10-12G/A 1 d424498d1012ga.htm 10-12G/A 10-12G/A
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As filed with the Securities and Exchange Commission on July 7, 2023

File no. 000-56543

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 2

to

FORM 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

 

 

EXCHANGERIGHT INCOME FUND

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   36-7729360

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1055 E. Colorado Blvd, Suite 310, Pasadena, California 91106

(Address of principal executive offices) (Zip Code)

(855) 317-4448

(Registrant’s telephone number, including area code)

Correspondence to:

David Van Steenis

Chief Financial Officer and Chief Investment Officer

ExchangeRight Income Fund

9215 Northpark Drive

Johnston, Iowa 50131

(626) 773-3481

Copies to:

David P. Hooper, Esq.

Barnes & Thornburg LLP

11 S. Meridian Street

Indianapolis, Indiana 46204

(317) 236-1313

Securities to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

None

Securities to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

Class A Common Shares, $0.01 par value per share

Class I Common Shares, $0.01 par value per share

Class S Common Shares, $0.01 par value per share

(Title of Class)

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

 


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TABLE OF CONTENTS

 

          Page  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     ii  

GLOSSARY OF CERTAIN TERMS

     iv  

ITEM 1.

  

BUSINESS

     1  

ITEM 1A.

  

RISK FACTORS

     17  

ITEM 2.

  

FINANCIAL INFORMATION

     59  

ITEM 3.

  

PROPERTIES

     86  

ITEM 4.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     94  

ITEM 5.

  

DIRECTORS AND EXECUTIVE OFFICERS

     97  

ITEM 6.

  

EXECUTIVE COMPENSATION

     103  

ITEM 7.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     104  

ITEM 8.

  

LEGAL PROCEEDINGS

     113  

ITEM 9.

  

MARKET PRICE OF DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     113  

ITEM 10.

  

RECENT SALES OF UNREGISTERED SECURITIES

     117  

ITEM 11.

  

DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED

     123  

ITEM 12.

  

INDEMNIFICATION OF DIRECTORS AND OFFICERS

     141  

ITEM 13.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     142  

ITEM 14.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     142  

ITEM 15.

  

FINANCIAL STATEMENTS AND EXHIBITS

     143  

INDEX TO FINANCIAL STATEMENTS

     F - 1  

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10 other than historical facts may be considered “forward-looking statements,” and, as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of ExchangeRight Income Fund (the “Company”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “may”, “will”, “should”, “estimates”, “projects”, “anticipates”, “believes”, “expects”, “intends”, “future” and words of similar import, or the negative thereof. Forward-looking statements in this registration statement include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations, our strategic plans and objectives, occupancy, leasing rates and trends, liquidity and ability to meet future obligations, anticipated expenditures of capital and other matters. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this registration statement is filed with the Securities and Exchange Commission.

Any such forward-looking statements are subject to unknown risks, uncertainties and other factors, which in some cases are beyond our control and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide distributions to shareholders and maintain the value of our real estate properties, may be significantly hindered.

Factors that could cause actual results, performance or achievements to differ materially from current expectations include, but are not limited to:

 

   

risks inherent in the real estate business, including tenant defaults, illiquidity of real estate investments, potential liability relating to environmental matters and potential damages from natural disasters;

 

   

general business and economic conditions;

 

   

the accuracy of our assessment that certain businesses are e-commerce resistant and recession-resilient;

 

   

the accuracy of the tools we use to determine the creditworthiness of our tenants;

 

   

concentration of our business within certain tenant categories;

 

   

ability to renew leases, lease vacant space or re-lease space as existing leases expire;

 

   

our ability to successfully execute our acquisition strategies;

 

   

the degree and nature of our competition;

 

   

inflation and interest rate fluctuations;

 

   

failure, weakness, interruption or breach in security of our information systems;

 

   

our failure to generate sufficient cash flows to service our outstanding indebtedness;

 

   

continued volatility and uncertainty in the credit markets and broader financial markets;

 

   

our ability to maintain our qualification as a real estate investment trust (“REIT”) for federal income tax purposes;

 

   

our limited operating history as a REIT, which may adversely affect our ability to make distributions to our shareholders;

 

   

changes in, or the failure or inability to comply with, applicable laws or regulations; and

 

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future sales or issuances of our common shares or other securities convertible into our common shares, or the perception thereof, could cause the value of our common shares to decline and could result in dilution.

The foregoing list is only a summary of the principal risks that may materially adversely affect our business, financial condition, results of operations and cash flows. The foregoing should be read in conjunction with the complete discussion of risk factors we face, which are set forth in “Item 1A. Risk Factors” in this registration statement.

 

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GLOSSARY OF CERTAIN TERMS

Except as otherwise specified in this registration statement, the terms: “we,” “us,” “our,” “our company” and the “Company” refer to ExchangeRight Income Fund, a Maryland statutory trust, together with its subsidiaries. Additionally, the following is a glossary of certain terms used in this registration statement.

“Class A Common Shares” means the Class A Common Shares of beneficial interest, $0.01 par value per share, of the Company.

“Class A Common Units” means the Class A Common Units of limited partnership interest of the Operating Partnership.

“Class I Common Shares” means the Class I Common Shares of beneficial interest, $0.01 par value per share, of the Company.

“Class I Common Units” means the Class I Common Units of limited partnership interest of the Operating Partnership.

“Class S Common Shares” means the Class S Common Shares of beneficial interest, $0.01 par value per share, of the Company.

“Class S Common Units” means the Class S Common Units of limited partnership interest of the Operating Partnership.

“Code” means the Internal Revenue Code of 1986, as amended.

“Common Shares” means, collectively, the Company’s Class A Common Shares, Class I Common Shares and Class S Common Shares.

“Company” means ExchangeRight Income Fund, doing business as ExchangeRight Essential Income REIT, a Maryland statutory trust, together with its subsidiaries, which serves as the sole general partner of the Operating Partnership.

“Declaration of Trust” means the Declaration of Trust of the Company, as the same may be amended and restated from time to time.

“DST” means Delaware statutory trust.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“ExchangeRight” means ExchangeRight Real Estate, LLC, a California limited liability company.

“ExchangeRight DST Portfolios” mean portfolios of net-leased properties acquired and managed by ExchangeRight through its previous DST offerings.

“ExchangeRight Secured Loans” means short-term secured loans made at any time or from time to time by the Company to ExchangeRight under the RSLCA.

“FINRA” means the Financial Industry Regulatory Authority, Inc., or any successor thereto.

“FFO” means funds from operations, which is a commonly accepted and reported measure of the operating performance of a REIT. FFO is equal to the Company’s net income (calculated in accordance with GAAP), excluding the following: depreciation and amortization related to real estate; gains and losses from the sale of real estate assets; gains and losses from changes in control; and impairment write-downs of real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the Company. The foregoing definition of FFO is consistent with the definition of “funds from operations” published by the National Association of Real Estate Investment Trusts (Nareit®).

“GAAP” means accounting principles generally accepted in the United States.

 

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“Insignificant Participation Exception” means the exception to the plan asset regulations which provides that an ERISA investor’s assets will not include any of the underlying assets of an entity in which it invests if at all times less than 25% of the value of each class of equity interests in the entity is held by ERISA Investors.

“Investment Company Act” means the Investment Company Act of 1940, as amended.

“JOBS Act” means the Jumpstart Our Business Startups Act of 2012.

“Key Principals” means Joshua Ungerecht, Warren Thomas and David Fisher.

“NAV” means the net asset value of the Company.

