1/24/2014
|
2013
|
||||||||||||||
|
Romulus, MI
|
(h)
|
|
274
|
|
1,171
|
|
—
|
|
1,445
|
|
174
|
|
3/7/2014
|
2013
|
|||||||||||||||
|
Russell, KS
|
(h)
|
|
54
|
|
899
|
|
(953
|
)
|
(i)
|
—
|
|
—
|
|
8/5/2014
|
2014
|
||||||||||||||
|
Shelby, MI
|
(h)
|
|
128
|
|
1,033
|
|
(1,161
|
)
|
(i)
|
—
|
|
—
|
|
1/24/2014
|
2013
|
||||||||||||||
|
Spring, TX
|
(h)
|
|
277
|
|
1,132
|
|
—
|
|
1,409
|
|
183
|
|
9/30/2013
|
2013
|
|||||||||||||||
|
Springfield, IL
|
(h)
|
|
205
|
|
934
|
|
—
|
|
1,139
|
|
129
|
|
9/17/2014
|
2014
|
|||||||||||||||
|
St. Louis, MO
|
(h)
|
|
229
|
|
1,102
|
|
—
|
|
1,331
|
|
178
|
|
12/31/2013
|
2013
|
|||||||||||||||
|
St. Louis, MO
|
(h)
|
|
240
|
|
1,118
|
|
—
|
|
1,358
|
|
178
|
|
1/15/2014
|
2013
|
|||||||||||||||
|
Weslaco, TX
|
(h)
|
|
141
|
|
848
|
|
—
|
|
989
|
|
121
|
|
9/5/2014
|
2014
|
|||||||||||||||
|
East Manchester Village Center:
|
|||||||||||||||||||||||||||||
|
Manchester, PA
|
$
|
8,300
|
|
2,517
|
|
12,672
|
|
233
|
|
15,422
|
|
2,117
|
|
12/19/2013
|
2009
|
||||||||||||||
|
East West Commons:
|
|||||||||||||||||||||||||||||
|
Austell, GA
|
13,000
|
|
10,094
|
|
16,034
|
|
3,943
|
|
30,071
|
|
2,822
|
|
9/30/2014
|
2002
|
|||||||||||||||
|
Evergreen Marketplace:
|
|||||||||||||||||||||||||||||
|
Evergreen Park, IL
|
(h)
|
|
2,823
|
|
6,239
|
|
—
|
|
9,062
|
|
1,283
|
|
9/6/2013
|
2013
|
|||||||||||||||
|
Family Dollar:
|
|||||||||||||||||||||||||||||
|
Adelanto, GA
|
(h)
|
|
463
|
|
1,711
|
|
—
|
|
2,174
|
|
230
|
|
11/14/2014
|
2014
|
|||||||||||||||
|
Bessemer, AL
|
(h)
|
|
201
|
|
1,043
|
|
—
|
|
1,244
|
|
168
|
|
12/27/2013
|
2013
|
|||||||||||||||
|
Birmingham, AL
|
(h)
|
|
500
|
|
831
|
|
—
|
|
1,331
|
|
136
|
|
12/27/2013
|
2013
|
|||||||||||||||
|
Brooksville, FL
|
(h)
|
|
206
|
|
791
|
|
—
|
|
997
|
|
129
|
|
12/18/2013
|
2013
|
|||||||||||||||
|
Cathedral City, CA
|
(h)
|
|
658
|
|
1,908
|
|
—
|
|
2,566
|
|
265
|
|
9/19/2014
|
2014
|
|||||||||||||||
|
Cheyenne, WY
|
(h)
|
|
148
|
|
986
|
|
—
|
|
1,134
|
|
150
|
|
4/23/2014
|
2014
|
|||||||||||||||
|
Coachella, CA
|
(h)
|
|
450
|
|
1,634
|
|
—
|
|
2,084
|
|
251
|
|
2/19/2014
|
2013
|
|||||||||||||||
|
Empire, CA
|
(h)
|
|
239
|
|
1,527
|
|
—
|
|
1,766
|
|
221
|
|
6/27/2014
|
2014
|
|||||||||||||||
|
Ft. Lauderdale, FL
|
(h)
|
|
443
|
|
1,361
|
|
—
|
|
1,804
|
|
210
|
|
12/18/2013
|
2013
|
|||||||||||||||
|
Fresno, CA
|
(h)
|
|
488
|
|
1,553
|
|
—
|
|
2,041
|
|
241
|
|
2/19/2014
|
2013
|
|||||||||||||||
|
Holtville, CA
|
(h)
|
|
317
|
|
1,609
|
|
—
|
|
1,926
|
|
247
|
|
2/19/2014
|
2013
|
|||||||||||||||
|
Indio, CA
|
(h)
|
|
393
|
|
1,636
|
|
—
|
|
2,029
|
|
236
|
|
6/25/2014
|
2014
|
|||||||||||||||
|
Irvington, AL
|
(h)
|
|
217
|
|
814
|
|
—
|
|
1,031
|
|
135
|
|
12/27/2013
|
2013
|
|||||||||||||||
|
Jay, FL
|
(h)
|
|
190
|
|
1,002
|
|
—
|
|
1,192
|
|
167
|
|
2/25/2014
|
2013
|
|||||||||||||||
|
Jonesboro, GA
|
(h)
|
|
297
|
|
1,098
|
|
—
|
|
1,395
|
|
173
|
|
2/14/2014
|
2013
|
|||||||||||||||
S-4
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
At December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
Family Dollar (continued):
|
|||||||||||||||||||||||||||||
|
Kissimmee, FL
|
(h)
|
|
$
|
622
|
|
$
|
1,226
|
|
$
|
—
|
|
$
|
1,848
|
|
$
|
178
|
|
8/27/2014
|
2014
|
||||||||||
|
LaBelle, FL
|
(h)
|
|
268
|
|
1,037
|
|
—
|
|
1,305
|
|
170
|
|
2/28/2014
|
2014
|
|||||||||||||||
|
Lake Elsinor, CA
|
(h)
|
|
417
|
|
1,682
|
|
—
|
|
2,099
|
|
254
|
|
3/3/2014
|
2013
|
|||||||||||||||
|
Lakeland, FL
|
(h)
|
|
353
|
|
937
|
|
—
|
|
1,290
|
|
141
|
|
6/30/2014
|
2014
|
|||||||||||||||
|
Little Rock, CA
|
(h)
|
|
499
|
|
1,730
|
|
—
|
|
2,229
|
|
221
|
|
2/19/2015
|
2014
|
|||||||||||||||
|
Melbourne, FL
|
(h)
|
|
362
|
|
883
|
|
—
|
|
1,245
|
|
139
|
|
2/28/2014
|
2014
|
|||||||||||||||
|
Oshkosh, WI
|
(h)
|
|
361
|
|
815
|
|
—
|
|
1,176
|
|
129
|
|
2/25/2014
|
2013
|
|||||||||||||||
|
Palmdale, CA
|
(h)
|
|
372
|
|
1,822
|
|
—
|
|
2,194
|
|
227
|
|
3/30/2015
|
2014
|
|||||||||||||||
|
Pensacola, FL
|
(h)
|
|
509
|
|
791
|
|
—
|
|
1,300
|
|
125
|
|
3/27/2014
|
2014
|
|||||||||||||||
|
Pine Lake, GA
|
(h)
|
|
639
|
|
897
|
|
—
|
|
1,536
|
|
132
|
|
8/26/2014
|
2014
|
|||||||||||||||
|
Riverside, CA
|
(h)
|
|
736
|
|
1,558
|
|
—
|
|
2,294
|
|
233
|
|
4/4/2014
|
2014
|
|||||||||||||||
|
San Jacinto, CA
|
(h)
|
|
430
|
|
1,682
|
|
—
|
|
2,112
|
|
239
|
|
7/18/2014
|
2014
|
|||||||||||||||
|
Statesboro, GA
|
(h)
|
|
347
|
|
800
|
|
—
|
|
1,147
|
|
129
|
|
2/14/2014
|
2013
|
|||||||||||||||
|
Stockton, CA
|
(h)
|
|
202
|
|
1,817
|
|
—
|
|
2,019
|
|
250
|
|
9/19/2014
|
2014
|
|||||||||||||||
|
Taft, CA
|
(h)
|
|
255
|
|
1,422
|
|
—
|
|
1,677
|
|
238
|
|
8/23/2013
|
2013
|
|||||||||||||||
|
Tampa, FL
|
(h)
|
|
563
|
|
737
|
|
—
|
|
1,300
|
|
121
|
|
12/18/2013
|
2013
|
|||||||||||||||
|
Tampa, FL
|
(h)
|
|
482
|
|
920
|
|
—
|
|
1,402
|
|
149
|
|
12/18/2013
|
2013
|
|||||||||||||||
|
Terra Bella, CA
|
(h)
|
|
332
|
|
1,394
|
|
—
|
|
1,726
|
|
215
|
|
2/19/2014
|
2013
|
|||||||||||||||
|
Tuscaloosa, AL
|
(h)
|
|
534
|
|
817
|
|
—
|
|
1,351
|
|
135
|
|
12/27/2013
|
2013
|
|||||||||||||||
|
Flower Foods:
|
|||||||||||||||||||||||||||||
|
Orlando, FL
|
(h)
|
|
418
|
|
387
|
|
—
|
|
805
|
|
54
|
|
9/11/2014
|
2013
|
|||||||||||||||
|
Waldorf, MD
|
(h)
|
|
