Investments in Unconsolidated Entities

6 Months Ended

Jun. 30, 2024

Equity Method Investments and Joint Ventures [Abstract]

Office Joint Venture

On August 26, 2022, the Company completed the sale of a majority interest in a 41-property office portfolio (the “Initial JV Office Portfolio”) for a sale price of approximately $1.1 billion. On December 27, 2022, the Company completed a companion sale of a majority interest in a five-property office portfolio (“Companion JV Office Portfolio”, and together with the Initial JV Office Portfolio, the “JV Office Portfolio”) for a sale price of approximately $170.4 million.

In connection with the sale of the JV Office Portfolio, the Company, through its subsidiary GRT VAO OP, LLC (“GRT VAO Sub”), invested a combined $184.2 million for a 49% interest in Galaxy REIT LLC, a joint venture through which it owns indirectly an approximate 49% interest in the JV Office Portfolio (the “Office Joint Venture”). The Office Joint Venture is managed and accounted for by RVMC Capital LLC, an affiliate of Workspace Property Trust (the “Managing Member”). The Managing Member of the Office Joint Venture has general authority to manage the operations of the Office Joint Venture. The Managing Member also has day-to-day management authority over the Office Joint Venture, subject to certain major decision rights held by another minority interest holder. The Managing Member may be removed from its management positions upon the occurrence of specified events. GRT VAO Sub has approval rights over certain major decisions regarding actions by the Office Joint Venture, including certain fundamental decisions that the Office Joint Venture may approve. GRT VAO Sub’s obligation is generally limited to its initial contribution. GRT VAO Sub is not obligated to make any additional capital contributions beyond its initial capital contribution.

The Office Joint Venture, through various subsidiary borrowers, obtained acquisition financing for the Initial JV Office Portfolio comprised of (a) a $736.0 million mortgage loan (the “Initial JV Office Mortgage Loan”), and (b) a $194.8 million mezzanine loan (the “JV Office Mezzanine Loan”, and together with the JV Office Initial Mortgage Loan, the “Initial Office JV Loans”). The Initial Office JV Loans have a maturity date of September 9, 2024 (subject to a one-year extension option), and interest rates of (i) for the Initial JV Office Mortgage Loan, Term SOFR (1-month) (with a 4.4% interest rate cap on SOFR) + 3.885% (subject to a 0.25% increase during the extension term), and (ii) for the JV Office Mezzanine Loan, Term SOFR (1-month) (with a 4.4% interest rate cap on SOFR) + 6.824% (subject to a 0.25% increase during the extension term).

The Office Joint Venture, through various subsidiary borrowers, also obtained acquisition financing for the Companion JV Office Portfolio, comprised of a $142.1 million mortgage loan, having a maturity date of January 6, 2025 (subject to a one-year extension option), and an interest rate of Term SOFR (1-month with a 4% interest rate cap on SOFR) + 4.50% (subject to a 0.25% increase during each extension term) (the “Companion Office JV Loan”, and together with the Initial Office JV Loans, the “Office JV Loans”).

The Office Joint Venture may call capital from its members (the “Capital Calls”). GRT VAO Sub is not obligated to fund any Capital Calls. In accordance with the Office Joint Venture’s governing documents, another member of the Office Joint Venture (the “Funding Member”) may make interest bearing loans to GRT VAO Sub in the principal amounts of GRT VAO Sub’s portions of the Capital Calls (the “Shortfall Loans”), the proceeds of which Shortfall Loans are treated as a funding of GRT VAO Sub’s portions of the Capital Calls. The Shortfall Loans are non-recourse to GRT VAO Sub and its affiliates and shall be repaid to the Funding Member solely out of (i) any distributions to which GRT VAO Sub is otherwise entitled under the Office Joint Venture’s governing documents and (ii) the proceeds from certain transfers which results in GRT VAO Sub and its affiliates no longer owning a direct or indirect equity interest in the Office Joint Venture.

The Company has not guaranteed any debt obligations and has not otherwise committed to providing financial support in respect of the Office JV Loans. In addition, the Company does not anticipate receiving any near-term cash flow distributions from the assets that are part of the JV Office Portfolio. Considering the Company’s limited economic exposure to the Office Joint Venture, the Company excludes interests in the assets in the Office Joint Venture from operating data.

The interests discussed above are deemed to be variable interests in variable interest entities (“VIE”) and based on an evaluation of the variable interests against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investment, as the Company does not have power to direct the activities of the entities that most significantly affect their performance. As such, the interest in the VIE is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the operating agreements. The Company records the net earnings or losses on investment on a one quarter lag, as applicable. The Company's maximum exposure to losses associated with its unconsolidated investments is primarily limited to its initial contribution in the investments.

Summary of Investment in Office Joint Venture Activity

In the third quarter of 2023, the Company recorded a complete write-off of its remaining investment balance in the Office Joint Venture. Subsequent to the write-off of the Office Joint Venture, the Company no longer records any equity income or losses.

During the second quarter of 2024, the Office Joint Venture initiated two Capital Calls, of which GRT VAO Sub’s proportionate share was approximately $3.1 million. The Company did not fund these Capital Calls. The Funding Member made a Shortfall Loan to GRT VAO Sub, which was treated as funding GRT VAO Sub’s portion of these Capital Calls by the Capital Call amounts. As of June 30, 2024, the cumulative Shortfall Loans made to GRT VAO Sub total approximately $5.0 million. The cumulative Shortfall Loans have a net zero impact on the Company’s investment in the Office Joint Venture.

In accordance with Regulation S-X 10-01(b)(1), the Company presents the summarized interim financial statements of the Office Joint Venture below.

The table below presents the condensed balance sheet for the unconsolidated Office Joint Venture:


	June 30, 2024(1)		December 31, 2023 (2)
Assets
Real estate properties, net	$	1,074,121	$	1,092,312
Other assets	261,401		299,045
Total Assets	$	1,335,522	$	1,391,357

Liabilities
Mortgages payable, net	$	1,071,265	$	1,067,005
Other liabilities	85,370		92,919
Total Liabilities	$	1,156,635	$	1,159,924

(1)Amounts are as of March 31, 2024 due to the recording of the Office Joint Venture’s activity on a one quarter lag.

(2)Amounts are as of September 30, 2023 due to the recording of the Office Joint Venture’s activity on a one quarter lag.

The table below presents condensed statements of operations of the unconsolidated Office Joint Venture:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024 (1)		2023 (1)		2024 (2)		2023 (2)
Total revenues	$	43,181	$	49,917	$	93,387	$	94,706
Expenses:
Operating expenses	(17,062)		(16,611)		(36,520)		(32,433)
General and administrative	(2,169)		(2,174)		(3,295)		(3,655)
Depreciation and amortization	(15,647)		(18,411)		(45,557)		(33,185)
Interest expense	(28,902)		(49,990)		(60,719)		(92,982)
Other income, net	479		1,531		741		1,883
Total Expenses	(63,301)		(85,655)		(145,350)		(160,372)
Net Loss	$	(20,120)	$	(35,738)	$	(51,963)	$	(65,666)

(1)Amounts represent the period of January 1 to March 31 due to the recording of the Office Joint Venture’s activity on a one quarter lag.

(2)Amounts represent the period of October 1 to March 31 due to the recording of the Office Joint Venture’s activity on a one quarter lag.