Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - CIM INCOME NAV, INC. | cinav10qexhibit3216302016.htm |
| EX-31.2 - EXHIBIT 31.2 - CIM INCOME NAV, INC. | cinav10qexhibit3126302016.htm |
| EX-31.1 - EXHIBIT 31.1 - CIM INCOME NAV, INC. | cinav10qexhibit3116302016.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
Form 10-Q
_________________________________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-55187
__________________________________________
COLE REAL ESTATE INCOME STRATEGY
(DAILY NAV), INC.
(Exact name of registrant as specified in its charter)
__________________________________________
Maryland | 27-3147801 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
2325 East Camelback Road, Suite 1100 Phoenix, Arizona 85016 | (602) 778-8700 | |
(Address of principal executive offices; zip code) | (Registrant’s telephone number, including area code) | |
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 9, 2016, there were approximately 10.4 million shares of Wrap Class common stock, approximately 2.9 million shares of Advisor Class common stock and approximately 726,000 shares of Institutional Class common stock, par value $0.01 each, of Cole Real Estate Income Strategy (Daily NAV), Inc. outstanding.
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
INDEX
2
PART I - FINANCIAL INFORMATION
Item 1. | Financial Statements |
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(in thousands, except share and per share amounts)
June 30, 2016 | December 31, 2015 | ||||||
ASSETS | |||||||
Investment in real estate assets: | |||||||
Land | $ | 54,675 | $ | 49,785 | |||
Buildings and improvements | 221,213 | 187,616 | |||||
Intangible lease assets | 36,094 | 32,880 | |||||
Total real estate investments, at cost | 311,982 | 270,281 | |||||
Less: accumulated depreciation and amortization | (17,161 | ) | (12,698 | ) | |||
Total real estate investments, net | 294,821 | 257,583 | |||||
Investment in marketable securities | 5,219 | 5,237 | |||||
Total real estate investments and marketable securities, net | 300,040 | 262,820 | |||||
Cash and cash equivalents | 29,885 | 14,840 | |||||
Restricted cash | 632 | 118 | |||||
Rents and tenant receivables, net | 3,027 | 2,655 | |||||
Property escrow deposits, prepaid expenses and other assets | 402 | 250 | |||||
Deferred costs, net | 726 | 819 | |||||
Total assets | $ | 334,712 | $ | 281,502 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Credit facility and notes payable, net | $ | 118,985 | $ | 117,730 | |||
Accrued expenses and accounts payable | 2,010 | 2,122 | |||||
Escrowed investor proceeds | 77 | 50 | |||||
Due to affiliates | 10,553 | 8,235 | |||||
Intangible lease liabilities, net | 3,372 | 3,513 | |||||
Distributions payable | 1,030 | 788 | |||||
Derivative liabilities, deferred rental income, and other liabilities | 2,397 | 1,120 | |||||
Total liabilities | 138,424 | 133,558 | |||||
Commitments and contingencies | |||||||
Redeemable common stock | 23,952 | 17,967 | |||||
STOCKHOLDERS’ EQUITY | |||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding | — | — | |||||
A Shares common stock, $0.01 par value; 163,000,000 shares authorized, 2,509,300 and 1,371,763 shares issued and outstanding, respectively | 25 | 14 | |||||
I Shares common stock, $0.01 par value; 163,000,000 shares authorized, 722,600 and 657,624 shares issued and outstanding, respectively | 7 | 7 | |||||
W Shares common stock, $0.01 par value; 164,000,000 shares authorized, 9,857,652 and 7,825,063 shares issued and outstanding, respectively | 99 | 78 | |||||
Capital in excess of par value | 189,325 | 140,202 | |||||
Accumulated distributions in excess of earnings | (15,806 | ) | (9,949 | ) | |||
Accumulated other comprehensive loss | (1,314 | ) | (375 | ) | |||
Total stockholders’ equity | 172,336 | 129,977 | |||||
Total liabilities and stockholders’ equity | $ | 334,712 | $ | 281,502 | |||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
3
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues: | |||||||||||||||
Rental income | $ | 5,713 | $ | 4,238 | $ | 10,997 | $ | 8,725 | |||||||
Tenant reimbursement income | 600 | 310 | 1,239 | 647 | |||||||||||
Interest income on marketable securities | 28 | 17 | 59 | 20 | |||||||||||
Total revenues | 6,341 | 4,565 | 12,295 | 9,392 | |||||||||||
Operating expenses: | |||||||||||||||
General and administrative | 1,115 | 418 | 2,186 | 853 | |||||||||||
Property operating | 212 | 152 | 444 | 332 | |||||||||||
Real estate tax | 477 | 206 | 970 | 415 | |||||||||||
Advisory fees and expenses | 636 | 709 | 1,186 | 993 | |||||||||||
Acquisition-related | 703 | (2 | ) | 1,043 | 67 | ||||||||||
Depreciation and amortization | 2,226 | 1,558 | 4,284 | 3,196 | |||||||||||
Total operating expenses | 5,369 | 3,041 | 10,113 | 5,856 | |||||||||||
Operating income | 972 | 1,524 | 2,182 | 3,536 | |||||||||||
Other income (expense): | |||||||||||||||
Interest expense and other, net | (1,252 | ) | (882 | ) | (2,479 | ) | (1,768 | ) | |||||||
(Loss) income before real estate dispositions | (280 | ) | 642 | (297 | ) | 1,768 | |||||||||
Gain on disposition of real estate, net | — | 4,678 | — | 4,678 | |||||||||||
Net (loss) income | $ | (280 | ) | $ | 5,320 | $ | (297 | ) | $ | 6,446 | |||||
Weighted average number of common shares outstanding: | |||||||||||||||
Basic and diluted | 12,211,730 | 7,504,384 | 11,401,674 | 7,331,680 | |||||||||||
Net (loss) income per common share: | |||||||||||||||
Basic and diluted | $ | (0.02 | ) | $ | 0.71 | $ | (0.03 | ) | $ | 0.88 | |||||
Distributions declared per common share | $ | 0.24 | $ | 0.24 | $ | 0.49 | $ | 0.48 | |||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net (loss) income | $ | (280 | ) | $ | 5,320 | $ | (297 | ) | $ | 6,446 | |||||
Other comprehensive loss: | |||||||||||||||
Unrealized holding gain (loss) on marketable securities | 60 | (63 | ) | 173 | (61 | ) | |||||||||
Less: reclassification adjustment for (gain) loss included in income as other expense | (7 | ) | 4 | (4 | ) | 7 | |||||||||
Unrealized loss on interest rate swaps | (392 | ) | (175 | ) | (1,382 | ) | (175 | ) | |||||||
Amount of loss reclassified from other comprehensive income into income as interest expense | 136 | 1 | 274 | 1 | |||||||||||
Total other comprehensive loss | (203 | ) | (233 | ) | (939 | ) | (228 | ) | |||||||
Comprehensive (loss) income | $ | (483 | ) | $ | 5,087 | $ | (1,236 | ) | $ | 6,218 | |||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
A Shares Common Stock | I Shares Common Stock | W Shares Common Stock | Capital in Excess of Par Value | Accumulated Distributions in Excess of Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Par Value | |||||||||||||||||||||||||||||||
Balance, January 1, 2016 | 1,371,763 | $ | 14 | 657,624 | $ | 7 | 7,825,063 | $ | 78 | $ | 140,202 | $ | (9,949 | ) | $ | (375 | ) | $ | 129,977 | |||||||||||||||||
Issuance of common stock | 1,203,651 | 12 | 64,976 | — | 2,482,180 | 25 | 69,117 | — | — | 69,154 | ||||||||||||||||||||||||||
Distributions to investors | — | — | — | — | — | — | — | (5,560 | ) | — | (5,560 | ) | ||||||||||||||||||||||||
Commissions, dealer manager and distribution fees | — | — | — | — | — | — | (4,100 | ) | — | — | (4,100 | ) | ||||||||||||||||||||||||
Other offering costs | — | — | — | — | — | — | (513 | ) | — | — | (513 | ) | ||||||||||||||||||||||||
Redemptions of common stock | (66,114 | ) | (1 | ) | — | — | (449,591 | ) | (4 | ) | (9,396 | ) | — | — | (9,401 | ) | ||||||||||||||||||||
Changes in redeemable common stock | — | — | — | — | — | — | (5,985 | ) | — | — | (5,985 | ) | ||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | (297 | ) | (939 | ) | (1,236 | ) | |||||||||||||||||||||||
Balance, June 30, 2016 | 2,509,300 | $ | 25 | 722,600 | $ | 7 | 9,857,652 | $ | 99 | $ | 189,325 | $ | (15,806 | ) | $ | (1,314 | ) | $ | 172,336 | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30, | ||||||||
2016 | 2015 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (297 | ) | $ | 6,446 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Depreciation and amortization, net | 4,253 | 3,294 | ||||||
Straight-line rental income | (440 | ) | (379 | ) | ||||
Amortization of deferred financing costs | 282 | 194 | ||||||
Amortization on marketable securities | 7 | 4 | ||||||
Gain on disposition of real estate assets, net | — | (4,678 | ) | |||||
(Gain) loss on sale of marketable securities | (4 | ) | 7 | |||||
Bad debt expense | 8 | 2 | ||||||
Changes in assets and liabilities: | ||||||||
Rents and tenant receivables | 60 | (24 | ) | |||||
Prepaid expenses and other assets | 168 | (222 | ) | |||||
Accounts payable and accrued expenses | (126 | ) | (222 | ) | ||||
Deferred rental income and other liabilities | 169 | (24 | ) | |||||
Due to affiliates | (483 | ) | (945 | ) | ||||
Net cash provided by operating activities | 3,597 | 3,453 | ||||||
Cash flows from investing activities: | ||||||||
Investment in real estate assets and capital expenditures | (41,618 | ) | (865 | ) | ||||
Investment in marketable securities | (376 | ) | (5,394 | ) | ||||
Proceeds from sale and maturities of marketable securities | 560 | 577 | ||||||
Proceeds from disposition of real estate assets | — | 17,403 | ||||||
Payment of property escrow deposits | (1,291 | ) | — | |||||
Refund of property escrow deposits | 971 | — | ||||||
Change in restricted cash | (514 | ) | (132 | ) | ||||
Net cash (used in) provided by investing activities | (42,268 | ) | 11,589 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock | 66,639 | 13,841 | ||||||
Offering costs on issuance of common stock | (1,812 | ) | (542 | ) | ||||
Redemptions of common stock | (9,401 | ) | (5,513 | ) | ||||
Distributions to investors | (2,803 | ) | (2,020 | ) | ||||
Proceeds from credit facility and notes payable | 16,275 | 39,950 | ||||||
Repayments of credit facility | (15,000 | ) | (51,000 | ) | ||||
Proceeds from line of credit with affiliate | — | 10,000 | ||||||
Repayments of line of credit with affiliate | — | (10,000 | ) | |||||
Deferred financing costs paid | (209 | ) | (863 | ) | ||||
Change in escrowed investor proceeds liability | 27 | 55 | ||||||
Net cash provided by (used in) financing activities | 53,716 | (6,092 | ) | |||||
Net increase in cash and cash equivalents | 15,045 | 8,950 | ||||||
Cash and cash equivalents, beginning of period | 14,840 | 4,489 | ||||||
Cash and cash equivalents, end of period | $ | 29,885 | $ | 13,439 | ||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||
Accrued dealer manager fee, distribution fee, and other offering costs | $ | 9,507 | $ | 5,062 | ||||
Distributions declared and unpaid | $ | 1,030 | $ | 612 | ||||
Common stock issued through distribution reinvestment plan | $ | 2,515 | $ | 1,517 | ||||
Change in fair value of marketable securities | $ | 96 | $ | (54 | ) | |||
Change in fair value of interest rate swaps | $ | (1,108 | ) | $ | (174 | ) | ||
Accrued capital expenditures | $ | 14 | $ | — | ||||
Supplemental cash flow disclosures: | ||||||||
Interest paid | $ | 2,054 | $ | 1,581 | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
7
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 2016
NOTE 1 — ORGANIZATION AND BUSINESS
Cole Real Estate Income Strategy (Daily NAV), Inc. (the “Company”) is a Maryland corporation, incorporated on July 27, 2010, that qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning in its taxable year ended December 31, 2012. Substantially all of the Company’s business is conducted through Cole Real Estate Income Strategy (Daily NAV) Operating Partnership, LP (“Cole OP”), a Delaware limited partnership. The Company is the sole general partner of, and owns, directly or indirectly, 100% of the partnership interests in Cole OP. The Company is externally managed by Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC, a Delaware limited liability company (“Cole Advisors”), an affiliate of the Company’s sponsor, Cole Capital®, which is a trade name used to refer to a group of affiliated entities directly or indirectly controlled by VEREIT, Inc. (“VEREIT”), a widely-held public company whose shares of common stock are listed on the New York Stock Exchange (NYSE: VER). VEREIT indirectly owns and/or controls the Company’s external advisor, Cole Advisors, the Company’s dealer manager, Cole Capital Corporation (“CCC”), the Company’s property manager, CREI Advisors, LLC (“CREI Advisors”), and Cole Capital.
