The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q, or this Quarterly Report. The following discussion should also be read in conjunction with our audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . We further invite you to visit our website, www.rreefpropertytrust.com, where we routinely post additional information about our Company, such as, without limitation, our daily net asset value, or NAV, per share. The contents of our website are not incorporated by reference. The terms "we," "us," "our" and the "Company" refer toRREEF Property Trust, Inc. and its subsidiaries. The NAV per share is published daily via NASDAQ's Mutual Fund Quotation System under the symbols ZRPTAX, ZRPTIX, ZRPTTX and ZRPTDX for our Class A shares, Class I shares, Class T shares and Class D shares, respectively. The NAV per share for each of our Class M-I, Class N, Class S and Class T2 Shares will be available on the Company's website and via NASDAQ's Mutual Fund Quotation System once the first sale of shares for that particular share class has occurred.
All dollar amounts included in this Quarterly Report on Form 10-Q are presented in thousands, except for per share data.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, other than
historical facts, may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, or Section 21E of the Securities Exchange Act of 1934, as
amended, or 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 guaranty of our performance in future
periods. Such forward-looking statements can generally be identified by our use
of forward-looking terminology such as "may," "will," "would," "could,"
"should," "expect," "intend," "anticipate," "estimate," "believe," "continue,"
"plan," "potential," "predict" or other similar words.
The forward-looking statements included herein are based upon our current
expectations, plans, estimates, assumptions and beliefs that involve numerous
risks and uncertainties. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, our actual results and
performance could differ materially from those set forth in the forward-looking
statements. Factors which could have a material adverse effect on our operations
and future prospects include, but are not limited to:
•our ability to raise capital and effectively deploy the proceeds;
•changes in economic conditions generally and the real estate and securities
markets specifically;
•legislative or regulatory changes (including changes to the laws governing the
taxation of REITs);
•the effect of financial leverage, including changes in interest rates,
availability of credit, loss of flexibility due to negative and affirmative
covenants, refinancing risk at maturity and generally the increased risk of loss
if our investments fail to perform as expected;
•our ability to access sources of liquidity when we have the need to fund
redemptions of common stock in excess of the proceeds from the sales of shares
of our common stock in our continuous offering and the consequential risk that
we may not have the resources to satisfy redemption requests;
•the impact of the coronavirus pandemic on our tenants, portfolio and
operations; and
38
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•changes to accounting principles generally accepted in
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 Quarterly Report on Form 10-Q is filed with theSecurities and Exchange Commission , or theSEC . We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q. 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 forward-looking statements should be read in light of the risk factors identified in "Risk Factors" of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Overview
We are aMaryland corporation formed onFebruary 7, 2012 , our inception date, to invest in a diversified portfolio of high quality, income-producing commercial real estate properties and other real estate-related assets. We are an externally advised, perpetual-life corporation that believes that it has operated in such a manner to qualify to be taxed as a REIT for federal income tax purposes beginning with the taxable year endedDecember 31, 2013 , when we first elected REIT status. We invest primarily in the office, industrial, retail and apartment sectors of the commercial real estate industry inthe United States . We may also invest in real estate-related assets, which include common and preferred stock of publicly-traded REITs and other real estate companies, which we refer to as "real estate equity securities," and debt investments backed by real estate, which we refer to as "real estate loans." We hold our properties, real estate-related assets and other investments throughRREEF Property Operating Partnership, LP , or our operating partnership, of which we are the sole general partner. Our board of directors will at all times have ultimate oversight and policy-making authority over us, including responsibility for governance, financial controls, compliance and disclosure. Pursuant to our advisory agreement, our board has delegated toRREEF America L.L.C. , or our advisor, authority to manage our day-to-day business in accordance with our investment objectives, strategy, guidelines, policies and limitations. Our advisory agreement is renewable annually upon approval by our board of directors, including a majority of the independent board members. The current term expiresApril 21, 2021 . Our initial public offering commenced onJanuary 3, 2013 , pursuant to our Registration Statement on Form S-11 (File No. 333-180356) under which we offered up to$2,500,000 of shares of our common stock in any combination of Class A and Class I shares, which we refer to as the initial offering. OnMay 30, 2013 , upon receipt of purchase orders from our sponsor for$10,000 of Class I shares of our common stock and the release to us of funds in the escrow account, we commenced operations. Our initial offering terminated onJuly 1, 2016 . We raised a total of$102,831 in proceeds from our initial offering. OnJanuary 15, 2016 , we filed articles supplementary to our articles of incorporation to add a newly-designated Class D common stock,$0.01 par value per share, or our Class D shares. OnJanuary 20, 2016 , we commenced a private offering of up to a maximum of$350,000 in Class D shares. OnJuly 12, 2016 , theSEC declared effective our Registration Statement on Form S-11 (File No. 333-208751) for our follow-on public offering for up to$2,300,000 of shares of our common stock in any combination of our Class A, Class I, Class T and Class N shares, which we refer to as our follow-on offering. Our follow-on offering included up to$2,100,000 in shares in our primary offering and up to$200,000 in shares in our distribution reinvestment plan. Our follow-on offering terminated onJanuary 8, 2020 . We raised a total of$132,994 in proceeds from our follow-on offering. OnJanuary 8, 2020 , theSEC declared effective our Registration Statement on Form S-11 (File No. 333-232425) for our second follow-on public offering for up to$2,300,000 of shares of our common stock in any combination of our Class A, Class I, Class N and Class T shares, which we refer to as our second follow-on offering. Our second follow-on offering includes up to$2,100,000 in shares in our primary offering and up to$200,000 in 39 -------------------------------------------------------------------------------- Table of Contents shares in our distribution reinvestment plan. OnApril 22, 2020 , we filed articles supplementary to our articles of incorporation to add newly-designated Class M-I common stock,$0.01 par value per share, Class S common stock,$0.01 par value per share, Class T2 common stock,$0.01 par value per share and Class Z common stock,$0.01 par value per share. Class M-I shares, Class S shares and Class T2 shares are available for sale in our second follow-on offering. Class Z shares are only expected to be offered to RREEF America in a private offering. We have engagedDWS Distributors, Inc. , an affiliate of our advisor, to serve as our dealer manager for our second follow-on offering pursuant to our dealer manager agreement. Our initial offering, follow-on offering and second follow-on offering are each referred to as an offering.