398
|
|
1,045
|
|
—
|
|
1,443
|
|
163
|
|
9/11/2014
|
2013
|
|||||||||||||||
|
Food 4 Less:
|
|||||||||||||||||||||||||||||
|
Atwater, CA
|
(h)
|
|
1,383
|
|
5,271
|
|
—
|
|
6,654
|
|
919
|
|
11/27/2013
|
2002
|
|||||||||||||||
|
Fountain Square:
|
|||||||||||||||||||||||||||||
|
Brookfield, WI
|
(h)
|
|
6,508
|
|
28,634
|
|
25
|
|
35,167
|
|
2,760
|
|
1/17/2017
|
2006
|
|||||||||||||||
|
Fourth Creek Landing:
|
|||||||||||||||||||||||||||||
|
Statesville, NC
|
(h)
|
|
1,375
|
|
7,795
|
|
—
|
|
9,170
|
|
1,809
|
|
3/26/2013
|
2012
|
|||||||||||||||
|
Fresenius Medical Care:
|
|||||||||||||||||||||||||||||
|
West Plains, MI
|
(h)
|
|
557
|
|
3,097
|
|
—
|
|
3,654
|
|
439
|
|
7/2/2014
|
2014
|
|||||||||||||||
|
Fresh Market Center:
|
|||||||||||||||||||||||||||||
|
Glen Ellyn, IL
|
$
|
4,750
|
|
2,767
|
|
6,403
|
|
(3,493
|
)
|
5,677
|
|
26
|
|
9/30/2014
|
2014
|
||||||||||||||
|
Fresh Thyme:
|
|||||||||||||||||||||||||||||
|
Indianapolis, IN
|
(h)
|
|
1,087
|
|
6,019
|
|
—
|
|
7,106
|
|
914
|
|
10/31/2014
|
2014
|
|||||||||||||||
|
Northville, MI
|
(h)
|
|
1,598
|
|
7,796
|
|
—
|
|
9,394
|
|
877
|
|
12/21/2015
|
2015
|
|||||||||||||||
|
Fresh Thyme & DSW:
|
|||||||||||||||||||||||||||||
|
Fort Wayne, IN
|
(h)
|
|
1,740
|
|
4,153
|
|
612
|
|
6,505
|
|
693
|
|
9/30/2014
|
1985
|
|||||||||||||||
|
Giant Eagle:
|
|||||||||||||||||||||||||||||
|
Seven Fields, PA
|
7,530
|
|
1,574
|
|
13,659
|
|
—
|
|
15,233
|
|
1,991
|
|
5/7/2014
|
2005
|
|||||||||||||||
|
Harbor Town Center:
|
|||||||||||||||||||||||||||||
|
Manitowoc, WI
|
9,750
|
|
3,568
|
|
13,209
|
|
(1,799
|
)
|
14,978
|
|
436
|
|
4/24/2015
|
2005
|
|||||||||||||||
|
Haverty Furniture:
|
|||||||||||||||||||||||||||||
|
Midland, TX
|
(h)
|
|
709
|
|
1,294
|
|
—
|
|
2,003
|
|
332
|
|
8/7/2013
|
2012
|
|||||||||||||||
|
HEB Center:
|
|||||||||||||||||||||||||||||
|
Waxahachie, TX
|
7,000
|
|
3,465
|
|
7,952
|
|
273
|
|
11,690
|
|
1,609
|
|
6/27/2012
|
1997
|
|||||||||||||||
S-5
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
At December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
Hickory Flat Commons:
|
|||||||||||||||||||||||||||||
|
Canton, GA
|
$
|
9,850
|
|
$
|
4,482
|
|
$
|
13,174
|
|
$
|
164
|
|
$
|
17,820
|
|
$
|
2,574
|
|
12/18/2012
|
2008
|
|||||||||
|
Hobby Lobby:
|
|||||||||||||||||||||||||||||
|
Lewisville, TX
|
(h)
|
|
2,184
|
|
8,977
|
|
—
|
|
11,161
|
|
1,511
|
|
11/26/2013
|
2013
|
|||||||||||||||
|
Home Depot:
|
|||||||||||||||||||||||||||||
|
Lincoln, NE
|
(h)
|
|
6,339
|
|
5,937
|
|
—
|
|
12,276
|
|
673
|
|
10/22/2015
|
1993
|
|||||||||||||||
|
North Canton, OH
|
7,234
|
|
2,203
|
|
12,012
|
|
360
|
|
14,575
|
|
2,288
|
|
12/20/2012
|
1998
|
|||||||||||||||
|
Plainwell, MI
|
(h)
|
|
521
|
|
11,905
|
|
(12,426
|
)
|
(i)
|
—
|
|
—
|
|
5/16/2013
|
2002
|
||||||||||||||
|
Inglewood Plaza:
|
|||||||||||||||||||||||||||||
|
Inglewood, CA
|
12,700
|
|
9,880
|
|
14,099
|
|
(23,979
|
)
|
(i)
|
—
|
|
—
|
|
9/12/2014
|
2008
|
||||||||||||||
|
Jewel-Osco
|
|||||||||||||||||||||||||||||
|
Plainfield, IL
|
(h)
|
|
—
|
|
—
|
|
11,151
|
|
11,151
|
|
306
|
|
11/14/2018
|
2001
|
|||||||||||||||
|
Kirklands:
|
|||||||||||||||||||||||||||||
|
Dothan, AL
|
(h)
|
|
486
|
|
946
|
|
—
|
|
1,432
|
|
178
|
|
8/5/2014
|
2014
|
|||||||||||||||
|
Kohl’s:
|
|||||||||||||||||||||||||||||
|
Chartlottesville, VA
|
8,745
|
|
3,929
|
|
12,280
|
|
—
|
|
16,209
|
|
1,739
|
|
7/28/2014
|
2011
|
|||||||||||||||
|
Easton, MD
|
(h)
|
|
2,962
|
|
2,661
|
|
—
|
|
5,623
|
|
269
|
|
12/2/2015
|
1992
|
|||||||||||||||
|
Kroger:
|
|||||||||||||||||||||||||||||
|
Shelton, WA
|
(h)
|
|
1,180
|
|
11,040
|
|
—
|
|
12,220
|
|
1,830
|
|
4/30/2014
|
1994
|
|||||||||||||||
|
Whitehall, OH
|
4,066
|
|
581
|
|
6,628
|
|
224
|
|
7,433
|
|
1,167
|
|
12/16/2013
|
1994
|
|||||||||||||||
|
Kum & Go:
|
|||||||||||||||||||||||||||||
|
Conway, AR
|
(h)
|
|
510
|
|
2,577
|
|
—
|
|
3,087
|
|
363
|
|
6/13/2014
|
2014
|
|||||||||||||||
|
LA Fitness:
|
|||||||||||||||||||||||||||||
|
Bloomfield Township, MI
|
(h)
|
|
2,287
|
|
10,075
|
|
—
|
|
12,362
|
|
1,857
|
|
6/21/2013
|
2008
|
|||||||||||||||
|
Columbus, OH
|
(h)
|
|
1,013
|
|
6,734
|
|
—
|
|
7,747
|
|
873
|
|
4/29/2015
|
2014
|
|||||||||||||||
|
Garland, TX
|
(h)
|
|
2,005
|
|
6,861
|
|
—
|
|
8,866
|
|
1,086
|
|
12/20/2013
|
2013
|
|||||||||||||||
|
Houston, TX
|
(h)
|
|
5,764
|
|
5,994
|
|
—
|
|
11,758
|
|
1,002
|
|
9/30/2013
|
2013
|
|||||||||||||||
|
New Lenox, IL
|
(h)
|
|
1,965
|
|
6,257
|
|
—
|
|
8,222
|
|
660
|
|
12/21/2015
|
2015
|
|||||||||||||||
|
Riverside, CA
|
(h)
|
|
2,557
|
|
9,951
|
|
—
|
|
12,508
|
|
1,708
|
|
8/2/2013
|
2010
|
|||||||||||||||
|
Lafayette Pavilions:
|
|||||||||||||||||||||||||||||
|
Lafayette, IN
|
(h)
|
|
7,632
|
|
42,497
|
|
(50,129
|
)
|
(i)
|
—
|
|
—
|
|
2/6/2015
|
2006
|
||||||||||||||
|
Logan’s Roadhouse:
|
|||||||||||||||||||||||||||||
|
Lancaster, TX
|
(h)
|
|
1,203
|
|
1,620
|
|
—
|
|
2,823
|
|
317
|
|
10/23/2012
|
2011
|
|||||||||||||||
|
Sanford, FL
|
(h)
|
|
1,031
|
|
1,807
|
|
—
|
|
2,838
|
|
355
|
|
10/23/2012
|
1999
|
|||||||||||||||
|
Troy, OH
|
(h)
|
|
992
|
|
1,577
|
|
(1,383
|
)
|
1,186
|
|
67
|
|
10/23/2012
|
2011
|
|||||||||||||||
|
Lord Salisbury Center:
|
|||||||||||||||||||||||||||||
|
Salisbury, MD
|
(h)
|
|
6,949
|
|