On December 6, 2011, pursuant to a registration statement filed on Form S-11 (Registration No. 333-169535) (the “Initial Registration Statement”) under the Securities Act of 1933, as amended (the “Securities Act”), the Company commenced its initial public offering on a “best efforts” basis of $4.0 billion in shares of common stock. On August 26, 2013, pursuant to a registration statement filed on Form S-11 (Registration No. 333-186656) (the “Multi-Class Registration Statement”) under the Securities Act, the Company designated the existing shares of the Company’s common stock that were sold prior to such date to be Wrap Class shares (“W Shares”) of common stock and registered two new classes of the Company’s common stock, Advisor Class shares (“A Shares”) and Institutional Class shares (“I Shares”). Pursuant to the Multi-Class Registration Statement, the Company is offering up to $4.0 billion in shares of common stock of the three classes (the “Offering”), consisting of $3.5 billion in shares in the Company’s primary offering (the “Primary Offering”) and $500.0 million in shares pursuant to a distribution reinvestment plan (the “DRIP”). The Company is offering to sell any combination of W Shares, A Shares and I Shares with a dollar value up to the maximum offering amount. As of June 30, 2016, the Company had issued approximately 15.4 million shares of common stock in the Offering for gross offering proceeds of $269.1 million before offering costs and selling commissions, and the current portion of dealer manager fees and distribution fees of $6.0 million.
The per share purchase price for each class of common stock varies from day-to-day and, on each business day, is equal to, for each class of common stock, the Company’s net asset value (“NAV”) for such class, divided by the number of shares of that class outstanding as of the close of business on the previous day, plus, for A Shares sold in the Primary Offering, applicable selling commissions. The Company’s NAV per share is calculated daily as of the close of business by an independent fund accountant using a process that reflects (1) estimated values of each of the Company’s commercial real estate assets, related liabilities and notes receivable secured by real estate provided periodically by the Company’s independent valuation expert in individual appraisal reports, (2) daily updates in the price of liquid assets for which third party market quotes are available, (3) accruals of daily distributions and (4) estimates of daily accruals, on a net basis, of operating revenues, expenses, debt service costs and fees. As of June 30, 2016, the NAV per share for W Shares, A Shares and I Shares was $18.31, $18.21 and $18.42, respectively. The Company’s NAV is not audited or reviewed by its independent registered public accounting firm.
The Company intends to use substantially all of the net proceeds from the Offering to acquire and operate a diversified portfolio primarily consisting of (1) necessity retail, office and industrial properties that are leased to creditworthy tenants under long-term net leases and are strategically located throughout the United States and U.S. protectorates, (2) notes receivable secured by commercial real estate, including the origination of loans, and (3) cash, cash equivalents, other short-term investments and traded real estate-related securities. As of June 30, 2016, the Company owned 90 commercial properties located in 30 states, containing 2.3 million rentable square feet of commercial space, including the square feet of buildings which are on land subject to ground leases. As of June 30, 2016, the rentable space at these properties was 99.2% leased.
The Company is structured as a perpetual-life, non-exchange traded REIT. This means that, subject to regulatory approval of our filing for additional offerings, the Company will be selling shares of common stock on a continuous basis and for an indefinite period of time to the extent permissible under applicable law. The Company will endeavor to take all reasonable actions to avoid interruptions in the continuous offering of shares of common stock. The Company reserves the right to terminate the Offering at any time.
8
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
NOTE 2 — CORRECTION OF PRIOR PERIOD AMOUNTS
During the second quarter of 2016, the Company was advised of a recent interpretative clarification regarding our industry’s accounting of the recognition of ongoing periodic fees (“OPFs”), which include dealer manager fees and distribution fees that are paid monthly related to the issuance of certain classes of common stock. The Company previously recorded OPFs as a reduction to equity on a monthly basis when payment was due to the dealer manager. The Company assessed this policy in light of the recent interpretive clarification, and determined that a liability should have been recorded for the estimated amount of total OPFs to be paid in future periods upon issuance of shares structured with OPFs. This determination affected the consolidated balance sheets, consolidated statements of stockholders’ equity and supplemental disclosures of non-cash investing and financing activities for historical periods beginning in 2011 through March 31, 2016. There was no impact to the statements of operations or comprehensive (loss) income or net cash provided by (used in) operating, investing or financing activities as presented in the consolidated statements of cash flows. The Company assessed the materiality of the correction on prior periods' financial statements in accordance with Accounting Standards Codification 250 (“ASC 250”), Presentation of Financial Statements, and concluded that these misstatements were not material to any of the Company's previously issued consolidated financial statements.
In accordance with ASC 250, the consolidated balance sheet as of December 31, 2015, the consolidated statement of stockholders’ equity January 1, 2016 beginning balance and the consolidated statements of cash flows – supplemental disclosures of non-cash investing and financing activities for the six months ended June 30, 2015 have been adjusted to reflect the correction.
The following tables show the affected line items within the consolidated financial statements (dollars in thousands):
Consolidated Balance Sheet
December 31, 2015 | ||||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||||
Due to affiliates | $ | 2,006 | $ | 6,229 | $ | 8,235 | ||||||
Total liabilities | $ | 127,329 | $ | 6,229 | $ | 133,558 | ||||||
Capital in excess of par value | $ | 146,431 | $ | (6,229 | ) | $ | 140,202 | |||||
Total stockholders’ equity | $ | 136,206 | $ | (6,229 | ) | $ | 129,977 | |||||
Consolidated Statement of Stockholders’ Equity
Capital in Excess of Par Value | Total Stockholders’ Equity | Capital in Excess of Par Value | Total Stockholders’ Equity | Capital in Excess of Par Value | Total Stockholders’ Equity | |||||||||||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||||||||||||||||
Balance, January 1, 2016 | $ | 146,431 | $ | 136,206 | $ | (6,229 | ) | $ | (6,229 | ) | $ | 140,202 | $ | 129,977 | ||||||||||
Consolidated Statements of Cash Flows – Supplemental Disclosures of Non-cash Investing and Financing Activities
Six Months Ended June 30, 2015 | |||||||||||
As Previously Reported | Adjustment | As Restated | |||||||||
Accrued dealer manager fee, distribution fee, and other offering costs | $ | 282 | $ | 4,780 | $ | 5,062 | |||||
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated unaudited financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying condensed consolidated unaudited financial statements.
9
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
Principles of Consolidation and Basis of Presentation
The condensed consolidated unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission regarding interim financial reporting, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements for the interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of full year results. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2015, and related notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The condensed consolidated unaudited financial statements should also be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.
The condensed consolidated unaudited financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the Company’s prior period condensed consolidated unaudited financial statements have been reclassified to conform to the current period presentation. The Company has chosen to break out the details of (i) real estate tax expenses from property operating expenses in the Company’s condensed consolidated unaudited statements of operations and (ii) straight-line rental income in the Company’s condensed consolidated unaudited statements of cash flows. The Company has also chosen to combine depreciation of $1.1 million and $2.1 million and amortization of $504,000 and $1.1 million for the three and six months ended June 30, 2015, respectively, into the line item depreciation and amortization in the condensed consolidated unaudited statements of operations.
The unrealized loss on interest rate swaps line item from the prior year has been disaggregated within the condensed consolidated unaudited statements of other comprehensive (loss) income into the captions unrealized loss on interest rate swaps and amount of loss reclassified from other comprehensive income into income as interest expense.
These reclassifications had no effect on previously reported totals or subtotals.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Investments
Real estate assets are stated at cost, less accumulated depreciation and amortization. Amounts capitalized to real estate assets consist of the cost of acquisition, construction and any tenant improvements, major improvements and betterments that extend the useful life of the real estate assets and leasing costs. All acquisition-related expenses, repairs and maintenance are expensed as incurred.
The Company considers the period of future benefit of each respective asset to determine the appropriate useful life. The estimated useful lives of the Company’s real estate assets by class are generally as follows:
Buildings | 40 years | |
Tenant improvements | Lesser of useful life or lease term | |
Intangible lease assets | Lease term | |
Recoverability of Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to, bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced
10
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
lease rates or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value will be determined using a discounted cash flow analysis and recent comparable sales transactions. No impairment indicators were identified and no impairment losses were recorded during the six months ended June 30, 2016 or 2015.
Assets Held for Sale
When a real estate asset is identified by the Company as held for sale, the Company will cease depreciation and amortization of the assets related to the property and estimate the fair value, net of selling costs. If, in management’s opinion, the fair value, net of selling costs, of the asset is less than the carrying amount of the asset, an adjustment to the carrying amount would be recorded to reflect the estimated fair value of the property, net of selling costs. There were no assets identified as held for sale as of June 30, 2016 or December 31, 2015.
Allocation of Purchase Price of Real Estate Assets
Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings and improvements, and to identified intangible assets and liabilities, consisting of the value of above- and below-market leases and the value of in-place leases, based in each case on their respective fair values. Acquisition-related expenses are expensed as incurred. The Company utilizes independent appraisals to assist in the determination of the fair values of the tangible assets of an acquired property (which includes land and buildings). The information in the appraisal, along with any additional information available to the Company’s management, is used in estimating the amount of the purchase price that is allocated to land. Other information in the appraisal, such as building value and market rents, may be used by the Company’s management in estimating the allocation of purchase price to the building and to intangible lease assets and liabilities. The appraisal firm has no involvement in management’s allocation decisions other than providing this market information.
The determination of the fair values of the real estate assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables. The use of alternative estimates may result in a different allocation of the Company’s purchase price, which could materially impact the Company’s results of operations.
Investment in Marketable Securities
Investment in marketable securities consists primarily of the Company’s investment in corporate and government debt securities. The Company determines the appropriate classification for debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. As of June 30, 2016, the Company classified its investments as available-for-sale as the Company is not actively trading the securities; however, the Company may sell them prior to their maturity. These investments are carried at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive (loss) income.
The Company monitors its available-for-sale securities for impairments. A loss is recognized when the Company determines that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost, the amount of the unrealized loss, the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. The analysis of determining whether the impairment of a security is deemed to be other-than-temporary requires significant judgments and assumptions. The use of alternative judgments and assumptions could result in a different conclusion.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method and is recorded in the accompanying condensed consolidated unaudited statements of operations in interest and other expense, net. Upon the sale of a security, the realized net gain or loss is computed on the specific identification method.
11
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
Restricted Cash
The Company had $632,000 and $118,000 in restricted cash as of June 30, 2016 and December 31, 2015, respectively. Included in restricted cash were escrowed investor proceeds of $77,000 and $50,000 for which shares of common stock had not been issued as of June 30, 2016 and December 31, 2015, respectively. Restricted cash as of June 30, 2016 included $500,000 held by a lender in an escrow account for a certain property in accordance with the respective loan agreement, and no amounts were held as of December 31, 2015. Additionally, as of June 30, 2016 and December 31, 2015, the Company had $55,000 and $68,000, respectively, in lender cash management accounts. As part of certain debt agreements, rent from certain of the Company’s tenants is deposited directly into a lockbox account, from which funds in excess of the required minimum balance are disbursed on a weekly basis to the Company.