Coronavirus Pandemic
The coronavirus (COVID-19) pandemic has had, and is expected to continue to have, a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. We are closely monitoring the impact of the coronavirus pandemic on all aspects of our investments and operations, including how it will impact our tenants and business partners. While we did not incur significant disruptions in our operations from the coronavirus during the six months endedJune 30, 2020 , the extent to which the coronavirus impacts our investments and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. These developments include the duration of the outbreak, the impact of government stimulus, new information that may emerge concerning the severity of the coronavirus, and actions taken by federal, state and local agencies as well as the general public to contain the coronavirus or treat its impact, among others. Our real estate property portfolio is diversified across the four primary sectors of commercial real estate: office, industrial, retail and apartment. Among these four sectors, retail is widely considered to be the sector that will be most impacted by the coronavirus pandemic. We collected 100% of our contractual rental revenue for the three months endedMarch 31, 2020 and 94% of our contractual rental revenue for the three months endedJune 30, 2020 . Approximately 98% of contractual rental revenue was collected for the month ofJuly 2020 . The retail properties we own are necessity-based properties, as they are grocery-anchored and contain a number of tenants that are considered essential. As of the end ofJuly 2020 , the store of one of our 44 retail tenants was closed. This tenant comprises approximately 0.1% of our annualized contractual rental revenue for our entire property portfolio. We and our independent valuation advisor are closely monitoring our rent collections, market transactions and tenant situations with respect to our property investments for purposes of assessing any potential valuation change to our properties. Our independent valuation advisor and certain independent third-party appraisal firms engaged by our advisor have included additional cautionary language in their respective second quarter 2020 reports related to the uncertain impact of the coronavirus pandemic on the property values. We have received rent relief requests from various tenants, most often in the form of requests for rent deferrals, as a result of the coronavirus. We are evaluating each rent relief request on an individual basis, considering a number of factors, and we are encouraging our tenants to apply for federal aid when available. Not all tenant requests will ultimately result in concessions, nor are we forgoing our contractual rights under our lease agreements. As ofJune 30, 2020 , we had entered into one rent deferral agreement and applied the FASB's recently issued practical expedient to not treat it as a lease modification. As such, the rent deferred remains as lease revenue for the three months endedJune 30, 2020 and amounts to approximately 0.6% of our annualized contractual rental revenue for our entire property portfolio. Subsequent toJune 30, 2020 , we entered into three agreements which included deferral of rent. The total amount of rent deferred is approximately 0.4% of our annualized contractual rental revenue for our entire property portfolio. For all four of these rent deferrals, the amount deferred is scheduled to be fully repaid within the next 12 months. Our real estate securities portfolio was significantly negatively impacted duringMarch 2020 as the financial markets saw considerable volatility as the coronavirus pandemic expanded and worsened. While the value of our real estate securities portfolio recovered the majority of its March losses during the three months endedJune 30 , 40 -------------------------------------------------------------------------------- Table of Contents 2020, there remains considerable uncertainty in the financial markets. The Company intends to maintain sufficient liquidity at all times to satisfy its operational needs and the maximum potential quarterly redemptions under its share redemption plan. The Company's real estate securities portfolio is comprised entirely of common stock of publicly traded REITs and is viewed as part of the Company's available liquidity that could be quickly converted to cash should the Company decide to do so. In addition, the Company may consider various options, including reducing its distributions or limiting its share redemption program.
We refer readers to Part II, Item 1A, Risk Factors, in our quarterly report for
the period ended
Portfolio Information
Real Estate Property Portfolio
As ofJune 30, 2020 , we owned 14 properties diversified across geography and sector, including one medical office property and one student housing property (a subset of apartment). Excluding The Flats at Carrs Hill, our apartment property with leases that roll over every year, as ofJune 30, 2020 , our weighted average remaining lease term for active leases was 5.2 years. The following table sets forth certain additional information about the properties we owned as ofJune 30, 2020 : Property Location Rentable Square Feet Number of Leases/Units Leased(1) Office Property Heritage Parkway(2) Woodridge, IL 94,233 1 100.0 % Anaheim Hills Office Plaza Anaheim, CA 73,892 6 73.7 Loudoun Gateway Sterling, VA 102,015 1 100.0 Allied Drive Dedham, MA 64,127 2 100.0 Office Total 334,267 10 93.9 Retail Property Wallingford Plaza(3) Seattle, WA 30,761 5 100.0 Terra Nova Plaza Chula Vista, CA 96,114 2 100.0 Elston Plaza(4) Chicago, IL 92,806 11 95.5Providence Square (5) Marietta, GA 222,805 26 99.3 Retail Total 442,486 44 98.6 Industrial Property Commerce Corner Logan Township, NJ 259,910 2 100.0 Miami Industrial Palmetto Lakes Miami Lakes, FL 182,919 1 100.0 Hialeah I Miami, FL 57,000 1 100.0 Hialeah II Miami, FL 50,000 1 100.0 Seattle East Industrial Redmond, WA 210,321 1 100.0 Industrial Total 760,150 6 100.0 Apartment Property The Flats at Carrs Hill Athens, GA 135,864 138 100.0 Apartment Total 135,864 138 100.0 Grand total 1,672,767 60/138 98.1 % 41
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(1) Leased percentage is based on executed leases as ofJune 30, 2020 , is calculated based on square footage for a single property, and is weighted by relative property value when calculated for more than one property together.Anaheim Hills Office Plaza has one executed lease for approximately 3,300 square feet that has not yet commenced pending completion of specified tenant improvements. Commencement is currently expected late in the third quarter of 2020. (2)Heritage Parkway is 100% occupied by Allstate. InApril 2020 , we executed a lease amendment with Allstate that extended the lease maturity date toMay 31, 2026 . Allstate has a termination option effective as ofMay 31, 2024 which is exercisable at their discretion upon satisfaction of certain conditions and subject to payment of the applicable early termination fee. (3)Wallingford Plaza is ground floor retail plus two floors of office space. (4) The total square footage forElston Plaza includes a freestanding bank branch of 4,860 square feet that is subject to a ground lease to a single tenant. (5) The total square footage forProvidence Square includes a freestanding restaurant of 5,779 square feet that is subject to a ground lease to a single tenant.
Real Estate Equity Securities Portfolio
As ofJune 30, 2020 , our real estate equity securities portfolio consisted of publicly-traded common stock of 32 REITs with a value of$17,988 . We believe that investing a portion of our proceeds from our offerings into a diversified portfolio of common and preferred shares of REITs and other real estate operating companies will provide the overall portfolio some flexibility with near-term liquidity as well as potentially enhance our NAV over a longer period. The portfolio is regularly reviewed and evaluated to determine whether the marketable securities held at any time continue to serve their original intended purposes.
The following chart summarizes our marketable securities by property type as of
[[Image Removed: rpt-20200630_g1.jpg]]
As of
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Security Sector Percent of Securities Portfolio
Prologis, Inc. Industrial 11.2 %
Equinix, Inc. Data Centers 11.1
Welltower, Inc. Healthcare 5.9
Alexandria Real Estate Equities, Inc. Office 5.0
Mid-America Apartment Communities, Inc. Apartment 4.9
Invitation Homes, Inc. Apartment 4.3
Digital Realty Trust, Inc. Data Centers 3.8
Equity Lifestyle Properties Apartment 3.4
Essex Property Trust, Inc. Apartment 3.3
Eastgroup Properties, Inc. Industrial 3.2
Total 56.1 %
Market Outlook
The impact of COVID-19 is generally not yet visible in industry statistics.
According to the National Council of Real Estate Investment Fiduciaries in
March, or NCREIF, in March 2020 , in the first quarter of 2020, vacancy rates
(6.2%) were near all-time lows and net operating income grew by more than 4%.
Within the REIT universe, rent collections in June were within 5% of normal
levels for apartment, office, and industrial properties, although they were off
by 40% at shopping centers, as reported by the National Association of Real
Estate Investment Trusts , or NAREIT, from June 2020 . Nevertheless, we believe
that the recession that took hold in March will manifest in rising vacancies and
falling rents in the second half of 2020.
While the recession may prove transitory, its severity will, in our view, exact
a toll on real estate fundamentals. While it appears that loan and rent
forbearance have staved off personal and business bankruptcies, we believe that
these will materialize in the second half of the year as emergency measures
unwind, which in our view may cause some tenants to default on their leases.