12,179
|
|
(19,128
|
)
|
(i)
|
—
|
|
—
|
|
3/11/2016
|
2005
|
||||||||||||||
|
Lowe’s:
|
|||||||||||||||||||||||||||||
|
Adrian, MI
|
(h)
|
|
2,604
|
|
5,036
|
|
30
|
|
7,670
|
|
1,098
|
|
9/27/2013
|
1996
|
|||||||||||||||
|
Alpharetta, GA
|
12,300
|
|
7,979
|
|
9,630
|
|
403
|
|
18,012
|
|
1,305
|
|
5/29/2015
|
1998
|
|||||||||||||||
|
Asheboro, NC
|
(h)
|
|
1,098
|
|
6,722
|
|
—
|
|
7,820
|
|
1,005
|
|
6/23/2014
|
1994
|
|||||||||||||||
|
Cincinnati, OH
|
(h)
|
|
14,092
|
|
—
|
|
—
|
|
14,092
|
|
—
|
|
2/10/2014
|
2001
|
|||||||||||||||
|
Columbia, SC
|
5,964
|
|
3,943
|
|
6,353
|
|
750
|
|
11,046
|
|
1,263
|
|
9/12/2013
|
1994
|
|||||||||||||||
|
Covington, LA
|
5,648
|
|
10,233
|
|
—
|
|
—
|
|
10,233
|
|
—
|
|
8/20/2014
|
2002
|
|||||||||||||||
|
Lilburn, GA
|
12,500
|
|
8,817
|
|
9,380
|
|
385
|
|
18,582
|
|
1,264
|
|
5/29/2015
|
1999
|
|||||||||||||||
|
Mansfield, OH
|
(h)
|
|
873
|
|
8,256
|
|
26
|
|
9,155
|
|
1,262
|
|
6/12/2014
|
1992
|
|||||||||||||||
S-6
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried At
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
Lowe’s (continued):
|
|||||||||||||||||||||||||||||
|
Marietta, GA
|
11,000
|
|
$
|
7,471
|
|
$
|
8,404
|
|
$
|
392
|
|
$
|
16,267
|
|
$
|
1,150
|
|
5/29/2015
|
1997
|
||||||||||
|
Oxford, AL
|
(h)
|
|
1,668
|
|
7,622
|
|
369
|
|
9,659
|
|
1,564
|
|
6/28/2013
|
1999
|
|||||||||||||||
|
Tuscaloosa, AL
|
(h)
|
|
4,908
|
|
4,786
|
|
9
|
|
9,703
|
|
849
|
|
10/29/2013
|
1993
|
|||||||||||||||
|
Woodstock, GA
|
11,200
|
|
7,316
|
|
8,879
|
|
392
|
|
16,587
|
|
1,213
|
|
5/29/2015
|
1997
|
|||||||||||||||
|
Zanesville, OH
|
(h)
|
|
2,161
|
|
8,375
|
|
297
|
|
10,833
|
|
1,392
|
|
12/11/2013
|
1995
|
|||||||||||||||
|
Market Heights Shopping Center:
|
|||||||||||||||||||||||||||||
|
Harker Heights, TX
|
47,000
|
|
12,888
|
|
64,105
|
|
(76,993
|
)
|
(i)
|
—
|
|
—
|
|
11/25/2013
|
2012
|
||||||||||||||
|
Marketplace at the Lakes:
|
|||||||||||||||||||||||||||||
|
West Covina, CA
|
—
|
|
10,020
|
|
8,664
|
|
(18,684
|
)
|
(i)
|
—
|
|
—
|
|
9/30/2013
|
1994
|
||||||||||||||
|
Mattress Firm:
|
|||||||||||||||||||||||||||||
|
Ashtabula, OH
|
(h)
|
|
301
|
|
1,965
|
|
—
|
|
2,266
|
|
215
|
|
3/23/2016
|
2015
|
|||||||||||||||
|
Mattress Firm & Aspen Dental:
|
|||||||||||||||||||||||||||||
|
Vienna, WV
|
$
|
—
|
|
774
|
|
2,466
|
|
—
|
|
3,240
|
|
439
|
|
9/15/2014
|
2014
|
||||||||||||||
|
Mattress Firm & Five Guys:
|
|||||||||||||||||||||||||||||
|
Muskegon, MI
|
(h)
|
|
813
|
|
1,766
|
|
(284
|
)
|
2,295
|
|
—
|
|
8/29/2014
|
2014
|
|||||||||||||||
|
McAlister’s Deli:
|
|||||||||||||||||||||||||||||
|
Lawton, OK
|
(h)
|
|
805
|
|
1,057
|
|
—
|
|
1,862
|
|
165
|
|
5/1/2014
|
2013
|
|||||||||||||||
|
McGowin Park:
|
|||||||||||||||||||||||||||||
|
Mobile, AL
|
42,765
|
|
2,243
|
|
69,357
|
|
—
|
|
71,600
|
|
5,984
|
|
4/26/2017
|
2016
|
|||||||||||||||
|
Melody Mountain:
|
|||||||||||||||||||||||||||||
|
Ashland, KY
|
7,376
|
|
1,286
|
|
9,879
|
|
(1,875
|
)
|
9,290
|
|
—
|
|
9/1/2015
|
2013
|
|||||||||||||||
|
Merchants Tire & Auto:
|
|||||||||||||||||||||||||||||
|
Wake Forest, NC
|
(h)
|
|
782
|
|
1,730
|
|
—
|
|
2,512
|
|
195
|
|
9/1/2015
|
2005
|
|||||||||||||||
|
Mister Car Wash:
|
|||||||||||||||||||||||||||||
|
Athens, AL
|
(h)
|
|
383
|
|
1,150
|
|
—
|
|
1,533
|
|
76
|
|
9/12/2017
|
2008
|
|||||||||||||||
|
Decatur, AL
|
(h)
|
|
257
|
|
559
|
|
—
|
|
816
|
|
40
|
|
9/12/2017
|
2005
|
|||||||||||||||
|
Decatur, AL
|
(h)
|
|
486
|
|
1,253
|
|
—
|
|
1,739
|
|
95
|
|
9/12/2017
|
2014
|
|||||||||||||||
|
Decatur, AL
|
(h)
|
|
359
|
|
1,152
|
|
—
|
|
1,511
|
|
86
|
|
9/12/2017
|
2007
|
|||||||||||||||
|
Hartselle, AL
|
(h)
|
|
360
|
|
569
|
|
—
|
|
929
|
|
42
|
|
9/12/2017
|
2007
|
|||||||||||||||
|
Madison, AL
|
(h)
|
|
562
|
|
1,139
|
|
—
|
|
1,701
|
|
88
|
|
9/12/2017
|
2012
|
|||||||||||||||
|
Morganton Heights:
|
|||||||||||||||||||||||||||||
|
Morganton, NC
|
22,800
|
|
7,032
|
|
29,763
|
|
30
|
|
36,825
|
|
5,295
|
|
4/29/2015
|
2013
|
|||||||||||||||
|
National Tire & Battery:
|
|||||||||||||||||||||||||||||
|
Cedar Hill, TX
|
(h)
|
|
469
|
|
1,951
|
|
—
|
|
2,420
|
|
352
|
|
12/18/2012
|
2006
|
|||||||||||||||
|
Cypress, TX
|
(h)
|
|
910
|
|
2,224
|
|
—
|
|
3,134
|
|
269
|
|
9/1/2015
|
2005
|
|||||||||||||||
|
Flower Mound, TX
|
(h)
|
|
779
|
|
2,449
|
|
—
|
|
3,228
|
|
285
|
|
9/1/2015
|
2005
|
|||||||||||||||
|
Fort Worth, TX
|
(h)
|
|
936
|
|
1,234
|
|
—
|
|
2,170
|
|
209
|
|
8/23/2013
|
2005
|
|||||||||||||||
|
Fort Worth, TX
|
(h)
|
|
730
|
|
2,309
|
|
—
|
|
3,039
|
|
268
|
|
9/1/2015
|
2005
|
|||||||||||||||
|
Frisco, TX
|
(h)
|
|
844
|
|
1,608
|
|
—
|
|
2,452
|
|
271
|
|
8/23/2013
|
2007
|
|||||||||||||||
|
Montgomery, IL
|
(h)
|
|
516
|
|
2,494
|
|
—
|
|
3,010
|
|
452
|
|
1/15/2013
|
2007
|
|||||||||||||||
|
North Richland Hills, TX
|
(h)
|
|
513
|
|
2,579
|
|
—
|
|
3,092
|
|
308
|
|
9/1/2015
|
2005
|
|||||||||||||||
|
Pasadena, TX
|
(h)
|
|
908
|
|
2,307
|
|
—
|
|
3,215
|
|
279
|
|
9/1/2015
|
2005
|
|||||||||||||||
|
Pearland, TX
|
(h)
|
|
1,016
|
|
2,040
|
|
—
|
|
3,056
|
|
242
|
|
9/1/2015
|
2005
|
|||||||||||||||
|
Plano, TX
|
(h)
|
|
1,292
|
|
2,197
|
|
—
|
|
3,489
|
|
260
|
|
9/1/2015
|
2005
|
|||||||||||||||
S-7
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried At