Dealer Manager and Distribution Fees
The Company pays CCC dealer manager and distribution fees, which are calculated on a daily basis in the amount of 1/365th of the amount summarized in the table below for each class of common stock:
Dealer Manager Fee | Distribution Fee | ||||
W Shares | 0.55 | % | — | ||
A Shares | 0.55 | % | 0.50 | % | |
I Shares | 0.25 | % | — | ||
The dealer manager and distribution fees are paid monthly in arrears. An estimated liability for future dealer manager and distribution fees fees payable to CCC is recognized at the time each share is sold and included in due to affiliates in the condensed consolidated unaudited balance sheets with a corresponding decrease to capital in excess of par value. The Company recognized a liability for future dealer manager and distribution fees payable to CCC of $8.9 million and $6.2 million, as of June 30, 2016 and December 31, 2015, respectively.
Revenue Recognition
Certain properties have leases where minimum rental payments increase during the term of the lease. The Company records rental income for the full term of each lease on a straight-line basis. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purpose of this calculation. The Company defers the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Expected reimbursements from tenants for recoverable real estate taxes and operating expenses are included in tenant reimbursement income in the period when such costs are incurred.
The Company continually reviews receivables related to rent, including any unbilled straight-line rent, and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company will record an increase in the allowance for uncollectible accounts or record a direct write-off of the receivable in the condensed consolidated unaudited statements of operations and comprehensive (loss) income. As of June 30, 2016, the Company had an allowance for uncollectible accounts of $8,000. No allowance for uncollectible accounts was recorded as of December 31, 2015.
Earnings per Share
We have three classes of common stock with nonforfeitable dividend rights that are determined based on a different NAV for each class. Accordingly, we utilize the two-class method to determine our earnings per share, which results in the same earnings per share for each of the classes. Diluted income (loss) per share considers the effect of any potentially dilutive share equivalents, of which the Company had none for each of the three and six months ended June 30, 2016 or 2015.
Recent Accounting Pronouncements
Accounting Standards Update (“ASU”) No. 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”) — The amendments in this update eliminate the requirement that an acquirer in a business combination retrospectively account for measurement-period adjustments. Measurement-period adjustments should be recognized during the period in which the adjustment amount is determined, including any earnings impact that the acquirer would have recorded in prior periods if the accounting was completed at the acquisition date. These
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COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
provisions are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. The Company has evaluated the effect of ASU 2015-16 and believes its adoption was not significant to the Company’s consolidated financial statements.
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company is currently evaluating the effect that certain of these new accounting requirements may have on the Company’s accounting and related reporting and disclosures in the Company’s consolidated financial statements:
ASU No. 2014-09, Revenue from Contracts with Customers — The requirements were amended to remove inconsistencies in revenue requirements and to provide a more complete framework for addressing revenue issues across a broad range of industries and transaction types. The revised standard’s core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised standard also clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract to a customer. These provisions are effective January 1, 2018, and are to be applied retrospectively, with early adoption permitted for periods beginning after December 15, 2016 and interim periods thereafter.
ASU No. 2016-01, Financial Instruments (Subtopic 825-10) — The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive (loss) income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the consolidated balance sheets or the accompanying notes to the financial statements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
On February 25, 2016, the Financial Accounting Standards Board issued ASC 842 (“ASC 842”), Leases, which replaces the existing guidance in ASC 840, Leases. ASC 842 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (“ROU”) asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. The provisions of ASC 842 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and are required to be applied on a modified retrospective approach. Early adoption is permitted.
ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”) — The amendments in this update clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. These provisions are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 requires more timely recording of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology in current GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018.
NOTE 4 — FAIR VALUE MEASUREMENTS
GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
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COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 — Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:
Line of credit and notes payable — The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of the measurement date. The estimated fair value of the Company’s debt was $120.8 million as of June 30, 2016, which approximated the carrying value on that date. As of December 31, 2015, the fair value of the Company’s debt was $119.3 million compared to a carrying value on that date of $119.5 million. The fair value of the Company’s debt is estimated using Level 2 inputs.
Marketable securities — The Company’s marketable securities are carried at fair value and are valued using Level 1 inputs. The estimated fair value of the Company’s marketable securities are based on quoted market prices that are readily and regularly available in an active market.
Derivative instruments — The Company’s derivative instruments are comprised of interest rate swaps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the respective counterparties.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. However, as of June 30, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Other financial instruments — The Company considers the carrying values of its cash and cash equivalents, restricted cash, tenant and other receivables, accounts payable and accrued expenses, other liabilities, due to affiliates and distributions payable to approximate their fair values because of the short period of time between their origination and their expected realization and based on their highly-liquid nature. Due to the short-term maturities of these instruments, Level 1 inputs are utilized to estimate the fair value of these financial instruments.
Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, on disposition of the financial assets and liabilities. As of June 30, 2016, there have been no transfers of financial assets or liabilities between fair value hierarchy levels.
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COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 (in thousands):
Balance as of | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
June 30, 2016 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial asset: | ||||||||||||||||
Marketable securities | $ | 5,219 | $ | 5,219 | $ | — | $ | — | ||||||||
Financial liabilities: | ||||||||||||||||
Interest rate swaps | $ | (1,410 | ) | $ | — | $ | (1,410 | ) | $ | — | ||||||
Balance as of | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
December 31, 2015 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial asset: | ||||||||||||||||
Marketable Securities | $ | 5,237 | $ | 5,237 | $ | — | $ | — | ||||||||
Financial liabilities: | ||||||||||||||||
Interest rate swaps | $ | (302 | ) | $ | — | $ | (302 | ) | $ | — | ||||||
NOTE 5 — REAL ESTATE ACQUISITIONS
2016 Property Acquisitions
During the six months ended June 30, 2016, the Company acquired a 100% interest in 13 commercial properties for an aggregate purchase price of $41.6 million (the “2016 Acquisitions”). The Company purchased the 2016 Acquisitions with net proceeds from the Offering and available borrowings. The purchase price allocation for each of the Company’s acquisitions is preliminary and subject to change as it finalizes the allocation, which will be prior to the end of the current fiscal year. The Company preliminarily allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed.
The following table summarizes the preliminary purchase price allocation for the properties purchased during the six months ended June 30, 2016 (in thousands):
June 30, 2016 | |||||
Land | $ | 4,890 | |||
Building and improvements | 33,578 | ||||
Acquired in-place leases (1) | 3,165 | ||||
Acquired above-market leases (2) | 67 | ||||
Intangible lease liabilities (3) | (69 | ) | |||
Total purchase price | $ | 41,631 | |||
(1) | The weighted average amortization period for acquired in-place leases is 12.7 years for acquisitions completed during the six months ended June 30, 2016. |
(2) | The weighted average amortization period for acquired above-market leases is 10.7 years for acquisitions completed during the six months ended June 30, 2016. |
(3) | The weighted average amortization period for acquired intangible lease liabilities is 10.7 years for acquisitions completed during the six months ended June 30, 2016. |
The Company recorded revenue of $577,000 and $681,000, respectively, and net income of $62,000 and $59,000, respectively, for the three and six months ended June 30, 2016 related to the 2016 Acquisitions. In addition, the Company recorded $279,000 and $330,000 of acquisition-related expenses for the three and six months ended June 30, 2016, respectively, which is included in acquisition-related expenses on the condensed consolidated unaudited statements of operations.
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COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
The following information summarizes selected financial information of the Company, as if all of the 2016 Acquisitions were completed on January 1, 2015 for each period presented below. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the three and six months ended June 30, 2016 and 2015 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Pro forma basis (unaudited) | |||||||||||||||
Revenue | $ | 6,523 | $ | 5,324 | $ | 13,132 | $ | 10,910 | |||||||
Net income | $ | (135 | ) | $ | 5,363 | $ | 63 | $ | 6,535 | ||||||
The unaudited pro forma information for the three and six months ended June 30, 2016 was adjusted to exclude acquisition-related expenses recorded during such periods related to the 2016 Acquisitions. Accordingly, these expenses were instead recognized in the pro forma information for the three and six months ended June 30, 2015. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2015, nor does it purport to represent the results of future operations.
2015 Property Acquisition
During the six months ended June 30, 2015, the Company acquired a 100% interest in one commercial property for an aggregate purchase price of $865,000 (the “2015 Acquisition”). The Company purchased the 2015 Acquisition with net proceeds from the Offering combined with proceeds from borrowings. The Company allocated the purchase price of this property to the fair value of the assets acquired and liabilities assumed.
The following table summarizes the purchase price allocation for the property purchased during the six months ended June 30, 2015 (in thousands):
June 30, 2015 | |||
Land | $ | 150 | |
Building and improvements | 645 | ||
Acquired in-place leases | 91 | ||
Intangible lease liabilities | (21 | ) | |
Total purchase price | $ | 865 | |
The Company recorded revenue of $3,000 and net loss of $19,000 for the three and six months ended June 30, 2015, respectively, related to the 2015 Acquisition. In addition, the Company recorded $20,000 of acquisition related expenses for the three and six months ended June 30, 2015, which is included in acquisition related (income) expenses on the condensed consolidated unaudited statement of operations.
The following information summarizes selected financial information of the Company as if the 2015 Acquisition was completed on January 1, 2014 for each period presented below. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the three and six months ended June 30, 2015 and 2014 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Pro forma basis | |||||||||||||||
Revenue | $ | 4,581 | $ | 2,708 | $ | 9,427 | $ | 5,079 | |||||||
Net income | $ | 5,344 | $ | 120 | $ | 6,475 | $ | 386 | |||||||
The pro forma information for the three and six months ended June 30, 2015 was adjusted to exclude acquisition related expenses recorded during such periods related to the 2015 Acquisition. Accordingly, these expenses were instead recognized in the pro forma information for the three and six months ended June 30, 2014. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transaction occurred at the beginning of 2014, nor does it purport to represent the results of future operations.
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COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
Property Concentrations
As of June 30, 2016, no single tenant and no single geographic concentration accounted for greater than 10% of the Company’s 2016 gross annualized rental revenues. Tenants in the discount store, drugstore, and manufacturing industries accounted for 16%, 12%, and 11%, respectively, of the Company’s 2016 gross annualized rental revenues.
NOTE 6 — MARKETABLE SECURITIES
The Company owned marketable securities with an estimated fair value of $5.2 million as of both June 30, 2016 and December 31, 2015. The following is a summary of the Company’s available-for-sale securities as of June 30, 2016 (in thousands):
Available-for-Sale Securities | ||||||||||||
Amortized Cost Basis | Unrealized Gain | Fair Value | ||||||||||
U.S. Treasury Bonds | $ | 1,544 | $ | 24 | $ | 1,568 | ||||||
U.S. Agency Bonds | 1,064 | 5 | 1,069 | |||||||||
Corporate Bonds | 2,515 | 67 | 2,582 | |||||||||
Total available-for-sale securities | $ | 5,123 | $ | 96 | $ | 5,219 | ||||||
The following table provides the activity for the marketable securities during the six months ended June 30, 2016 (in thousands):
Amortized Cost Basis | Unrealized (Loss) Gain | Fair Value | ||||||||||
Marketable securities as of January 1, 2016 | $ | 5,310 | $ | (73 | ) | $ | 5,237 | |||||
Face value of marketable securities acquired | 370 | — | 370 | |||||||||
Premiums and discounts on purchase of marketable securities, net of acquisition costs | 6 | — | 6 | |||||||||
Amortization on marketable securities | (7 | ) | — | (7 | ) | |||||||
Sales and maturities of securities | (556 | ) | (4 | ) | (560 | ) | ||||||
Unrealized gain on marketable securities | — | 173 | 173 | |||||||||
Marketable securities as of June 30, 2016 | $ | 5,123 | $ | 96 | $ | 5,219 | ||||||
During the six months ended June 30, 2016, the Company sold 36 marketable securities for aggregate proceeds of $560,000. Unrealized gains (losses) on marketable securities are recorded in other comprehensive (loss) income, with a portion of the amount subsequently reclassified into other expense on the statement of operations as securities are sold and gains (losses) are recognized. In addition, the Company recorded an unrealized gain of $173,000 on its investments, which is included in accumulated other comprehensive loss on the accompanying condensed consolidated unaudited statement of stockholders’ equity for the six months ended June 30, 2016 and the condensed consolidated unaudited balance sheet as of June 30, 2016.
The scheduled maturities of the Company’s marketable securities as of June 30, 2016 are as follows (in thousands):
Available-for-Sale Securities | ||||||||
Amortized Cost | Estimated Fair Value | |||||||
Due within one year | $ | 762 | $ | 763 | ||||
Due after one year through five years | 1,809 | 1,827 | ||||||
Due after five years through ten years | 1,949 | 2,022 | ||||||
Due after ten years | 603 | 607 | ||||||
Total | $ | 5,123 | $ | 5,219 | ||||
Actual maturities of marketable securities can differ from contractual maturities because borrowers on certain debt securities may have the right to prepay their respective debt obligations at any time. In addition, factors such as prepayments and interest rates may affect the yields on such securities.
