The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto. Also see "Forward-Looking Statements" and "Summary Risk Factors" preceding Part I and Part I, Item 1A, "Risk Factors."
Overview
We were formed onDecember 22, 2009 as aMaryland corporation that elected to be taxed as a REIT beginning with the taxable year endedDecember 31, 2011 and we intend to continue to operate in such a manner. We conduct our business primarily through ourOperating Partnership , of which we are the sole general partner. Subject to certain restrictions and limitations, our business is managed by our advisor pursuant to an advisory agreement and our advisor conducts our operations and manages our portfolio of real estate investments. Our advisor owns 20,857 shares of our common stock. We have no paid employees.
We have invested in a diversified portfolio of real estate investments. From
Our conflicts committee and our board of directors continue to evaluate various alternatives available to us, including whether or not to convert to an "NAV REIT." Our conflicts committee and board of directors remain focused on providing stable distributions and enhanced liquidity to stockholders. In the near term, while our conflicts committee and board of directors explore alternatives available to us, we may market certain of our assets for sale. Based on our assessment of alternatives available to us, market conditions and our further assessment of our capital raising prospects, our conflicts committee and board of directors may conclude that it would be in the best interest of our stockholders to (i) convert to an "NAV REIT," (ii) continue to operate as a going concern under our current business plan, or (iii) adopt a plan of liquidation that would involve the sale of our remaining assets (in which event such plan would be presented to stockholders for approval). There is no assurance that any alternative being considered by our board of directors will provide a return to stockholders that equals or exceeds the Company's estimated value per share as ofNovember 1, 2021 , and although we remain focused on providing enhanced liquidity to stockholders while maximizing returns to stockholders, we can provide no assurances in this regard. We also can provide no assurances as to whether or when any alternative being considered by our board of directors will be consummated. See Part I, Item 1A, "Risk Factors - Risks of the Proposed NAV REIT Conversion" and Part III, Item 13, "Certain Relationships and Related Transactions and Director Independence - Report of the Conflicts Committee - Certain Transactions with Related Persons." Section 5.11 of our charter requires that we seek stockholder approval of our liquidation if our shares of common stock are not listed on a national securities exchange bySeptember 30, 2020 , unless a majority of the conflicts committee of our board of directors, composed solely of all of our independent directors, determines that liquidation is not then in the best interest of our stockholders. Pursuant to our charter requirement, the conflicts committee assessed our portfolio of investments, and with consideration of the then current market conditions, including the uncertainty as a result of the COVID-19 pandemic and lack of liquidity in the marketplace, as well as our conflicts committee's and board of directors' continuing review and evaluation of various alternatives available to us, onAugust 30, 2021 , our conflicts committee unanimously determined to postpone approval of our liquidation. Section 5.11 of our charter requires that the conflicts committee revisit the issue of liquidation at least annually. At our annual meeting of stockholders held onMay 7, 2020 , our stockholders approved the removal of Section 5.11 of our charter. As set forth in the proxy statement for our annual meeting of stockholders, implementation of this amendment to our charter and our conversion to an NAV REIT remain subject to further approval of our conflicts committee. See Part I, Item 1A, "Risk Factors - Risks of the Proposed NAV REIT Conversion." 66
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Market Insights – Real Estate and Real Estate Finance Markets
Volatility in global financial markets and changing political environments can cause fluctuations in the performance of theU.S. commercial real estate markets. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Further, revenues from our properties could decrease due to a reduction in occupancy (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases), rent deferrals or abatements, tenants being unable to pay their rent and/or lower rental rates. To the extent there are increases in the cost of financing due to higher interest rates, this may cause difficulty in refinancing debt obligations at terms as favorable as the terms of existing indebtedness. Further, increases in interest rates would increase the amount of our debt payments on our variable rate debt to the extent the interest rates on such debt are not fixed through interest rate swap agreements or limited by interest rate caps. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure. Most recently, the COVID-19 pandemic has had a negative impact on the real estate market as discussed below.
COVID-19 pandemic and portfolio outlook
As ofDecember 31, 2021 , the novel coronavirus, or COVID-19, pandemic is ongoing. The spread of COVID-19 in many countries, includingthe United States , has significantly adversely impacted global economic activity and has contributed to significant volatility in financial markets. The global impact of the pandemic has been rapidly evolving and many countries, states and localities, including states and localities inthe United States , have reacted by restricting many business and travel activities, mandating the partial or complete closures of certain businesses and schools and taking other actions to mitigate the spread of the virus, most of which have a disruptive effect on economic activity, including the use of and demand for office space. Many private businesses, including some of our tenants, continue to recommend or mandate some or all of their employees work from home or are rotating employees in and out of the office to encourage social distancing in the workplace. Due to these events, during 2021, the usage of our assets remained lower than pre-pandemic levels. In addition, we experienced a significant reduction in leasing interest and activity when compared to pre-pandemic levels. We cannot predict when, if and to what extent these restrictions and other actions will end and when, if and to what extent economic activity, including the use of and demand for office space, will return to pre-pandemic levels. Even after the pandemic has ceased to be active, the prevalence of work-from-home policies during the pandemic may alter tenant preferences in the long-term with respect to the demand for leasing office space. The outbreak of COVID-19 and its impact on the current financial, economic, capital markets and real estate market environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions. Although a recovery is partially underway, it continues to be gradual, uneven and characterized by meaningful dispersion across sectors and regions, and could be hindered by persistent or resurgent infection rates. Issues with respect to the distribution and acceptance of vaccines or the spread of new variants of the virus could adversely impact the recovery. Overall, there remains significant uncertainty regarding the timing and duration of the economic recovery, which precludes any prediction as to the ultimate adverse impact COVID-19 may have on our business. During the years endedDecember 31, 2021 and 2020, we did not experience significant disruptions in our operations from the COVID-19 pandemic. Many of our tenants have suffered reductions in revenue sinceMarch 2020 . Rent collections for the quarter endedDecember 31, 2021 were approximately 99%. We have granted a number of lease concessions related to the effects of the COVID-19 pandemic but these lease concessions did not have a material impact to our consolidated balance sheet as ofDecember 31, 2021 or consolidated statement of operations for the year endedDecember 31, 2021 . As ofDecember 31, 2021 , we had entered into lease amendments related to the effects of the COVID-19 pandemic, granting$4.2 million of rent deferrals for the period fromMarch 2020 throughSeptember 2021 and granting$2.9 million in rental abatements. As ofDecember 31, 2021 , 81 tenants were granted rental deferrals, rental abatements and/or rent restructures, of which 49 of these tenants have begun to pay rent in accordance with their lease agreements subsequent to the deferral and/or abatement period, six of these tenants early terminated their leases and eight of these tenant leases were modified at lower rental rates and/or based on a percentage of the tenant's gross receipts. As ofDecember 31, 2021 , two of the 81 tenants continue to be in the rental deferral and/or rental abatement periods as granted in accordance with their agreements. ThroughDecember 31, 2021 ,$2.8 million of rent previously deferred has been billed to the tenants, of which$2.4 million was collected. 67
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As ofDecember 31, 2021 , we had$1.4 million of receivables for lease payments that had been deferred as lease concessions related to the effects of the COVID-19 pandemic, of which$1.1 million was reserved for payments not probable of collection, which were included in rent and other receivables, net on the accompanying consolidated balance sheet. For the years endedDecember 31, 2021 and 2020, we recorded$1.2 million and$1.5 million , respectively, of rental abatements granted to tenants as a result of the COVID-19 pandemic. Subsequent toDecember 31, 2021 , we have not seen a material impact on our rent collections. We are in discussions with several retail tenants to extend additional short-term deferrals. We will continue to evaluate any additional short-term rent relief requests from tenants on an individual basis. Not all tenant requests will ultimately result in modified agreements, nor are we forgoing our contractual rights under our lease agreements. In most cases, it is in our best interest to help our tenants remain in business and reopen when restrictions are lifted. Current collections and rent relief requests to date may not be indicative of collections or requests in any future period. During the year endedDecember 31, 2020 , we recognized an impairment charge of$19.9 million for an office/retail property due to the continued deterioration of retail demand at the property which was further impacted by the COVID-19 pandemic. We have also made a significant investment in the common units of the SREIT. Since earlyMarch 2020 , the trading price of the common units of the SREIT has experienced substantial volatility; however, the units have recovered a portion of their losses since the low inMarch 2020 . As ofMarch 31, 2022 , the aggregate value of our investment in the units of the SREIT was$163.0 million , which was based solely on the closing price of the units on the SGX-ST of$0.755 per unit as ofMarch 31, 2022 and did not take into account any potential discount for the holding period risk due to the quantity of units we hold. Should we experience significant reductions in rental revenue in the future related to the impact of the COVID-19 pandemic, this may limit our ability to draw on our revolving credit facilities or exercise our extension options due to covenants described in our loan agreements. However, we believe that our cash flow from operations, cash on hand, proceeds from our dividend reinvestment plan, proceeds from asset sales and current and anticipated financing activities are sufficient to meet our liquidity needs for the foreseeable future. Our business, like all businesses, is being impacted by the uncertainty regarding the COVID-19 pandemic, the effectiveness of policies introduced to neutralize the disease, and the impact of those policies on economic activity. While there are weakening macroeconomic conditions and some negative impact to our tenants, we believe with our diverse portfolio of core real estate properties with tenants across various industries, and with creditworthy tenants and limited retail exposure in our real estate portfolio, we are positioned to navigate this unprecedented period.