Reduced (albeit improving) profitability and employment may also depress leasing
activity. Further, we believe the pipeline of buildings already under
construction will compete for a limited pool of tenants. Overall, we expect that
rents will slide by 7% through 2021, with significant variation by sector and
market. Yet this would represent a victory of sorts: rents declined 18% during
the Global Financial Crisis, or GFC, according to CBRE Economic Analysis in June
2020 . The differences this time as we see it are threefold. First, while this
recession is deeper, the recovery may also be swifter, courtesy of an
unprecedented infusion of fiscal and monetary stimulus. Second, vacancy rates
were lower coming into this recession, so even a significant increase would
leave them below peak GFC levels, according to CBRE Economic Analysis in June
2020 . Third, new construction is generally more constrained (about 25% lower
relative to Gross Domestic Product, or GDP, as reported by the Bureau of
Economic Analysis in March 2020 ).
We are optimistic about prospects for rent growth once the COVID-19 crisis
passes. We believe that construction starts will plunge this year, due to
logistical constraints, restrictive financing, and uncertainty around future
demand (a June Federal Reserve survey in June 2020 indicated that a net 52% of
banks were tightening lending standards on construction loans, the highest level
since the GFC). Coupled with an improving economy, this should drive vacancies
lower, and rents higher, beginning in late 2021. Yet the recovery will not be
uniform: we believe that industrial and apartment buildings will be the first to
revive, likely next summer, followed by office and retail properties in 2022.
Taking a longer view, we believe that real estate is positioned to perform well
on a relative basis. Well after the crisis has passed and the economy is on the
mend, we believe interest rates will likely remain low, a pattern that is
reflected in long-term (e.g., 30-year) bond yields. We additionally believe that
capitalization rates provide an attractive spread that could power robust
returns for several years. Furthermore, a constellation of factors, from massive
fiscal and monetary stimulus to trade wars to supply-side constraints, arguably
raise the specter of inflation
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over the medium term. Financial markets currently place low odds on an
inflationary spiral (implicit expectations are below 2% for the foreseeable
future), but real estate and other tangible assets may gain currency as a
partial hedge over time, according to the
Results of Operations
ThroughJune 30, 2020 , we have acquired 14 properties and invested in real estate equity securities as described above under "Portfolio Information." We expect to continue to raise additional capital, increase our borrowings and make future investments in our targeted segments of real estate properties, real estate equity securities and real estate loans, which we believe will have a significant impact on our future results of operations. We review our stabilized operating results, measured by contractual rental revenue, including tenant reimbursement income, less property operating expenses, which we refer to as net operating income, for properties that we owned for the entirety of both the current and prior year reporting periods, which we refer to as "same-store" properties. We believe that net operating income, a non-GAAP financial measure, in combination with net income (loss) and cash flows from operating activities, as defined by GAAP, is a useful supplemental performance measure that helps us evaluate our operating performance. We believe this metric is useful to our stockholders and other users of our reports because it provides additional information regarding our property acquisitions and their impact on our portfolio. Net operating income should not be considered as an alternative to net income (loss) or to cash flows from operating activities (both as defined by GAAP) as an indication of our performance and is not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. No single measure can provide users of financial information with sufficient information, and only our disclosures read as a whole can be relied upon to adequately portray our financial position, liquidity and results of operations.
Three and Six Months Ended
The following table illustrates the changes in lease revenue, property operating expenses, and net operating income for the three and six months endedJune 30, 2020 and 2019. "Non-same-store," as reflected in the table below, includes properties acquired afterJanuary 1, 2019 , which for the three and six months endedJune 30, 2020 and 2019 areProvidence Square andSeattle East Industrial . For purposes of comparative analysis, the table below reconciles the net operating income to net income (loss) determined in accordance with GAAP for the three and six months endedJune 30, 2020 and 2019. 44
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Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Change 2020 2019 Change
Lease revenue
Lease revenue - same-store
portfolio $ 5,209 $ 5,178 $ 31 10,809 10,566 243
Lease revenue - non-same-store
portfolio 2,145 - 2,145 4,236 - 4,236
Total lease revenue 7,354 5,178 2,176 15,045 10,566 4,479
Property operating expenses
Same-store portfolio 1,791 1,723 68 3,695 3,605 90
Non-same-store portfolio 357 - 357 691 - 691
Total property operating expenses 2,148 1,723 425 4,386 3,605 781
Net operating income
Same-store portfolio 3,418 3,455 (37) 7,114 6,961 153
Non-same-store portfolio 1,788 - 1,788 3,545 - 3,545
Total net operating income 5,206 3,455 1,751 10,659 6,961 3,698
Adjustments to lease revenue
Straight-line revenue 459 214 245 616 421 195
Above- and below-market lease
amortization, net 190 195 (5) 380 390 (10)
Lease incentive amortization (26) (26) - (51) (51) -
Depreciation (1,764) (1,336) (428) (3,543) (2,646) (897)
Amortization (1,449) (1,131) (318) (2,930) (2,300) (630)
General and administrative
expenses (487) (468) (19) (1,027) (1,040) 13
Advisory fees (532) (561) 29 (1,071) (932) (139)
Interest expense (1,761) (1,196) (565) (3,713) (2,489) (1,224)
Marketable securities
Investment income on marketable
securities 131 150 (19) 293 301 (8)
Net realized (loss) gain on
marketable securities (1,707) 146 (1,853) (2,150) 265 (2,415)
Net unrealized change in fair
value of marketable securities 3,005 189 2,816 (1,358) 2,355 (3,713)
Net income (loss) $ 1,265 $ (369) $ 1,634 $ (3,895) $ 1,235 $ (5,130)
Property Operations
Our total lease revenue and total property operating expenses for the three and
six months ended June 30, 2020 increased compared to those from the same periods
in 2019 primarily due to the acquisition of Providence Square and Seattle East
Industrial during the year ended December 31, 2019 . Our total same-store net
operating income for the three and six months ended June 30, 2020 and 2019
reflects 12 of the 14 properties in the portfolio.
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Lease revenue for the six months ended June 30, 2020 increased from the same
period in 2019 primarily due to three leases at Anaheim Hills Office Plaza which
were executed during 2019 and began paying rent, thereby increasing lease
revenue by $353 compared to the six months ended June 30, 2019 . There were two
lease extensions at Wallingford Plaza that became effective in the second half
of 2019 which further increased lease revenue along with contractually stepped
up rents at several leases across the portfolio. These increases in same-store
lease revenue were offset by a decrease in lease revenue of $362 at Heritage
Parkway due to a 5-year lease renewal with Allstate which provided free rent for
three months in the early part of the amended lease. Lease revenue for the three
months ended June 30, 2020 increased from the same period in 2019 for the same
reasons although to a lesser extent at Anaheim Hills Office Plaza .
Same-store property operating expenses for the six months ended June 30, 2020
increased from the same period in 2019 due to higher real estate taxes and
personnel costs at The Flats at Carrs Hill, increased building maintenance and
repair expenses at Elston Plaza and increased landscape and roof repair costs at
Palmetto Lakes . Same-store property operating expenses for the three months
ended June 30, 2020 increased from the same period in 2019 due to higher HVAC
and legal expenses at Anaheim Hills Office Plaza , increased real estate taxes,
personnel costs and cleaning supplies at The Flats at Carrs Hill, and higher
utility expenses at Loudoun Gateway. These increases in same-store operating
expenses during the 2020 period referred to above were partially offset by lower
utility expenses at Allied Drive .