“NN” or “Double Net” means leases where landlord will have some obligations for roof, parking lot, and/or building structure but where the tenant remains obligated for operating costs of property taxes, insurance and property maintenance.

“NNN” or “Triple Net” means leases where the tenant is obligated pursuant to its lease for the costs of property taxes, insurance and property maintenance, often including both repairs and replacements.

“Operating Partnership” or the “Partnership” means ExchangeRight Income Fund Operating Partnership, LP, a Delaware limited partnership, together with its subsidiaries.

“Operating Partnership Agreement” means the Amended and Restated Limited Partnership Agreement of ExchangeRight Income Fund Operating Partnership, LP, dated April 4, 2022.

“OP Units” mean the common units of limited partnership interest in the Operating Partnership.

“REIT” means real estate investment trust.

“RSLCA” means the Amended and Restated Uncommitted Senior Revolving Secured Line of Credit Agreement dated April 4, 2022 between ExchangeRight Real Estate, LLC, as borrower, and ExchangeRight Income Fund Operating Partnership, LP., as lender.

“Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002.

“Securities Act” means the Securities Act of 1933, as amended.

“TCJA” means the Tax Cuts and Jobs Act of 2017.

“Trustee” means ExchangeRight Income Fund Trustee, LLC, a Delaware limited liability company.

 

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ITEM 1.

BUSINESS.

We are filing this Form 10 to register our Common Shares pursuant to Section 12(g) of the Exchange Act. As a result of the registration of our Common Shares pursuant to the Exchange Act, following the effectiveness of this Form 10, we will be subject to the requirements of the Exchange Act and the rules promulgated thereunder. In particular, we will be required to file Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K and otherwise comply with the disclosure obligations of the Exchange Act applicable to issuers filing registration statements to register a class of securities pursuant to Section 12(g) of the Exchange Act. This registration statement does not constitute an offering of securities of the Company or any other entity. We are an emerging growth company as defined in the JOBS Act and will take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act.

General

ExchangeRight Income Fund, doing business as ExchangeRight Essential Income REIT, a Maryland statutory trust, is a self-administered real estate company, formed on January 11, 2019, focusing on investing in single-tenant, primarily investment-grade net-leased real estate. The Company, through the Operating Partnership, owned 337 properties with an average age of 17.5 years in 34 states (collectively, the “Trust Properties”) that were 99.8% leased as of March 31, 2023. The Trust Properties are occupied by 36 different national, primarily investment-grade necessity-based retail tenants as of March 31, 2023 and are additionally diversified by industry, geographic region and lease term. The Company has had 100% collection of all of its contractual rents from its net-leased properties since inception, including through the COVID-19 pandemic and for the three months ended March 31, 2023.

We are structured as an umbrella partnership REIT, commonly called an UPREIT, and own all of our assets and conduct substantially all of our business through ExchangeRight Income Fund Operating Partnership, LP, a Delaware limited partnership, which was formed on January 9, 2019. The Company is the sole general partner and a limited partner of the Operating Partnership. As of June 30, 2023, an aggregate of 22,796,411 OP Units in the Operating Partnership are issued and outstanding. The Company owns 15,278,945 of the issued and outstanding OP Units in the Operating Partnership, investors who completed tax-deferred Code Section 721 exchanges into the Operating Partnership own 7,440,158 of the issued and outstanding OP Units in the Operating Partnership and ExchangeRight owns 77,308 of the issued and outstanding OP Units in the Operating Partnership. Additionally, ExchangeRight owns 600,000 of the Company’s 15,278,945 issued and outstanding OP Units in the Operating Partnership disclosed above through its ownership in ExchangeRight Income Fund GP, LLC (“EIFG”).

On February 9, 2019, we commenced an offering of up to $100.0 million of our Common Shares under a private placement to qualified investors who meet the definition of “accredited investor” under Regulation D of the Securities Act. We expect to conduct the offering on a continuous basis until the Trustee determines to terminate the offering. The maximum dollar amount of the offering has been increased over time. The following table details the increases in the maximum dollar amount of the offering of our Common Shares, prior to selling commissions, as approved by the Trustee, since the inception of the offering:

 

Effective date

   Maximum
offering amount
 

Inception

   $ 100,000,000  

May 18, 2020

   $ 200,000,000  

March 2, 2021

   $ 500,000,000  

April 4, 2022

   $ 2,165,000,000  

As of June 30, 2023, the Company had issued 5,691,005 Class I Common Shares and 9,889,076 Class A Common Shares pursuant to the offering, resulting in gross offering proceeds of approximately $422.9 million since inception. Of these issued Common Shares, 5,535,028 Class I Common Shares and 9,743,917 Class A

 

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Common Shares remained outstanding as of June 30, 2023. After deductions for payments of selling commissions (net of support received from ExchangeRight), marketing and diligence allowances, wholesale selling costs and expenses, and other offering expenses, we have received net offering proceeds since inception of approximately $406.5 million as of June 30, 2023. The net offering proceeds have been contributed to the Operating Partnership in exchange for OP Units, and the Operating Partnership has used the net proceeds of the offering to acquire the Trust Properties, and to pay certain fees and expenses related to the offering and acquisition of the Trust Properties.

Our executive offices are located at 1055 E. Colorado Blvd., Suite 310, Pasadena, CA 91106. Our telephone number is (855) 317-4448. Our internet website is www.exchangeright.com. The information contained in, or that can be accessed through our website, is not incorporated by reference in or otherwise a part of this Form 10.

REIT Status

The Company has elected and is qualified to be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2019. We intend to operate in a manner that allows us to continue qualifying as a REIT for U.S. federal income tax purposes commencing with such taxable year, and to continue qualifying as a REIT for each subsequent year. To maintain REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our REIT taxable income, determined without regard for any deduction for distributions paid and excluding any net capital gain, to our shareholders. As a REIT, we generally are not subject to U.S. federal income tax on the REIT taxable income we distribute to our shareholders. Even though we qualify as a REIT, we may still be subject to some federal, state and local taxes on a certain portion of our income or property. If we fail to qualify as a REIT in any taxable year, including the current year, we will be subject to federal income tax at regular corporate rates.

Operating Partnership and Managers

Substantially all of the Company’s business is conducted through the Operating Partnership. The Trust Properties are owned and controlled by the Company and are managed by ExchangeRight Net-Leased Property Management, LLC (the “Property Manager”) and ExchangeRight Net-Leased Asset Management, LLC (the “Asset Manager”), which are both wholly-owned subsidiaries of ExchangeRight, pursuant to executed property management and asset management agreements (collectively the “Management Agreements”) with each respective entity. ExchangeRight is the sole member and manager of the Trustee, who as Trustee, has a fiduciary obligation to act on behalf of our shareholders. Under Maryland law and our Declaration of Trust, our Trustee must act in good faith, in a manner it reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances.

Since 2012, ExchangeRight has been active in syndicating ownership in primarily investment-grade single-tenant, net-leased necessity-based retail assets through DST programs that qualify for tax-deferred exchange treatment under Section 1031 of the Code. ExchangeRight provides a vertically integrated, fully scalable real estate platform consisting of underwriting and acquisitions, financing and structuring, leasing and tenant retention, marketing and dispositions, asset and property management, analysis and legal and institutional-quality investor reporting. ExchangeRight and its affiliates have acquired over 1,200 properties and manage over approximately $5.6 billion of assets as of March 31, 2023. ExchangeRight and its affiliates utilize fair market value, when available, to calculate its assets under management. When fair market value is not available, which is the case for its DST programs, ExchangeRight utilizes the original offering price of such offerings. The assets under management total over 22 million square feet and ExchangeRight’s net-leased platform is diversified across 80 national tenants and 47 different states as of June 30, 2023.