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
National Tire & Battery (continued):
|
|||||||||||||||||||||||||||||
|
Tomball, TX
|
(h)
|
|
$
|
838
|
|
$
|
2,229
|
|
$
|
—
|
|
$
|
3,067
|
|
$
|
262
|
|
9/1/2015
|
2005
|
||||||||||
|
Natural Grocers:
|
|||||||||||||||||||||||||||||
|
Idaho Falls, ID
|
(h)
|
|
833
|
|
2,316
|
|
—
|
|
3,149
|
|
361
|
|
2/14/2014
|
2013
|
|||||||||||||||
|
Nordstrom Rack:
|
|||||||||||||||||||||||||||||
|
Tampa, FL
|
$
|
6,880
|
|
3,371
|
|
6,402
|
|
242
|
|
10,015
|
|
1,543
|
|
4/16/2012
|
2010
|
||||||||||||||
|
North Logan Commons:
|
|||||||||||||||||||||||||||||
|
Loganville, GA
|
—
|
|
4,535
|
|
11,826
|
|
28
|
|
16,389
|
|
1,577
|
|
9/22/2016
|
2009
|
|||||||||||||||
|
O’Reilly Auto Parts:
|
|||||||||||||||||||||||||||||
|
Clayton, GA
|
(h)
|
|
501
|
|
945
|
|
—
|
|
1,446
|
|
97
|
|
1/29/2016
|
2015
|
|||||||||||||||
|
Owensboro Towne Center:
|
|||||||||||||||||||||||||||||
|
Owensboro, KY
|
14,027
|
|
3,807
|
|
16,259
|
|
788
|
|
20,854
|
|
1,968
|
|
1/12/2016
|
1996
|
|||||||||||||||
|
Park Place:
|
|||||||||||||||||||||||||||||
|
Enterprise, AL
|
(h)
|
|
931
|
|
8,595
|
|
(9,526
|
)
|
(i)
|
—
|
|
—
|
|
8/30/2013
|
2012
|
||||||||||||||
|
Parkway Centre South:
|
|||||||||||||||||||||||||||||
|
Grove City, OH
|
14,250
|
|
7,027
|
|
18,223
|
|
(2,843
|
)
|
22,407
|
|
579
|
|
7/15/2016
|
2005
|
|||||||||||||||
|
Pecanland Plaza:
|
|||||||||||||||||||||||||||||
|
Monroe, LA
|
(h)
|
|
2,206
|
|
18,957
|
|
(21,163
|
)
|
(i)
|
—
|
|
—
|
|
10/13/2015
|
2008
|
||||||||||||||
|
PetSmart:
|
|||||||||||||||||||||||||||||
|
Wilkesboro, NC
|
(h)
|
|
447
|
|
1,710
|
|
—
|
|
2,157
|
|
356
|
|
4/13/2012
|
2011
|
|||||||||||||||
|
PetSmart/Old Navy:
|
|||||||||||||||||||||||||||||
|
Reynoldsburg, OH
|
3,658
|
|
1,295
|
|
4,077
|
|
—
|
|
5,372
|
|
859
|
|
12/14/2012
|
2012
|
|||||||||||||||
|
Pick ’n Save:
|
|||||||||||||||||||||||||||||
|
Pewaukee, WI
|
(h)
|
|
1,323
|
|
6,761
|
|
257
|
|
8,341
|
|
1,101
|
|
8/13/2014
|
1999
|
|||||||||||||||
|
Sheboygan, WI
|
(h)
|
|
2,003
|
|
10,695
|
|
—
|
|
12,698
|
|
2,059
|
|
9/6/2012
|
2012
|
|||||||||||||||
|
South Milwaukee, WI
|
(h)
|
|
1,126
|
|
5,706
|
|
—
|
|
6,832
|
|
908
|
|
11/6/2013
|
2005
|
|||||||||||||||
|
Plainfield Plaza:
|
|||||||||||||||||||||||||||||
|
Plainfield, IL
|
(h)
|
|
3,167
|
|
14,788
|
|
(2,385
|
)
|
15,570
|
|
359
|
|
12/3/2015
|
2002
|
|||||||||||||||
|
Plaza San Mateo:
|
|||||||||||||||||||||||||||||
|
Albuquerque, NM
|
$
|
—
|
|
2,867
|
|
11,582
|
|
(4,018
|
)
|
10,431
|
|
54
|
|
5/2/2014
|
2014
|
||||||||||||||
|
Popeyes:
|
|||||||||||||||||||||||||||||
|
Independence, MO
|
(h)
|
|
333
|
|
680
|
|
—
|
|
1,013
|
|
98
|
|
6/27/2014
|
2005
|
|||||||||||||||
|
Poplar Springs Plaza:
|
|||||||||||||||||||||||||||||
|
Duncan, SC
|
5,000
|
|
1,862
|
|
5,277
|
|
478
|
|
7,617
|
|
1,097
|
|
5/24/2013
|
1995
|
|||||||||||||||
|
Raising Cane’s:
|
|||||||||||||||||||||||||||||
|
Phoenix, AZ
|
(h)
|
|
761
|
|
1,972
|
|
(2,733
|
)
|
(i)
|
—
|
|
—
|
|
3/28/2014
|
2011
|
||||||||||||||
|
Rolling Acres Plaza:
|
|||||||||||||||||||||||||||||
|
Lady Lake, FL
|
21,930
|
|
7,540
|
|
26,839
|
|
(4,093
|
)
|
30,286
|
|
644
|
|
9/1/2016
|
2005
|
|||||||||||||||
|
Ross:
|
|||||||||||||||||||||||||||||
|
Fort Worth, TX
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
10/4/2012
|
1977
|
|||||||||||||||
|
Rushmore Crossing:
|
|||||||||||||||||||||||||||||
|
Rapid City, SD
|
22,568
|
|
7,066
|
|
33,019
|
|
(40,085
|
)
|
(i)
|
—
|
|
—
|
|
1/2/2014
|
2012
|
||||||||||||||
|
Rapid City, SD
|
(h)
|
|
883
|
|
4,128
|
|
(5,011
|
)
|
(i)
|
—
|
|
—
|
|
1/2/2014
|
2012
|
||||||||||||||
|
Sherwin-Williams:
|
|||||||||||||||||||||||||||||
|
Macon, GA
|
(h)
|
|
59
|
|
659
|
|
—
|
|
718
|
|
81
|
|
4/16/2015
|
2015
|
|||||||||||||||
S-8
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried At
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
Shippensburg Market Place:
|
|||||||||||||||||||||||||||||
|
Shippensburg, PA
|
(h)
|
|
$
|
1,917
|
|
$
|
9,263
|
|
$
|
(3,530
|
)
|
$
|
7,650
|
|
$
|
—
|
|
9/18/2014
|
2002
|
||||||||||
|
Shoppes at Stroud:
|
|||||||||||||||||||||||||||||
|
Stroud Township, PA
|
(h)
|
|
3,754
|
|
22,614
|
|
(2,220
|
)
|
24,148
|
|
576
|
|
10/29/2014
|
2007
|
|||||||||||||||
|
Southwest Plaza:
|
|||||||||||||||||||||||||||||
|
Springfield, IL
|
(h)
|
|
2,992
|
|
48,935
|
|
(23,580
|
)
|
28,347
|
|
564
|
|
9/18/2014
|
2003
|
|||||||||||||||
|
Spinx:
|
|||||||||||||||||||||||||||||
|
Simpsonville, SC
|
(h)
|
|
591
|
|
969
|
|
—
|
|
1,560
|
|
170
|
|
1/24/2013
|
2012
|
|||||||||||||||
|
Springfield Commons:
|
|||||||||||||||||||||||||||||
|
Springfield, OH
|
$
|
11,250
|
|
3,745
|
|
15,049
|
|
187
|
|
18,981
|
|
2,088
|
|
5/5/2015
|
1995
|
||||||||||||||
|
Sprouts:
|
|||||||||||||||||||||||||||||
|
Bixby, OK
|
(h)
|
|
1,320
|
|
7,117
|
|
—
|
|
8,437
|
|
1,184
|
|
7/26/2013
|
2013
|
|||||||||||||||
|
Stoneridge Village:
|
|||||||||||||||||||||||||||||
|
Jefferson City, MO
|
6,500
|
|
1,830
|
|
9,351
|
|
—
|
|
11,181
|
|
1,606
|
|
6/30/2014
|
2012
|
|||||||||||||||
|
Summerfield Crossing:
|
|||||||||||||||||||||||||||||
|
Riverview, FL
|
7,310
|
|
6,130
|
|
6,753
|
|
(1,159
|
)
|
11,724
|
|
175
|
|
7/12/2013
|
2013
|
|||||||||||||||
|
Sunbelt Rentals:
|