17
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
In estimating other-than-temporary impairment losses, management considers a variety of factors, including (1) whether the Company has the intent to sell the impaired security, (2) whether the Company expects to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value, and (3) whether the Company expects to recover the entire amortized cost basis of the security. The Company believes that none of the unrealized losses on investment securities are other-than-temporary as management expects the Company will fully recover the entire amortized cost basis of all securities. As of June 30, 2016, the Company had no other-than-temporary impairment losses.
NOTE 7 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risk. The following table summarizes the terms of the Company’s executed interest rate swap agreements designated as hedging instruments as of June 30, 2016 and December 31, 2015 (in thousands):
Outstanding Notional Amount as of | Interest | Effective | Maturity | Fair Value of Liabilities as of | |||||||||||||||
Balance Sheet Location | June 30, 2016 | Rate (1) | Date | Date | June 30, 2016 | December 31, 2015 | |||||||||||||
Interest Rate Swaps | Derivative liabilities, deferred rental income, and other liabilities | $ | 49,240 | 3.43% to 3.57% | 6/30/15 to 12/1/15 | 9/12/19 to 12/1/20 | $ | (1,410 | ) | $ | (302 | ) | |||||||
(1) The interest rates consist of the underlying index swapped to a fixed rate and the applicable interest rate spread as of June 30, 2016.
Additional disclosures related to the fair value of the Company’s derivative instruments are included in Note 4 to these condensed consolidated unaudited financial statements. The notional amount under the interest rate swap agreements is an indication of the extent of the Company’s involvement in each instrument, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges in order to hedge the variability of the anticipated cash flows on its variable rate debt. The change in fair value of the effective portion of the derivative instruments that are designated as hedges is recorded in other comprehensive loss, with a portion of the amount subsequently reclassified to interest expense as interest payments are made on the Company’s variable rate debt. For the three and six months ended June 30, 2016, the amounts reclassified were $136,000 and $274,000, respectively. The amount reclassified for both the three and six months ended June 30, 2015 was $1,000.
Any ineffective portion of the change in fair value of the derivative instruments is recorded in interest expense. During the next 12 months, the Company estimates that an additional $520,000 will be reclassified from other comprehensive loss as an increase to interest expense.
The Company has agreements with each of its derivative counterparties that contain provisions whereby, if the Company defaults on certain of its unsecured indebtedness, the Company could also be declared in default on its derivative obligations, resulting in an acceleration of payment. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at an aggregate termination value, inclusive of interest payments, of $1.5 million, which includes accrued interest, at June 30, 2016. In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the credit quality of the Company and the respective counterparty. There were no termination events or events of default related to the interest rate swaps as of June 30, 2016.
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COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
NOTE 8 — CREDIT FACILITY AND NOTES PAYABLE
As of June 30, 2016, the Company had $119.0 million of debt outstanding, including net deferred financing costs, with weighted average years to maturity of 5.1 years and a weighted average interest rate of 3.66%. The following table summarizes the debt balances as of June 30, 2016 and December 31, 2015, and the debt activity for the six months ended June 30, 2016 (in thousands):
During the Six Months Ended June 30, 2016 | ||||||||||||||||||||
Balance as of December 31, 2015 | Debt Issuance, Net (1) | Repayments | Accretion | Balance as of June 30, 2016 | ||||||||||||||||
Credit facility | $ | 50,000 | $ | 5,000 | $ | (15,000 | ) | $ | — | $ | 40,000 | |||||||||
Fixed rate debt | 69,494 | 11,275 | — | — | 80,769 | |||||||||||||||
Total debt | 119,494 | 16,275 | (15,000 | ) | — | 120,769 | ||||||||||||||
Deferred costs (2) | (1,764 | ) | (170 | ) | — | 150 | (1,784 | ) | ||||||||||||
Total debt, net | $ | 117,730 | $ | 16,105 | $ | (15,000 | ) | $ | 150 | $ | 118,985 | |||||||||
(1) Includes deferred financing costs incurred during the period.
(2) Deferred costs relate to mortgage notes payable and the term portion of the Credit Facility.
As of June 30, 2016, the Company had fixed rate debt outstanding of $80.8 million, including $9.2 million of variable rate debt that is fixed through interest rate swap agreements, which has the effect of fixing the variable interest rate per annum through the maturity of the variable rate debt. The fixed rate debt has interest rates ranging from 3.37% to 4.05% per annum and as of June 30, 2016, the fixed rate debt had a weighted average interest rate of 3.77%. The fixed rate debt outstanding matures on various dates from December 2020 to February 2025. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the fixed rate debt outstanding was $134.9 million as of June 30, 2016. Each of the mortgage notes payable comprising the fixed rate debt is secured by the respective properties on which the debt was placed.
The Company has an amended and restated credit agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent (“JPMorgan Chase”), that provides for borrowings up to $125.0 million, which is comprised of $85.0 million in revolving loans (the “Revolving Loans”), and a $40.0 million term loan (the “Term Loan”), collectively, the credit facility (the “Credit Facility”). The Term Loan matures on September 12, 2019 and the Revolving Loans mature on September 12, 2017; however, the Company may elect to extend the maturity date for the Revolving Loans to September 12, 2019, subject to satisfying certain conditions described in the Amended Credit Agreement.
The Credit Facility bears interest at rates dependent upon the type of loan specified by the Company and the overall leverage ratio. For a eurodollar rate loan, the interest rate will be equal to the one-month, two-month, three-month or six-month London Interbank Offered Rate (“LIBOR”) for the interest period, as elected by the Company, multiplied by the statutory reserve rate, as defined in the Amended Credit Agreement (the “Eurodollar Rate”), plus an interest rate spread ranging from 1.90% to 2.45%. For base rate committed loans, the interest rate will be equal to a rate ranging from 0.90% to 1.45%, depending on the Company’s leverage ratio as defined in the Amended Credit Agreement, plus the greatest of: (a) JPMorgan Chase’s Prime Rate; (b) the Federal Funds Effective Rate (as defined in the Amended Credit Agreement) plus 0.50%; and (c) one-month LIBOR multiplied by the statutory reserve rate plus 1.0%. As of June 30, 2016, there were no amounts outstanding under the Revolving Loans, and the amount of the Term Loan outstanding totaled $40.0 million, which was subject to an interest rate swap agreement (the “Swapped Term Loan”). As of June 30, 2016, the all-in rate for the Swapped Term Loan was 3.43%. The Company had $85.0 million in unused capacity, subject to borrowing availability, as of June 30, 2016.
The Amended Credit Agreement contains customary representations, warranties, borrowing conditions and affirmative, negative and financial covenants, including minimum net worth, debt service coverage and leverage ratio requirements and dividend payout and REIT status requirements. The Amended Credit Agreement also includes usual and customary events of default and remedies for facilities of this nature. In particular, the Credit Agreement includes a requirement for the Company to maintain a minimum consolidated net worth greater than or equal to the sum of (i) $63.0 million plus (ii) 75% of the issuance of equity from the date of the Credit Agreement, a leverage ratio less than or equal to 60.0% and a fixed charge coverage ratio greater than 1.50. As of June 30, 2016, the Company believes it was in compliance with the covenants of the Amended Credit Agreement.
19
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
NOTE 9 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation and claims. The Company is not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which the Company’s properties are the subject.
Purchase Commitments
As of June 30, 2016, the Company had entered into a purchase agreement with an unaffiliated third-party seller to acquire a 100% interest in one retail property, subject to meeting certain criteria, for an aggregate purchase price of $10.7 million, exclusive of closing costs. As of June 30, 2016, the Company had a $320,000 property escrow deposit held by an escrow agent in connection with this future property acquisition. This deposit is included in the condensed consolidated unaudited balance sheets in prepaid expenses, property escrow deposits and other assets. As of June 30, 2016, this escrow deposit had not been forfeited.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. In addition, the Company may own or acquire certain properties that are subject to environmental remediation. Generally, the seller of the property, the tenant of the property and/or another third party is responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify the Company against future remediation costs. The Company also carries environmental liability insurance on its properties that provides limited coverage for any remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which the Company may be liable. The Company is not aware of any environmental matters which it believes are reasonably likely to have a material effect on its results of operations, financial condition or liquidity.
NOTE 10 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred, and will continue to incur, commissions, fees and expenses payable to Cole Advisors and certain of its affiliates in connection with the Offering, and the acquisition, management and performance of the Company’s assets.
Selling commissions, dealer manager and distribution fees
In connection with the Offering, CCC, the Company’s dealer manager, will receive selling commissions, an asset-based dealer manager fee and/or an asset-based distribution fee, as summarized in the table below for each class of common stock:
Selling Commission (1) | Dealer Manager Fee (2) | Distribution Fee (2) | |||||||
W Shares | — | 0.55 | % | — | |||||
A Shares | up to 3.75% | 0.55 | % | 0.50 | % | ||||
I Shares | — | 0.25 | % | — | |||||
(1) The selling commission is based on the offering price for A Shares. The selling commission expressed as a percentage of NAV per A Share, rather than the offering price, is up to 3.90%, subject to rounding and the effect of volume discounts the Company is offering on certain purchases of $150,001 or more of A Shares. Selling commissions are deducted directly from the offering price for A Shares and paid to CCC. CCC reallows 100% of the selling commissions on A Shares to participating broker-dealers.
(2) The dealer manager and distribution fees will be calculated on a daily basis in an amount equal to 1/365th of the percentage of NAV per W Share, A Share or I Share, as applicable, for such day on a continuous basis. CCC, in its sole discretion, may reallow a portion of the dealer manager fee and distribution fee to participating broker-dealers.
Other organization and offering expenses
All other organization and offering expenses associated with the sale of the Company’s common stock (excluding selling commissions, the distribution fee and the dealer manager fee) are paid for by Cole Advisors or its affiliates and can be reimbursed by the Company up to 0.75% of the aggregate gross offering proceeds, excluding selling commissions charged on A Shares sold in the Primary Offering. As of June 30, 2016, Cole Advisors or its affiliates had paid organization and offering expenses in excess of the 0.75% in connection with the Offering. These excess amounts were not included in the financial
20
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
statements of the Company because such amounts were not a liability of the Company as they exceeded 0.75% of gross proceeds from the Offering. As the Company raises additional proceeds from the Offering, these excess amounts may become payable to Cole Advisors.
Advisory fees and expenses
The Company pays Cole Advisors an asset-based advisory fee that is payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 0.90% of the Company’s NAV for each class of common stock, for each day.
Operating expenses
The Company reimburses Cole Advisors for the operating expenses it paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse for any amount by which its operating expenses (including the advisory fee) at the end of the four preceding fiscal quarters exceeds the greater of (1) 2% of average invested assets, or (2) 25% of net income other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period.
Expense Cap
Cole Advisors had an expense cap in place from October 1, 2013 through December 31, 2015, whereby Cole Advisors funded all general and administrative expenses of the Company that were in excess of an amount calculated by multiplying the average NAV for the respective three month period by an annualized rate of 1.25% (the “Excess G&A”). During the six months ended June 30, 2015, the Company incurred $155,000 of Excess G&A which was reimbursed by Cole Advisors subsequent to June 30, 2015. Beginning January 1, 2016, Cole Advisors no longer funded Excess G&A.
Acquisition fees and expenses
In addition, the Company reimburses Cole Advisors for all out-of-pocket expenses incurred in connection with the acquisition of the Company’s investments. While most of the acquisition expenses are expected to be paid to third parties, a portion of the out-of-pocket acquisition expenses may be reimbursed to Cole Advisors or its affiliates. Acquisition expenses, together with any acquisition fees paid to third parties for a particular real estate-related asset, will in no event exceed 6% of the gross purchase price of such asset.