We depend on ExchangeRight and its affiliates, including the Property Manager and Asset Manager, to provide certain services essential to the Company, such as asset management services, supervision of the

 

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management of the Trust Properties, asset acquisition and disposition services, as well as other administrative responsibilities for the Company, including accounting services, investor communications and investor relations. As a result of these relationships, we are dependent upon ExchangeRight and its affiliates.

Ownership Structure

The following chart illustrates our current operating structure and ownership as of June 30, 2023. The solid-line arrows in the chart represent equity ownership relationships between the applicable parties, and the dotted lines represent contractual or service-provider relationships between the parties.

 

LOGO

 

(1)

As of June 30, 2023, an aggregate of 613,007 Common Shares, representing 4.0% of the total outstanding Common Shares were beneficially owned by (i) our Trustee; (ii) our Key Principals; (iii) our executive officers and (iv) EIFG. See “Item 4. Security Ownership of Certain Beneficial Owners and Management” for further ownership information.

(2)

ExchangeRight Income Fund Trustee, LLC serves as the sole trustee of the Company.

(3)

EIFG owns 600,000 Class I Common Shares as of June 30, 2023, which were purchased on the same terms as all other holders of Class I Common Shares at acquisition. Additionally, EIFG owns a special limited partner interest in the Operating Partnership which entitles it to receive a promote interest in the profits of the Operating Partnership upon an investor receiving their preferred return plus a return of capital. See “Item 7. Certain Relationships and Related Transactions, and Director Independence” for further ownership information.

(4)

ExchangeRight Net-Leased Property Management, LLC (referred to herein as the “Property Manager”) manages certain Trust Properties owned by the Operating Partnership pursuant to a Property Management Agreement dated February 28, 2019, as described elsewhere in this registration statement.

(5)

ExchangeRight Net-Leased Asset Management, LLC (referred to herein as the “Asset Manager”) manages certain Trust Properties owned by the Operating Partnership pursuant to an Asset Management Agreement dated February 28, 2019, as described elsewhere in this registration statement.

 

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(6)

The holders of the Operating Partnership Class I Common Units have the right to cause their Class I Common Units to be redeemed by the Operating Partnership for cash, unless we, in our sole discretion, elect to purchase such Class I Common Units in exchange for Class I Common Shares of the Company, issuable on a 1:1 basis, subject to adjustment under certain circumstances. We currently intend to elect to pay the redemption price for all Class I Common Units tendered for redemption in Class I Common Shares. The Class I Common Units have the same economic rights as a Class I Common Shares. As of June 30, 2023, an aggregate of 142,548 OP Units, representing 1.9% of the total outstanding OP Units were beneficially owned by (i) ExchangeRight; (ii) our Trustee; (iii) our Key Principals and (iv) our executive officers. See “Item 4. Security Ownership of Certain Beneficial Owners and Management” for further information.

Management Structure

The Company operates under the direction of the Trustee, which in turn is managed by ExchangeRight as the sole manager of the Trustee. The business and affairs of ExchangeRight are managed by the Key Principals as the sole managers of ExchangeRight, who have full and complete authority, power and discretion to manage and control the business, affairs and properties of ExchangeRight, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of ExchangeRight’s business. As a result, the Key Principals act in effect as directors of the Company.

For additional information regarding the Key Principals and individuals acting as the executive officers of the Company, see “Item 5. Directors and Executive Officers” below.

Investment Objectives and Strategy

The Company seeks to provide capital preservation and stable income by focusing primarily on investment-grade necessity-based retail tenants that are additionally diversified by industry, geographic region and lease term. For these purposes, the Company considers “investment-grade” tenants to be tenants with leases that are either entered into directly with a parent entity, leases that are backed directly by the parent entity through a lease guarantee, or tenants that are publicly disclosed as significant subsidiaries of a parent entity, and in each such case the parent entity carries a credit rating of BBB- issued by Standard & Poor’s, Baa3 issued by Moody’s or NAIC2 issued by the National Association of Insurance Commissioners or higher. We intend to take advantage of ExchangeRight’s fully scalable platform and deep industry relationships to strategically acquire a diversified portfolio. The Company is structured to target:

 

   

capital preservation throughout economic cycles with a focus on recession-resilient tenants and industries;

 

   

stable distributions paid monthly that are covered by cash flow from operations;

 

   

significant tax deferral and deductions provided to increase the tax-equivalent yield;

 

   

clearly-defined aggregation strategy that is structured to benefit from the diversification and scale of ExchangeRight’s proprietary acquisitions pipeline and existing assets under management; and

 

   

an investor-centric structure and significant alignment of interest.

Capital preservation throughout economic cycles with a focus on recession-resilient tenants and industries – In order to achieve these objectives, the Company focuses on acquiring a diversified portfolio consisting primarily of:

 

   

long-term net-leased properties;

 

   

backed by national, investment-grade and recession-resilient tenants;

 

   

that operate essential businesses;

 

   

in online-resilient; and

 

   

recession-resilient necessity retail industry.

 

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Long-term, net-leased properties – We focus on net leases that obligate the tenant to pay not only their rent, but also the costs of property taxes, insurance and property maintenance, often including repairs and replacements. The net-lease structure shields the landlord from the burden of those costs that are typically borne by the landlord in most other asset classes of real estate. By shifting the burden of many of these operating expenses from the landlord to the tenant, net-leased real estate provides investors with an income stream that is more stable and predictable and that is less likely to experience significant volatility throughout the lease term.

National, investment-grade and recession-resilient tenants – We focus on national tenants that exhibit strong balance sheets and financial performance, primarily carrying investment-grade credit ratings from S&P and/or Moody’s rating agencies, which are nationally recognized statistical rating organizations (“NRSROs”). Based on research from S&P and Moody’s, investment-grade credit tenants have historically had an 11.07x to 14.39x lower likelihood of defaulting over a 10-year horizon compared to speculative- or junk-rated credit tenants. We focus on investment-grade credit tenants so that we can rely on their strong balance sheets to weather economic crises and recessions and continue to meet their financial obligations under the leases.

Operate essential businesses – We focus on properties occupied by businesses that are essential and that remained open and operating throughout the COVID-19 crisis. Essential businesses provide the goods and services that people need and are therefore generally able to continue to be profitable in most economic environments. We focus on tenants with strong balance sheets to weather a crisis, and more particularly on those tenants whose balance sheets get stronger even in the midst of a crisis.

Online-resilient – We focus on tenants and industries that have historically exhibited consistent resilience and growth in the face of the competitive expansion of online retail. The growth of online retail has impacted a number of real estate sectors, especially the discretionary retail sector that we avoid. By primarily focusing on pharmaceutical, grocery, healthcare, necessity-based retail, farm and rural supply, and discount retail, the Company’s targeted tenants provide essential goods and services that are expected to be less susceptible to being replaced by online retail given the needs-based component of their business plan, the accommodation of immediate-fulfillment needs or desires, the provision of in-person services that are not or cannot be competitively duplicated online and/or the low-cost nature of products offered. In addition, the tenants we focus on have adapted their business models to utilize their locations to provide in-person services and experiences. Our focus on necessity-based sectors that are less susceptible to economic shocks and online retail is intended to protect and insulate the Company’s long-term income.

 

   

Discount necessity retailers have converted approximately 15-20% of their floor space to groceries and provide necessity goods at a price point that is uneconomical for online retailers to compete against. Online retailers target demographics that have a much higher discretionary income that does not overlap significantly with discount necessity retailers. Furthermore, in recessions, a larger portion of the population tends to shop at discount necessity retailers in order to save money.