|||||||||||||||||||||||||||||
|
Canton, OH
|
(h)
|
|
147
|
|
1,679
|
|
—
|
|
1,826
|
|
357
|
|
10/24/2013
|
2013
|
|||||||||||||||
|
Sunoco:
|
|||||||||||||||||||||||||||||
|
Palm Beach Gardens, FL
|
(h)
|
|
1,050
|
|
2,667
|
|
—
|
|
3,717
|
|
448
|
|
4/12/2013
|
2009
|
|||||||||||||||
|
Palm City, FL
|
(h)
|
|
667
|
|
1,698
|
|
—
|
|
2,365
|
|
286
|
|
4/12/2013
|
2011
|
|||||||||||||||
|
Palm Springs, FL
|
(h)
|
|
580
|
|
1,907
|
|
—
|
|
2,487
|
|
321
|
|
4/12/2013
|
2011
|
|||||||||||||||
|
Sebastian, FL
|
(h)
|
|
490
|
|
2,128
|
|
—
|
|
2,618
|
|
358
|
|
4/12/2013
|
2009
|
|||||||||||||||
|
Titusville, FL
|
(h)
|
|
626
|
|
2,534
|
|
—
|
|
3,160
|
|
426
|
|
4/12/2013
|
2009
|
|||||||||||||||
|
Sutters Creek:
|
|||||||||||||||||||||||||||||
|
Rocky Mount, NC
|
(h)
|
|
1,458
|
|
2,616
|
|
283
|
|
4,357
|
|
517
|
|
1/31/2014
|
2012
|
|||||||||||||||
|
Target Center:
|
|||||||||||||||||||||||||||||
|
Columbia, SC
|
5,450
|
|
3,234
|
|
7,297
|
|
(710
|
)
|
9,821
|
|
187
|
|
3/31/2014
|
2012
|
|||||||||||||||
|
Terrell Mill Village:
|
|||||||||||||||||||||||||||||
|
Marietta, GA
|
7,500
|
|
3,079
|
|
11,185
|
|
(14,264
|
)
|
(i)
|
—
|
|
—
|
|
1/31/2014
|
2012
|
||||||||||||||
|
TGI Friday’s:
|
|||||||||||||||||||||||||||||
|
Chesapeake, VA
|
(h)
|
|
1,217
|
|
1,388
|
|
—
|
|
2,605
|
|
205
|
|
6/27/2014
|
2003
|
|||||||||||||||
|
Wilmington, DE
|
(h)
|
|
1,685
|
|
969
|
|
—
|
|
2,654
|
|
146
|
|
6/27/2014
|
1991
|
|||||||||||||||
|
The Center at Hobbs Brook:
|
|||||||||||||||||||||||||||||
|
Sturbridge, MA
|
21,500
|
|
11,241
|
|
29,152
|
|
928
|
|
41,321
|
|
3,643
|
|
6/29/2016
|
1999
|
|||||||||||||||
|
The Market at Clifty Crossing:
|
|||||||||||||||||||||||||||||
|
Columbus, IN
|
(h)
|
|
2,669
|
|
16,308
|
|
113
|
|
19,090
|
|
4,049
|
|
10/31/2014
|
1989
|
|||||||||||||||
|
The Market at Polaris:
|
|||||||||||||||||||||||||||||
|
Columbus, OH
|
(h)
|
|
11,828
|
|
41,702
|
|
(32,758
|
)
|
20,772
|
|
460
|
|
12/6/2013
|
2005
|
|||||||||||||||
|
The Marquis:
|
|||||||||||||||||||||||||||||
|
Williamsburg, VA
|
8,556
|
|
2,615
|
|
11,406
|
|
—
|
|
14,021
|
|
2,294
|
|
9/21/2012
|
2007
|
|||||||||||||||
|
The Plant:
|
|||||||||||||||||||||||||||||
|
San Jose, CA
|
123,000
|
|
67,596
|
|
108,203
|
|
450
|
|
176,249
|
|
21,309
|
|
4/15/2013
|
2008
|
|||||||||||||||
|
The Ridge at Turtle Creek:
|
|||||||||||||||||||||||||||||
|
Hattiesburg, MS
|
9,900
|
|
2,749
|
|
12,434
|
|
(3,482
|
)
|
11,701
|
|
—
|
|
2/27/2015
|
2011
|
|||||||||||||||
S-9
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried At
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
Tire Kingdom (continued):
|
|||||||||||||||||||||||||||||
|
Bluffton, SC
|
(h)
|
|
$
|
645
|
|
$
|
1,688
|
|
$
|
—
|
|
$
|
2,333
|
|
$
|
191
|
|
9/1/2015
|
2005
|
||||||||||
|
Summerville, SC
|
(h)
|
|
1,208
|
|
1,233
|
|
—
|
|
2,441
|
|
144
|
|
9/1/2015
|
2005
|
|||||||||||||||
|
Tarpon Springs, FL
|
(h)
|
|
427
|
|
1,458
|
|
(1,885
|
)
|
(i)
|
—
|
|
—
|
|
11/30/2012
|
2003
|
||||||||||||||
|
Tire Kingdom & Starbucks:
|
|||||||||||||||||||||||||||||
|
Mount Pleasant, SC
|
$
|
2,400
|
|
1,291
|
|
3,149
|
|
(502
|
)
|
3,938
|
|
76
|
|
9/1/2015
|
2005
|
||||||||||||||
|
Tractor Supply:
|
|||||||||||||||||||||||||||||
|
Ashland, VA
|
(h)
|
|
500
|
|
2,696
|
|
—
|
|
3,196
|
|
438
|
|
11/22/2013
|
2013
|
|||||||||||||||
|
Augusta, KS
|
(h)
|
|
407
|
|
2,315
|
|
—
|
|
2,722
|
|
368
|
|
1/10/2014
|
2013
|
|||||||||||||||
|
Cambridge, MN
|
(h)
|
|
807
|
|
1,272
|
|
28
|
|
2,107
|
|
298
|
|
5/14/2012
|
2012
|
|||||||||||||||
|
Canon City, CO
|
(h)
|
|
597
|
|
2,527
|
|
—
|
|
3,124
|
|
450
|
|
11/30/2012
|
2012
|
|||||||||||||||
|
Fortuna, CA
|
(h)
|
|
568
|
|
3,819
|
|
—
|
|
4,387
|
|
572
|
|
6/27/2014
|
2014
|
|||||||||||||||
|
Lumberton, NC
|
(h)
|
|
611
|
|
2,007
|
|
—
|
|
2,618
|
|
380
|
|
5/24/2013
|
2013
|
|||||||||||||||
|
Marion, IN
|
(h)
|
|
1,536
|
|
1,099
|
|
—
|
|
2,635
|
|
189
|
|
2/19/2014
|
2004
|
|||||||||||||||
|
Monticello, FL
|
(h)
|
|
448
|
|
1,916
|
|
—
|
|
2,364
|
|
360
|
|
6/20/2013
|
2013
|
|||||||||||||||
|
South Hill, VA
|
(h)
|
|
630
|
|
2,179
|
|
—
|
|
2,809
|
|
386
|
|
6/24/2013
|
2011
|
|||||||||||||||
|
Weaverville, NC
|
(h)
|
|
867
|
|
3,138
|
|
—
|
|
4,005
|
|
538
|
|
9/13/2013
|
2006
|
|||||||||||||||
|
Woodward, OK
|
(h)
|
|
446
|
|
1,973
|
|
—
|
|
2,419
|
|
346
|
|
11/19/2013
|
2013
|
|||||||||||||||
|
Trader Joe’s:
|
|||||||||||||||||||||||||||||
|
Asheville, NC
|
(h)
|
|
2,770
|
|
3,766
|
|
—
|
|
6,536
|
|
641
|
|
10/22/2013
|
2013
|
|||||||||||||||
|
Columbia, SC
|
(h)
|
|
2,308
|
|
2,597
|
|
—
|
|
4,905
|
|
518
|
|
3/28/2013
|
2012
|
|||||||||||||||
|
Wilmington, NC
|
(h)
|
|
2,016
|
|
2,519
|
|
—
|
|
4,535
|
|
546
|
|
6/27/2013
|
2012
|
|||||||||||||||
|
Turfway Crossing:
|
|||||||||||||||||||||||||||||
|
Florence, KY
|
8,480
|
|
2,261
|
|
10,323
|
|
418
|
|
13,002
|
|
1,850
|
|
5/27/2014
|
2002
|
|||||||||||||||
|
Ulta Salon:
|
|||||||||||||||||||||||||||||
|
Albany, GA
|
(h)
|
|
441
|
|
1,757
|
|
—
|
|
2,198
|
|
266
|
|
5/8/2014
|
2013
|
|||||||||||||||
|
Greeley, CO
|
(h)
|
|
596
|
|
2,035
|
|
—
|
|
2,631
|
|
260
|
|
3/31/2015
|
2014
|
|||||||||||||||
|
United Oil:
|
|||||||||||||||||||||||||||||
|
Bellflower, CA
|
(h)
|
|
1,246
|
|
788
|
|
—
|
|
2,034
|
|
105
|
|
9/30/2014