Performance Fee
As compensation for services provided pursuant to the advisory agreement, the Company will also pay Cole Advisors a performance-based fee calculated based on the Company’s annual total return to stockholders for each class of common stock (defined below), payable annually in arrears. The performance fee will be calculated such that for any calendar year in which the total return per share for a particular class exceeds 6% (the “6% Return”), Cole Advisors will receive 25% of the excess total return on such class above the 6% Return allocable to that class, but in no event will the Company pay Cole Advisors more than 10% of the aggregate total return, for that class, for such year. However, in the event the NAV per share of the Company’s W Shares, A Shares and I Shares decreases below the base NAV for the respective share class ($15.00, $16.72 and $16.82 for the W Shares, A Shares and I Shares, respectively) (the “Base NAV”), the performance-based fee for a respective class will not be calculated on any increase in NAV up to the Base NAV for the respective share class. In addition, the performance fee will not be paid with respect to any calendar year in which the NAV per share as of the last business day of the calendar year (the “Ending NAV”) for the respective share class is less than the Base NAV of that class. The Base NAV of any share class is subject to downward adjustment in the event that the Company’s board of directors, including a majority of the independent directors, determines that such an adjustment is necessary to provide an appropriate incentive to Cole Advisors to perform in a manner that seeks to maximize stockholder value and is in the best interests of the Company’s stockholders. In the event of any stock dividend, stock split, recapitalization or similar change in the Company’s capital structure, the Base NAV for the respective share class shall be ratably adjusted to reflect the effect of any such event.
The total return to stockholders is defined, for each class of the Company’s common stock, as the change in NAV per share plus distributions per share for such class. The NAV per share for a class calculated on the last trading day of a calendar year shall be the amount against which changes in NAV per share for such class are measured during the subsequent calendar year. Therefore, for each class of the Company’s common stock, payment of the performance-based component of the advisory fee (1) is contingent upon the Company’s actual annual total return exceeding the 6% Return and the Ending NAV per share for the respective share class being greater than the Base NAV of that class, (2) will vary in amount based on the Company’s actual performance, (3) cannot cause the Company’s total return as a percentage of stockholders’ invested capital for the year to be
21
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
reduced below 6% and (4) is payable to Cole Advisors if the Company’s total return exceeds the 6% Return in a particular calendar year, even if the total return to stockholders (or any particular stockholder) on a cumulative basis over any longer or shorter period has been less than 6% per annum. Cole Advisors will not be obligated to return any portion of advisory fees paid based on the Company’s subsequent performance. The Company did not reach the 6% Return during the six months ended June 30, 2016.
The Company incurred commissions, fees and expense reimbursements as shown in the table below for services provided by Cole Advisors and its affiliates related to the services described above during the periods indicated (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Selling commissions | $ | 421 | $ | 30 | $ | 804 | $ | 45 | ||||||||
Selling commissions reallowed by CCC | $ | 421 | $ | 30 | $ | 804 | $ | 45 | ||||||||
Distribution fees | $ | 50 | (1) | $ | 20 | (1) | $ | 88 | (1) | $ | 40 | (1) | ||||
Distribution fees reallowed by CCC | $ | 46 | $ | 15 | $ | 79 | $ | 34 | ||||||||
Dealer manager fees | $ | 295 | (1) | $ | 181 | (1) | $ | 552 | (1) | $ | 351 | (1) | ||||
Dealer manager fees reallowed by CCC | $ | 32 | $ | 24 | $ | 60 | $ | 49 | ||||||||
Organization and offering expense reimbursement | $ | 276 | $ | 80 | $ | 513 | $ | 115 | ||||||||
Acquisition (income) expense reimbursement(2) | $ | 377 | $ | (23 | ) | $ | 657 | $ | 40 | |||||||
Advisory fee | $ | 636 | $ | 306 | $ | 1,186 | $ | 590 | ||||||||
Operating expense reimbursement | $ | 402 | $ | — | $ | 749 | $ | — | ||||||||
Performance fee | $ | — | $ | 403 | $ | — | $ | 403 | ||||||||
(1) Amounts are calculated for the respective period in accordance with the dealer manager agreement and exclude the estimated liability for the future dealer manager and distribution fees payable to CCC, which are included in due to affiliates in the condensed consolidated unaudited balance sheets, with a corresponding decrease to capital in excess of par value, as described in Note 3 – Summary of Significant Accounting Policies.
(2) Includes amounts recorded during the three months ended June 30, 2015 to adjust expense accruals for actual amounts billed during the six months ended June 30, 2015.
Due to Affiliates
As of June 30, 2016 and December 31, 2015, $10.6 million and $8.2 million, respectively, was due to Cole Advisors or its affiliates primarily related to the estimated liability for current and future dealer manager and distribution fees, advisory fees, the reimbursement of organization and offering expenses, and acquisition expenses which were included in due to affiliates on the condensed consolidated unaudited balance sheets.
NOTE 11 — | ECONOMIC DEPENDENCY |
Under various agreements, the Company has engaged or will engage Cole Advisors or its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issuance, as well as other administrative responsibilities for the Company including accounting services and investor relations. As a result of these relationships, the Company is dependent upon Cole Advisors or its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.
22
COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS - (Continued)
June 30, 2016
NOTE 12 — SUBSEQUENT EVENTS
Investment in Real Estate Assets
Subsequent to June 30, 2016, the Company acquired a 100% interest in one real estate property for an aggregate purchase price of $10.7 million. The acquisition was funded with net proceeds from the Offering. The Company has not completed its initial purchase price allocation with respect to this property and therefore cannot provide similar disclosures to those included in Note 5 in these condensed consolidated unaudited financial statements for this property.
Status of the Offering
As of August 9, 2016, the Company had received $286.6 million in gross offering proceeds through the issuance of approximately 16.3 million shares of its common stock in the Offering (including shares issued pursuant to the DRIP).
Share Redemptions
Subsequent to June 30, 2016 and through August 9, 2016, the Company redeemed approximately 15,000 shares for $281,000.
Credit Facility
As of August 9, 2016, the Company had $40.0 million outstanding under the Credit Facility and $85.0 million in unused capacity, subject to borrowing availability.
23
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015. The terms “we,” “us,” “our” and the “Company” refer to Cole Real Estate Income Strategy (Daily NAV), Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated unaudited financial statements and the notes thereto.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q of Cole Real Estate Income Strategy (Daily NAV), Inc., other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about our plans, strategies and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue” or other similar words.
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:
• | changes in economic conditions generally and the real estate and securities markets specifically; |
• | 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 raise a substantial amount of capital in the near term; |
• | 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; |
• | our ability to effectively deploy the proceeds raised in our public offering; |
• | our ability to make property sector allocations of our properties consistent with our present expectations; |
• | legislative or regulatory changes (including changes to the laws governing the taxation of REITs); |
• | changes to accounting principles generally accepted in the United States of America (“GAAP”); and |
• | our sponsor’s ability to fully reestablish the financial network which previously supported us. |
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 the SEC. Additionally, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. The forward-looking statements should be read in light of the risk factors identified in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2015.
Overview
We were formed on July 27, 2010 to acquire and operate a diversified portfolio of (1) necessity retail, office and industrial properties that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States and U.S. protectorates, (2) notes receivable secured by commercial real estate, including the origination of loans, and (3) cash, cash equivalents, other short-term investments and traded real estate securities. We commenced our principal operations on December 7, 2011, when we issued the initial $10.0 million in shares of our common stock in the Offering and acquired our first real estate property. We have no paid employees and are externally advised and managed by Cole Advisors.
24
VEREIT indirectly owns and/or controls Cole Advisors, our dealer manager, CCC, our property manager, CREI Advisors, and our sponsor, Cole Capital.
Our operating results and cash flows are primarily influenced by rental income from our commercial properties, interest expense on our indebtedness and acquisition and operating expenses. Rental and other property income accounted for 90% and 93% of our total revenue for the three months ended June 30, 2016 and 2015, respectively, and 89% and 93% for six months ended June 30, 2016 and 2015, respectively. As 99.2% of our rentable square feet was under lease as of June 30, 2016 with a weighted average remaining lease term of 10.7 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors. Cole Advisors regularly monitors the creditworthiness of our tenants by reviewing each tenant’s financial results, credit rating agency reports, when available, on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment, and other information for changes and possible trends. If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property or identifying a possible replacement tenant should the current tenant fail to perform on the lease. As of June 30, 2016, the net debt leverage ratio of our consolidated real estate assets, which is the ratio of debt, less cash and cash equivalents, to total gross real estate assets net of gross intangible lease liabilities, was 29.5%.
Portfolio Information
As of June 30, 2016, we owned 90 properties located in 30 states, comprising 2.3 million rentable square feet of commercial space, which includes the rentable square feet of buildings on land subject to ground leases. Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate investments. The following table shows the property statistics of our real estate assets as of June 30, 2016, and 2015:
As of June 30, | |||||||
2016 | 2015 | ||||||
Number of properties | 90 | 72 | |||||
Approximate rentable square feet (1) | 2.3 million | 1.6 million | |||||
Percentage of rentable square feet leased | 99.2 | % | 99.6 | % | |||
(1) Includes square feet of the buildings on land that are subject to ground leases.
The following table summarizes our consolidated real estate investment activity during the three and six months ended June 30, 2016 and 2015:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Properties acquired | 11 | 1 | 13 | 1 | |||||||||||
Approximate purchase price of acquired properties | $ | 23.9 | million | $ | 865,000 | $ | 41.6 | million | $ | 865,000 | |||||
Approximate rentable square feet | 216,000 | 7,000 | 328,000 | 7,000 | |||||||||||
Same Store Properties
We review our stabilized operating results, measured by contract rental revenue, from properties that we owned for the entirety of both the current and prior year reporting periods, referred to as “same store” properties. Contract rental revenue is a supplemental non-GAAP financial measure of real estate companies’ operating performance. Contract rental revenue is considered by management to be a helpful supplemental performance measure, as it provides a consistent method for the comparison of the Company’s properties. In determining the same store property pool, we include all properties that were owned for the entirety of both the current and prior reporting periods, except for properties during the current or prior year that were under development or redevelopment.
25
“Non-same store,” as reflected in the table below, includes properties acquired on or after April 1, 2015. As shown in the table below, contract rental revenue on the 70 same store properties for the three months ended June 30, 2016 increased 0.4%, compared to the three months ended June 30, 2015. The same store properties were 99.5% occupied as of June 30, 2016 and 99.6% occupied as of June 30, 2015. The following table shows the contract rental revenue from properties owned for both of the entire three months ended June 30, 2016 and 2015, along with a reconciliation to rental income, calculated in accordance with GAAP (dollar amounts in thousands):
Number of Properties | Three Months Ended June 30, | Increase (Decrease) | ||||||||||||||||
Contract rental revenue | 2016 | 2015 | $ Change | % Change | ||||||||||||||
“Same store” properties | 70 | $ | 3,984 | $ | 3,969 | $ | 15 | 0.4 | % | |||||||||
“Non-same store” properties | 20 | 1,489 | 3 | 1,486 | 49,533 | % | ||||||||||||
Disposed properties (1) | 5 | — | 134 | (134 | ) | (100 | )% | |||||||||||
Total contract rental revenue | 5,473 | 4,106 | 1,367 | 33 | % | |||||||||||||
Straight-line rental income | 233 | 182 | 51 | 28 | % | |||||||||||||
Amortization (2) | 7 | (50 | ) | 57 | (114 | )% | ||||||||||||
Rental income - as reported | $ | 5,713 | $ | 4,238 | $ | 1,475 | 35 | % | ||||||||||
______________________
(1) The Company disposed of five properties during the year ended December 31, 2015.
(2) Includes amortization of above- and below-market lease intangibles and deferred lease incentives.
“Non-same store,” as reflected in the table below, includes properties acquired on or after January 1, 2015. As shown in the table below, contract rental revenue on the 70 same store properties for the six months ended June 30, 2016 increased 0.5%, compared to the six months ended June 30, 2015. The same store properties were 99.5% occupied as of June 30, 2016 and 99.6% occupied as of June 30, 2015. The following table shows the contract rental revenue from properties owned for both of the entire six months ended June 30, 2016 and 2015, along with a reconciliation to rental income, calculated in accordance with GAAP (dollar amounts in thousands):
Number of Properties | Six Months Ended June 30, | Increase (Decrease) | ||||||||||||||||
Contract rental revenue | 2016 | 2015 | $ Change | % Change | ||||||||||||||
“Same store” properties | 70 | $ | 7,982 | $ | 7,944 | $ | 38 | 0.5 | % | |||||||||
“Non-same store” properties | 20 | 2,561 | 3 | 2,558 | 85,267 | % | ||||||||||||
Disposed properties (1) | 5 | — | 497 | (497 | ) | (100 | )% | |||||||||||
Total contract rental revenue | 10,543 | 8,444 | 2,099 | 25 | % | |||||||||||||
Straight-line rental income | 440 | 379 | 61 | 16 | % | |||||||||||||
Amortization (2) | 14 | (98 | ) | 112 | (114 | )% | ||||||||||||
Rental income - as reported | $ | 10,997 | $ | 8,725 | $ | 2,272 | 26 | % | ||||||||||
______________________
(1) The Company disposed of five properties during the year ended December 31, 2015.