 

   

Pharmaceutical retailers frequently include health hubs, minute clinics and medical testing centers that deliver discount healthcare like flu shots, vaccines and medical testing within their stores and also immediately provide any prescriptions needed. They also provide a viable and convenient alternative to going to an urgent care facility to address non-urgent illnesses.

 

   

Grocers focus on perishable goods that online retailers have struggled to provide competitively. Certain online retailers had to ultimately acquire a brick-and-mortar retail grocer to compete in the grocery space. Many grocers have also created a one-stop-shop destination by adding cafes, pharmacies, restaurants, dry cleaners and banks to their stores and higher margin products like meals on-the-go that cannot be replicated online.

 

   

Discount specialty and apparel retailers provide discount home goods, decor, and clothing that consumers often prefer to shop for in-person, that are discounted and therefore, less economical to ship and that target a demographic that is less likely to overlap with online retailers’ target demographic.

 

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Farm and rural supply stores provide essential products for agriculture, livestock, and pet care while also carrying products related to home improvement, truck maintenance and lawn and garden care. Many of these products tend to be larger and less economical to ship to customers and are needed more immediately than shipping can accommodate.

 

   

Automotive stores typically provide for the immediate and ongoing supply chain needs of local auto repair shops in addition to meeting the immediate needs of local consumers.

 

   

Healthcare providers provide in-person health care services that are either difficult or impossible to deliver through an online format.

Recession-resilient necessity retail industry – The necessity retail industry is an industry in which people continue to spend money even in recessions because the goods and services they provide are a necessity and not a discretionary choice. Therefore, this industry tends to be more recession-resilient than others. We focus on this industry to align ourselves with tenants that continue to be profitable and resilient even during economic crises and/or recessionary periods.

Diversification Strategy

While focusing almost exclusively on those properties that meet all of the investment factors discussed above, we will then take the pursuit of risk mitigation a step further with broad diversification by property, location, tenant, industry, lease term and debt term so that we avoid significant concentrations of income coming from any one factor.

 

LOGO

When we put these all together, the intended result is a diversified, long-term stream of cash flow that is shielded from many of the potential costs of real estate ownership and that is ultimately guaranteed by tenants with strong balance sheets. The tenants we focus on operate businesses that performed well throughout the COVID-19 pandemic, and historically have performed well in recessions.

 

LOGO

 

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Each of these separate investment factors build upon each other and, in combination, create an investment strategy that can provide stable income and value for investors. The combination of all of these factors and the potential to aggregate a large, diversified portfolio of similar quality net-leased real estate through ExchangeRight’s proprietary pipeline and existing assets under management also create upside potential as it is well-positioned to continue to perform through a variety of economic conditions, including recessionary environments.

Stable distributions paid monthly that are covered by cash flow from operations – The Company’s net-leased portfolio has provided a diversified and secure stream of distributable cash flows that has thus far proven to be resilient in the face of significant economic turmoil. The distribution rate has been increased by our Trustee five times since our inception and has never been reduced, delayed or suspended. Based on the current monthly distribution rate of $0.1449 per Common Share, the distribution yield, when compared to the March 31, 2023 declared NAV per Common Share of $27.74, was 6.27%. Paying distributions out of operations is important as it avoids the dilution and capital destruction that results from paying distributions out of equity capital or financing and can provide retained earnings that can allow for excess reserves and be reinvested on behalf of shareholders or maintain consistent distributions in the face of difficult circumstances. Our distribution policy is to pay distributions exclusively out of inception-to-date cash flows from operations, rather than investor equity or financing, subject only to REIT qualification requirements or to avoid incurring federal income tax. Since inception, the Company has fully paid its cumulative distributions, and the Operating Partnership has paid distributions to the holders of its OP Units, out of cumulative cash flows from operations.

Significant tax deferral and deductions provided to increase the tax-equivalent yield – The Company is structured to take advantage of a number of tax deductions and depreciation benefits, including the REIT pass-through deduction included in the TCJA. Distributions to investors in 2022 were reported as a 56.98% non-taxable return of capital for federal income tax purposes, meaning that only 43.02% were treated as taxable distributions. In addition, so long as the Company continues to satisfy the various requirements for qualification as a REIT, non-corporate shareholders of the Company that receive distributions characterized as ordinary dividends for U.S. federal income tax purposes will be eligible to claim a tax deduction for the taxable year prior to January 1, 2026 equal to 20% of the ordinary dividends distributed to them in each such taxable year. In addition, the Company, and any of its subsidiaries that qualify as a real property trade or business, intend to make an election to be exempt from rules limiting the amount of interest expense a taxpayer is permitted to deduct each taxable year. Individual circumstances will vary by investor, and each investor should consult with their own tax advisor.

Clearly-defined aggregation strategy that is structured to benefit from the diversification and scale of ExchangeRight’s proprietary acquisitions pipeline and existing assets under management – We intend to take advantage of ExchangeRight’s fully scalable platform and deep industry relationships to continue to strategically acquire single-tenant, net-leased necessity-based retail assets. This aggregation strategy is intended to leverage the significant synergies between its net lease DST and REIT platforms in order to reduce risk and enhance value through increased diversification; expand capacity to accommodate liquidity needs; unlock additional access to capital; and optimize estate planning benefits on behalf of investors across both platforms. There is no guarantee that any aggregation strategy will be executed or that they will produce enhanced liquidity or returns.

An investor-centric structure and significant alignment of interest – The Company’s fee arrangements with ExchangeRight are structured to have ongoing performance fees that are on average more favorable than what we believe are market fees. ExchangeRight currently has invested $15.0 million in Class I Common Shares and $2.0 million in OP Units alongside investors as of the date of this registration statement, creating what we believe to be a strong alignment of interest in the success of the Company. Moreover, should ExchangeRight achieve at least a 100% return of capital and a 7% annual return on behalf of investors, ExchangeRight may participate in up to 20% of the potential upside above those returns, thus creating an additional incentive for ExchangeRight to perform.

 

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Table of Contents

Share Repurchase Program

Our share repurchase program may provide eligible shareholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law, if such repurchases do not impair the capital or operations of the Company. The Company is structured to provide partial liquidity to investors through redemptions on a quarterly basis of up to 5% of the Company’s issued and outstanding shares per fiscal year pursuant to its share repurchase plan. Affiliates may seek to have their shares repurchased at the same terms and limitations as the common shareholders. ExchangeRight’s $15.0 million investment in Class I Common Shares is not eligible for redemption pursuant to the share repurchase plan.