Cash and capital resources
Our principal demands for funds during the short and long-term are and will be for operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock; and payments of distributions to stockholders. Our primary sources of capital for meeting our cash requirements are as follows:
•The cash flows generated by our real estate and real estate-related investments;
• Debt financing (including amounts currently available under existing loan facilities);
•Proceeds from the sale of our real estate and real estate-related investments; and
• Proceeds from common shares issued under our dividend reinvestment plan.
Our real estate properties generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our real estate properties is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates on our leases, the collectability of rent and operating recoveries from our tenants and how well we manage our expenditures. Our investment in the equity securities of the SREIT generates cash flow in the form of dividend income, and dividends are typically declared and paid on a semi-annual basis, though dividends are not guaranteed. As ofDecember 31, 2021 , we held 215,841,899 units of the SREIT which represented 18.5% of the outstanding units of the SREIT as of that date. 68
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As ofDecember 31, 2021 , we had mortgage debt obligations in the aggregate principal amount of$1.5 billion , with a weighted-average remaining term of 1.8 years. The maturity dates of certain loans may be extended beyond their current maturity date, subject to certain terms and conditions contained in the loan documents. As ofDecember 31, 2021 , we did not have any debt maturing during the 12 months endingDecember 31, 2022 . We plan to exercise our extension options available under our loan agreements, pay down or refinance the related notes payable prior to their maturity dates. As ofDecember 31, 2021 , our debt obligations consisted of$123.0 million of fixed rate notes payable and$1.3 billion of variable rate notes payable. As ofDecember 31, 2021 , the interest rates on$1.1 billion of our variable rate notes payable were effectively fixed through interest rate swap agreements. As ofDecember 31, 2021 , we had$312.3 million of revolving debt available for future disbursement under various loans, subject to certain conditions set forth in the loan agreements. In order to provide stockholders with additional liquidity that is in excess of that permitted under our share redemption program, onJune 4, 2021 , we commenced a self-tender offer (the "Self-Tender") for up to 33,849,130 shares of our common stock at a price of$10.34 per share, or approximately$350.0 million of shares. OnJuly 12, 2021 , we accepted for purchase 26,375,383 shares properly tendered and not properly withdrawn at a purchase price of$10.34 per share, or approximately$272.7 million of shares, excluding fees and expenses relating to the tender offer. We funded the purchase of shares in the offer with approximately$100.0 million of available cash on hand and by drawing on our existing credit facilities in an aggregate amount of approximately$172.7 million . We paid cash distributions to our stockholders during the year endedDecember 31, 2021 using cash flow from operations from current and prior periods and proceeds from the sale of real estate. We believe that our cash flow from operations, cash on hand, proceeds from our dividend reinvestment plan, proceeds from asset sales and current and anticipated financing activities are sufficient to meet our liquidity needs for the foreseeable future. Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four fiscal quarters endedDecember 31, 2021 did not exceed the charter-imposed limitation.
Cash flow from operating activities
During the year ended
Cash flow from investing activities
Net cash from investing activities was
•$237.7 million net proceeds from the sale of Anchor Center and Domain Gateway; and
•$58.9 million net proceeds from sale of SREIT equity securities; offset by
•$70.1 million used for property improvements.
Cash flow from financing activities
During the year ended
• $365.6 million of cash used for common stock repurchases and repurchases, including
•$72.8 million of net cash provided by debt financing as a result of proceeds from notes payable of$806.0 million , partially offset by principal payments on notes payable of$730.5 million and payments of deferred financing costs of$2.7 million ;
• $61.7 million in net cash distributions, taking into account distributions reinvested by shareholders of
•$3.0 million used to settle interest rate swaps for off-market swap instruments; and
•Payment of other organizations and costs of offering
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We expect that our debt financing and other liabilities will be between 45% and 65% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves). There is no limitation on the amount we may borrow for the purchase of any single asset. We limit our total liabilities to 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), meaning that our borrowings and other liabilities may exceed our maximum target leverage of 65% of the cost of our tangible assets without violating these borrowing restrictions. We may exceed the 75% limit only if a majority of the conflicts committee approves each borrowing in excess of this limitation and we disclose such borrowings to our stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. To the extent financing in excess of this limit is available on attractive terms, our conflicts committee may approve debt in excess of this limit. From time to time, our total liabilities could also be below 45% of the cost of our tangible assets due to the lack of availability of debt financing. As ofDecember 31, 2021 , our borrowings and other liabilities were approximately 54% of both the cost (before deducting depreciation and other noncash reserves) and book value (before deducting depreciation) of our tangible assets. We also expect to use our capital resources to make certain payments to our advisor. We currently make payments to our advisor in connection with the acquisition of investments, the management of our investments and costs incurred by our advisor in providing services to us. We also pay fees to our advisor in connection with the disposition of investments. We reimburse our advisor and dealer manager for certain stockholder services. In addition, our advisor is entitled to an incentive fee upon achieving certain performance goals. Among the fees payable to our advisor is an asset management fee. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition expenses related thereto (but excludes acquisition fees paid or payable to our advisor). In the case of investments made through joint ventures, the asset management fee is determined based on our proportionate share of the underlying investment (but excluding acquisition fees paid to our advisor). With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment (which amount includes any portion of the investment that was debt financed and is inclusive of acquisition or origination expenses related thereto but is exclusive of acquisition or origination fees paid or payable to our advisor) and (ii) the outstanding principal amount of such loan or other investment, plus the acquisition or origination expenses related to the acquisition or funding of such investment (excluding acquisition or origination fees paid or payable to our advisor), as of the time of calculation. We currently do not pay asset management fees to our advisor on our investment in units of the SREIT. Pursuant to the advisory agreement, with respect to asset management fees accruing fromMarch 1, 2014 , our advisor agreed to defer, without interest, our obligation to pay asset management fees for any month in which our modified funds from operations ("MFFO") for such month, as such term is defined in the practice guideline issued by the IPA inNovember 2010 and interpreted by us, excluding asset management fees, does not exceed the amount of distributions declared by us for record dates of that month. We remain obligated to pay our advisor an asset management fee in any month in which our MFFO, excluding asset management fees, for such month exceeds the amount of distributions declared for the record dates of that month (such excess amount, an "MFFO Surplus"); however, any amount of such asset management fee in excess of the MFFO Surplus will also be deferred under the advisory agreement. If the MFFO Surplus for any month exceeds the amount of the asset management fee payable for such month, any remaining MFFO Surplus will be applied to pay any asset management fee amounts previously deferred in accordance with the advisory agreement. However, notwithstanding the foregoing, any and all deferred asset management fees that are unpaid will become immediately due and payable at such time as our stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) an 8% per year cumulative, noncompounded return on net invested capital (the "Stockholders' 8% Return") and (ii) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to our share redemption program. The Stockholders' 8% Return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of our stockholders to have received any minimum return in order for our advisor to receive deferred asset management fees. 70