(2) Includes amortization of above- and below-market lease intangibles and deferred lease incentives.
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Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate investments. The following table provides summary information about our results of operations for the three and six months ended June 30, 2016 and 2015 (in thousands):
Three Months Ended June 30, | 2016 vs 2015 Increase (Decrease) | Six Months Ended June 30, | 2016 vs 2015 Increase (Decrease) | |||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||
Total revenues | $ | 6,341 | $ | 4,565 | $ | 1,776 | $ | 12,295 | $ | 9,392 | $ | 2,903 | ||||||||||||
General and administrative expenses | $ | 1,115 | $ | 418 | $ | 697 | $ | 2,186 | $ | 853 | $ | 1,333 | ||||||||||||
Property operating expenses | $ | 212 | $ | 152 | $ | 60 | $ | 444 | $ | 332 | $ | 112 | ||||||||||||
Real estate tax expenses | $ | 477 | $ | 206 | $ | 271 | $ | 970 | $ | 415 | $ | 555 | ||||||||||||
Advisory fees and expenses | $ | 636 | $ | 709 | $ | (73 | ) | $ | 1,186 | $ | 993 | $ | 193 | |||||||||||
Acquisition-related expenses | $ | 703 | $ | (2 | ) | $ | 705 | $ | 1,043 | $ | 67 | $ | 976 | |||||||||||
Depreciation and amortization | $ | 2,226 | $ | 1,558 | $ | 668 | $ | 4,284 | $ | 3,196 | $ | 1,088 | ||||||||||||
Operating income | $ | 972 | $ | 1,524 | $ | (552 | ) | $ | 2,182 | $ | 3,536 | $ | (1,354 | ) | ||||||||||
Interest expense and other, net | $ | 1,252 | $ | 882 | $ | 370 | $ | 2,479 | $ | 1,768 | $ | 711 | ||||||||||||
Gain on disposition of real estate, net | $ | — | 4,678 | $ | (4,678 | ) | $ | — | $ | 4,678 | $ | (4,678 | ) | |||||||||||
Net (loss) income | $ | (280 | ) | $ | 5,320 | $ | (5,600 | ) | $ | (297 | ) | $ | 6,446 | $ | (6,743 | ) | ||||||||
Revenues
Our revenues consist primarily of rental and other property income from net leased commercial properties. We also pay certain operating expenses subject to reimbursement by our tenants, which results in tenant reimbursement income. Additionally, our portfolio includes liquid assets in the form of marketable securities. These investments can result in revenue in the form of interest income.
The increase in revenue of $1.8 million and $2.9 million during the three and six months ended June 30, 2016, respectively, as compared to the same periods in 2015 was primarily due to the acquisition of 19 rental income-producing properties subsequent to June 30, 2015. Rental and other property income accounted for 90% and 93% of our total revenues for the three months ended June 30, 2016 and 2015, respectively, and 89% and 93% of our total revenues for the six months ended June 30, 2016 and 2015, respectively. We also paid certain operating expenses subject to reimbursement by our tenants, which resulted in $600,000 and $1.2 million in tenant reimbursement income during the three and six months ended June 30, 2016, respectively, compared to $310,000 and $647,000 during the same periods in 2015. Interest income on marketable securities of $28,000 and $59,000 for the three and six months ended June 30, 2016, respectively, increased due to an increase in the average outstanding investment in marketable securities of $2.4 million, compared to $17,000 and $20,000 during the same periods in 2015.
General and Administrative Expenses
The primary general and administrative expense items are advisory fees, professional, accounting and legal fees, escrow and trustee fees, unused line of credit fees and state franchise and income taxes.
The increase in general and administrative expenses of $697,000 and $1.3 million during the three and six months ended June 30, 2016, respectively, as compared to the same periods in 2015 was primarily due to an increase in advisor reimbursements as Cole Advisors no longer funded Excess G&A in 2016.
Property Operating Expenses
Property operating expenses such as property repairs, maintenance and property related insurance include both reimbursable and non-reimbursable property expenses. We are reimbursed by tenants for reimbursable property operating expenses in accordance with the respective lease agreements.
The increase in property operating expenses of $60,000 during the three months ended June 30, 2016 as compared to the same period in 2015 was due to owning 79 properties during the three months ended June 30, 2016, and acquiring 11 additional properties during the period, compared to owning 75 properties during the three months ended June 30, 2015, and acquiring one and disposing of four properties during such period.
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The increase in property operating expenses of $112,000 during the six months ended June 30, 2016 as compared to the same period in 2015 was due to owning 77 properties during the six months ended June 30, 2016, and acquiring 13 additional properties during such period, compared to owning 75 properties during the six months ended June 30, 2015, and acquiring one and disposing of four properties during such period.
Real Estate Tax Expenses
The increase in real estate tax expenses of $271,000 and $555,000 during the three and six months ended June 30, 2016 as compared to the same periods in 2015 was primarily due to real estate taxes incurred on 19 additional properties acquired subsequent to June 30, 2015 and an increase in assessments at several of the 70 properties owned in comparable periods.
Advisory Fees and Expenses
The advisory fees and expenses that we pay to our advisor are based upon our NAV.
The decrease in advisory fees and expenses of $73,000 during the three months ended June 30, 2016 was due to the advisor not reaching the 6% performance fee benchmark during such period, which was reached during the three months ended June 30, 2015.
The increase in advisory fees and expenses of $193,000 during the six months ended June 30, 2016 as compared to the same period in 2015 was primarily due to an increase in our NAV for each share class resulting from the issuance of common stock subsequent to June 30, 2015 and the overall increase in property values since June 30, 2015. The NAV per share for W Shares, A Shares and I Shares increased $0.13, $0.05 and $0.17, respectively, between June 30, 2015 and June 30, 2016.
Acquisition-Related Expenses
The increase in acquisition-related expenses of $705,000 during the three months ended June 30, 2016 as compared to the same period in 2015 was due to the acquisition of 11 commercial properties for an aggregate purchase price of $23.9 million during the three months ended June 30, 2016, compared to the purchase of one commercial property for an aggregate purchase price of $865,000 during the three months ended June 30, 2015.
The increase in acquisition-related expenses of $976,000 during the six months ended June 30, 2016 as compared to the same period in 2015 was due to the acquisition of 13 commercial properties for an aggregate purchase price of $41.6 million during the six months ended June 30, 2016, compared to the purchase of one commercial property for an aggregate purchase price of $865,000 during the six months ended June 30, 2015.
Depreciation and Amortization
The increase in depreciation and amortization of $668,000 during the three months ended June 30, 2016 as compared to the same period in 2015 was due to owning 79 properties during the three months ended June 30, 2016, and acquiring 11 additional properties during such period, compared to owning 75 properties during the three months ended June 30, 2015, and acquiring one and disposing of four properties during such period.
The increase in depreciation and amortization of $1.1 million during the six months ended June 30, 2016 as compared to the same period in 2015 was due to owning 77 properties during the six months ended June 30, 2016, and acquiring 13 additional properties during such period, compared to owning 75 properties during the six months ended June 30, 2015, and acquiring one and disposing of four properties during such period.
Interest Expense and Other, Net
The increase in interest expense and other, net of $370,000 during the three months ended June 30, 2016 as compared to the same period in 2015 was primarily due to the addition of three notes payable subsequent to June 30, 2015 of $43.6 million in addition to an increase in the weighted average interest rate from 3.35% to 3.66%.
The increase in interest expense and other, net of $711,000 during the six months ended June 30, 2016 as compared to the same period in 2015 was primarily due to the addition of three notes payable subsequent to June 30, 2015 of $43.6 million in addition to an increase in the weighted average interest rate from 3.35% to 3.66%.
Gain on Disposition of Real Estate, Net
The decrease in gain on disposition of real estate, net of $4.7 million was related to the disposition of four properties during the three and six months ended June 30, 2015. No dispositions occurred during the three and six months ended June 30, 2016.
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Distributions
Our board of directors authorized a daily distribution, based on 366 days in the calendar year, of $0.002678083 per share for stockholders of record as of the close of business on each day of the period commencing on January 1, 2016 and ending on December 31, 2016. The daily distribution amount for each class of outstanding common stock is adjusted based on the relative NAV of the various classes each day so that, from day to day, distributions constitute a uniform percentage of the NAV per share of all classes. As a result, from day to day, the per share daily distribution for each outstanding class of common stock may be higher or lower than the daily distribution amount authorized by our board of directors based on the relative NAV of each class of common stock on that day.
During the six months ended June 30, 2016 and 2015, we paid distributions of $5.3 million and $3.5 million, respectively, including $2.5 million and $1.5 million, respectively, through the issuance of shares pursuant to the DRIP. Net cash provided by operating activities for the six months ended June 30, 2016 and 2015 was $3.6 million and $3.5 million, respectively, and reflected a reduction for real estate acquisition-related expenses incurred of $1.0 million and $67,000, respectively. We treat our real estate acquisition-related expenses as funded by proceeds from the Offering, including proceeds from the DRIP. Therefore, for consistency, proceeds from the issuance of common stock used as a source of distributions for the six months ended June 30, 2016 and 2015 includes the amount by which real estate acquisition-related expenses reduced net cash flows from operating activities in those periods of $1.0 million and $67,000, respectively. The distributions paid during the six months ended June 30, 2016 and 2015 were fully covered by cash flows from operating activities, including cash flows from operating activities from prior periods.
Share Redemptions
We have adopted a share redemption plan to provide limited liquidity whereby, on a daily basis, stockholders may request that we redeem all or any portion of their shares. Our share redemption plan provides that, on each business day, stockholders may request that we redeem all or any portion of their shares, subject to a minimum redemption amount and certain short-term trading fees. The redemption price per share for each class on any business day will be our NAV per share for such class for that day, calculated by the independent fund accountant in accordance with our valuation policies.
Our share redemption plan includes certain redemption limits, including a quarterly limit and, in some cases, an individual stockholder limit. During the six months ended June 30, 2016, we received redemption requests for, and redeemed, a total of approximately 516,000 shares of our common stock for $9.4 million, comprised of approximately 450,000 W Shares and 66,000 A Shares of our common stock for $8.2 million and $1.2 million, respectively. From June 30, 2016 through August 9, 2016, the Company redeemed approximately 15,000 shares for $281,000.
We intend to fund share redemptions with available cash, proceeds from our liquid investments and proceeds from sales of additional shares. We may, after taking the interests of our Company as a whole and the interests of our remaining stockholders into consideration, use proceeds from any available sources at our disposal to satisfy redemption requests, including, but not limited to, proceeds from sales of additional shares, excess cash flow from operations, sales of our liquid investments, incurrence of indebtedness and, if necessary, proceeds from the disposition of real estate properties. In an effort to have adequate cash available to support our share redemption plan, Cole Advisors may determine to reserve borrowing capacity under the Line of Credit. Cole Advisors could then elect to borrow against the Line of Credit in part to redeem shares presented for redemption during periods when we do not have sufficient proceeds from the sale of shares in the Offering to fund all redemption requests.
Liquidity and Capital Resources
General
Our principal demands for funds will be for real estate and real estate related investments and for the payment of acquisition-related expenses, operating expenses, distributions and redemptions to stockholders and principal and interest on any current and any future indebtedness. Generally, cash needs for items other than acquisitions and acquisition-related expenses will be generated from the operations of our current and future investments. We expect to continue to raise capital through the Offering and to utilize such funds along with future proceeds from secured or unsecured financing to complete future property acquisitions. Our operating cash flows primarily are driven by the rental income received from current and future leased properties. As of June 30, 2016, we had raised $269.1 million of gross proceeds from the Offering before offering costs, selling commissions, dealer manager fees and distribution fees of $6.0 million. Refer to Item 1A - Risk Factors in our annual report on Form 10-K for risks related to our ability to raise capital in the near term.