Real Estate Investments

The Company, through the Operating Partnership, owned 337 properties in 34 states as of March 31, 2023. The average age of the properties in the Company’s portfolio is 17.5 years. The Trust Properties were 99.8% leased as of March 31, 2023 and occupied by 36 different national primarily investment-grade necessity-based retail tenants as of March 31, 2023, and are additionally diversified by industry, geographic region and lease term. The portfolio has had 100% collection of all of its rents from its net-leased properties since inception, including through the COVID-19 pandemic and for the three months ended March 31, 2023. The following table details information about our tenants as of March 31, 2023:

 

          Weighted
average lease
term (yrs)
(k)
 
    Number of leases           Annualized base rents  
          Total     % of
total
    Per sq.
ft (j)
 

Tenant

  NN     NNN     Total     GLA  

Dollar General

    25       88       113       1,072,200     $ 11,685,800       18.2   $ 10.90       6.0  

Walgreens

    17       13       30       434,900       9,821,200       15.3   $ 22.58       6.2  

Tractor Supply

    12       5       17       349,600       4,679,500       7.3   $ 13.39       7.7  

Family Dollar (a)

    28       12       40       345,600       4,431,500       6.9   $ 12.82       4.0  

Hobby Lobby

    8       1       9       513,400       4,075,200       6.3   $ 7.94       6.7  

Advance Auto Parts

    27       5       32       233,900       3,513,000       5.5   $ 15.02       5.2  

Stop & Shop

          1       1       102,100       2,940,000       4.6   $ 28.80       13.7  

CVS Pharmacy

    8       2       10       122,700       2,866,100       4.5   $ 23.36       5.4  

Kroger

    4             4       263,200       2,826,100       4.4   $ 10.74       8.1  

Fresenius Medical Care

    9       1       10       83,100       2,654,200       4.1   $ 31.94       7.5  

Napa Auto Parts

          18       18       155,000       1,833,000       2.8   $ 11.83       12.8  

Publix

    2             2       96,800       1,548,400       2.4   $ 16.00       17.2  

Hy-Vee

          1       1       101,200       1,415,800       2.2   $ 13.99       15.8  

AutoZone

    7       2       9       65,900       994,700       1.5   $ 15.09       3.4  

Old National Bank (b)

          2       2       38,200       989,300       1.5   $ 25.90       7.5  

Dollar Tree

    9             9       84,200       880,200       1.4   $ 10.45       2.4  

Giant Eagle

    1             1       81,800       848,300       1.3   $ 10.37       8.0  

Walmart Neighborhood Market

          1       1       41,800       738,600       1.1   $ 17.67       8.5  

BioLife Plasma Services L.P. (c)

          1       1       15,500       672,400       1.0   $ 43.38       12.7  

Goodwill

    2             2       42,800       653,200       1.0   $ 15.26       7.1  

Verizon Wireless (d)

    2             2       11,300       569,800       0.9   $ 50.42       4.2  

Sherwin Williams

    7             7       45,400       566,700       0.9   $ 12.48       3.0  

O’Reilly (e)

    5       1       6       41,400       542,000       0.8   $ 13.09       6.1  

Food Lion (f)

    1             1       41,300       351,400       0.5   $ 8.51       5.6  

Ross Stores

    1             1       25,800       335,400       0.5   $ 13.00       5.8  

Indianapolis Osteopathic Hospital, Inc

    1             1       11,500       320,000       0.5   $ 27.83       0.3  

PNC Bank, N.A.

          1       1       6,100       266,800       0.4   $ 43.74       5.5  

HomeGoods (g)

    1             1       22,200       255,800       0.4   $ 11.52       8.0  

 

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Table of Contents
          Weighted
average lease
term (yrs)
(k)
 
    Number of leases           Annualized base rents  
          Total     % of
total
    Per sq.
ft (j)
 

Tenant

  NN     NNN     Total     GLA  

MedSpring

    1             1       4,600       193,100       0.3   $ 41.98       3.9  

Franciscan Alliance, Inc.

          1       1       6,000       182,100       0.3   $ 30.35       1.2  

The Christ Hospital

          1       1       9,300       177,800       0.3   $ 19.12       4.8  

Five Below

    1             1       8,500       135,700       0.2   $ 15.96       7.8  

TCF National Bank (h)

          1       1       4,500       116,700       0.2   $ 25.93       3.8  

Truist Bank (i)

    1             1       2,700       103,400       0.2   $ 38.30       5.8  

Aaron’s

    1             1       7,200       101,900       0.2   $ 14.15       2.9  

Athletico Physical Therapy

    1             1       3,400       77,000       0.1   $ 22.65       3.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

    182       158       340       4,495,100     $ 64,362,100       100.0   $ 14.32       7.1  
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

Vacant (l)

      16,400          
       

 

 

         

Total Portfolio

      4,511,500          
       

 

 

         

 

(a)

Family Dollar's leases are made primarily with Family Dollar Stores, Inc. This entity is a wholly owned subsidiary of Dollar Tree, Inc.

(b)

Our leases were originally with First Midwest Bank as lessee. In February 2022 First Midwest Bancorp Inc., the former parent entity of First Midwest Bank, merged with Old National Bancorp. Subsequent to the merger, our leases are now with Old National Bank.

(c)

BioLife Plasma Services L.P.'s lease is guaranteed by Takeda Pharmaceuticals U.S.A., Inc. This entity is a wholly owned subsidiary of Takeda Pharmaceutical Co. Ltd.

(d)

Verizon Wireless's leases are entered into with Cellco Partnership. This entity is a wholly owned subsidiary of Verizon Communications, Inc.. Verizon Communications, Inc. has provided a parent support agreement whereby it has agreed to guarantee certain of the payment obligations of Cellco Partnership.

(e)

O'Reilly's leases are entered into with various wholly owned subsidiaries of O'Reilly Automotive Inc.

(f)

Food Lion's lease is guaranteed by Delhaize America, Inc. This entity is a wholly owned subsidiary of Ahold Delhaize N.V.

(g)

HomeGoods lease is guaranteed by HomeGoods, Inc. This entity is a wholly owned subsidiary of TJX Companies, Inc.

(h)

Our lease was originally with TCF Bank as lessee. In June 2021 TCF Financial Corporation, the former parent entity of TCF Bank, merged with Huntington Bancshares Inc.

(i)

Our lease was originally with BB&T Bank as lessee. In December 2019 BB&T Corporation, the former parent entity of BB&T Bank, merged with SunTrust Banks, Inc. in a merger of equals to form Truist Financial Corporation, . Subsequent to the merger, our lease is now with Truist Bank.

(j)

Annualized base rent per square foot is calculated as the aggregate, annualized contractual minimum rent for all occupied spaces divided by the aggregate GLA of all occupied spaces as of June 30, 2023. Tenant concessions and abatements are reflected in this measure. Furthermore, from time to time, a limited number of short-term (generally one to three months) free rent concessions may be provided to tenants prior to initial occupancy or upon a renewal extension. As of June 30, 2023, no tenants were in a free rent concession period.

(k)

Weighted based on annualized base rents.

(l)

Includes 9,300 square feet that was leased to Archana Grocery in November 2022 with expected occupancy occurring in July 2023.

 

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Table of Contents

The following table details the industries in which our tenants operate as of March 31, 2023:

 

     Number
of leases
     GLA     Annualized base rents  

Industry

   Square feet      % of total     Dollars (a)      % of total  

Discount Necessity Retail

     162        1,502,000        33.3   $ 16,997,500        26.4

Pharmaceutical Retailers

     40        557,600        12.4     12,687,300        19.7

Grocery

     11        728,200        16.1     10,668,600        16.6

Discount Automotive

     65        496,200        11.0     6,882,700        10.7

Discount Specialty Retail

     13        586,900        13.0     5,119,900        8.0

Farm and Rural Supply

     17        349,600        7.7     4,679,500        7.3

Medical Care

     11        89,100        2.0     2,836,300        4.4

Banking Services

     5        51,500        1.1     1,476,200        2.3

Healthcare Providers

     4        39,700        0.9     1,247,200        1.9

Necessity Retail

     2        11,300        0.3     569,800        0.9

Paint and Supplies

     7        45,400        1.0     566,700        0.9

Discount Apparel

     1        25,800        0.6     335,400        0.5

Urgent Care

     1        4,600        0.1     193,100        0.3

Rental & Leasing Services

     1        7,200        0.2     101,900        0.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

     340        4,495,100        99.6   $ 64,362,100        100.0
  

 

 

         

 

 

    

 

 

 

Vacant (b)

        16,400        0.4     
     

 

 

    

 

 

      

Total Portfolio

        4,511,500        100.0     
     

 

 

    

 

 

      

 

(a)

Annualized base rents is calculated as the aggregate, annualized contractual minimum rent for all the space as of March 31, 2023. Tenant concessions and abatements are reflected in this amount. Furthermore, from time to time, a limited number of short-term (generally one to three months) free rent concessions may be provided to tenants prior to initial occupancy or upon a renewal extension. As of March 31, 2023, no tenants were in a free rent concession period.