Straight-Line Revenue
The increase in straight-line revenue for the three and six months ended June
30, 2020 compared to the same periods in 2019 was due to the aforementioned free
rent for Allstate which resulted in higher straight-line revenue during the free
rent months and additional straight-line revenue from Providence Square and
Seattle East Industrial which were acquired in September and December 2019 ,
respectively. These increases were offset by a decrease at Anaheim Hills Office
Plaza as the leases signed in 2019 began to pay cash rent in late 2019 thereby
reducing the straight-line revenue for such leases.
Lease Intangible Amortization
During the three and six months endedJune 30, 2020 , the net amount of above- and below-market lease amortization is nearly unchanged from the same period in 2019 as the 2019 acquisitions ofProvidence Square andSeattle East Industrial had minimal impact. Lease incentive amortization represents amortization of the lease incentive paid to Dick's Sporting Goods, Inc. atTerra Nova Plaza , which is being amortized over the approximate 10-year term of that lease.
Depreciation and Amortization
The depreciation and amortization on properties increased in the 2020 period as
a result of the acquisitions of
General and Administrative
Our general and administrative expenses include a variety of corporate expenses, the largest of which were directors and officers insurance, audit fees, legal fees and independent director compensation. The amount for the six months endedJune 30, 2020 decreased from the same period in 2019 primarily due to the portion of theMarch 2019 grant of Class I shares to our independent directors which vested immediately upon grant, and to a lesser extent, lower travel costs in the 2020 period. These decreases were partially offset by increases in appraisal costs due to additional properties, audit fees, and higher directors and officers insurance resulting from higher coverage limits. For the three months endedJune 30, 2020 , the increase from the same period in 2019 is due to higher audit fees, legal fees and directors and officers insurance, offset by decreases in travel costs and income taxes. 46 -------------------------------------------------------------------------------- Table of Contents Advisory Fees The fixed component of the advisory fee pursuant to the advisory agreement is equal to 1% per annum of the NAV for each share class and is calculated and accrued daily and reflected in our NAV per share. The fixed component of the advisory fee was higher in the 2020 period compared to the 2019 period which is commensurate with the overall increase in our NAV, as we continue to raise and invest capital. In accordance with our advisory agreement, our advisor can earn the performance component of the advisory fee when the total return to stockholders of a particular share class exceeds a required per annum hurdle for such share class (the "Hurdle Amount"). The performance component is calculated separately for each share class and is comprised of the distributions paid to stockholders in each share class combined with the change in price of each share class. For any calendar year in which the total return per share allocable to a class exceeds the Hurdle Amount for such class, RREEF America will receive a percentage of the aggregate total return allocable to such class. The performance component of the advisory fee is payable annually based on the results for the entire calendar year. The actual performance component that our advisor could earn in the current calendar year depends on several factors, including but not limited to the performance of our investments, our expenses and interest rates. For the six months endedJune 30, 2020 , the total return of each share class did not exceed the Hurdle Amount, applied on a pro rata basis as applicable. For the six months endedJune 30, 2019 , the total return of each share class exceeded the required Hurdle Amount for each share class, applied on a pro rata basis as applicable, resulting in our recognition under GAAP of a performance component of the advisory fee of$150 .
Interest Expense
The increase in interest expense for the three and six months endedJune 30, 2020 over the same period in 2019 was primarily due to a greater weighted average outstanding aggregate balance on our fixed rate loans. We originated a$17,600 loan onElston Plaza with a fixed interest rate of 3.89% inJune 2019 , a$29,700 loan onProvidence Square with a fixed interest rate of 3.67% inSeptember 2019 and$45,140 loan onSeattle East Industrial with a fixed interest rate of 3.87% inDecember 2019 . As a result, the weighted average outstanding aggregate balance and interest rate on all of our loan obligations was$202,713 and$112,096 for the six months endedJune 30, 2020 and 2019, respectively. A general decrease in interest rates over the past year reduced the interest rate on our line of credit, resulting in our all-in interest rate on all of our loan obligations averaging 3.4% and 4.0% for the six months endedJune 30, 2020 and 2019, respectively, partially offsetting the increase in our overall interest expense for the two periods. Our total outstanding loan balance as ofJune 30, 2020 consisted of 62% fixed rate loans and 38% floating rate loans.
We expect our interest expense to increase in future periods because we anticipate acquiring additional properties with borrowings, including by utilizing additional property-specific debt as a form of permanent financing along with continuing to use our line of credit.
The decrease in investment income for the three and six months endedJune 30, 2020 compared to the 2019 periods is primarily due to having less dividend paying stocks within the portfolio in the 2020 period relative to the 2019 period. Our portfolio of investments in publicly-traded REIT securities is actively managed and thus is regularly adjusted by increasing and decreasing specific holdings primarily based upon changes in sector allocations and to a lesser degree based upon performance of specific securities. These continual portfolio refinements generate realized gains and losses by using the highest cost method whereby a sale of any particular security is first attributed to the shares of that security with the highest cost basis. In response to the COVID-19 pandemic, the financial markets significantly declined inMarch 2020 , and our marketable securities portfolio similarly suffered. During the three months endedJune 30, 2020 , our marketable securities portfolio regained a significant portion of its first quarter losses, resulting in an unrealized gain of$3,005 for the three months endedJune 30, 2020 . However, active management resulted in our marketable securities portfolio incurring net realized losses for the three months endedJune 30, 2020 . 47 -------------------------------------------------------------------------------- Table of Contents Inflation In our view, the real estate property sector has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. With the exception of leases with tenants in apartment properties, we will seek to include provisions in our tenant leases designed to protect us from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases, annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market. Leases in apartment properties generally turn over on an annual basis and do not typically present the same concerns regarding inflation protection due to their short-term nature.
NAV per Share
Our NAV per share is calculated in accordance with the valuation guidelines approved by our board of directors for the purposes of establishing a purchase price for our shares sold in our offerings as well as establishing a redemption price for our share repurchase plan. The following table provides a breakdown of the major components of our total NAV and NAV per share as ofJune 30, 2020 : Per Class A Per Class I Per Class T Per Class D Components of NAV Total NAV Share Share Share Share Investments in real estate (1)$ 396,300 $ 26.07 $ 26.24 $ 26.15 $ 26.19 Investments in real estate equity securities (2) 17,988 1.18 1.19 1.19 1.18 Other assets, net 10,243 0.67 0.67 0.68 0.67 Line of credit (77,600) (5.10) (5.14) (5.12) (5.11) Mortgage loans payable (126,507) (8.32) (8.38) (8.35) (8.33) Other liabilities, net (7,243) (0.48) (0.48) (0.49) (0.51) Net asset value$ 213,181 $ 14.02
(1) The value of our investments in real estate was approximately 9.0% more than their historical cost. (2) The value of our investments in real estate securities was approximately 12.7% more than their historical cost. As ofJune 30, 2020 , all properties had been appraised by a third-party appraisal firm in addition to our independent valuation advisor. Set forth below are the weighted averages of the key assumptions used in the appraisals of the office, retail and industrial properties as ofJune 30, 2020 . Once we own more than one property for the apartment property type, we will include the key assumptions for that property type. Discount Rate Exit Capitalization Rate Office properties 7.32% 6.67% Retail properties 6.93% 6.05% Industrial properties 5.78% 4.94% These assumptions are determined by our independent valuation advisor or by separate third-party appraisers. A change in these assumptions would impact the calculation of the value of our property investments. For example, assuming all other factors remain unchanged, an increase in the weighted-average discount rate used as ofJune 30, 2020 of 0.25% would yield decreases in the office, retail and industrial property investment values of 1.8%, 1.9% and 2.0%, respectively. Similarly, an increase in the weighted-average exit capitalization rate used as ofJune 30, 2020 of 0.25% would yield decreases in the office, retail and industrial property investment values of 2.2%, 2.4% 48 -------------------------------------------------------------------------------- Table of Contents and 3.2%, respectively.