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As ofDecember 31, 2021 , we had accrued$8.1 million of asset management fees, of which$6.4 million was deferred as ofDecember 31, 2021 , pursuant to the provision for deferral of asset management fees under the Advisory Agreement. The amount of asset management fees deferred, if any, will vary on a month-to-month basis and the total amount of asset management fees deferred as well as the timing of the deferrals and repayments are difficult to predict as they will depend on the amount of and terms of the debt we use to acquire assets, the level of operating cash flow generated by our real estate investments and other factors. In addition, deferrals and repayments may occur in the same period, and it is possible that there could be additional deferrals in the future. OnSeptember 27, 2021 , we and our advisor renewed the advisory agreement. The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee. If we convert to an NAV REIT, we would implement a revised advisory fee structure. See Part I, Item 1A, "Risk Factors - Risks of the Proposed NAV REIT Conversion" and Part III, Item 13, "Certain Relationships and Related Transactions and Director Independence - Report of the Conflicts Committee - Certain Transactions with Related Persons."
Responsibility for participation fees and potential change in fee structure
Pursuant to our advisory agreement currently in effect with our advisor, our advisor is due a subordinated participation in our net cash flows (the "Subordinated Participation in Net Cash Flows") upon meeting certain performance goals. After our stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to our share redemption program, and (ii) an 8.0% per year cumulative, noncompounded return on such net invested capital, our advisor is entitled to receive 15.0% of our net cash flows, whether from continuing operations, net sale proceeds or otherwise. Net sales proceeds means the net cash proceeds realized by us after deduction of all expenses incurred in connection with a sale, including disposition fees paid to our advisor. The 8.0% per year cumulative, noncompounded return on net invested capital is calculated on a daily basis. In making this calculation, the net invested capital is reduced to the extent distributions in excess of a cumulative, noncompounded, annual return of 8.0% are paid (from whatever source), except to the extent such distributions would be required to supplement prior distributions paid in order to achieve a cumulative, noncompounded, annual return of 8.0% (invested capital is only reduced as described in this sentence; it is not reduced simply because a distribution constitutes a return of capital for federal income tax purposes). The 8.0% per year cumulative, noncompounded return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of our stockholders to have received any minimum return in order for our advisor to participate in our net cash flows. In fact, if our advisor is entitled to participate in our net cash flows, the returns of our stockholders will differ, and some may be less than an 8.0% per year cumulative, noncompounded return. This fee is payable only if we are not listed on an exchange. OnJanuary 9, 2020 , we filed a definitive proxy statement with theSEC in connection with the annual meeting of stockholders to vote on, among other proposals, two proposals related to our pursuit of conversion to an NAV REIT. OnMay 7, 2020 at our annual meeting of stockholders, our stockholders approved the proposal to accelerate the payment of incentive compensation to our advisor, upon our conversion to an NAV REIT. If we convert to an NAV REIT, the proposed acceleration of the payment of incentive compensation to our advisor remains subject to further approval of the conflicts committee, after the proposed amount of the accelerated payment of the incentive fee has been determined. In connection with the determination of theNovember 1, 2021 estimated value per share of our common stock, our advisor determined that there would be no liability related to the Subordinated Participation in Net Cash Flows at that time, based on a hypothetical liquidation of the assets and liabilities at their estimated fair values, after considering the impact of any potential closing costs and fees related to the disposition of real estate properties; however, changes to the fair values of assets and liabilities could have a material impact to the incentive fee calculation. 71
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Our conflicts committee and our board of directors continue to evaluate various alternatives available to us, including whether or not to convert to an "NAV REIT." Our conflicts committee and board of directors remain focused on providing stable distributions and enhanced liquidity to stockholders. In the near term, while our conflicts committee and board of directors explore alternatives available to us, we may market certain of our assets for sale. Based on our assessment of alternatives available to us, market conditions and our further assessment of our capital raising prospects, our conflicts committee and board of directors may conclude that it would be in the best interest of our stockholders to (i) convert to an "NAV REIT," (ii) continue to operate as a going concern under our current business plan, or (iii) adopt a plan of liquidation that would involve the sale of our remaining assets (in which event such plan would be presented to stockholders for approval). There is no assurance that any alternative being considered by our board of directors will provide a return to stockholders that equals or exceeds our estimated value per share as ofNovember 1, 2021 , and although we remain focused on providing enhanced liquidity to stockholders while maximizing returns to stockholders, we can provide no assurances in this regard. We also can provide no assurances as to whether or when any alternative being considered by our board of directors will be consummated. See Part I, Item 1A, "Risk Factors" and Part III, Item 13, "Certain Relationships and Related Transactions and Director Independence - Report of the Conflicts Committee - Certain Transactions with Related Persons."
Debt securities
Below is a summary of our debt securities at
Payments Due During the Years Ended December 31,
Debt Obligations Total 2022 2023-2024 2025-2026
Outstanding debt obligations (1) $ 1,472,290 $ 1,013 $ 1,471,277 $ -
Interest payments on outstanding debt
obligations (2) (4) 54,555 29,500 25,055 -
Interest payments on interest rate swaps
(3) (4) 26,523 16,390 10,133 -
_____________________
(1) Amounts include principal repayments only based on maturity dates at
(2) Projected interest payments are based on the outstanding principal amounts, maturity dates and interest rates in effect as ofDecember 31, 2021 (consisting of the contractual interest rate and using interest rate indices as ofDecember 31, 2021 , where applicable). (3) Projected interest payments on interest rate swaps are calculated based on the notional amount, effective term of the swap contract, and fixed rate net of the swapped floating rate in effect as ofDecember 31, 2021 .
(4) We incurred interest expense of
Capital expenditure obligations
As ofDecember 31, 2021 , we have capital expenditure obligations of$111.3 million , the majority of which is expected to be spent in the next twelve months and of which$30.1 million has already been accrued and included in accounts payable and accrued liabilities on our consolidated balance sheet as ofDecember 31, 2021 . This amount includes unpaid contractual obligations for building improvements and unpaid portions of tenant improvement allowances which were granted pursuant to lease agreements executed as ofDecember 31, 2021 , including amounts that may be classified as lease incentives pursuant to GAAP. In certain cases, tenants may have discretion when to utilize their tenant allowances and may delay the start of projects or tenants control the construction of their projects and may not submit timely requests for reimbursement or there are general construction delays, all of which could extend the timing of payment for a portion of these capital expenditure obligations beyond twelve months.