|
2001
|
|||||||||||||||
|
Brea, CA
|
(h)
|
|
2,393
|
|
658
|
|
—
|
|
3,051
|
|
87
|
|
9/30/2014
|
1984
|
|||||||||||||||
|
El Cajon, CA
|
(h)
|
|
1,533
|
|
568
|
|
—
|
|
2,101
|
|
76
|
|
9/30/2014
|
2008
|
|||||||||||||||
|
El Cajon, CA
|
(h)
|
|
1,225
|
|
368
|
|
—
|
|
1,593
|
|
49
|
|
9/30/2014
|
2000
|
|||||||||||||||
|
El Monte, CA
|
(h)
|
|
766
|
|
510
|
|
—
|
|
1,276
|
|
68
|
|
9/30/2014
|
1994
|
|||||||||||||||
|
Escondido, CA
|
(h)
|
|
3,514
|
|
1,062
|
|
—
|
|
4,576
|
|
141
|
|
9/30/2014
|
2002
|
|||||||||||||||
|
Glendale, CA
|
(h)
|
|
4,871
|
|
795
|
|
—
|
|
5,666
|
|
106
|
|
9/30/2014
|
1999
|
|||||||||||||||
|
Inglewood, CA
|
(h)
|
|
1,809
|
|
878
|
|
—
|
|
2,687
|
|
117
|
|
9/30/2014
|
1997
|
|||||||||||||||
|
La Habra, CA
|
(h)
|
|
1,971
|
|
571
|
|
—
|
|
2,542
|
|
76
|
|
9/30/2014
|
2000
|
|||||||||||||||
|
Lawndale, CA
|
(h)
|
|
1,462
|
|
862
|
|
—
|
|
2,324
|
|
115
|
|
9/30/2014
|
2001
|
|||||||||||||||
|
Long Beach, CA
|
(h)
|
|
2,778
|
|
883
|
|
—
|
|
3,661
|
|
117
|
|
9/30/2014
|
1972
|
|||||||||||||||
|
Los Angeles, CA
|
(h)
|
|
2,334
|
|
717
|
|
—
|
|
3,051
|
|
95
|
|
9/30/2014
|
2002
|
|||||||||||||||
|
Los Angeles, CA
|
(h)
|
|
3,552
|
|
1,242
|
|
—
|
|
4,794
|
|
165
|
|
9/30/2014
|
2002
|
|||||||||||||||
|
Los Angeles, CA
|
(h)
|
|
2,745
|
|
669
|
|
—
|
|
3,414
|
|
89
|
|
9/30/2014
|
1998
|
|||||||||||||||
|
Los Angeles, CA
|
(h)
|
|
3,930
|
|
428
|
|
—
|
|
4,358
|
|
57
|
|
9/30/2014
|
2005
|
|||||||||||||||
|
Los Angeles, CA
|
(h)
|
|
1,927
|
|
1,484
|
|
—
|
|
3,411
|
|
197
|
|
9/30/2014
|
2007
|
|||||||||||||||
|
Los Angeles, CA
|
(h)
|
|
2,182
|
|
701
|
|
—
|
|
2,883
|
|
93
|
|
9/30/2014
|
1964
|
|||||||||||||||
|
Madera, CA
|
—
|
|
1,500
|
|
3,804
|
|
—
|
|
5,304
|
|
83
|
|
9/27/2019
|
2018
|
|||||||||||||||
S-10
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried At
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
United Oil (continued):
|
|||||||||||||||||||||||||||||
|
Norco, CA
|
(h)
|
|
$
|
1,852
|
|
$
|
1,489
|
|
$
|
—
|
|
$
|
3,341
|
|
$
|
198
|
|
9/30/2014
|
1995
|
||||||||||
|
Poway, CA
|
(h)
|
|
3,072
|
|
705
|
|
—
|
|
3,777
|
|
94
|
|
9/30/2014
|
1960
|
|||||||||||||||
|
San Diego, CA
|
(h)
|
|
2,977
|
|
1,448
|
|
—
|
|
4,425
|
|
192
|
|
9/30/2014
|
1984
|
|||||||||||||||
|
San Diego, CA
|
(h)
|
|
1,877
|
|
883
|
|
—
|
|
2,760
|
|
117
|
|
9/30/2014
|
2006
|
|||||||||||||||
|
San Diego, CA
|
(h)
|
|
1,824
|
|
382
|
|
—
|
|
2,206
|
|
51
|
|
9/30/2014
|
2006
|
|||||||||||||||
|
Santa Clarita, CA
|
(h)
|
|
4,787
|
|
733
|
|
—
|
|
5,520
|
|
97
|
|
9/30/2014
|
2001
|
|||||||||||||||
|
Sun City, CA
|
(h)
|
|
1,136
|
|
1,421
|
|
—
|
|
2,557
|
|
189
|
|
9/30/2014
|
1984
|
|||||||||||||||
|
Vista, CA
|
(h)
|
|
2,063
|
|
334
|
|
—
|
|
2,397
|
|
44
|
|
9/30/2014
|
1986
|
|||||||||||||||
|
Vista, CA
|
(h)
|
|
2,028
|
|
418
|
|
—
|
|
2,446
|
|
56
|
|
9/30/2014
|
2010
|
|||||||||||||||
|
Whittier, CA
|
(h)
|
|
1,629
|
|
985
|
|
—
|
|
2,614
|
|
131
|
|
9/30/2014
|
1997
|
|||||||||||||||
|
University Marketplace:
|
|||||||||||||||||||||||||||||
|
Marion, IN
|
$
|
—
|
|
850
|
|
6,722
|
|
(1,993
|
)
|
(i)
|
5,579
|
|
1,099
|
|
3/22/2013
|
2012
|
|||||||||||||
|
Urban Air Adventure Park:
|
|||||||||||||||||||||||||||||
|
Waukesha, WI
|
(h)
|
|
3,408
|
|
12,918
|
|
—
|
|
16,326
|
|
1,728
|
|
9/29/2014
|
2007
|
|||||||||||||||
|
Vacant:
|
|||||||||||||||||||||||||||||
|
Appleton, WI
|
(h)
|
|
895
|
|
1,026
|
|
—
|
|
1,921
|
|
128
|
|
11/18/2015
|
2015
|
|||||||||||||||
|
Ballard, UT
|
(h)
|
|
334
|
|
2,865
|
|
(1,392
|
)
|
1,807
|
|
10
|
|
3/4/2016
|
2015
|
|||||||||||||||
|
Broken Bow, NE
|
(h)
|
|
244
|
|
1,733
|
|
—
|
|
1,977
|
|
282
|
|
6/19/2014
|
2007
|
|||||||||||||||
|
Cherokee, IA
|
(h)
|
|
217
|
|
3,326
|
|
(1,911
|
)
|
1,632
|
|
9
|
|
12/23/2015
|
2015
|
|||||||||||||||
|
Cokato, MN
|
(h)
|
|
358
|
|
3,229
|
|
(1,768
|
)
|
1,819
|
|
—
|
|
12/23/2015
|
2015
|
|||||||||||||||
|
Danville, VA
|
(h)
|
|
274
|
|
1,514
|
|
(1,062
|
)
|
726
|
|
18
|
|
4/29/2014
|
2014
|
|||||||||||||||
|
Georgetown, KY
|
—
|
|
1,048
|
|
1,452
|
|
(2,500
|
)
|
(i)
|
—
|
|
—
|
|
6/11/2014
|
2004
|
||||||||||||||
|
Greenville, SC
|
(h)
|
|
672
|
|
1,737
|
|
(1,406
|
)
|
1,003
|
|
39
|
|
6/27/2014
|
2004
|
|||||||||||||||
|
Nampa, ID
|
(h)
|
|
449
|
|
2,213
|
|
(1,482
|
)
|
1,180
|
|
6
|
|
3/31/2014
|
1972
|
|||||||||||||||
|
St. Louis, MO
|
—
|
|
1,254
|
|
3,354
|
|
(4,608
|
)
|
(i)
|
—
|
|
—
|
|
3/28/2014
|
1988
|
||||||||||||||
|
Valentine, NE
|
(h)
|
|
395
|
|
3,549
|
|
(2,403
|
)
|
1,541
|
|
10
|
|
6/30/2014
|
2014
|
|||||||||||||||
|
Ventura Place:
|
|||||||||||||||||||||||||||||
|
Albuquerque, NM
|
(h)
|
|
5,203
|
|
7,998
|
|
(5,065
|
)
|
8,136
|
|
34
|
|
4/29/2015
|
2008
|
|||||||||||||||
|
Village at Hereford Farms:
|
|||||||||||||||||||||||||||||
|
Grovetown, GA
|
—
|
|
1,222
|
|
5,912
|
|
(7,134
|
)
|
(i)
|
—
|
|
—
|
|
9/26/2014
|
2009
|
||||||||||||||
|
Wal-Mart:
|
|||||||||||||||||||||||||||||
|
Anderson, SC
|
(h)
|
|
2,424
|
|
9,719
|
|
—
|
|
12,143
|
|
1,007
|
|
11/5/2015
|
2015
|
|||||||||||||||
|
Florence, SC
|
(h)
|
|
2,013
|
|
9,225
|
|
—
|
|
11,238
|
|
951
|
|
11/5/2015
|
2015
|
|||||||||||||||
|
Perry, GA
|
7,095
|
|
2,270
|
|
11,053
|
|
—
|
|
13,323
|
|
2,051
|
|
6/4/2013
|
1999
|
|||||||||||||||
|
Summerville, SC