The table below sets forth a reconciliation of our stockholders' equity to our
NAV, which we calculate for the purpose of establishing the purchase and
redemption price for our shares, as of
Per Class A Per Class I Per Class T Per Class D
Total NAV Share Share Share Share
Total stockholders' equity $ 116,802 $ 7.68 $ 7.71 $ 7.71 $ 7.74
Plus:
Unrealized gain on real estate
investments 32,725 2.15 2.17 2.16 2.16
Accumulated depreciation 25,316 1.67 1.68 1.67 1.67
Accumulated amortization 23,399 1.54 1.55 1.54 1.54
Deferred costs and expenses, net 18,385 1.21 1.22 1.21 1.21Less:
Deferred rent receivable (3,446) (0.23) (0.23) (0.23) (0.23) Net asset value$ 213,181 $ 14.02
The deferred costs and expenses of$18,385 includes amounts that are initially excluded from the NAV calculation. This includes$5,187 payable to our advisor, which is less than the total amount payable to our advisor as reflected on our consolidated balance sheet as ofJune 30, 2020 , because (1) certain amounts payable to our advisor as ofJune 30, 2020 were recorded as assets and as such have no impact on our NAV as ofJune 30, 2020 , and (2) the amount payable to our advisor as reflected in due to affiliates and note to affiliate on our consolidated balance sheet includes accrued advisory fees and other amounts due under the advisory agreement. The deferred amounts will be included in the NAV calculation as such costs are reimbursed to our advisor, in accordance with the advisory agreement, the expense support agreement and theESA letter agreement datedMarch 24, 2020 amending the advisory agreement and expense support agreement (defined below). The deferred costs and expenses above additionally includes$14,180 in estimated trailing fees that will be deducted from the NAV on a daily basis as and when they become payable toDWS Distributors, Inc. , or the dealer manager. Lastly, the deferred cost and expenses above is net of (1) the portion of the performance component of the advisory fee that is reflected in the NAV calculation, if any, but does not yet meet the threshold for accrual under GAAP, and (2) the difference in recognition of (i) certain offering costs and (ii) compensation costs related to the shares granted to our independent board members. Limitations and Risks As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different NAV per share. Accordingly, with respect to our NAV per share, we can provide no assurance that: •a stockholder would be able to realize this NAV per share upon attempting to resell his or her shares; •we would be able to achieve, for our stockholders, the NAV per share, upon a listing of our shares of common stock on a national securities exchange, selling our real estate portfolio, or merging with another company; or •the NAV per share, or the methodologies relied upon to estimate the NAV per share, will be found by any regulatory authority to comply with any regulatory requirements. Furthermore, the NAV per share was calculated as of a particular point in time. The NAV per share will fluctuate over time in response to, among other things, global, national or regional economic events, such as those caused by the coronavirus pandemic, changes in real estate market fundamentals, capital markets activities, and attributes specific to the properties and leases within our portfolio. The extent to which the coronavirus impacts our 49 -------------------------------------------------------------------------------- Table of Contents investments and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. These developments include the duration of the outbreak, the impact of government stimulus, new information that may emerge concerning the severity of the coronavirus, and actions taken to contain the coronavirus or treat its impact, among others. The coronavirus pandemic is expected to continue to have a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. Our independent valuation advisor and certain independent third-party appraisal firms engaged by our advisor have included additional cautionary language in their respective second quarter reports related to the uncertain impact of the coronavirus pandemic on the property values.
Funds from Operations and Modified Funds from Operations
We believe that funds from operations, or FFO, FFO as adjusted and modified funds from operations, or MFFO, in combination with net income or loss and cash flows from operating activities, as defined by GAAP, are useful supplemental performance measures that we use to evaluate our operating performance. However, these supplemental, non-GAAP measures should not be considered as an alternative to net income or loss or to cash flows from operating activities, both as determined by GAAP, as an indication of our performance and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. No single measure can provide users of financial information with sufficient information, and only our disclosures read as a whole can be relied upon to adequately portray our financial position, liquidity and results of operations. In addition, other REITs may define FFO and similar measures differently and thus choose to treat certain accounting line items in a manner different from us due to differences in investment and operating strategy or for other reasons. As defined by theNational Association of Real Estate Investment Trusts , or NAREIT, FFO is a non-GAAP supplemental financial performance measure that excludes certain items such as real estate-related depreciation and amortization and the impact of certain non-recurring items such as realized gains and losses on sales of real estate. We believe FFO is a meaningful supplemental financial performance measure of our operating performance that is useful to investors because depreciation and amortization in accordance with GAAP implicitly assume that the value of real estate assets diminishes predictably over time. Additionally, realized gains and losses on sales of real estate generally occur infrequently. As a result, excluding these items from FFO aids our analysis of our ongoing operations. We use FFO as an indication of our operating performance and as a guide to making decisions about future investments. Under GAAP, the net unrealized change in the fair value of our investments in marketable securities for the period presented is recorded in earnings as part of operating income or loss. As a result, under the current NAREIT definition of FFO, the net unrealized change in the fair value of our investments in marketable securities is included in our FFO. Our investment objective with our investments in marketable securities is to generate consistent income while providing an opportunity for long term price appreciation. Additionally, we believe that investing a portion of our proceeds from our offerings into a diversified portfolio of common and preferred shares of REITs and other real estate operating companies will provide our overall investment portfolio some flexibility with near-term liquidity as well as potentially enhance our NAV over a longer period. The securities portfolio is regularly reviewed and evaluated to determine whether the marketable securities held at any time continue to serve their original intended purposes. In accordance with our objectives, it is our view that providing FFO as adjusted for the net unrealized change in the fair value of our securities portfolio, as an additional non-GAAP supplemental financial performance measure, will enhance an investor's understanding of the impact of our securities portfolio on our ongoing operations. As defined by theInstitute for Portfolio Alternatives , or IPA, MFFO is a non-GAAP supplemental financial performance measure used to assist us in evaluating our operating performance. We believe that MFFO is helpful as a measure of ongoing operating performance because it excludes costs that management considers more reflective of investing activities and other non-operating items included in FFO. Compared to FFO, MFFO additionally excludes items such as acquisition-related costs (if expensed in accordance with GAAP), non-cash amounts related to straight-line rent, amortization of above- and below-market lease intangibles and mark to market valuation 50 -------------------------------------------------------------------------------- Table of Contents adjustments on securities. In addition, there are certain other MFFO adjustments as defined by the IPA that are not applicable to us at this time and are not included in our presentation of MFFO. We believe that excluding acquisition costs from MFFO, if such costs were expensed in accordance with GAAP, provides investors with supplemental performance information that is consistent with our analysis of the operating performance of our portfolio over time, including periods after our acquisition stage. We use FFO, FFO as adjusted and MFFO, among other things: (i) to evaluate and compare the potential performance of the portfolio after the acquisition phase is complete, and (ii) as metrics in evaluating our ongoing distribution policy. We believe investors are best served if the information that is made available to them allows them to align their analyses and evaluation with these same performance metrics used by us in planning and executing our business strategy. We believe that these performance metrics will assist investors in evaluating the potential performance of the portfolio after the completion of the acquisition phase. However, these supplemental, non-GAAP measures are not necessarily indicative of future performance and should not be considered as an alternative to net income or loss or to cash flows from operating activities, both as determined by GAAP, and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. Neither theSEC , NAREIT, nor any regulatory body has passed judgment on the acceptability of the adjustments used to calculate FFO as adjusted or MFFO. In the future, theSEC , NAREIT, or a regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry at which point we may adjust our calculation and characterization of FFO as adjusted or MFFO.