Operating results
In this section, we discuss the results of our operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . For a discussion of the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , please refer to Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , which was filed with theSEC onMarch 12, 2021 and which specific discussion is incorporated herein by reference. 72
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As ofDecember 31, 2020 , we owned 18 office properties, one mixed-use office/retail property and an investment in the equity securities of the SREIT, which was accounted for as an investment in an unconsolidated entity under the equity method of accounting at that time. Subsequent toDecember 31, 2020 , we sold two office properties and through our indirect wholly owned subsidiary ("REIT Properties III"), sold 73,720,000 of our units in the SREIT, reducingREIT Properties III's ownership in the SREIT to 18.5%. As ofDecember 31, 2021 , we owned 16 office properties, one mixed-use office/retail property and an investment in the equity securities of the SREIT. As a result of our reduced ownership in the SREIT, our investment in the equity securities of the SREIT is now presented at fair value at each reporting date based on the closing price of the SREIT units on the SGX-ST on that date. Therefore, the results of operations presented for the years endedDecember 31, 2021 and 2020 are not directly comparable.
Comparison of the year ended
The following table provides summary information about our results of operations for the years endedDecember 31, 2021 and 2020 (dollar amounts in thousands): $ Changes Due to Dispositions of For the Years Ended Properties, Sale December 31, of Real Estate $ Change Due Equity to Properties Held Increase Percentage Securities and Throughout Both 2021 2020 (Decrease) Change Loan Pay-off (1) Periods (2) Rental income$ 280,144 $ 282,527 $ (2,383) (1) %$ (6,239) $ 3,856 Interest income from real estate loan receivable - 5,666 (5,666) (100) % (5,666) - Other operating income 16,617 18,725 (2,108) (11) % (1,018) (1,090) Operating, maintenance and management 68,806 71,470 (2,664) (4) % (3,971) 1,307 Real estate taxes and insurance 57,687 57,234 453 1 % (2,040) 2,493 Asset management fees to affiliate 19,832 20,990 (1,158) (6) % (1,644) 486 General and administrative expenses 6,116 6,600 (484) (7) % n/a n/a Depreciation and amortization 110,984 110,806 178 - % (3,675) 3,853 Interest expense 29,301 81,139 (51,838) (64) % (1,782) (50,056) Impairment charges on real estate - 19,896 (19,896) (100) % - (19,896) Other interest income 52 72 (20) (28) % n/a n/a Equity in income (loss) of an unconsolidated entity 8,698 (465) 9,163 (1,971) % 9,163 - Loss from extinguishment of debt (214) (199) (15) 8 % (166) 151 Unrealized gain on real estate equity securities 16,765 - 16,765 100 % 16,765 - Gain on sale of real estate, net 114,321 49,457 64,864 131 % 64,864 - _____________________
(1) Represents the increase (decrease) in dollar amount for the year ended
(2) Represents the increase (decrease) in dollar amount for the year ended
Rental income from our real estate properties decreased from$282.5 million for the year endedDecember 31, 2020 to$280.1 million for the year endedDecember 31, 2021 . The decrease in rental income was primarily due to the dispositions of real estate properties subsequent toJanuary 1, 2020 , partially offset by an increase in rental income related to lease commencements and early renewals of leases and lease termination income received during the year endedDecember 31, 2021 with respect to properties held throughout both periods. We expect rental income to decrease in future periods to the extent we dispose of properties, to vary based on occupancy rates and rental rates of our real estate investments and uncertainty and business disruptions or recoveries as a result of the COVID-19 pandemic and to increase due to tenant reimbursements related to operating expenses as physical occupancy increases as employees return to the office. See "Market Outlook - Real Estate and Real Estate Finance Markets - COVID-19 Pandemic and Portfolio Outlook" for a discussion on the impact of the COVID-19 pandemic on our business. Interest income from our real estate loan receivable, recognized using the interest method, was$5.7 million for the year endedDecember 31, 2020 . OnMay 7, 2020 , in connection with the sale ofHardware Village , we, through an indirect wholly owned subsidiary, provided seller financing and entered into a promissory note with the buyer. The promissory note was paid off in full onDecember 11, 2020 . We did not own any real estate loans receivable during the year endedDecember 31, 2021 . 73
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Other operating income decreased from$18.7 million during the year endedDecember 31, 2020 to$16.6 million for the year endedDecember 31, 2021 . The decrease in other operating income was primarily due to a decrease in parking revenues for properties held throughout both periods and the disposition of Anchor Centre inJanuary 2021 . We expect other operating income to vary in future periods based on occupancy rates and parking rates at our real estate properties, and business disruptions or recoveries as a result of the COVID-19 pandemic and to decrease to the extent we dispose of properties. Operating, maintenance and management costs decreased from$71.5 million for the year endedDecember 31, 2020 to$68.8 million for the year endedDecember 31, 2021 . The decrease in operating, maintenance and management costs was primarily due to the dispositions of real estate properties subsequent toJanuary 1, 2020 , partially offset by an overall increase in operating costs as a result of an increase in physical occupancy at properties held throughout both periods. We expect operating, maintenance and management costs to increase in future periods as a result of general inflation and as physical occupancy increases as employees return to the office and to decrease to the extent we dispose of additional properties. Real estate taxes and insurance increased slightly from$57.2 million for the year endedDecember 31, 2020 to$57.7 million for the year endedDecember 31, 2021 . The increase in real estate taxes and insurance was primarily due to a net increase in real estate taxes due to higher property tax assessments for real estate properties held throughout both periods, offset by a decrease due to the dispositions of real estate properties subsequent toJanuary 1, 2020 . We expect real estate taxes and insurance to increase in future periods as a result of general inflation and general increases due to future property tax reassessments for properties that we continue to own and to decrease to the extent we dispose of properties. Asset management fees with respect to our real estate investments decreased from$21.0 million for the year endedDecember 31, 2020 to$19.8 million for the year endedDecember 31, 2021 , primarily due to the dispositions of real estate properties subsequent toJanuary 1, 2020 and the payoff of our real estate loan receivable inDecember 2020 . We expect asset management fees to increase in future periods as a result of any improvements we make to our properties and to decrease to the extent we dispose of additional properties. As ofDecember 31, 2021 , there were$8.1 million of accrued asset management fees, of which$6.4 million was deferred as ofDecember 31, 2021 . For a discussion of accrued and deferred asset management fees, see "- Liquidity and Capital Resources" herein. General and administrative expenses decreased from$6.6 million for the year endedDecember 31, 2020 to$6.1 million for the year endedDecember 31, 2021 , primarily due to a receivable as ofDecember 31, 2021 related to estimated amounts charged to us by certain vendors for services for which we believe we were either overcharged or which were never performed, as discussed under Part II, Item 9B, "Other Information" of this Annual Report on Form 10-K, offset by appraisal fees related to the update of our estimated value per share inMay 2021 , and an increase in legal fees and proxy costs incurred during the year endedDecember 31, 2021 . General and administrative costs consisted primarily of portfolio legal fees, board of directors fees, third party transfer agent fees and errors and omissions insurance. We expect general and administrative