(b)

Includes 9,300 square feet that was leased to Archana Grocery in November 2022 with expected occupancy occurring in July 2023.

The following table details our contractual lease expirations as of March 31, 2023 (assuming no exercise of contractual extension options):

 

     Number
of leases
     GLA     Annualized base rents  

Year

   Square feet      % of total     Dollars      % of total     Per sq. ft. (a)  

MTM

     1        8,400        0.2   $ 145,700        0.2   $ 17.35  

2023

     5        46,300        1.0     699,600        1.1   $ 15.11  

2024

     19        169,100        3.8     2,451,000        3.8   $ 14.49  

2025

     23        197,200        4.4     2,289,200        3.6   $ 11.61  

2026

     43        496,300        11.0     5,893,900        9.2   $ 11.88  

2027

     36        474,600        10.6     6,758,100        10.5   $ 14.24  

2028

     55        600,300        13.4     9,233,500        14.3   $ 15.38  

2029

     30        374,800        8.3     5,296,500        8.2   $ 14.13  

2030

     29        431,200        9.6     6,939,400        10.8   $ 16.09  

2031

     40        638,600        14.2     8,467,300        13.2   $ 13.26  

2032

     25        398,300        8.9     5,348,400        8.3   $ 13.43  

2033

     5        46,300        1.0     764,700        1.2   $ 16.52  

2034

     5        135,400        3.0     1,439,000        2.2   $ 10.63  

2035

     8        71,400        1.6     1,317,500        2.0   $ 18.45  

2036

     6        140,500        3.1     3,521,400        5.5   $ 25.06  

2037

     5        54,200        1.2     641,900        1.0   $ 11.84  

 

10


Table of Contents
     Number
of leases
     GLA     Annualized base rents  

Year

   Square feet      % of total     Dollars      % of total     Per sq. ft. (a)  

2038

     2        14,200        0.3     190,800        0.3   $ 13.44  

2039

     2        149,600        3.3     2,214,200        3.4   $ 14.80  

2040

     1        48,400        1.1     750,000        1.2   $ 15.50  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

Total

     340        4,495,100        100.0   $ 64,362,100        100.0   $ 14.32  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

(a)

Annualized base rent per square foot is calculated as the aggregate, annualized contractual minimum rent for all occupied spaces divided by the aggregate GLA of all occupied spaces as of March 31, 2023. Tenant concessions and abatements are reflected in this measure. Furthermore, from time to time, a limited number of short-term (generally one to three months) free rent concessions may be provided to tenants prior to initial occupancy or upon a renewal extension. As of March 31, 2023, no tenants were in a free rent concession period.

The following table details annualized base rents by state for our portfolio as of March 31, 2023:

 

     Number
of leases
     GLA     Annualized base rents  

State

   Square feet     % of total     Dollars (a)      % of total  

Illinois

     37        379,100       8.4   $ 6,886,700        10.7

Ohio

     41        559,100 (b)      12.4     6,482,700        10.1

Texas

     36        389,900       8.6     5,650,600        8.8

Louisiana

     39        404,600       9.0     4,872,500        7.6

Wisconsin

     19        282,500       6.3     4,234,600        6.6

Alabama

     15        268,800       6.0     3,896,800        6.1

Florida

     21        216,300       4.8     3,308,600        5.1

Georgia

     14        264,300       5.9     3,034,200        4.7

Tennessee

     16        207,400       4.6     2,945,500        4.6

Massachusetts

     1        102,100       2.3     2,940,000        4.6

Indiana

     12        230,600       5.1     2,608,800        4.1

North Carolina

     14        210,000       4.7     2,525,500        3.9

South Carolina

     15        186,100       4.1     2,510,300        3.9

Pennsylvania

     13        129,200       2.9     2,102,300        3.3

Virginia

     7        91,800       2.0     1,457,100        2.3

Minnesota

     1        101,200       2.2     1,415,800        2.2

Missouri

     7        72,700       1.6     1,352,000        2.1

Nevada

     2        31,100       0.7     1,076,000        1.7

Oklahoma

     5        53,800       1.2     685,300        1.1

Michigan

     2        53,200       1.2     638,900        1.0

Utah

     2        44,700       1.0     618,200        1.0

Connecticut

     3        38,000       0.8     547,300        0.9

California

     2        35,000       0.8     479,800        0.7

Iowa

     3        29,300       0.6     304,200        0.5

Arizona

     2        16,700       0.4     293,900        0.5

Maryland

     1        20,000       0.4     292,700        0.5

Arkansas

     3        29,400       0.7     261,900        0.4

Idaho

     1        22,000       0.5     255,000        0.4

Wyoming

     1        7,000       0.2     132,200        0.2

Rhode Island

     1        8,400       0.2     131,400        0.2

Colorado

     1        8,000       0.2     109,600        0.2

Mississippi

     1        9,300       0.2     106,400        0.2

 

11


Table of Contents
     Number
of leases
     GLA     Annualized base rents  

State

   Square feet      % of total     Dollars (a)      % of total  

New Jersey

     1        2,700        0.1     103,400        0.2

Kansas

     1        7,200        0.2     101,900        0.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Portfolio

     340        4,511,500        100.0   $ 64,362,100        100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(a)

Annualized base rents is calculated as the aggregate, annualized contractual minimum rent for all the space as of March 31, 2023. Tenant concessions and abatements are reflected in this amount. Furthermore, from time to time, a limited number of short-term (generally one to three months) free rent concessions may be provided to tenants prior to initial occupancy or upon a renewal extension. As of March 31, 2023, no tenants were in a free rent concession period.

(b)

Includes 9,300 square feet that was leased to Archana Grocery in November 2022 with expected occupancy occurring in July 2023.

Identified Trust Properties

As part of the Company’s aggregation strategy, we intend to take advantage of ExchangeRight’s fully scalable platform and deep industry relationships to strategically acquire single-tenant, net-leased necessity-based retail assets with the goal of creating additional size and diversification in order to seek enhanced, recession-resilient returns and liquidity for shareholders. The Company, through the Operating Partnership, has entered into non-binding agreements to acquire a diversified portfolio of 478 single-tenant, net-leased properties leased primarily to investment-grade tenants that are part of existing ExchangeRight DST Portfolios as well as 129 additional properties (collectively, the “Identified Trust Properties”).

The 478 properties that are part of the ExchangeRight DST Portfolios are currently owned by various ExchangeRight DSTs as of March 31, 2023, and can be acquired by the Company for an aggregate purchase price of $2.4 billion. The Identified Trust Properties are leased and operated by tenants that are primarily investment-grade tenants that have proven to be recession-resilient in the past. These tenants operate successfully in the necessity-based retail space, and are diversified by geography, tenant, industry, lease term, and debt maturities. The Identified Trust Properties were selected for their proven operating history and cash flows as well as management’s experience in managing the majority of these locations and tenants. In limited circumstances, certain portfolio acquisitions may require the inclusion of individual properties that are vacant; however, when considering portfolio acquisitions that include such properties, the Company will consider the portfolio composition, diversification, and value as a whole. Moreover, we intend to only acquire properties and portfolios that result in a post-acquisition Company NAV that is higher than or equal to the pre-acquisition Company NAV at the time of property identification and approval, including the valuation of all properties in the acquired portfolio. The majority of the Identified Trust Properties have built-in rent escalations in their primary term or option periods that are intended to provide increased income and inflation protection.