The following unaudited table presents a reconciliation of net income (loss) to FFO, FFO as adjusted, and MFFO.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Net income (loss) $ 1,265 $ (369) $ (3,895) $ 1,235
Real estate related depreciation 1,764 1,336 3,543 2,646
Real estate related amortization 1,449 1,131 2,930 2,300
NAREIT defined FFO 4,478 2,098 2,578 6,181
Net unrealized change in fair value
of investments in marketable
securities (3,005) (189) 1,358 (2,355)
FFO as adjusted 1,473 1,909 3,936 3,826
Additional adjustments:
Straight line rents, net (459) (214) (616) (421)
Amortization of above- and
below-market lease intangibles, net (190) (195) (380) (390)
Amortization of lease incentive 26 26 51 51
IPA defined MFFO $ 850 $ 1,526 $ 2,991 $ 3,066 Liquidity and Capital Resources
Our primary needs for liquidity and capital resources are to fund our
investments in accordance with our investment strategy and policies, make
distributions to our stockholders, redeem shares of our common stock pursuant to
our redemption plan, pay our offering and operating fees and expenses and pay
interest on any outstanding indebtedness.
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Over time, we generally intend to fund our cash needs for items, other than
asset acquisitions and material capital improvements, from operations. Our cash
needs for acquisitions and material capital improvements will be funded
primarily from the sale of shares of our common stock in our offerings. The
amount we may raise in such offerings is uncertain and dependent on a number of
factors, including the impacts of the coronavirus pandemic. We intend to
contribute any additional net proceeds from our offerings that are not used or
retained to pay the fees and expenses attributable to our operations to our
operating partnership.
The coronavirus pandemic has had, and is expected to continue to have, a
significant impact on local, national and global economies and has resulted in a
world-wide economic slowdown. We are closely monitoring the impact of the
coronavirus pandemic on all aspects of our investments and operations, including
how it will impact our tenants and business partners. We collected 100% of our
contractual rental revenue for the three months ended March 31, 2020 and 94% of
our contractual rental revenue for the three months ended June 30, 2020 .
Approximately 98% of contractual rental revenue was collected for the month of
July 2020 . However, the future impacts of the coronavirus pandemic cannot be
predicted and it has caused, and may cause, certain of our tenants to request
deferral of rental payments or not to pay rent at all. Through July 31, 2020 , we
had entered into four lease amendments that resulted in the deferral of
approximately 1.0% of our annualized contractual rental revenue. Such deferred
rent is scheduled to be fully paid within the next 12 months.
We generally intend to maintain sufficient liquidity at all times to satisfy our
operational needs and the maximum potential quarterly redemptions under our
share redemption plan. As of June 30, 2020 , among our cash balances, our real
estate securities portfolio, and the available borrowing capacity on our Wells
Fargo line of credit, we had liquidity of $35,932 .
We may also satisfy our cash needs for acquisitions and material capital
improvements through the assumption or incurrence of debt. On February 27, 2018 ,
we entered into an amended and restated secured revolving line of credit with
Wells Fargo Bank, National Association . The Wells Fargo line of credit has a
three-year term with two one-year extension options exercisable by us upon
satisfaction of certain conditions and payment of applicable extension fees. The
first extension option becomes exercisable in November 2020 . The interest rate
under the Wells Fargo line of credit is based on the 1-month LIBOR with a spread
of 160 to 180 basis points depending on the debt yield as defined in the
agreement. The Wells Fargo line of credit has a current maximum capacity of
$100,000 , and we have the option to expand the Wells Fargo line of credit up to
a maximum capacity of $200,000 upon satisfaction of specified conditions. Each
requested expansion must be for at least $25,000 and may result in the Wells
Fargo line of credit being syndicated.
The Wells Fargo line of credit has as co-borrowers certain of the wholly-owned
subsidiaries of our operating partnership, with the Company serving as the
guarantor. At any time, the borrowing capacity under the Wells Fargo line of
credit is based on the lesser of (1) an amount equal to 65% of the aggregate
value of the properties in the collateral pool as determined by lender
appraisals, (2) an amount that results in a minimum debt yield of 9% based on
the in-place net operating income of the collateral pool as defined or (3) the
maximum capacity of the Wells Fargo line of credit. Proceeds from the Wells
Fargo line of credit can be used to fund acquisitions, redeem shares pursuant to
our redemption plan and for any other corporate purpose. As of June 30, 2020 ,
our maximum borrowing capacity was $89,310 , our outstanding balance was $77,600
and our weighted average interest rate was 1.89%.
The Wells Fargo line of credit agreement contains customary representations,
warranties, borrowing conditions and affirmative, negative and financial
covenants, including that there must be at least five properties in the
collateral pool at all times, and the collateral pool must also meet specified
concentration provisions, unless waived by the lender. In addition, the
guarantor must meet tangible net worth hurdles. Subsequent to June 30, 2020 , we
entered into a second amendment to the Wells Fargo line of credit which
pre-emptively amended certain financial covenants in the event the coronavirus
pandemic were to have a negative effect in the future on our properties
encumbered by the Wells Fargo line of credit. As of June 30, 2020 , we were in
compliance with all covenants.
Since our inception, we have entered into property specific mortgage loans to
finance the acquisition of certain properties, or refinance certain properties
off of our Wells Fargo line of credit to create room under our Wells Fargo line
of credit to fund future property acquisitions. The following table presents a
summary of the property specific
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mortgage loans in place as of June 30, 2020 . Each of the below mortgage loans
has a fixed interest rate for the entire term of the mortgage loan. In addition,
each mortgage loan contains provisions allowing for (a) a one-time transfer of
the loan to an unaffiliated borrower at the sole discretion of the lender and
upon payment of applicable fees, and (b) full prepayment of the mortgage loan
within allowable windows subject to payment of applicable penalties, if any.