expenses to vary in future periods. Depreciation and amortization increased slightly from$110.8 million for the year endedDecember 31, 2020 to$111.0 million for the year endedDecember 31, 2021 , primarily due to an increase in capital improvements at properties held throughout both periods, offset by a decrease as a result of the sale of Anchor Centre inJanuary 2021 and Domain Gateway inNovember 2021 . We expect depreciation and amortization to increase in future periods as a result of additional capital improvements, offset by a decrease in amortization related to fully amortized tenant origination and absorption costs and to the extent we dispose of properties. Interest expense decreased from$81.1 million for the year endedDecember 31, 2020 to$29.3 million for the year endedDecember 31, 2021 . Included in interest expense was (i)$37.7 million and$30.6 million of interest expense payments for the years endedDecember 31, 2020 and 2021, respectively, (ii) the amortization of deferred financing costs of$4.3 million and$4.0 million for the years endedDecember 31, 2020 and 2021, respectively, and (iii) interest expense (including gains and losses) incurred as a result of our derivative instruments which increased interest expense by$39.1 million for the year endedDecember 31, 2020 , and decreased interest expense by$5.3 million for the year endedDecember 31, 2021 . The decrease in interest expense was primarily due to changes in fair values with respect to our interest rate swaps that are not accounted for as cash flow hedges and a lower 30-day LIBOR during the year endedDecember 31, 2021 and its impact on interest expense related to our variable rate debt, partially offset by an increase in interest expense due to additional borrowings on our existing credit facilities, which was used to partially fund the Self-Tender. In general, we expect interest expense to vary based on fair value changes with respect to our interest rate swaps that are not accounted for as cash flow hedges, fluctuations in interest rates (for our variable rate debt) and our level of future borrowings. 74
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During the year endedDecember 31, 2020 , we recorded a non-cash impairment charge of$19.9 million to write down the carrying value of an office/retail property to its estimated fair value as a result of changes in cash flow estimates, including a change to the anticipated hold period of the property, which triggered the future estimated undiscounted cash flows to be lower than the net carrying value of the property. The decrease in cash flow projections was primarily due to the continued lack of demand for the property's retail component resulting in longer than estimated lease-up periods and lower projected rental rates, mostly due to the impact of the COVID-19 pandemic. We did not record any impairment charges on our real estate properties during the year endedDecember 31, 2021 . During the period fromJanuary 1, 2021 throughNovember 8, 2021 , we recorded equity in income from an unconsolidated entity of$8.7 million , related to our investment in the SREIT. Equity in income of an unconsolidated entity during the period fromJanuary 1, 2021 throughNovember 8, 2021 included a gain of$3.1 million related to our sale of 73,720,000 units in the SREIT onNovember 9, 2021 and a gain of$1.1 million to reflect the net effect to our investment as a result of the net proceeds raised by the SREIT in a private offering inJuly 2021 . During the year endedDecember 31, 2020 , we recorded equity in loss of an unconsolidated entity of$0.5 million related to our investment in the SREIT. Equity in loss of an unconsolidated entity for the year endedDecember 31, 2020 included$2.6 million related to our share of the net losses from the SREIT offset by a gain of$2.1 million to reflect the net effect to our investment as a result of the net proceeds raised by the SREIT in a private offering inFebruary 2020 . EffectiveNovember 9, 2021 , based on our 18.5% ownership interest in the SREIT, we do not exercise significant influence over the operations, financial policies and decision making with respect to the SREIT. Accordingly, our investment in the units of the SREIT represents an investment in marketable securities and therefore is presented at fair value as ofDecember 31, 2021 , based on the closing price of the SREIT units on the SGX-ST on that date. During the period fromNovember 9, 2021 throughDecember 31, 2021 , we recorded an unrealized gain on real estate equity securities of$16.8 million based on the difference in the aggregate carrying value of our 215,841,899 units of the SREIT onNovember 9, 2021 and the aggregate fair value of these units as ofDecember 31, 2021 , based on the closing price of the SREIT units on the SGX-ST on that date. We recognized a gain on sale of real estate of$114.3 million during the year endedDecember 31, 2021 related to the dispositions of Anchor Centre inJanuary 2021 and Domain Gateway inNovember 2021 . During the year endedDecember 31, 2020 , we recognized a gain on sale of real estate of$49.5 million related to the disposition ofHardware Village .
Funds from Operations and Modified Funds from Operations
We believe that funds from operations ("FFO") is a beneficial indicator of the
performance of an equity REIT. We compute FFO in accordance with the current
National Association of Real Estate Investment Trusts ("NAREIT") definition. FFO
represents net income, excluding gains and losses from sales of operating real
estate assets (which can vary among owners of identical assets in similar
conditions based on historical cost accounting and useful-life estimates), gains
and losses from change in control, impairment losses on real estate assets,
depreciation and amortization of real estate assets, and adjustments for
unconsolidated partnerships and joint ventures. In addition, we elected the
option to exclude mark-to-market changes in value recognized on real estate
equity securities in the calculation of FFO. We believe FFO facilitates
comparisons of operating performance between periods and among other REITs.
However, our computation of FFO may not be comparable to other REITs that do not
define FFO in accordance with the NAREIT definition or that interpret the
current NAREIT definition differently than we do. Our management believes that
historical cost accounting for real estate assets in accordance with U.S.
generally accepted accounting principles ("GAAP") implicitly assumes that the
value of real estate assets diminishes predictably over time. Since real estate
values have historically risen or fallen with market conditions, many industry
investors and analysts have considered the presentation of operating results for
real estate companies that use historical cost accounting to be insufficient by
themselves. As a result, we believe that the use of FFO, together with the
required GAAP presentations, provides a more complete understanding of our
performance relative to our competitors and provides a more informed and
appropriate basis on which to make decisions involving operating, financing, and
investing activities.
Changes in accounting rules have resulted in a substantial increase in the
number of non-operating and non-cash items included in the calculation of FFO.
As a result, our management also uses MFFO as an indicator of our ongoing
performance as well as our dividend sustainability. MFFO excludes from FFO:
acquisition fees and expenses (to the extent that such fees and expenses have
been recorded as operating expenses); adjustments related to contingent purchase
price obligations; amounts relating to straight-line rents and amortization of
above and below market intangible lease assets and liabilities; accretion of
discounts and amortization of premiums on debt investments; amortization of
closing costs relating to debt investments; impairments of real estate-related
investments; mark-to-market adjustments included in net income; and gains or
losses included in net income for the extinguishment or sale of debt or hedges.
We compute MFFO in accordance with the definition of MFFO included in the
practice guideline issued by the IPA in November 2010 as interpreted by
management. Our computation of MFFO may not be comparable to other REITs that do
not compute MFFO in accordance with the current IPA definition or that interpret
the current IPA definition differently than we do.