|
4,300
|
|
2,410
|
|
2,098
|
|
—
|
|
4,508
|
|
252
|
|
9/18/2015
|
2015
|
|||||||||||||||
|
Tallahassee, FL
|
8,157
|
|
14,823
|
|
—
|
|
—
|
|
14,823
|
|
—
|
|
12/11/2012
|
2008
|
|||||||||||||||
|
York, SC
|
(h)
|
|
1,913
|
|
11,410
|
|
—
|
|
13,323
|
|
2,103
|
|
6/4/2013
|
1998
|
|||||||||||||||
|
Walgreens:
|
|||||||||||||||||||||||||||||
|
Austintown, OH
|
(h)
|
|
637
|
|
4,173
|
|
—
|
|
4,810
|
|
673
|
|
8/19/2013
|
2002
|
|||||||||||||||
|
Chicopee, MA
|
3,894
|
|
2,094
|
|
4,945
|
|
—
|
|
7,039
|
|
648
|
|
10/23/2014
|
2008
|
|||||||||||||||
|
Connelly Springs, NC
|
(h)
|
|
1,349
|
|
3,628
|
|
—
|
|
4,977
|
|
600
|
|
8/27/2013
|
2012
|
|||||||||||||||
|
Danville, VA
|
(h)
|
|
989
|
|
4,547
|
|
—
|
|
5,536
|
|
857
|
|
12/24/2012
|
2012
|
|||||||||||||||
|
Dearborn Heights, MI
|
(h)
|
|
2,236
|
|
3,411
|
|
—
|
|
5,647
|
|
569
|
|
7/9/2013
|
2008
|
|||||||||||||||
|
East Chicago, IN
|
(h)
|
|
331
|
|
5,242
|
|
—
|
|
5,573
|
|
707
|
|
8/8/2014
|
2005
|
|||||||||||||||
|
Fort Madison, IA
|
(h)
|
|
514
|
|
3,723
|
|
—
|
|
4,237
|
|
604
|
|
9/20/2013
|
2008
|
|||||||||||||||
S-11
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
|
Initial Costs to Company
|
Gross Amount at
|
||||||||||||||||||||||||||||
|
Buildings,
|
Total
|
Which Carried At
|
Accumulated
|
||||||||||||||||||||||||||
|
Fixtures and
|
Adjustment
|
December 31, 2019
|
Depreciation
|
Date
|
Date
|
||||||||||||||||||||||||
|
Description (a)
|
Encumbrances
|
Land
|
Improvements
|
to Basis (b)
|
(c) (d) (e)
|
(e) (f) (g)
|
Acquired
|
Constructed
|
|||||||||||||||||||||
|
Walgreens (continued):
|
|||||||||||||||||||||||||||||
|
Hickory, NC
|
(h)
|
|
$
|
1,100
|
|
$
|
4,241
|
|
$
|
—
|
|
$
|
5,341
|
|
$
|
757
|
|
2/28/2013
|
2009
|
||||||||||
|
Huntsville, AL
|
$
|
3,273
|
|
1,931
|
|
2,457
|
|
97
|
|
4,485
|
|
463
|
|
3/15/2013
|
2001
|
||||||||||||||
|
Kannapolis, NC
|
3,966
|
|
1,480
|
|
5,031
|
|
—
|
|
6,511
|
|
847
|
|
6/12/2013
|
2012
|
|||||||||||||||
|
Las Vegas, NV
|
(h)
|
|
2,325
|
|
3,262
|
|
70
|
|
5,657
|
|
539
|
|
9/26/2013
|
1999
|
|||||||||||||||
|
Lawton, OK
|
(h)
|
|
860
|
|
2,539
|
|
106
|
|
3,505
|
|
426
|
|
7/3/2013
|
1998
|
|||||||||||||||
|
Little Rock, AR
|
(h)
|
|
548
|
|
4,676
|
|
—
|
|
5,224
|
|
650
|
|
6/30/2014
|
2011
|
|||||||||||||||
|
Lubbock, TX
|
(h)
|
|
565
|
|
3,257
|
|
103
|
|
3,925
|
|
603
|
|
10/11/2012
|
2000
|
|||||||||||||||
|
Lubbock, TX
|
(h)
|
|
531
|
|
2,951
|
|
102
|
|
3,584
|
|
542
|
|
10/11/2012
|
1998
|
|||||||||||||||
|
Metropolis, IL
|
(h)
|
|
284
|
|
4,991
|
|
—
|
|
5,275
|
|
673
|
|
8/8/2014
|
2009
|
|||||||||||||||
|
Mobile, AL
|
(h)
|
|
1,603
|
|
3,161
|
|
—
|
|
4,764
|
|
508
|
|
11/7/2013
|
2013
|
|||||||||||||||
|
Pine Bluff, AR
|
(h)
|
|
248
|
|
5,229
|
|
—
|
|
5,477
|
|
848
|
|
9/17/2013
|
2012
|
|||||||||||||||
|
Sacramento, CA
|
(h)
|
|
324
|
|
2,669
|
|
—
|
|
2,993
|
|
388
|
|
6/30/2014
|
2008
|
|||||||||||||||
|
Springfield, IL
|
(h)
|
|
830
|
|
3,619
|
|
—
|
|
4,449
|
|
710
|
|
5/14/2012
|
2007
|
|||||||||||||||
|
Suffolk, VA
|
(h)
|
|
1,261
|
|
3,461
|
|
—
|
|
4,722
|
|
713
|
|
5/14/2012
|
2007
|
|||||||||||||||
|
Sun City, AZ
|
(h)
|
|
837
|
|
2,484
|
|
245
|
|
3,566
|
|
379
|
|
5/6/2014
|
2000
|
|||||||||||||||
|
Tarboro, NC
|
(h)
|
|
755
|
|
3,634
|
|
—
|
|
4,389
|
|
501
|
|
8/22/2014
|
2014
|
|||||||||||||||
|
Walgreens/KeyBank:
|
|||||||||||||||||||||||||||||
|
Newburgh, NY
|
5,000
|
|
3,280
|
|
5,441
|
|
—
|
|
8,721
|
|
856
|
|
9/16/2013
|
2010
|
|||||||||||||||
|
Wallace Commons:
|
|||||||||||||||||||||||||||||
|
Salisbury, NC
|
7,590
|
|
3,265
|
|
8,058
|
|
—
|
|
11,323
|
|
1,473
|
|
12/21/2012
|
2009
|
|||||||||||||||
|
Wallace Commons II:
|
|||||||||||||||||||||||||||||
|
Salisbury, NC
|
(h)
|
|
2,231
|
|
8,479
|
|
—
|
|
10,710
|
|
1,400
|
|
2/28/2014
|
2013
|
|||||||||||||||
|
Warrenton Highlands:
|
|||||||||||||||||||||||||||||
|
Warrenton, OR
|
(h)
|
|
2,139
|
|
5,774
|
|
(7,913
|
)
|
(i)
|
—
|
|
—
|
|
5/29/2013
|
2011
|
||||||||||||||
|
Waterford South Park:
|
|||||||||||||||||||||||||||||
|
Clarksville, IN
|
7,200
|
|
2,946
|
|
8,564
|
|
45
|
|
11,555
|
|
1,828
|
|
4/12/2013
|
2006
|
|||||||||||||||
|
Wendy's:
|
|||||||||||||||||||||||||||||
|
Grafton, VA
|
(h)
|
|
539
|
|
894
|
|
—
|
|
1,433
|
|
130
|
|
6/27/2014
|
1985
|
|||||||||||||||
|
Westminster, CO
|
(h)
|
|
596
|
|
1,108
|
|
—
|
|
1,704
|
|
160
|
|
6/27/2014
|
1986
|
|||||||||||||||
|
West Marine:
|
|||||||||||||||||||||||||||||
|
Panama City, FL
|
(h)
|
|
676
|
|
2,219
|
|
—
|
|
2,895
|
|
329
|
|
4/24/2015
|
2014
|
|||||||||||||||
|
Pensacola, FL
|
(h)
|
|
1,107
|
|
3,398
|
|
—
|
|
4,505
|
|
494
|
|
2/27/2015
|
2015
|
|||||||||||||||
|
Westover Market:
|
|||||||||||||||||||||||||||||
|
San Antonio, TX
|
6,200
|
|
2,705
|
|
7,959
|
|
(6,264
|
)
|
4,400
|
|
50
|
|
7/10/2013
|
2013
|
|||||||||||||||
|
Winn-Dixie:
|
|||||||||||||||||||||||||||||
|
Walker, LA
|
(h)
|
|
900
|
|
3,909
|
|
—
|
|
4,809
|
|
557
|
|
6/27/2014
|
1999
|
|||||||||||||||
|
$
|
726,262
|
|
$
|
796,835
|
|
$
|
2,172,782
|
|
$
|
(439,306
|
)
|
$
|
2,530,311
|
|
$
|
243,122
|
|
||||||||||||
____________________________________
(a) As of
December 31, 2019
, the Company owned
334
retail properties,
59
anchored shopping centers and
three
industrial and distribution properties.