Outstanding
Lender Encumbered Property Balance Interest Rate Maturity Date
Nationwide Life Insurance
Company Flats at Carrs Hill $ 14,500 3.63 % March 1, 2026
Hartford Life Insurance
Company Commerce Corner 12,617 3.41 December 1, 2023
Transamerica Life
Insurance Company Wallingford Plaza 6,950 4.56 January 1, 2029
State Farm Life Insurance
Company Elston Plaza 17,600 3.89 July 1, 2026
Nationwide Life Insurance
Company Providence Square 29,700 3.67 October 5, 2029
JPMorgan Chase Bank Seattle East Industrial 45,140 3.87 January 1, 2030
$ 126,507
In the future, as our assets increase, it may not be commercially feasible or we
may not be able to secure an adequate line of credit to fund acquisitions,
redemptions or other needs. Moreover, actual availability may be reduced at any
given time if the values of our real estate or our marketable securities
portfolio decline, such as that which may occur as a result of the coronavirus
pandemic. Furthermore, the credit markets have been significantly impacted by
the coronavirus pandemic which has caused certain lenders in the commercial real
estate space to limit available financing options.
Expense Payments by Our Advisor
Pursuant to the advisory agreement, RREEF America is entitled to reimbursement of certain costs incurred by RREEF America or its affiliates. Costs eligible for reimbursement include most third-party operating expenses, salaries and related costs of its employees who perform services for us (but not those employees for which RREEF America earns a separate fee or those employees who are our executive officers) and travel related costs for its employees who incur such costs on our behalf. We will reimburse our advisor for all expenses paid or incurred by our advisor in connection with the services provided to us, subject to the limitations described below regarding the 2%/25% guidelines as defined in our advisory agreement. As ofJune 30, 2020 , we owed$115 to our advisor for such costs. OnMay 29, 2013 , we entered into an expense support agreement with our advisor, which was amended and restated most recently onJanuary 20, 2016 , which we refer to as the expense support agreement. Pursuant to the terms of the expense support agreement, our advisor incurred expenses related to our operations which we refer to as expense payments. As ofDecember 31, 2015 , our advisor had incurred$9,200 in expense payments, which was the maximum amount of expense payments allowed under the expense support agreement. As the expense payment limit had been reached, pursuant to the expense support agreement, inJanuary 2016 the reimbursement provisions were triggered. During the first quarter of 2016, we reimbursed$250 to our advisor under the expense support agreement. OnApril 25, 2016 , we and our advisor entered into a letter agreement that amended certain provisions of the advisory agreement and the expense support agreement. OnMarch 24, 2020 , we and our advisor entered into a second letter agreement which superseded the previous letter agreement, which we refer to as theESA letter agreement. TheESA letter agreement provides, in part, that our obligations to reimburse our advisor for expense payments under the expense support agreement are suspended until the first calendar month following the month in which we have reached$500,000 in offering proceeds from our offerings, which we refer to as theESA commencement date. Since our inception throughJune 30, 2020 , we raised$262,333 from the sale of shares of our 53 -------------------------------------------------------------------------------- Table of Contents common stock, including proceeds from our dividend reinvestment plan. We currently owe$5,383 to our advisor under the expense support agreement. Beginning the month following theESA commencement date, we will make monthly reimbursement payments to our advisor in the amount of$250 for the first 12 months and$198 for the second 12 months. In addition, pursuant to theESA letter agreement, if RREEF America is serving as our advisor at the time that we or our operating partnership undertakes a liquidation, our remaining obligations to reimburse our advisor for the unpaid monthly reimbursements under the expense support agreement shall be waived.
Limits on Expense Reimbursement
In all cases, reimbursement payments to our advisor will be subject to reduction as necessary in order to ensure that such reimbursement payment will not cause the aggregate organization and offering costs paid by us for an offering to exceed 15% of the gross proceeds from the sale of shares in such offering as of the date of the reimbursement payment, and such reimbursement payment will not adversely affect our ability to maintain our status as a REIT for federal tax purposes. In addition to the reimbursement limitations for organization and offering costs, we are also limited in the amount of operating expenses that we may reimburse our advisor. Pursuant to our charter, we may reimburse our advisor, at the end of each fiscal quarter, for total operating expenses incurred by our advisor; provided, however, that we may not reimburse our advisor at the end of any fiscal quarter for total operating expenses (as defined in our charter) that, in the four consecutive fiscal quarters then ended, exceed the greater of 2% of our average invested assets or 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period (which we refer to as the 2%/25% guidelines) for such four-quarter period. Notwithstanding the foregoing, we may reimburse our advisor for expenses in excess of the 2%/25% guidelines if a majority of our independent directors determine that such excess expenses, which we refer to as an excess amount, are justified based on unusual and non-recurring factors. For the four fiscal quarters endedJune 30, 2020 , our total operating expenses (as defined in our charter) were$4,878 , which did not exceed the amount prescribed by the 2%/25% guidelines. Pursuant to the expense support agreement, the amount of the reimbursement payment paid in any calendar quarter will not be aggregated with our cumulative operating expenses for any four consecutive calendar quarters that includes the calendar quarter in which such reimbursement payment is paid, and instead the amount of the unreimbursed expense payments comprising such reimbursement payment will have previously been aggregated with our total operating expenses for the four calendar quarter periods ending with the calendar quarter in which such expense payment was originally incurred, which we refer to as prior 2%/25% periods. If an unreimbursed expense payment incurred during a prior 2%/25% period exceeded the 2%/25% guidelines for such prior 2%/25% period, the amount of such excess will only be reimbursed pursuant to the expense support agreement to the extent that our independent directors previously approved such excess with respect to the applicable prior 2%/25% period. Our independent directors approved the excess amount for every period of four consecutive quarters since we were first subject to this limitation for the four consecutive quarters endedJune 30, 2014 throughSeptember 30, 2016 . During the fiscal quarter endedMarch 31, 2017 , our advisor reimbursed us for the excess amount related to the four fiscal quarters endedDecember 31, 2016 . Our total operating expenses have not exceeded the 2%/25% guidelines for any four-quarter period ending afterDecember 31, 2016 . We anticipate our offering and operating fees and expenses will include, among other things, the advisory fee that we pay to our advisor, the selling commissions, dealer manager and distribution fees we pay to the dealer manager, legal and audit expenses, federal and state filing fees, printing expenses, transfer agent fees, marketing and distribution expenses and fees related to appraising and managing our properties. We will not have any office or personnel expenses as we do not have any employees. Our advisor will incur certain of these expenses and fees, for which we may reimburse our advisor, subject to certain limitations. Additionally, our advisor may allocate to us out-of-pocket expenses in connection with providing services to us, including our allocable share of our advisor's overhead, such as rent, utilities and personnel costs for personnel who are directly involved in the performance of services to us and are not our executive officers. Ultimately, total organization and offering costs incurred in a given offering will not exceed 15% of the gross proceeds from such offering. During our initial offering, our advisor paid on our behalf or reimbursed us for$3,975 in organization and offering costs and$5,229 in operating expenses. 54 -------------------------------------------------------------------------------- Table of Contents Pursuant to theESA letter agreement datedMarch 24, 2020 , our advisor waived reimbursement of$3,567 of expense payments related to organization and offering costs from our initial offering. The total organization and offering costs paid by our advisor did not cause us to exceed the 15% limitation as ofJune 30, 2020 with respect to the initial offering. If, in future periods, the total organization and offering costs paid by our advisor and the dealer manager cause us to exceed the 15% limitation with respect to the initial offering, the excess would not be reflected on our consolidated balance sheet as of the end of such period. A similar limitation will apply to the total organization and offering costs incurred with respect to each follow-on offering. In such event, we may become obligated to reimburse all or a portion of this excess as we raise additional proceeds from such follow-on offering. As ofJune 30, 2020 , our total organization and offering costs incurred with respect to the follow-on offering and the second follow-on offering did not exceed the 15% limitation for each such follow-on offering. Other potential future sources of capital include secured or unsecured financings from banks or other lenders and proceeds from the sale of assets. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.