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Our Credit Facility with JPMorgan Chase Bank, N.A. as administrative agent, provides for borrowings up to $125.0 million, which is comprised of $85.0 million in revolving loans and a $40.0 million term loan, collectively, the credit facility. As of June 30, 2016, we had $85.0 million in unused capacity, subject to borrowing availability. As of June 30, 2016, we had cash and cash equivalents of $29.9 million.
Our investment guidelines provide that we will target the following aggregate allocation to relatively liquid investments, such as U.S. government securities, agency securities, corporate debt, publicly traded debt and equity real estate-related securities, cash, cash equivalents and other short-term investments and, in Cole Advisors’ discretion, lines of credit (collectively, the “Liquid Assets”): (1) 10% of our NAV up to $1.0 billion and (2) 5% of our NAV in excess of $1.0 billion. To the extent that Cole Advisors elects to maintain borrowing capacity under lines of credit, the amount available under the lines of credit will be included in calculating the Liquid Assets under these guidelines. These are guidelines, and our stockholders should not expect that we will, at all times, hold liquid assets at or above the target levels or that all liquid assets will be available to satisfy redemption requests as we receive them. We anticipate that both our overall allocation to liquid assets as a percentage of our NAV and our allocation to different types of liquid assets will vary. In making these determinations our advisor will consider our receipt of proceeds from sales of additional shares, our cash flow from operations, available borrowing capacity under lines of credit, if any, or from additional mortgages on our real estate, our receipt of proceeds from sales of assets, and the anticipated use of cash to fund redemptions, as well as the availability and pricing of different investments. The amount of the Liquid Assets is determined by our advisor, in its sole discretion, but is subject to review by our independent directors on a quarterly basis.
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for operating expenses, distributions and redemptions to stockholders and interest on our outstanding debt. We expect to meet our short-term liquidity requirements through available cash, cash provided by property operations, proceeds from the Offering and borrowings from the Line of Credit or other borrowings.
The Term Loan matures on September 12, 2019 and the Revolving Loans mature on September 12, 2017; however, we may elect to extend the maturity date for the Revolving Loans to September 12, 2019, subject to satisfying certain conditions described in the Amended Credit Agreement. As a result, we believe that the resources identified above will be sufficient to satisfy our short-term operating requirements, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds are for property and other asset acquisitions and the payment of tenant improvements, operating expenses, including debt service payments on any outstanding indebtedness, and distributions and redemptions to our stockholders. We expect to meet our long-term liquidity requirements through proceeds from the Offering, secured or unsecured financings from banks and other lenders, any available capacity on the Line of Credit by the addition of properties to the borrowing base, proceeds from the sale of marketable securities and net cash flows provided by operations.
We expect that substantially all net cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we may use other sources to fund distributions, as necessary, including proceeds from the Offering, borrowings on the Line of Credit and/or future borrowings on our unencumbered assets. To the extent that cash flows from operations are lower due to fewer properties being acquired or lower than expected returns on the properties, distributions paid to our stockholders may be lower. We expect that substantially all net cash flows from the Offering or debt financings will be used to fund acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding debt or distributions to our stockholders.
Contractual Obligations
As of June 30, 2016, we had $120.8 million of debt outstanding, with a weighted average interest rate of 3.66%. See Note 8 - Credit Facility and Notes Payable to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for a description of certain terms of our debt.
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Our contractual obligations as of June 30, 2016 were as follows (in thousands):
Payments due by period (1) | ||||||||||||||||||||
Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||||
Principal payments - credit facility (2) | $ | 40,000 | $ | — | $ | — | $ | 40,000 | $ | — | ||||||||||
Interest payments - credit facility (3) | 4,732 | 1,372 | 2,744 | 616 | — | |||||||||||||||
Principal payments - fixed debt rate | 80,769 | — | — | 9,240 | 71,529 | |||||||||||||||
Interest payments - fixed debt rate | 18,824 | 3,073 | 6,145 | 5,956 | 3,650 | |||||||||||||||
Total | $ | 144,325 | $ | 4,445 | $ | 8,889 | $ | 55,812 | $ | 75,179 | ||||||||||
(1) | The table does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable. |
(2) | Does not include the impact of any extension. We may elect to extend the maturity of the Revolving Loans to September 12, 2019, subject to satisfying certain conditions described in the Amended Credit Agreement. |
(3) | As of June 30, 2016, we had $9.2 million of variable rate mortgage notes and $40.0 million of variable rate debt on the Credit Facility effectively fixed through the use of interest rate swap agreements. We used the effective interest rates fixed under our swap agreements to calculate the debt payment obligations in future periods. |
Our charter prohibits us from incurring debt that would cause our borrowings to exceed 75% of our gross assets, valued at the aggregate cost (before depreciation and other non-cash reserves), unless approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report. In addition to this limitation in our charter, our board of directors has adopted a policy to further limit our borrowings to 60% of the greater of cost (before depreciation or other non-cash reserves) or fair market value of our gross assets; provided however, that a majority of our board of directors (including a majority of the independent directors) has determined that, as a general policy, borrowing in excess of 60% of the greater of cost (before deducting depreciation and other non-cash reserves) or fair market value of our gross assets is justified and in the best interest of us and our stockholders during our capital raising stage. The independent directors believe such borrowing levels are justified as higher debt levels during the offering stage may enable us to acquire properties earlier than we might otherwise be able to acquire them if we were to adhere to the 60% debt limitation, which could yield returns that are accretive to the portfolio. In addition, as we are in the offering stage, more equity could be raised in the future to reduce the debt levels. As of June 30, 2016, our ratio of debt to total gross real estate assets net of gross intangible lease liabilities was 39.2% (29.5% including adjustment to debt for cash and cash equivalents).
As of June 30, 2016, we had entered into a purchase agreement with an unaffiliated third-party seller to acquire a 100% interest in one retail property, subject to meeting certain criteria, for an aggregate purchase price of $10.7 million, exclusive of closing costs. As of June 30, 2016, we had $320,000 of property escrow deposits held by escrow agents in connection with this future property acquisition. These deposits are included in the condensed consolidated unaudited balance sheets in prepaid expenses, property escrow deposits and other assets in this Quarterly Report on Form 10-Q. As of June 30, 2016, none of these escrow deposits have been forfeited.
Cash Flow Analysis
Operating Activities. Net cash provided by operating activities was $3.6 million for the six months ended June 30, 2016, compared to $3.5 million for the six months ended June 30, 2015. The increase was primarily due to an increase in our working capital balances of $1.2 million, offset by a decrease in net income before non-cash adjustments for depreciation, amortization of intangibles, amortization of deferred financing costs, and amortization of discounts on marketable securities of $1.1 million. See “— Results of Operations” for a more complete discussion of the factors impacting our operating performance.
Investing Activities. Net cash used in investing activities increased $53.9 million to $42.3 million for the six months ended June 30, 2016, compared to net cash provided by investing activities of $11.6 million for the six months ended June 30, 2015. The increase was primarily due to the acquisition of 13 commercial properties during the six months ended June 30, 2016 compared to having acquired one property during the six months ended June 30, 2015.
Financing Activities. Net cash provided by financing activities increased $59.8 million to $53.7 million for the six months ended June 30, 2016, compared to net cash used in financing activities of $6.1 million for the six months ended June 30, 2015. The increase was primarily due to an increase in net proceeds from the issuance of common stock of $51.5 million and an increase in net proceeds from borrowing facilities and notes payable of $12.3 million, offset by an increase in redemptions of common stock of $3.9 million.
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Election as a REIT
From the date of our formation until the day following the date on which we issued shares to stockholders other than Cole Holdings Corporation (“CHC”), a former affiliate of our sponsor, we were a qualified subchapter S subsidiary of CHC, and therefore were disregarded as an entity separate from CHC for U.S. federal income tax purposes. We have elected to be taxed and currently qualify, as a REIT under the Internal Revenue Code of 1986, as amended. To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding certain non-cash items and net capital gains).
If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated unaudited financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying condensed consolidated unaudited financial statements.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 — Summary of Significant Accounting Policies to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015. We consider our critical accounting policies to be the following:
• | Recoverability of Real Estate Assets; |
• | Allocation of Purchase Price of Real Estate Assets; and |
• | Derivative Instruments and Hedging Activities. |
A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year ended December 31, 2015. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the period ended December 31, 2015 and related notes thereto.
Related-Party Transactions and Agreements
We have entered into agreements with Cole Advisors and its affiliates whereby we will pay certain fees to, or reimburse certain expenses of, Cole Advisors or its affiliates, primarily advisory and performance fees and expenses, organization and offering costs, selling commissions, dealer manager fees and expenses, distribution fees, and the reimbursement of certain acquisition and operating costs. See Note 10 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for a further explanation of the various related-party transactions, agreements and fees.
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Conflicts of Interest
Affiliates of Cole Advisors act as an advisor to, and our interim chief financial officer and our chief executive officer act as executive officers and/or directors of Cole Credit Property Trust IV, Inc., Cole Credit Property Trust V, Inc., Cole Office & Industrial REIT (CCIT II), Inc. and/or other real estate offerings in registration, all of which are REITs offered, distributed and/or managed by affiliates of Cole Advisors. As such, there are conflicts of interest where Cole Advisors or its affiliates, while serving in the capacity as sponsor, general partner, officer, director, key personnel and/or advisor for VEREIT or another real estate program sponsored by Cole Capital, including other real estate offerings in registration, may be in conflict with us in connection with providing services to other real estate related programs related to property acquisitions, property dispositions, and property management among others. The compensation arrangements between affiliates of Cole Advisors and VEREIT and these other real estate programs sponsored by Cole Capital could influence the advice provided to us. See Part I, Item 1. Business — Conflicts of Interest in our Annual Report on Form 10-K for the year ended December 31, 2015.
Off-Balance Sheet Arrangements
As of June 30, 2016 and December 31, 2015, 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.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
In connection with the acquisition of our properties, we have obtained variable rate debt financing, and are therefore exposed to changes in LIBOR. In the future, our objectives in managing interest rate risks will be to limit the impact of interest rate changes on operations and cash flows, and to lower overall borrowing costs. To achieve these objectives, we expect to borrow primarily at interest rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. In addition, we expect that we may enter into derivative financial instruments such as interest rate swaps, interest rate caps and rate lock arrangements in order to mitigate our interest rate risk. To the extent we enter into such arrangements, we will be exposed to credit and market risks including, but not limited to, the failure of any counterparty to perform under the terms of the derivative contract or the adverse effect on the value of the financial instrument resulting from a change in interest rates. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations. From time to time, we may enter into interest rate hedge contracts in order to mitigate our interest rate risk with respect to various debt instruments.
As of June 30, 2016, we had no variable rate debt outstanding.
As of June 30, 2016, we had two interest rate swap agreements outstanding, which mature on September 12, 2019 and December 1, 2020, with an aggregate notional amount of $49.2 million and an aggregate net fair value liability of $1.4 million, respectively. The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of June 30, 2016, an increase of 50 basis points in interest rates would result in a change of $820,000 to the fair value of the net derivative liability, resulting in a net derivative liability of $590,000. A decrease of 50 basis points in interest rates would result in an $829,000 change to the fair value of the net derivative liability, resulting in a net derivative liability of $2.2 million.
We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that no controls and procedures, no matter how well designed and operated, can provide absolute assurance of achieving the desired control objectives.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of June 30, 2016 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of June 30, 2016, were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. | Legal Proceedings |
In the ordinary course of business we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which our properties are the subject.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On December 6, 2011, the Initial Registration Statement for our public offering of up to $4.0 billion in shares of common stock was declared effective under the Securities Act. The Initial Registration Statement covered up to $3.5 billion in shares in a primary offering and up to $500.0 million in shares pursuant to the DRIP. On December 7, 2011, we satisfied the conditions of our escrow agreement and accepted the initial subscription for 666,667 W Shares of our common stock in the offering under the Initial Registration Statement, at a price of $15.00 per share, resulting in gross proceeds of $10.0 million. Additionally, as of June 30, 2016, we were authorized to issue 10.0 million shares of preferred stock, but none were issued or outstanding.