The purchase price for the Identified Trust Properties was determined by the Trustee based on several factors the Trustee deemed to be relevant for achieving the purpose of the acquisition transactions and the investment goals of investors. In this regard, the Trustee primarily utilized an income-based approach by performing a discounted cash flow analysis of each of the Identified Trust Properties to provide an indication of the value of the properties. This analysis included projecting anticipated cash flows pursuant to in-place leases and a residual value for each of the properties, and then discounting those anticipated cash flows and the residual value back to the present value using a discount rate based on market factors and an anticipated weighted average cost of capital. Along with this analysis, the Trustee also employed a market-based approach to use as part of the purchase price determination, which involved researching and analyzing market data of similarly situated properties, reviewing recent transactions involving similar properties, and considering other asset-specific details, such as property location, building size, tenancy, lease rates, lease terms, and various other property characteristics and metrics the Trustee deemed relevant. Next, the Trustee evaluated the aggregate price for the

 

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properties that would need to be paid in order for the investors in the relevant DSTs subject to the acquisition transactions to achieve a full return of capital, and considered whether that price was sufficient to support the discounted cash flow and market-based analyses used to provide the indication of value described above. After applying the foregoing approaches, the Trustee then aggregated the values of the properties resulting from these analyses, which the Trustee used as the basis for the purchase price for the Identified Trust Properties.

Upon determining the purchase price for the properties as described above, the Trustee then engaged a nationally-recognized independent third party professional valuation firm to perform an independent valuation of the properties and produce a restricted appraisal report indicating a range of the high and low fair values of the subject properties. This independent valuation was used by the Trustee at the time of the identification of the properties to confirm and support the purchase price determined by the Trustee through the application of the valuation analyses described above.

The value of any Identified Trust Property may fluctuate after the Company identifies the property and before the Company determines to purchase it, as well as after the Company determines to purchase the property but before the completion of the purchase. If the value of a property decreases prior to the Company’s determination to purchase the property, the purchase price is not likely to be revised, unless in the event of a significant tenant vacating a property, a material credit downgrade of a tenant, or another similar material adverse change.

The Identified Trust Properties are anticipated to provide several distinct advantages to the Company:

 

   

The properties are expected to provide the Company with a pre-determined initial portfolio of properties and the ability to achieve an attractive diversification level;

 

   

There is reduced blind pool risk or counterparty execution risk as the properties are already controlled and managed by ExchangeRight;

 

   

The ExchangeRight DST Portfolios have a proven history as they are currently managed by ExchangeRight with a long-term track record of performance;

 

   

The tenants and lease terms are known, providing the Company with more certainty regarding potential rental increases, inflation protection, and its underwriting projections of cash flows to investors;

 

   

The acquisition agreements for the properties give flexibility to the Company to acquire the properties in stages and over a period of time, thereby improving the Company’s ability to invest capital and earn a return to fully cover investor distributions;

 

   

There will be no acquisition fees charged to the Company to acquire any ExchangeRight DST Portfolios;

 

   

The ExchangeRight DST Portfolios often have loans that can be assumed with limited lender costs that on average have interest rates that are more favorable than market interest rates as of March 31, 2023; and

 

   

The Operating Partnership is expected to grow more quickly than it would otherwise as a result of DST investors electing to perform a tax-deferred Code Section 721 exchange, providing long-term tax-sensitive investors for the Operating Partnership and the Company who are aligned with the long-term aggregation strategy and reducing the amount of new cash the Company must raise to acquire additional net-leased portfolios.

The non-binding agreements to acquire certain of the Identified Trust Properties are subject to obtaining the consent of the current mortgage lenders secured by the corresponding Identified Trust Properties and provide the Company with the unilateral right to acquire the Identified Trust Properties. See Item 1A. Risk Factors for certain risks relating to the acquisition and ownership of the Identified Trust Properties.

 

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If any of the Identified Trust Properties that the Company does not currently own are not available for acquisition at the time we seek to purchase them, or if our Trustee believes that the acquisition of different properties is in the best interests of the Company, we may acquire properties other than the Identified Trust Properties consistent with our investment objectives, including properties owned or controlled by ExchangeRight or its affiliates.

Our Trustee may increase the maximum aggregate amount of the Company’s Common Share offering, in its sole discretion, to acquire additional properties consistent with our investment objectives, which are intended to include properties owned or controlled by ExchangeRight, to take advantage of ExchangeRight’s diversification and scale as well as its aggregation strategy. Our Trustee may expand the offering to achieve those objectives if such an expansion would result in a projected NAV that is equivalent to or at a premium to the then-current NAV per share of the Company based in part on an independent real estate valuation. Before the maximum aggregate offering amount of our offering is increased, we expect to enter into definitive agreements to acquire these properties. ExchangeRight’s current portfolio is similar to, yet more diversified by tenant, geography, lease and debt maturity than the Company’s portfolio, and is intended to provide additional diversification and size benefits that are anticipated to be attractive in executing the Company’s aggregation strategy.

Competition

We compete for tenants with numerous traded and non-traded public REITs, private REITs, private equity investors, institutional investment funds, individuals, banks and insurance companies, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements or below-market renewal options in order to retain tenants when our leases expire. Competition for tenants could decrease the occupancy and rental rates of our properties.

Additionally, we face competition for acquisitions of real property from investors, including traded and non-traded public REITs, private REITs, private equity investors, institutional investment funds, individuals, banks and insurance companies, some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties and the ability to accept more risk than we can prudently manage. This competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable investment opportunities available to us which may impede our growth and increase the prices paid for such acquisition properties. This competition will increase if investments in real estate become more attractive relative to other types of investments. Accordingly, competition for the acquisition of real property could materially and adversely affect us. However, the Company already has non-binding agreements to acquire the Identified Trust Properties, which may offset the effects of the foregoing competitive factors.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of  (i) the last day of the first fiscal year during which our total annual gross revenues equal or exceed $1.235 billion, (ii) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the previous three-year period, and (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act. For so long as we remain an “emerging growth company,” we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We have not yet made a decision as to whether we will take advantage of any or all of these exemptions. To the extent we take advantage of some or all of the reduced reporting requirements applicable to “emerging growth companies,” an investment in our Common Shares may be less attractive to investors.

 

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Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of the registrant’s internal control over financial reporting, and generally requires in the same report a report by an independent registered public accounting firm on the effectiveness of internal control over financial reporting. Under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company.”

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act. Accordingly, our consolidated financial statements may not be comparable to the financial statements of reporting companies that comply with such new or revised accounting standards.

Human Capital

The Company has no direct employees. Services necessary for our business are provided by individuals who are employees of ExchangeRight or its affiliates, pursuant to the terms of the Management Agreements, and we pay fees associated with such services. See Item 7. Certain Relationships and Related Transactions, and Director Independence for a summary of the fees paid to ExchangeRight and its affiliates during the three months ended March 31, 2023 and during the years ended December 31, 2022 and 2021.