Cash Flow Analysis
Cash flow provided by operating activities during the six months endedJune 30, 2020 and 2019 was$4,634 and$2,493 , respectively. The increase in cash flow from operating activities for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 is due to additional operating cash flows from our 2019 acquisitions as well as additional cash paying leases atAnaheim Hills Office Plaza and increased payable balances as ofJune 30, 2020 . These increases were partially offset by higher debt service costs in the 2020 period as a result of our higher average outstanding debt balances and higher deferred leasing costs of$892 most of which relates to the renewal of the Allstate lease atHeritage Parkway . Cash flow used in investing activities during the six months endedJune 30, 2020 and 2019 was$1,389 and$1,469 , respectively. In 2020 we paid approximately$1,114 on improvements to our real estate investments, primarily for tenant improvements atAnaheim Hills Office Plaza related to new leases as well as building improvements at ourMiami Industrial properties. This compares to paid real estate improvements of only$1,181 in the 2019 period. Cash flow used in financing activities was$1,246 for the six months endedJune 30, 2020 . We received proceeds of$23,536 in our offerings and paid$1,721 in offering costs. Cash distributions to stockholders paid during the six months endedJune 30, 2020 were$2,709 . Of the total distributions declared for the six months endedJune 30, 2020 ,$2,694 was reinvested via our distribution reinvestment plan. Additionally, we processed redemptions during the six months endedJune 30, 2020 that resulted in payments by us of$16,222 , after deductions for any applicable 2% short-term trading discounts. We used the proceeds from our offerings to repay$13,500 against our outstanding balance on the Wells Fargo line of credit. We borrowed$9,500 from our Wells Fargo line of credit during the six months endedJune 30, 2020 . Additionally, we made principal payments on the Hartford Loan of$130 which required monthly principal payments beginning inJanuary 2019 . Cash flow used in financing activities was$585 for the six months endedJune 30, 2019 . We received proceeds of$26,192 in our offerings and paid$1,434 in offering costs. Cash distributions to stockholders paid during the six months endedJune 30, 2019 were$2,064 . Of the total distributions declared for the six months endedJune 30, 2019 ,$1,794 was reinvested via our distribution reinvestment plan. Additionally, we processed redemptions during the six months endedJune 30, 2019 that resulted in payments by us of$2,949 , after deductions for any applicable 2% short-term trading discounts. We originated a$17,600 property specific loan fromState Farm onElston Plaza and used the proceeds along with proceeds from our offerings to repay$39,819 against our outstanding balance on the Wells Fargo line of credit. We also borrowed$2,200 from our Wells Fargo line of credit during the six months endedJune 30, 2019 . Additionally, we made principal payments on the Hartford Loan of$126 which required monthly principal payments beginning inJanuary 2019 . 55 -------------------------------------------------------------------------------- Table of Contents Distributions Our board of directors authorized and declared daily cash distributions for each quarter which were payable monthly for each share of Class A, Class I, Class T and Class D common stock outstanding. Shown below are details of the distributions: Six Three Months Ended Months Ended June 30, March 31, 2020 June 30, 2020 2020 Distributions: Declared daily distribution rate, before adjustment for class-specific fees$ 0.00198576 $ 0.00195203
Distributions paid or payable in cash
$ 2,699
Distributions reinvested 1,339 1,355 2,694
Distributions declared $ 2,708 $ 2,685 $ 5,393
Net Cash Provided by Operating
Activities: $ 1,949 $ 2,685 $ 4,634
Funds From Operations: $ (1,900) $ 4,478 $ 2,578
For the six months ended June 30, 2020 , our distributions were covered 85.9% by
cash flow from operations and 14.1% by borrowings. We expect that we will
continue to pay distributions monthly in arrears. Any distributions not
reinvested will be payable in cash, and there can be no assurances regarding the
portion of the distributions that will be reinvested. We intend to fund
distributions from cash generated by operations. However, we may fund
distributions from borrowings under our line of credit, from the proceeds of our
offering or any other source.
As discussed above under "Funds from Operations and Modified Funds from
Operations," FFO, as defined by NAREIT, includes the net unrealized change in
fair value of our investments in marketable securities. For the three and six
months ended June 30, 2020 , the net unrealized change in fair value of our
investments in marketable securities was a gain of $3,005 and a loss of $1,358 ,
respectively. Without this net unrealized change in fair value, our FFO for the
three and six months ended June 30, 2020 would have been $1,473 and $3,936 ,
respectively, which we refer to as FFO as adjusted, and which is presented above
under "Funds from Operations and Modified Funds from Operations" for the three
and six months ended June 30, 2020 .
The coronavirus pandemic has caused a world-wide economic slowdown, and resulted
in numerous temporary retail store closings as well as temporary closings of
many other businesses due to government imposed or elected shelter-in-place
orders. The duration and ultimate impact of these measures cannot be predicted
and may cause reduced operating cash flows from our investments. The payment of
distributions from sources other than cash flow from operations or FFO may be
dilutive to our NAV per share because it may reduce the amount of proceeds
available for investment and operations or cause us to incur additional interest
expense as a result of borrowed funds.
Redemptions
For details on our redemptions, please see Note 9 ("Capitalization") to our
consolidated financial statements included in this quarterly report on Form
10-Q. As of
Critical Accounting Policies
Our accounting policies have been established to conform with GAAP. The preparation of financial statements
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in conformity with GAAP requires management 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.
If management's 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 the comparability of
our results of operations to those of companies in similar businesses. We
consider our critical accounting policies to be the policies that relate to the
following concepts:
•Real Estate Investments and Lease Intangibles
•Revenue Recognition
•Organization and Offering Expenses
A complete description of such policies and our considerations is contained in
Note 2 ("Summary of Significant Accounting Policies") to our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2019 , as supplemented by the most recent quarterly report on
Form 10-Q.
Certain Accounting Pronouncements Effective in the Future
We refer you to Note 2 ("Summary of Significant Accounting Policies") to our
consolidated financial statements included in this quarterly report on Form 10-Q
for a discussion of the potential impact on us from certain accounting
pronouncements that become effective in the future.
REIT Compliance and Income Taxes
We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code beginning with the year endedDecember 31, 2013 , and we believe that we have operated in such a manner to continue to be taxed as a REIT for federal income tax purposes. In order to maintain our qualification as a REIT, we are required to, among other things, distribute as dividends at least 90% of our REIT taxable income, determined without regard to the dividends-paid deduction and excluding net capital gains, to our stockholders and meet certain tests regarding the nature of our income and assets. If we qualify for taxation as a REIT, we generally will not be subject to federal income tax to the extent our income meets certain criteria and we distribute our REIT taxable income to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to (1) certain state and local taxes on our income, property or net worth and (2) federal income and excise taxes on undistributed income, if any income remains undistributed. Many of these requirements are highly technical and complex. We will monitor the business and transactions that may potentially impact our REIT status. If we were to fail to meet these requirements, we could be subject to federal income tax on our taxable income at regular corporate rates. We would not be able to deduct distributions paid to stockholders in any year in which we fail to qualify as a REIT. We will also be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions.
Off Balance Sheet Arrangements
As ofJune 30, 2020 , 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.
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