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We believe that MFFO is helpful as a measure of ongoing operating performance because it excludes costs that management considers more reflective of investing activities and other non-operating items included in FFO. Management believes that excluding acquisition fees and expenses (to the extent that such fees and expenses have been recorded as operating expenses) from MFFO provides investors with supplemental performance information that is consistent with management's analysis of the operating performance of the portfolio over time. MFFO also excludes non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO provides investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes. FFO and MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO and MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO and MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO and MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO and MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures; however, neither FFO nor MFFO reflects adjustments for the operations of properties sold or under contract to sale during the periods presented. During periods of significant disposition activity, FFO and MFFO are much more limited measures of future performance and dividend sustainability. In connection with our presentation of FFO and MFFO, we are providing information related to the proportion of MFFO related to properties sold during the years endedDecember 31, 2021 , 2020 and 2019, and a real estate loan receivable paid off in full onDecember 11, 2020 . 76
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Although the MFFO includes other adjustments, excluding adjustments for straight line rent, amortization of above and below market leases, amortization of discounts and closing costs, unrealized (gains) losses on derivative instruments and the loss resulting from the extinguishment of debt are the most significant adjustments for the periods presented. We have excluded these items based on the following economic considerations:
•Adjustments for straight-line rent. These are adjustments to rental revenue as
required by GAAP to recognize contractual lease payments on a straight-line
basis over the life of the respective lease. We have excluded these adjustments
in our calculation of MFFO to more appropriately reflect the current economic
impact of our in-place leases, while also providing investors with a useful
supplemental metric that addresses core operating performance by removing rent
we expect to receive in a future period or rent that was received in a prior
period;
•Amortization of above- and below-market leases. Similar to depreciation and
amortization of real estate assets and lease related costs that are excluded
from FFO, GAAP implicitly assumes that the value of intangible lease assets and
liabilities diminishes predictably over time and requires that these charges be
recognized currently in revenue. Since market lease rates in the aggregate have
historically risen or fallen with local market conditions, management believes
that by excluding these charges, MFFO provides useful supplemental information
on the realized economics of the real estate;
•Amortization of discounts and closing costs. Discounts and closing costs
related to debt investments are amortized over the term of the loan as an
adjustment to interest income. This application results in income recognition
that is different than the underlying contractual terms of the debt investments.
We have excluded the amortization of discounts and closing costs related to our
debt investments in our calculation of MFFO to more appropriately reflect the
economic impact of our debt investments, as discounts will not be economically
recognized until the loan is repaid and closing costs are essentially the same
as acquisition fees and expenses on real estate. We believe excluding these
items provides investors with a useful supplemental metric that directly
addresses core operating performance;
•Unrealized (gains) losses on derivative instruments. These adjustments include
unrealized (gains) losses from mark-to-market adjustments on interest rate
swaps. The change in fair value of interest rate swaps not designated as a hedge
are non-cash adjustments recognized directly in earnings and are included in
interest expense. We have excluded these adjustments in our calculation of MFFO
to more appropriately reflect the economic impact of our interest rate swap
agreements; and
•Loss from extinguishment of debt. A loss from extinguishment of debt, which
includes prepayment fees related to the extinguishment of debt, represents the
difference between the carrying value of any consideration transferred to the
lender in return for the extinguishment of a debt and the net carrying value of
the debt at the time of settlement. We have excluded the loss from
extinguishment of debt in our calculation of MFFO because these losses do not
impact the current operating performance of our investments and do not provide
an indication of future operating performance.
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Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculation of MFFO, for the years endedDecember 31, 2021 , 2020 and 2019, respectively (in thousands). No conclusions or comparisons should be made from the presentation of these periods. For the
Completed exercises
2021 2020 2019
Net income (loss) attributable to common shareholders
$ (18,497) $ 261,211 Depreciation of real estate assets 86,025 83,323 94,546 Amortization of lease-related costs 24,959 27,483 46,556 Impairment charges on real estate - 19,896 8,706 Unrealized gain on real estate equity securities (16,765) - - Gain on sale of real estate, net (114,321)
(49,457) (327,211) Adjustments for non-controlling interests – consolidated entity (1)
- 6,144 (28)
Adjustment for participation in a non-consolidated entity (2)
12,046 16,040 8,571
FFO attributable to ordinary shareholders (3) (4) (5) 135,601
84,932 92,351 Straight-line rent and amortization of above- and below-market leases, net (5,304) (7,371) (9,739)
Amortization of discount and closing costs on home loan receivable
- (2,415) - Loss from extinguishment of debt 214 199 2,229
Unrealized (gains) losses on derivative instruments (23,283)
25,165 35,664
Adjustment for participation in a non-consolidated entity (2)
(3,321) 4,426 2,017
MFFO attributable to ordinary shareholders (3) (4) (5)
$ 104,936 $ 122,522 _____________________
(1) Reflects adjustments to eliminate non-controlling interests from adjustments to convert our net income (loss) attributable to common shareholders to FFO.
(2) Reflects our noncontrolling interest share of adjustments to convert our net income (loss) attributable to common stockholders to FFO and MFFO for our equity investment in an unconsolidated entity.
(3) FFO and MFFO include
(4) FFO and MFFO for the year endedDecember 31, 2021 include a one-time$2.5 million holdover payment from a tenant related to a six-month lease extension which was received inDecember 2021 and will be recognized as rental income for GAAP purposes on a straight-line basis for a six-month period throughMay 2022 . (5) FFO and MFFO exclude our share of the SREIT's FFO and MFFO, respectively, for the period fromNovember 9, 2021 throughDecember 31, 2021 . OnNovember 9, 2021 , upon our sale of 73,720,000 units in the SREIT, we determined that based on our ownership interest of 18.5% of the outstanding units of the SREIT, we no longer have significant influence over the operations, financial policies and decision making with respect to the SREIT and therefore, ceased accounting for our investment in the SREIT as an equity method investment on that date. Accordingly, effectiveNovember 9, 2021 , our investment in the units of the SREIT represents an investment in marketable securities and is therefore presented at fair value at each reporting date based on the closing price of the SREIT units on the SGX-ST on that date. As a result, our share of the SREIT's FFO and MFFO will no longer be recorded on a monthly basis and we will only recognize FFO and MFFO related our investment in the SREIT as the SREIT declares future dividends based on eligible units as of the ex-dividend date consistent with GAAP. Our calculation of MFFO above includes amounts related to the operations of two office properties sold onJanuary 19, 2021 andNovember 2, 2021 , respectively, the operations of the multifamily apartment complex held by theHardware Village joint venture that was sold onMay 7, 2020 , interest income from our real estate loan receivable paid off in full onDecember 11, 2020 and the operations of the Singapore Portfolio sold onJuly 18, 2019 . Please refer to the table below with respect to the proportion of MFFO related to the real estate properties sold during the years endedDecember 31, 2021 , 2020 and 2019, and the real estate loan receivable paid off (in thousands). For the Years Ended December 31, 2021 2020 2019 MFFO by component: Assets held for investment$ 99,320 $ 97,892 $ 97,406 Real estate properties sold 4,587 4,340 25,116 Real estate loan receivable paid off - 2,704 - MFFO$ 103,907 $ 104,936 $ 122,522 78
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FFO and MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO and MFFO, such as tenant improvements, building improvements and deferred leasing costs.
Distributions
Distributions declared, distributions paid and cash flow from operating
activities were as follows during 2021 (in thousands, except per share amounts):
Distributions Distributions Paid (1) (2) Cash Flow
Distributions Declared from Operating
Period Declared Per Share (1) Cash Reinvested Total Activities
First Quarter 2021 $ 27,640 $ 0.149 $ 16,274 $ 11,326 $ 27,600 $ 16,295
Second Quarter 2021 27,755 0.149 22,024 14,959 36,983 27,698
Third Quarter 2021 23,863 0.150 9,434 6,507 15,941 32,247
Fourth Quarter 2021 23,361 0.150 13,970 9,577 23,547 24,559
$ 102,619 $ 0.598 $ 61,702 $ 42,369 $ 104,071 $ 100,799
_____________________
(1) Assumes share was issued and outstanding on each monthly record date for
distributions during the period presented. For each monthly record date for
distributions during the period from January 1, 2021 through December 31, 2021 ,
distributions were calculated at a rate of $0.04983333 per share.