(b)
Consists of capital expenditures and real estate development costs, and impairment charges.
(c) The aggregate cost for federal income tax purposes was
$3.1 billion
.
S-12
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)
(d) The following is a reconciliation of total real estate carrying value for the years ended December 31 (in thousands):
|
2019
|
2018
|
2017
|
||||||||||
|
Balance, beginning of period
|
$
|
4,444,041
|
|
$
|
4,564,592
|
|
$
|
4,370,629
|
|
|||
|
Additions
|
||||||||||||
|
Acquisitions
|
5,305
|
|
11,151
|
|
261,660
|
|
||||||
|
Joint Venture Purchased
|
—
|
|
—
|
|
—
|
|
||||||
|
Improvements
|
13,832
|
|
6,135
|
|
13,708
|
|
||||||
|
Adjustment to basis
|
—
|
|
—
|
|
—
|
|
||||||
|
Total additions
|
$
|
19,137
|
|
$
|
17,286
|
|
$
|
275,368
|
|
|||
|
Less: Deductions
|
||||||||||||
|
Cost of real estate sold
|
1,448,915
|
|
61,891
|
|
78,700
|
|
||||||
|
Adjustment to basis
|
—
|
|
—
|
|
—
|
|
||||||
|
Other (including provisions for impairment of real estate assets)
|
483,952
|
|
75,946
|
|
2,705
|
|
||||||
|
Total deductions
|
1,932,867
|
|
137,837
|
|
81,405
|
|
||||||
|
Balance, end of period
|
$
|
2,530,311
|
|
$
|
4,444,041
|
|
$
|
4,564,592
|
|
|||
(e) Gross intangible lease assets of
$313.1 million
and the associated accumulated amortization of
$131.0 million
are not reflected in the table above.
(f) The following is a reconciliation of accumulated depreciation for the years ended December 31 (in thousands):
|
2019
|
2018
|
2017
|
||||||||||
|
Balance, beginning of period
|
$
|
385,245
|
|
$
|
334,476
|
|
$
|
245,425
|
|
|||
|
Additions
|
||||||||||||
|
Acquisitions - Depreciation expense for building, acquisitions costs and tenant improvements acquired
|
73,790
|
|
92,998
|
|
93,170
|
|
||||||
|
Improvements - Depreciation expense for tenant improvements and building equipment
|
2,352
|
|
2,481
|
|
1,679
|
|
||||||
|
Total additions
|
$
|
76,142
|
|
$
|
95,479
|
|
$
|
94,849
|
|
|||
|
Deductions
|
||||||||||||
|
Cost of real estate sold
|
144,820
|
|
6,901
|
|
5,552
|
|
||||||
|
Other (including provisions for impairment of real estate assets)
|
73,445
|
|
37,809
|
|
246
|
|
||||||
|
Total deductions
|
218,265
|
|
44,710
|
|
5,798
|
|
||||||
|
Balance, end of period
|
$
|
243,122
|
|
$
|
385,245
|
|
$
|
334,476
|
|
|||
(g) The Company’s assets are depreciated or amortized using the straight-line method over the useful lives of the assets by class. Generally, buildings are depreciated over
40 years
, site improvements are amortized over
15 years
and tenant improvements are amortized over the remaining life of the lease or the useful life, whichever is shorter.
(h) Property is included in the Credit Facility’s borrowing base. As of
December 31, 2019
, the Company had
$885.0 million
outstanding under the Credit Facility.
|
(i)
|
Asset held for sale or partially held for sale as of December 31, 2019.
|
S-13
CIM REAL ESTATE FINANCE TRUST, INC.
SCHEDULE IV – MORTGAGE LOANS ON REAL ESTATE
(in thousands)
|
Principal
|
||||||||||||||||||||
|
Amount of
|
||||||||||||||||||||
|
Loans Subject
|
||||||||||||||||||||
|
Final
|
Periodic
|
Face
|
Carrying
|
to Delinquent
|
||||||||||||||||
|
Interest
|
Maturity
|
Payment
|
Prior
|
Amount of
|
Amount of
|
Principal or
|
||||||||||||||
|
Description
|
Rate (a)
|
Date
|
Terms (b)
|
Liens
|
Mortgages
|
Mortgages
|
"Interest"
|
|||||||||||||
|
Mezzanine Loans:
|
||||||||||||||||||||
|
Astor — New York, New York
|
L + 13.85%
|
5/9/2021
|
P/I
|
N/A
|
$
|
36,334
|
|
$
|
37,153
|
|
$
|
—
|
|
|||||||
|
88 Lex — New York, New York
|
L + 13.85%
|
5/9/2021
|
P/I
|
N/A
|
23,401
|
|
24,033
|
|
—
|
|
||||||||||
|
90 Lex — New York, New York
|
L + 13.85%
|
5/9/2021
|
P/I
|
N/A
|
14,475
|
|
14,854
|
|
—
|
|
||||||||||
|
Metro — New York, New York
|
L + 13.85%
|
5/9/2021
|
P/I
|
N/A
|
9,505
|
|
9,934
|
|
—
|
|
||||||||||
|
Astor — New York, New York
|
L + 7.00%
|
5/9/2021
|
P/I
|
N/A
|
23,288
|
|
23,566
|
|
—
|
|
||||||||||
|
88 Lex — New York, New York
|
L + 7.00%
|
5/9/2021
|
P/I
|
N/A
|
17,575
|
|
17,780
|
|
—
|
|
||||||||||
|
90 Lex — New York, New York
|
L + 7.00%
|
5/9/2021
|
P/I
|
N/A
|
10,571
|
|
10,695
|
|
—
|
|
||||||||||
|
Metro — New York, New York
|
L + 7.00%
|
5/9/2021
|
P/I
|
N/A
|
7,954
|
|
8,046
|
|
—
|
|
||||||||||
|
Senior Loans:
|
||||||||||||||||||||
|
Lucero — Austin, Texas
|
L + 3.50%
|
10/9/2023
|
P/I
|
N/A
|
40,079
|
|
39,759
|
|
—
|
|
||||||||||
|
Satellite Place — Duluth, Georgia
|
L + 3.15%
|
2/1/2025
|
P/I
|
N/A
|
44,675
|
|
44,080
|
|
—
|
|
||||||||||
|
Yoo on the Park — Atlanta, Georgia
|
L + 2.75%
|
1/9/2024
|
P/I
|
N/A
|
69,500
|
|
68,980
|
|
—
|
|
||||||||||
|
$
|
297,357
|
|
$
|
298,880
|
|
$
|
—
|
|
||||||||||||
____________________________________
(a) L = one month LIBOR rate.
(b) P/I = principal and interest.
The following table reconciles mortgage loans on real estate for the years ended December 31 (in thousands):
|
Year Ended December 31,
|
||||||||
|
2019
|
2018
|
|||||||
|
Balance, beginning of period
|
$
|
89,762
|
|
$
|
—
|
|
||
|
Additions during period:
|
||||||||
|
New loans
|
217,014
|
|
89,295
|
|
||||
|
Capitalized interest
|
8,546
|
|
384
|
|
||||
|
Accretion of fees and other items
|
2,441
|
|
268
|
|
||||
|
Total additions
|
$
|
228,001
|
|
$
|
89,947
|
|
||
|
Less: Deductions during period:
|
||||||||
|
Collections of principal
|
(17,186
|
)
|
—
|
|
||||
|
Deferred fees and other items
|
(1,697
|
)
|
(185
|
)
|
||||
|
Total deductions
|
(18,883
|
)
|
(185
|
)
|
||||
|
Balance, end of period
|
$
|
298,880
|
|
$
|
89,762
|
|
||
S-14
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsNote 3 Fair Value MeasurementsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesNote 13 Stockholders EquityNote 14 Income TaxesItem 6. Selected Financial DataNote 2 Summary Of Significant Accounting PoliciesItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsNote 4 Real Estate AssetsNote 11 Related-party Transactions and ArrangementsNote 8 Credit Facilities and Notes PayableItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesItem 16. Form 10-k SummaryNote 1 Organization and BusinessNote 10 Commitments and ContingenciesNote 15 LeasesNote 17 Subsequent EventsNote 5 Intangible Lease Assets and LiabilitiesNote 6 Loans Held-for-investmentNote 7 Derivative Instruments and Hedging ActivitiesNote 9 Supplemental Cash Flow DisclosuresNote 12 Economic DependencyNote 16 Quarterly Results (unaudited)