Rich Uncles Real Estate Investment Trust I filed on May 15 10-Q

Rich Uncles Real Estate Investment Trust I filed 10-Q with SEC. Read ‘s full filing at 000167275419000080.

The Company was formed primarily to invest in single-tenant income-producing properties located in California and that are leased to creditworthy tenants under long-term net leases, however, the Company may invest up to 20% of the net proceeds of its offering in properties located outside of California. The Company’s goal is to generate current income for investors and long-term capital appreciation in the value of its properties.

The Company holds its investments directly and/or through special purpose wholly-owned limited liability companies or other subsidiaries. As of March 31, 2019, the Company held a 70.14% interest in one property subject to a tenancy-in-common agreement. On May 9, 2019, the Company purchased the remaining 29.86% interest in this property, resulting in full 100% ownership.

In March 2016, the Company entered into a tenancy-in-common agreement related to and sold an undivided 29.86% interest in the Chevron Gas Station located in Roseville, CA for $1,000,000. The purchaser had the right to require the Company to repurchase their interest in the property during the period from March 1, 2018 through March 1, 2019. Therefore, the sale did not qualify for sales recognition under ASC 360 for financial reporting purposes and the transaction was accounted for as a financing transaction. The proceeds received from the purchaser were recorded as a sales deposit liability and the payments to the purchaser for their share of the property’s operations were recorded as interest expense.

Following the purchaser’s notice of exercise, on February 21, 2019, the Company and the owner of the 29.86% tenant-in-common interest in the property entered into a purchase and sale agreement whereby the Company agreed to acquire the 29.86% tenant-in-common interest in the property for $1,000,000 by no later than May 9, 2019. The transaction was completed on May 9, 2019 and the Company now owns 100% of this Roseville, CA property.

The Company had previously determined that due to the decline in expected rental rates and difficulties re-leasing the 5,660 square feet of space at the Antioch, California property, it was necessary to record an impairment charge of $862,190 as of June 30, 2018. The impairment charge was less than 1% of the Company’s total investments in real estate property, based on the estimated fair value of the real estate which approximated the then outstanding balance of the existing mortgage loan. Having not reached any agreement with the lender when the August 2018 mortgage payment came due, the Company’s special purpose subsidiary defaulted on the mortgage loan. The book value of the Antioch property after the impairment charge was less than 2.0% of the Company’s total investments in real estate property.

The Company’s independent trust managers and the board of trust managers have set the Company’s maximum leverage ratio at 50%. Factors considered in setting the leverage ratio include the moderate level of 50% leverage, current economic and market conditions, the relative cost of debt and equity capital, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors. As of March 31, 2019, the Company’s leverage ratio was approximately 44%.

During the Company’s offering of its common stock which was terminated in July 2016, the Company was obligated to reimburse the Advisor or its affiliates for organizational and offering expenses paid by the Advisor on behalf of the Company. The Company reimburses the Advisor for organizational and offering expenses up to 3.0% of gross offering proceeds. As of March 31, 2019, the Advisor had incurred organizational and offering expenses of $2,796,198, which amount was less than the 3.0% of the gross offering proceeds received by the Company as of March 31, 2019 and, therefore, the Company has reimbursed the Advisor for all of these organization and offering expenses.

The Company pays the Advisor an acquisition fee in an amount equal to 2.0% of Company’s contract purchase price of its properties. The total of all acquisition fees and acquisition costs must be reasonable and not exceed 6.0% of the contract price of the properties. However, a majority of the trust managers (including a majority of the independent trust managers) not otherwise interested in an acquisition transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to the Company. The Company expects to pay a $20,000 acquisition fee in connection with the purchase of the 29.86% tenant-in-common interest in the Chevron property described in Note 5.

The Company pays the Advisor as compensation for the advisory services rendered, a monthly fee in an amount equal to 0.05% of the Company’s Average Invested Assets, as defined (the “Asset Management Fee”), as of the end of the preceding month. The Asset Management Fee is payable monthly on the last business day of such month. The Asset Management Fee, which must be reasonable in the determination of the Company’s independent trust managers at least annually, may or may not be taken, in whole or in part as to any year, in the sole discretion of the Advisor. All or any portion of the Asset Management Fee not paid as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine. See Note 11 for a discussion of the deferral of asset management fees in April 2019.

Other than with respect to any mortgage or other financing related to a property that is concurrent with its acquisition, if the Advisor or an affiliate provides a substantial amount of the services (as determined by a majority of the Company’s independent trust managers) in connection with the post-acquisition financing or refinancing of any debt that the Company obtains relative to a property, then the Company will pay to the Advisor or such affiliate a financing coordination fee equal to 1.0% of the amount of such financing. The Company expects to pay a $30,000 financing fee in connection with the $3,000,000 bridge loan described in Note 11.