(2) Distributions are generally paid on a monthly basis. Distributions for the
monthly record date of a given month are paid on or about the first business day
of the following month; however, we accelerated the payment of the June 2021
distributions due to the timing of the Self-Tender.
For the year ended December 31, 2021 , we paid aggregate distributions of $104.1
million , including $61.7 million of distributions paid in cash and $42.4 million
of distributions reinvested through our dividend reinvestment plan. Our net
income attributable to common stockholders for the year ended December 31, 2021
was $143.7 million . FFO for the year ended December 31, 2021 was $135.6 million
and cash flow from operating activities was $100.8 million . See the
reconciliation of FFO to net income attributable to common stockholders above.
We funded our total distributions paid, which includes net cash distributions
and dividends reinvested by stockholders, with $83.5 million of cash flow from
current operating activities, $4.2 million of cash flow from operating
activities in excess of distributions paid during prior periods and
$16.4 million of proceeds from the sale of real estate. For purposes of
determining the source of our distributions paid, we assume first that we use
cash flow from operating activities from the relevant or prior periods to fund
distribution payments.
Over the long-term, we generally expect our distributions will be paid from cash
flow from operating activities from current periods or prior periods (except
with respect to distributions related to sales of our assets and distributions
related to the sales or repayment of real estate-related investments). From time
to time during our operational stage, we may not pay distributions solely from
our cash flow from operating activities, in which case distributions may be paid
in whole or in part from debt financing. To the extent that we pay distributions
from sources other than our cash flow from operating activities, the overall
return to our stockholders may be reduced. Further, our operating performance
cannot be accurately predicted and may deteriorate in the future due to numerous
factors, including those discussed under "Forward-Looking Statements," "Summary
Risk Factors," Part I, Item 1A, "Risk Factors" and in this Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Those factors include: the future operating performance of our real
estate investments in the existing real estate and financial environment; the
success and economic viability of our tenants; our ability to refinance existing
indebtedness at comparable terms; changes in interest rates on any variable rate
debt obligations we incur; the level of participation in our dividend
reinvestment plan; and the extent to which the COVID-19 pandemic impacts our
operations and those of our tenants and our investment in the SREIT. In the
event our FFO and/or cash flow from operating activities decrease in the future,
the level of our distributions may also decrease. In addition, future
distributions declared and paid may exceed FFO and/or cash flow from operating
activities.
Significant Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of theSEC . The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. 79
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Revenue recognition – Operating leases
Immovable
OnJanuary 1, 2019 , we adopted ASU 2016-02, Leases Topic 842 including the package of practical expedients ("Topic 842") for all leases that commenced before the effective date ofJanuary 1, 2019 . Accordingly, we (i) did not reassess whether any expired or existing contracts are or contain leases, (ii) did not reassess the lease classification for any expired or existing lease, and (iii) did not reassess initial direct costs for any existing leases. We did not elect the practical expedient related to using hindsight to reevaluate the lease term. In addition, we adopted the practical expedient for land easements and did not assess whether existing or expired land easements that were not previously accounted for as leases under the lease accounting standards of Topic 840 are or contain a lease under Topic 842. In addition, Topic 842 provides an optional transition method to allow entities to apply the new lease accounting standards at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We adopted this transition method upon our adoption of the lease accounting standards of Topic 842, which did not result in a cumulative effect adjustment to the opening balance of retained earnings onJanuary 1, 2019 . In accordance with Topic 842, tenant reimbursements for property taxes and insurance are included in the single lease component of the lease contract (the right of the lessee to use the leased space) and therefore are accounted for as variable lease payments and are recorded as rental income on our statement of operations. In addition, we adopted the practical expedient available under Topic 842, to not separate nonlease components from the associated lease component and, instead to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue recognition standard (Topic 606) and if certain conditions are met, specifically related to tenant reimbursements for common area maintenance which would otherwise be accounted for under the revenue recognition standard. We believe the two conditions have been met for tenant reimbursements for common area maintenance as (i) the timing and pattern of transfer of the nonlease components and associated lease components are the same and (ii) the lease component would be classified as an operating lease. Accordingly, tenant reimbursements for common area maintenance are also accounted for as variable lease payments and recorded as rental income on our statement of operations. We recognize minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectibility is probable and record amounts expected to be received in later years as deferred rent receivable. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant's rent) that is funded is treated as a lease incentive and amortized as a reduction of rental revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
• whether the lease stipulates how a leasehold improvement allowance may be spent;
•whether the lessee or lessor supervises construction and bears the risk of cost overruns;
•if the amount of a leasehold improvement allowance is higher than market rates;
• whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
• whether the leasehold improvements are tenant-specific or general-purpose; and
• whether the leasehold improvements are expected to have a residual value at the end of the lease.
We leased apartment units under operating leases with terms generally of one
year or less. Generally, credit investigations were performed for prospective
residents and security deposits were obtained. We recognized rental revenue, net
of concessions, on a straight-line basis over the term of the lease, when
collectibility was determined to be probable.
In accordance with Topic 842, we make a determination of whether the
collectibility of the lease payments in an operating lease is probable. If we
determine the lease payments are not probable of collection, we would fully
reserve for any contractual lease payments, deferred rent receivable, and
variable lease payments and would recognize rental income only if cash is
received. These changes to our collectibility assessment are reflected as an
adjustment to rental income. We make estimates of the collectability of the
lease payments which requires significant judgment by management. We consider
payment history, current credit status, the tenant's financial condition,
security deposits, letters of credit, lease guarantees and current market
conditions that may impact the tenant's ability to make payments in accordance
with its lease agreements, including the impact of the COVID-19 pandemic on the
tenant's business, in making the determination.
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We, as a lessor, record costs to negotiate or arrange a lease that would have been incurred regardless of whether the lease was obtained, such as legal costs incurred to negotiate an operating lease, as an expense and classify such costs as operating, maintenance, and management expense on our consolidated statement of operations, as these costs are no longer capitalizable under the definition of initial direct costs under Topic 842.
Real estate sales
We follow the guidance of ASC 610-20, Other Income - Gains and Losses from the
Derecognition of Nonfinancial Assets ("ASC 610-20"), which applies to sales or
transfers to noncustomers of nonfinancial assets or in substance nonfinancial
assets that do not meet the definition of a business. Generally, our sales of
real estate would be considered a sale of a nonfinancial asset as defined by ASC
610-20.
ASC 610-20 refers to the revenue recognition principles under ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606). Under ASC 610-20, if we
determine we do not have a controlling financial interest in the entity that
holds the asset and the arrangement meets the criteria to be accounted for as a
contract, we would derecognize the asset and recognize a gain or loss on the
sale of the real estate when control of the underlying asset transfers to the
buyer. The application of these criteria can be complex and incorrect
assumptions on collectability of the transaction price or transfer of control
can result in the improper recognition of the gain or loss from sales of real
estate during the period.
Real Estate Loan Receivable
Interest income on our real estate loan receivable was recognized on an accrual
basis over the life of the investment using the interest method. Direct loan
origination fees and origination or acquisition costs, as well as premiums or
discounts, were amortized over the term of the loan as an adjustment to interest
income.
Dividend income from real estate equity securities is recognized on an accrual basis based on qualifying units on the ex-dividend date.