As of June 30, 2016, we had issued approximately 15.4 million shares in the Offering for gross proceeds of $269.1 million, out of which we have incurred $4.0 million in dealer manager fees, selling commissions and distribution fees and $2.0 million in organization and offering costs. With the net offering proceeds of $263.1 million and the borrowings from the credit facility, we acquired $323.4 million in real estate assets and incurred $4.6 million of acquisition-related expenses.
As of August 9, 2016, we have sold the following common shares and raised the following proceeds in connection with the Offering (dollar amounts in thousands):
W Shares | A Shares | I Shares | Total | |||||||||||||
Primary Offering | ||||||||||||||||
Shares | 12,192,238 | 2,918,243 | 685,737 | 15,796,218 | ||||||||||||
Proceeds | $ | 210,692 | $ | 53,922 | $ | 12,188 | $ | 276,802 | ||||||||
Distribution Reinvestment Plan | ||||||||||||||||
Shares | 437,320 | 74,904 | 40,549 | 552,773 | ||||||||||||
Proceeds | $ | 7,761 | $ | 1,345 | $ | 728 | $ | 9,834 | ||||||||
We have adopted a share redemption plan to provide limited liquidity whereby, on a daily basis, stockholders may request that we redeem all or any portion of their shares. The redemption price per share for each class on any business day is equal to our NAV per share for such class for that day, calculated by the independent fund accountant after the close of business on the redemption request day, without giving effect to any share purchases or redemptions to be effected on such day. Subject to limited exceptions, stockholders who redeem their shares of our common stock within the first 365 days from the date of purchase are subject to a short-term trading fee of 2% of the aggregate NAV per share of the shares of common stock received. In each calendar quarter, net redemptions are limited under our share redemption plan to 5% of our total NAV as of the end of the immediately preceding quarter, plus any unused percentage carried over to the next quarter, but the maximum carryover percentage may never exceed 15% in the aggregate, and net redemptions in any quarter may never exceed 10% of the prior quarter’s NAV.
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During the three months ended June 30, 2016, we redeemed shares as follows:
Period | Total Number of Shares Redeemed | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||
April 1, 2016 – April 30, 2016 | ||||||||||||
W Shares | 143,810 | $ | 18.28 | 143,810 | (1) | |||||||
A Shares | 27,382 | $ | 18.02 | 27,382 | (1) | |||||||
May 1, 2016 – May 30, 2016 | ||||||||||||
W Shares | 58,919 | $ | 18.19 | 58,919 | (1) | |||||||
A Shares | 22,727 | $ | 18.21 | 22,727 | (1) | |||||||
June 1, 2016 – June 30, 2016 | ||||||||||||
W Shares | 51,510 | $ | 18.29 | 51,510 | (1) | |||||||
A Shares | 2,453 | $ | 18.01 | 2,453 | (1) | |||||||
Total | 306,801 | 306,801 | ||||||||||
(1) | A description of the maximum number of shares that may be purchased under our share redemption program, the date our share redemption program was announced (in the Initial Registration Statement and the Multi-Class Registration Statement) and the amount of shares approved under our share redemption program is included in the narrative preceding this table. |
Unregistered Sales of Equity Securities
None.
Item 3. | Defaults Upon Senior Securities |
No events occurred during the three months ended June 30, 2016 that would require a response to this item.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
The following disclosure would have otherwise been filed in a Current Report on Form 8-K under the heading “Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers:”
On August 11, 2016, our board of directors appointed Nathan D. DeBacker, age 36, as our chief financial officer and treasurer, effective August 15, 2016. In addition, effective August 15, 2016, Mr. DeBacker was appointed as chief financial officer and treasurer of Cole Credit Property Trust IV, Inc., Cole Credit Property Trust V, Inc. and Cole Office & Industrial REIT (CCIT II), Inc. (together with the Company, the “Cole REITs”).
Effective August 8, 2016, Mr. DeBacker has served as senior vice president and chief financial officer, Cole REITs, of VEREIT. From May 2014 until joining VEREIT, Mr. DeBacker was the principal at CFO Financial Services, LLC, a certified public accounting firm that provided accounting, payroll, tax, forecasting and planning, business valuation and investment advisory services to business organizations. From December 2005 until May 2014, Mr. DeBacker worked at Cole Capital and, following the merger with VEREIT, most recently as vice president of real estate planning and analysis. From 2002 until 2005, Mr. DeBacker worked as an auditor for the independent public accounting firm of Ernst & Young LLP. Mr. DeBacker earned his bachelor’s degree in accounting from the University of Arizona and is a Certified Public Accountant.
Mr. DeBacker will replace Michael J. Bartolotta, who has served as our interim chief financial officer and treasurer since May 30, 2016. Mr. DeBacker did not enter into an employment agreement with us in connection with his appointment as the Company’s chief financial officer and treasurer, and the appointment of Mr. DeBacker as the Company’s chief financial officer and treasurer was not made pursuant to any arrangement or understanding between Mr. DeBacker and any other person. Mr. DeBacker has not had any direct or indirect material interests in any transaction with the Company or to which the Company is a party or in any currently proposed transaction with the Company or to which the Company is a party. Mr. DeBacker does have an employment agreement with VEREIT, dated as of August 8, 2016, relating to his position as senior vice president and chief financial officer, Cole REITs, of that company.
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Correction of Prior Period Amounts
The following tables showing the correction of prior period amounts should be read in conjunction with Note 2 — Correction of Prior Period Amounts to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q. This correction affected the consolidated balance sheets, consolidated statements of stockholders’ equity, and supplemental disclosures of non-cash investing and financing activities for historical periods beginning in 2011 through March 31, 2016. There was no impact to the statements of operations or comprehensive (loss) income or net cash provided by (used in) operating, investing or financing activities as presented in the consolidated statements of cash flows.
This correction was not material to any of the Company’s previously issued financial statements. The consolidated balance sheets as of March 31, 2016 and December 31, 2014, 2013, 2012 and 2011 and the consolidated statement of stockholders’ equity and the consolidated statements of cash flows – supplemental disclosures of non-cash investing and financing activities for the three months ended March 31, 2016 and the years ended December 31, 2014, 2013, 2012 and 2011 have been adjusted to reflect the correction.
The following tables show the affected line items within the consolidated financial statements (in thousands):
Consolidated Balance Sheets
December 31, 2011 | ||||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||||
Due to affiliates (1) | $ | 1,085 | $ | — | (1) | $ | 1,085 | |||||
Total liabilities (1) | $ | 23,761 | $ | — | (1) | $ | 23,761 | |||||
Capital in excess of par value (1) | $ | 10,115 | $ | — | (1) | $ | 10,115 | |||||
Total stockholders’ equity (1) | $ | 9,668 | $ | — | (1) | $ | 9,668 | |||||
______________________
(1) The adjustment to the upfront accrual for trailing fees in 2011 was $152.
December 31, 2012 | ||||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||||
Due to affiliates | $ | 335 | $ | 560 | $ | 895 | ||||||
Total liabilities | $ | 22,558 | $ | 560 | $ | 23,118 | ||||||
Capital in excess of par value | $ | 10,010 | $ | (560 | ) | $ | 9,450 | |||||
Total stockholders’ equity | $ | 8,880 | $ | (560 | ) | $ | 8,320 | |||||
December 31, 2013 | ||||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||||
Due to affiliates | $ | 829 | $ | 2,636 | $ | 3,465 | ||||||
Total liabilities | $ | 47,239 | $ | 2,636 | $ | 49,875 | ||||||
Capital in excess of par value | $ | 59,573 | $ | (2,636 | ) | $ | 56,937 | |||||
Total stockholders’ equity | $ | 55,662 | $ | (2,636 | ) | $ | 53,026 | |||||
December 31, 2014 | ||||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||||
Due to affiliates | $ | 1,816 | $ | 4,781 | $ | 6,597 | ||||||
Total liabilities | $ | 126,571 | $ | 4,781 | $ | 131,352 | ||||||
Capital in excess of par value | $ | 104,284 | $ | (4,781 | ) | $ | 99,503 | |||||
Total stockholders’ equity | $ | 94,820 | $ | (4,781 | ) | $ | 90,039 | |||||
March 31, 2016 | ||||||||||||
As Previously Reported | Adjustment | As Restated | ||||||||||
Due to affiliates | $ | 1,841 | $ | 7,508 | $ | 9,349 | ||||||
Total liabilities | $ | 118,396 | $ | 7,508 | $ | 125,904 | ||||||
Capital in excess of par value | $ | 170,809 | $ | (7,508 | ) | $ | 163,301 | |||||
Total stockholders’ equity | $ | 157,263 | $ | (7,508 | ) | $ | 149,755 | |||||
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Consolidated Statements of Stockholders’ Equity
Capital in Excess of Par Value | Total Stockholders’ Equity | Capital in Excess of Par Value | Total Stockholders’ Equity | Capital in Excess of Par Value | Total Stockholders’ Equity | |||||||||||||||||||
Balance, | As Previously Reported | Adjustment | As Restated | |||||||||||||||||||||
December 31, 2011 | $ | 10,115 | $ | 9,668 | $ | — | (1) | $ | — | (1) | $ | 10,115 | $ | 9,668 | ||||||||||
December 31, 2012 | $ | 10,010 | $ | 8,880 | $ | (560 | ) | $ | (560 | ) | $ | 9,450 | $ | 8,320 | ||||||||||
December 31, 2013 | $ | 59,573 | $ | 55,662 | $ | (2,636 | ) | $ | (2,636 | ) | $ | 56,937 | $ | 53,026 | ||||||||||
December 31, 2014 | $ | 104,284 | $ | 94,820 | $ | (4,781 | ) | $ | (4,781 | ) | $ | 99,503 | $ | 90,039 | ||||||||||
March 31, 2016 | $ | 170,809 | $ | 157,263 | $ | (7,508 | ) | $ | (7,508 | ) | $ | 163,301 | $ | 149,755 | ||||||||||
______________________
(1) The adjustment to the upfront accrual for trailing fees in 2011 was $152.
Consolidated Statements of Cash Flows – Supplemental Disclosures of Non-cash Investing and Financing Activities
As Previously Reported | Adjustment | As Restated | |||||||||
Accrued dealer manager fee, distribution fee, and other offering costs | |||||||||||
Year Ended December 31, 2011 | $ | 75 | $ | — | (1) | $ | 75 | ||||
Year Ended December 31, 2012 | $ | 136 | $ | 560 | $ | 696 | |||||
Year Ended December 31, 2013 | $ | 210 | $ | 2,636 | $ | 2,846 | |||||
Year Ended December 31, 2014 | $ | 273 | $ | 4,781 | $ | 5,054 | |||||
Three Months Ended March 31, 2016 | $ | 531 | $ | 7,508 | $ | 8,039 | |||||
______________________
(1) The adjustment to the upfront accrual for trailing fees in 2011 was $152.
Item 6. | Exhibits |
The exhibits listed on the Exhibit Index (following the signature section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cole Real Estate Income Strategy (Daily NAV), Inc. (Registrant) | ||
By: | /s/ Michael J. Bartolotta | |
Name: | Michael J. Bartolotta | |
Title: | Interim Chief Financial Officer and Treasurer (Principal Financial Officer) | |
Date: August 11, 2016
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EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | |
3.1 | Second Articles of Amendment and Restatement of Cole Real Estate Income Strategy (Daily NAV), Inc., dated as of August 26, 2013 (Incorporated by reference to the Company’s Form 8-K (File No. 333-169535), filed on August 26, 2013). | |
3.2 | Bylaws of Cole Real Estate Income Strategy (Daily NAV), Inc. effective September 28, 2011 (Incorporated by reference to Exhibit 3.2 to the Company’s pre-effective amendment No. 4 to Form S-11 (File No. 333-169535), filed on November 3, 2011). | |
3.3 | First Amendment of Bylaws effective June 14, 2012 (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K (File No. 333-169535), filed on June 19, 2012). | |
4.1 | Amended and Restated Distribution Reinvestment Plan (Incorporated by reference to Appendix E to the Company’s prospectus filed pursuant to Rule 424(b)(3) (File No. 333-186656), filed on August 26, 2013). | |
4.2 | Multiple Class Plan of Cole Real Estate Income Strategy (Daily NAV), Inc., dated as of August 26, 2013 (Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K (File No. 333-169535), filed on August 26, 2013). | |
31.1* | Certifications of the Principal Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certifications of the Principal Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | Certifications of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
* | Filed herewith. |
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