If the Advisor or any of its affiliates provides a substantial amount of the property management services (as determined by a majority of the Company’s independent trust managers) for the Company’s properties, then the Company pays the Advisor or such affiliate a property management fee equal to 1.5% of gross revenues from the properties managed. The Company also will reimburse the Advisor and any of its affiliates for property-level expenses that such person pays or incurs on behalf of the Company, including salaries, bonuses and benefits of persons employed by such person, except for the salaries, bonuses and benefits of persons who also serve as one of the Company’s executive officers or as an executive officer of such person. The Advisor or its affiliate may subcontract the performance of its property management duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracts for these services. See Note 11 for a discussion of the deferral of property management fees in April 2019.

For substantial assistance in connection with the sale of properties, the Company pays the Advisor or one of its affiliates 3.0% of the contract sales price, as defined, of each property sold; provided, however, that if, in connection with such disposition, commissions are paid to third parties unaffiliated with the Company’s Advisor or its affiliates, the disposition fees paid to its Advisor, its affiliates and unaffiliated third parties may not exceed the lesser of the competitive real estate commission or 6.0% of the contract sales price.

If the Advisor or any of its affiliates provides a substantial amount of the services (as determined by a majority of the Company’s independent trust managers) in connection with the Company’s leasing of its properties to unaffiliated third parties, then the Company shall pay to the Advisor or such affiliate leasing commissions equal to 6.0% of the rents due pursuant to such lease for the first ten years of the lease term; provided, however (i) if the term of the lease is less than ten years, such commission percentage will apply to the full term of the lease and (ii) any rents due under a renewal of a lease of an existing tenant upon expiration of the initial lease agreement (including any extensions provided for thereunder) shall accrue a commission of 3.0% in lieu of the aforementioned 6.0% commission.

Total operating expenses of the Company are limited to the greater of 2% of average invested assets or 25% of net income for the four most recently completed fiscal quarters (the “2%/25% Limitation”). If the Company exceeds the 2%/25% Limitation, the Advisor must reimburse the Company the amount by which the aggregate total operating expenses exceeds the limitation, or the Company must obtain a waiver from the Company’s conflicts committee, which is comprised of its independent trust managers. For purposes of determining the 2%/25% Limitation amount, “average invested assets” means the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, reserves for bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company, as determined by GAAP, that are in any way related to the Company’s operation including Asset Management Fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based upon increases in net asset value (“NAV”) per share; (f) acquisition fees and acquisition expenses (including expenses, relating to potential investments that the Company does not close); and (h) disposition fees on the sale of real property and other expenses connected with the acquisition, disposition and ownership of real estate interests or other property (other than disposition fees on the sale of assets other than real property), including the costs of insurance premiums, legal services, maintenance, repair and improvement of real property.

Operating expenses for the four fiscal quarters ended March 31, 2019 did not exceed the 2%/25% Limitation.

The investment in the Company by NNN REIT totaled 403,980 shares, or an approximate 4.80% ownership interest as of March 31, 2019 and December 31, 2018.

On April 24, 2019, the Company obtained a short-term loan from Mr. Wirta, the Company’s Chairman of the Board and borrowed $200,000 at an interest rate of 10% as described in Note 11. This loan was repaid, along with accrued interest of $768 on May 8, 2019.

On April 23, 2019, the Company’s Board declared dividends based on daily record dates for the period January 1, 2019 through March 31, 2019 at a rate of $0.00208333 per share per day, or $1,576,388, on the outstanding shares of the Company’s common stock, which the Company paid in cash on April 24, 2019. During April 2019, in order to fund the increase in cash dividends resulting from the suspension of the Company’s dividend reinvestment program, the Company’s Advisor deferred $301,000 of asset management and property management fees (January to April 2019) and on April 24, 2019 the Company borrowed $200,000 at an interest rate of 10% from Mr. Wirta, the Company’s Chairman of the Board. On May 14, 2019, following completion of the bridge loan financing described below, the Company paid the deferred fees owed to the Advisor and on May 8, 2019 repaid the loan from Mr. Wirta, along with accrued interest of $768.