Immovable
Depreciation and amortization
Real estate costs related to the acquisition and improvement of properties are capitalized and depreciated over the expected useful life of the asset on a straight-line basis. Repair and maintenance costs are charged to expense as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. We consider the period of future benefit of an asset to determine its appropriate useful life. Expenditures for tenant improvements are capitalized and amortized over the shorter of the tenant's lease term or expected useful life. We anticipate the estimated useful lives of our assets by class to be generally as follows: Land N/A Buildings 25-40 years Building improvements 10-25 years Tenant improvements Shorter of lease term or
expected useful life Tenant severance and absorption costs Remaining term of related leases, including
below-market renewal periods
Real estate acquisition estimate
We record the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination or an asset acquisition. If substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, then the set is not a business. For purposes of this test, land and buildings can be combined along with the intangible assets for any in-place leases and accordingly, most acquisitions of investment properties would not meet the definition of a business and would be accounted for as an asset acquisition. To be considered a business, a set must include an input and a substantive process that together significantly contributes to the ability to create an output. All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values. For asset acquisitions, the cost of the acquisition is allocated to individual assets and liabilities on a relative fair value basis. Acquisition costs associated with business combinations are expensed as incurred. Acquisition costs associated with asset acquisitions are capitalized. 81
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We assess the acquisition date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methods similar to those used by independent appraisers, generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant. We record above-market and below-market in-place lease values for acquired properties based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of above-market in-place leases and for the initial term plus any extended term for any leases with below-market renewal options. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease, including any below-market renewal periods. We estimate the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease-up periods, considering current market conditions. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods.
We amortize the value of tenant creation and absorption costs through the charge to depreciation expense over the remaining non-cancellable term of the leases.
Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of our acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of our net income. Subsequent to the acquisition of a property, we may incur and capitalize costs necessary to get the property ready for its intended use. During that time, certain costs such as legal fees, real estate taxes and insurance and financing costs are also capitalized.
Impairment of real estate and related intangible assets and liabilities
We continually monitor events and changes in circumstances that could indicate
that the carrying amounts of our real estate and related intangible assets and
liabilities may not be recoverable or realized. When indicators of potential
impairment suggest that the carrying value of real estate and related intangible
assets and liabilities may not be recoverable, we assess the recoverability by
estimating whether we will recover the carrying value of the real estate and
related intangible assets and liabilities through its undiscounted future cash
flows and its eventual disposition. If, based on this analysis, we do not
believe that we will be able to recover the carrying value of the real estate
and related intangible assets and liabilities, we would record an impairment
loss to the extent that the carrying value exceeds the estimated fair value of
the real estate and related intangible assets and liabilities.
Projecting future cash flows involves estimating expected future operating
income and expenses related to the real estate and its related intangible assets
and liabilities as well as market and other trends. Using inappropriate
assumptions to estimate cash flows or the expected hold period until the
eventual disposition could result in incorrect conclusions on recoverability and
incorrect fair values of the real estate and its related intangible assets and
liabilities and could result in the overstatement of the carrying values of our
real estate and related intangible assets and liabilities and an overstatement
of our net income.
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Investments in
We account for investments in joint ventures or entities over which we may exercise significant influence, but do not control, and for investments in joint ventures that qualify as variable interest entities of which we are not the primary beneficiary using the equity method of accounting. Under the equity method, the investment is initially recorded at cost and subsequently adjusted to reflect additional contributions or distributions and our proportionate share of equity in the entity's income (loss). We recognize our proportionate share of the ongoing income or loss of the unconsolidated entity as equity in income (loss) of unconsolidated entities on the consolidated statements of operations. In addition, we account for any share issuances by the unconsolidated entity as if we sold a proportionate share of our investment. Any gain or loss as a result of the unconsolidated entity's share issuance is recognized in equity in income (loss) of unconsolidated entities on the consolidated statement of operations. On a quarterly basis, we evaluate our investment in an unconsolidated entity for other-than-temporary impairments. To evaluate for other-than-temporary impairments, we must determine if we have the ability to recover the carrying amount of our investment, which requires us to make assumptions about whether the unconsolidated entity can sustain earnings and requires us to estimate projected cash flows from our unconsolidated entity, which may include the amount we expect to realize upon the sale of our investment. Using inappropriate assumptions to estimate projected cash flows or sales prices could result in incorrect conclusions on recoverability.
Real estate equity securities are carried at fair value based on quoted market prices for the security. Unrealized gains and losses on real estate equity securities are recognized in profit or loss.
Derivatives
We enter into derivative instruments for risk management purposes to hedge our exposure to cash flow variability caused by changing interest rates on our variable rate notes payable. We record these derivative instruments at fair value on the accompanying consolidated balance sheets. The changes in fair value for derivative instruments that are not designated as a hedge or that do not meet the hedge accounting criteria are recorded as gain or loss on derivative instruments and included in interest expense as presented in the accompanying consolidated statements of operations. The calculation of the fair value of derivative instruments is complex and different inputs used in the model can result in significant changes to the fair value of derivative instruments and the related gain or loss on derivative instruments included as interest expense in the accompanying consolidated statements of operations. The valuation of our derivative instruments is based on a proprietary model using the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.
Choice of fair value of hybrid financial instruments with embedded derivatives
When we enter into interest rate swaps which include off-market terms, we
determine if these contracts are hybrid financial instruments with embedded
derivatives requiring bifurcation between the host contract and the derivative
instrument. We elected to initially and subsequently measure these hybrid
financial instruments in their entirety at fair value with concurrent
documentation of this election. Changes in the fair value of the hybrid
financial instrument under this fair value election are recorded in earnings and
are included in interest expense in the accompanying consolidated statements of
operations. The cash flows for these off-market swap instruments which contain
an other-than-insignificant financing element at inception are included in cash
flows provided by or used in financing activities on the accompanying
consolidated statements of cash flows.
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Income taxes
We have elected to be taxed as a REIT under the Internal Revenue Code. To continue to qualify as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax on income that we distribute as dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially and 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 qualify for treatment as a REIT.
Subsequent events
We assess subsequent events up to the date of issue of the consolidated financial statements.
Distributions Paid
At
Amended and updated share buyback program
OnMarch 17, 2022 , our board of directors approved theMarch 2022 Share Redemption Program. TheMarch 2022 Share Redemption Program decreases the reserve for Special Redemptions for calendar year 2022 from$10.0 million to$2.0 million . As such, during calendar year 2022, theMarch 2022 Share Redemption Program limits the number of shares we may redeem to those that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year, provided that once we have received requests for redemptions, whether in connection with Special Redemptions or otherwise, that if honored, and when combined with all prior redemptions made during the calendar year, would result in the amount of remaining funds available for the redemption of additional shares in such calendar year being$2.0 million or less, the last$2.0 million of available funds shall be reserved exclusively for redemptions sought in connection with Special Redemptions.
No other significant changes have been made to our share buyback program.
We may (a) amend, suspend or terminate theMarch 2022 Share Redemption Program for any reason, or (b) consistent withSEC guidance and interpretations, increase or decrease the funding available for the redemption of shares pursuant to theMarch 2022 Share Redemption Program, each upon ten business days' notice to our stockholders. We may provide notice by including such information in a (i) Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with theSEC or (ii) separate mailing to the stockholders.
the
Repayment date.
Monthly distributions
OnMarch 28, 2022 , our board of directors authorized aMarch 2022 distribution in the amount of$0.04983333 per share of common stock to stockholders of record as of the close of business onMarch 28, 2022 , which we expect to pay inApril 2022 , and anApril 2022 distribution in the amount of$0.04983333 per share of common stock to stockholders of record as of the close of business onApril 20, 2022 , which we expect to pay inMay 2022 .
Investors can choose to receive cash distributions or purchase additional shares through our dividend reinvestment plan.
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