On May 7, 2019, a special purpose subsidiary of the Company entered into a mortgage loan agreement secured by the Walgreens property and borrowed $3,000,000 to provide additional liquidity to the Company. The loan bears interest at a floating rate of 30-day LIBOR plus 500 basis points with a floor rate of 7.5% payable monthly in arrears. The loan includes yield maintenance provisions during the first six months and is required to be repaid on or before May 6, 2020 along with an exit fee equal to 15 days of interest on the principal balance being repaid, or approximately $9,375 at the current interest rate. The Company paid a $45,000 origination fee and a $30,000 brokerage fee to the lender and a third-party mortgage broker, respectively, both of which were paid from the loan proceeds along with the related legal, due diligence and closing costs. The Company expects to pay a $30,000 financing fee to the Advisor in connection with the $3,000,000 bridge loan.

We are a publicly registered, non-exchange traded company dedicated to providing shareholders with dependable quarterly dividends. We believe we are qualified and operate as a REIT, which requires us to annually distribute at least 90% of our taxable income (excluding net capital gains) in the form of dividends to our shareholders. Our quarterly dividends are supported by the cash flow generated from real estate we own under long-term, net lease agreements with local, regional, and national commercial tenants.

Rental income, including tenant reimbursements, was $3,288,644 and $3,231,218 for the three months ended March 31, 2019 and 2018, respectively. The slight increase of $57,426 or 1.8% quarter-over-quarter was primarily due to increase in tenant reimbursements resulting from higher common area maintenance reimbursement rates and increase in property taxes, offset in part by lower rental income due to the foreclosure and sale of the Antioch California property on March 13, 2019 and (2) lower lease payments negotiated by a tenant that went through a restructuring during the second quarter of 2018.

Asset management fees to affiliate were $291,779 and $285,535 for the three months ended March 31, 2019 and 2018, respectively. The asset management fees are equal to 0.6% per annum of our Average Invested Assets. The minor increase is due to an increase in Invested Assets from property improvements.

General and administrative expenses were $371,219 and $263,364 for the three months ended March 31, 2019 and 2018, respectively. The overall increase of $107,855 or 41.0% quarter-over-quarter primarily reflects higher professional fees incurred due to additional legal fees, and the cost of trust managers and officers’ insurance incurred in the current year quarter compared to the prior year quarter and the timing of fees for annual valuation (NAV) consultation.

Depreciation and amortization expense was $1,442,060 and $1,448,244 for the three months ended March 31, 2019 and 2018, respectively. The decrease of $6,184 or 0.4% quarter-over-quarter was primarily due to the reduction in depreciation expense related to the Antioch, California property after the second quarter of 2018. Our second quarter 2018 impairment charge reduced our cost-basis for depreciating such property (see Note 6 of our unaudited condensed consolidated financial statements for additional information). The purchase price of the acquired properties is allocated to tangible assets, identifiable intangibles and assumed liabilities. The tangible assets and identifiable intangibles are depreciated or amortized over their estimated useful lives.

Interest expense was $863,173 and $484,873 for the three months ended March 31, 2019 and 2018, respectively. The increase of $378,300 or 78.0% quarter-over-quarter was primarily due to a loss on interest rate swap valuations of $95,714 in the first quarter of 2019 compared to a gain of $(229,106) in the first quarter of 2018. Interest expense also increased by $54,277 primarily due to penalty interest charged on the Antioch, California property which was in default until its foreclosure sale in March 2019.

Property expenses were $565,865 and $631,138 for the three months ended March 31, 2019 and 2018, respectively. The decrease of $65,273 or 10.3% quarter-over quarter was primarily due to the provision for doubtful accounts in the prior year quarter, none of which were incurred in the current year quarter. In addition, repairs and maintenance, utilities and insurance decreased during the current year quarter.

We were obligated to reimburse our Advisor for organizational and offering costs related to the offering paid by them on our behalf provided such reimbursement would not exceed 3.0% of gross offering proceeds raised in the offering as of the date of the reimbursement.

As of March 31, 2019, we had not incurred any organizational and offering costs related to the offering as all such costs had been funded by our Advisor. As a result, these organizational and offering costs related to the offering are not recorded in our condensed consolidated financial statements as of March 31, 2019 other than to the extent of 3% of the gross offering proceeds. Through March 31, 2019, our Advisor had incurred organizational and offering costs on our behalf in connection with our offering of $2,796,198. Through March 31, 2019, we had recorded and paid $2,796,198 of organizational and offering costs, which was our maximum liability.

We elected to be taxed as a REIT for U.S. federal income tax purposes under Section 856 through 860 of the Internal Revenue Code of 1986, as amended beginning with the taxable year ended December 31, 2014. To qualify and maintain our status as a REIT, we must meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our shareholders and recordkeeping. As a REIT, we generally would not be subject to federal income tax on taxable income that we distribute to our shareholders 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).

Receive News & Ratings Via Email - Enter your email address below to receive a concise daily summary of the latest news and analysts' ratings with our FREE daily email newsletter.