Investment Company Act Limitations

We conduct our operations, and the operations of our Operating Partnership, and any other subsidiaries, so that no such entity meets the definition of an “investment company” under Section 3(a)(1) of the Investment Company Act. Under the Investment Company Act, in relevant part, a company is an “investment company” if:

 

   

pursuant to Section 3(a)(1)(A), it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

 

   

pursuant to Section 3(a)(1)(C), it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the 40% test). “Investment securities” excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

We intend to continue to acquire a diversified portfolio of income-producing real estate assets; however, our portfolio may include, to a much lesser extent, other real estate-related investments. We anticipate that our assets generally will be held in wholly and majority-owned subsidiaries of our Operating Partnership, each formed to hold a particular asset. We monitor our operations and our assets on an ongoing basis in order to ensure that neither we nor any of our subsidiaries meet the definition of “investment company” under Section 3(a)(1) of the Investment Company Act.

We believe that neither we nor our Operating Partnership will be considered investment companies under Section 3(a)(1)(A) of the Investment Company Act because neither of these entities will engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, we, through our Operating Partnership, are primarily engaged in non-investment company businesses related to real estate. Consequently, we expect that we and our Operating Partnership will be able to continue to conduct our respective operations such that neither entity will be required to register as an investment company under the Investment Company Act.

 

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In addition, because we are organized as a holding company that conducts its business primarily through our Operating Partnership, which in turn is a holding company that conducts its business through its subsidiaries, we intend to conduct our operations, and the operations of our Operating Partnership and any other subsidiary, so that we will not meet the 40% test under Section 3(a)(1)(C) of the Investment Company Act, as described above.

To avoid meeting the definition of an “investment company” under Section 3(a)(1) of the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. Similarly, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and that would be important to our investment strategy. In addition, a change in the value of any of our assets could negatively affect our ability to avoid being required to register as an investment company.

If we are required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use borrowings), management, operations, transactions with affiliated persons (as defined in the Investment Company Act) and portfolio composition, including restrictions with respect to diversification and industry concentration and other matters. Compliance with the Investment Company Act would, accordingly, limit our ability to make certain investments and could require us to significantly restructure our business plan, which could materially adversely affect our business, financial condition and results of operations.

Conflicts of Interest

We are subject to conflicts of interest arising out of our relationship with ExchangeRight and its affiliates. See Item 1A. Risk Factors and Item 7. Certain Relationships and Related Transactions, and Director Independence for further details regarding conflicts of interest.

Regulation

Environmental. As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and our management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties we currently own, or on properties that may be acquired in the future.

Americans with Disabilities Act and Other Regulations. Our properties must comply with Title III of the Americans with Disabilities Act (the “ADA”), to the extent that such properties are public accommodations as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Many states and localities have similar requirements that are in addition to, and sometimes more stringent than, federal requirements. We believe our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA or a comparable state or local requirement could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily accessible accommodations is an ongoing one, and we will continue to assess our properties and make alterations as appropriate in this respect. In addition, our properties are subject to fire and safety regulations, building codes and other land use regulations.

Healthcare Regulatory Matters. Certain material healthcare laws and regulations may affect our operations and our tenants. Although there is presently no federal regulation on the lessor itself from federal government agencies that regulate and inspect the tenants and no regulation of the lessor in the states in which we own real property, certain of our tenants (including the operators of plasma and blood donation centers and other healthcare providers) are subject to extensive federal, state and local government healthcare laws and regulations.

 

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These laws and regulations include requirements related to licensure, conduct of operations, ownership of the facilities, operation, addition or expansion of facilities and services, prices for services, billing for services and the confidentiality and security of health-related information. Different properties within our portfolio may be more or less subject to certain types of regulation, some of which are specific to the type of facility or provider. These laws and regulations are wide-ranging and complex, may vary or overlap from jurisdiction to jurisdiction, and are subject frequently to change. Compliance with these regulatory requirements can increase operating costs and, thereby, adversely affect the financial viability of our tenants’ businesses. Our tenants’ failure to comply with these laws and regulations could adversely affect their ability to successfully operate our properties, or receive reimbursement for services rendered within them, which could negatively impact their ability to satisfy their contractual obligations to us. Our leases will require the tenants to comply with all applicable laws, including healthcare laws.

Our tenants which operate in the healthcare industry are subject directly to healthcare laws and regulations, because of the broad nature of some of these restrictions. We intend for all of our business activities and operations to conform in all material respects with all applicable laws and regulations, including healthcare laws and regulations. We expect that the healthcare industry will continue to face increased regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services.

Industry Segments

Our current business is focused on the ownership and operation of net-leased, primarily investment-grade tenanted properties. We review operating and financial information for each property on an individual basis and, accordingly, each property represents an individual operating segment. We evaluate financial performance using property net operating income, which consists of rental income and other property income, less operating expenses. No individual property constitutes more than 10% of our revenue or property operating income, and the Company has no operations outside of the United States of America. Therefore, we have aggregated our properties into one reportable segment as the properties share similar long-term economic characteristics and have other similarities including the fact that they are operated using consistent business strategies.

 

ITEM 1A.

RISK FACTORS

The following factors and other factors discussed in this Form 10 could cause the Company’s actual results to differ materially from those contained in forward-looking statements made in this registration statement or presented elsewhere in future SEC reports. You should carefully consider each of the risks, assumptions, uncertainties and other factors described below and elsewhere in this registration statement, as well as any reports, amendments or updates reflected in subsequent filings or furnishings with the SEC. We believe these risks, assumptions, uncertainties and other factors, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations, results of operations, financial condition and liquidity.

 

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Risk Factors Summary

Our business, financial condition and results of operations are subject to numerous risks and uncertainties. Below is a summary of the principal factors that make an investment in our Common Shares speculative or risky. This summary does not address all of the risks that we face and should be read in conjunction with the full risk factors contained below in this “Risk Factors” section in this Form 10.

 

   

Our business depends on our tenants successfully operating their businesses and satisfying their obligations to us.

 

   

Illiquidity of real estate investments and restrictions imposed by the Code could significantly impede our ability to respond to adverse changes in the performance of our properties.

 

   

We are subject to risks associated with the current interest rate environment and increases in interest rates may negatively impact us.

 

   

Our revenues and expenses are not directly correlated, and because a large percentage of our expenses are fixed, we may not be able to lower our cost structure to offset declines in our revenue.

 

   

We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.

 

   

We are subject to risks related to tenant concentration, and an adverse development with respect to a large tenant, such as a tenant declaring bankruptcy, could materially and adversely affect us.

 

   

We may be unable to complete the acquisitions of the newly identified ExchangeRight DST Portfolios or the other identified properties included in the Identified Trust Properties.

 

   

We may not acquire all of the properties that are included among the Identified Trust Properties.

 

   

We may acquire portfolios of properties, which may result in the acquisition of individual properties that do not otherwise meet our investment standards, including properties that are vacant.

 

   

The value of the Identified Trust Properties may fluctuate before we can complete the purchase of any or all of those properties, and we would not likely be able to adjust the purchase price for such acquisition.

 

   

We may only obtain limited warranties when we purchase a property and may only have limited recourse in the event our due diligence did not identify any issues that lower the value of the property.

 

   

We may be unable to identify and complete acquisitions of suitable properties, which may impede our growth, and our future acquisitions may not yield the returns we expect.

 

   

As we continue to acquire properties, we may decrease or fail to increase the diversification of our portfolio.

 

   

Challenging economic conditions could increase vacancy rates.

 

   

As leases expire, we may be unable to renew those leases or re-lease the space on favorable terms or at all.

 

   

REIT distribution requirements limit our ability to retain cash.

 

   

The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.

 

   

Conflicts of interest could arise between the interests of our shareholders and the interests of holders of OP Units, which may impede business decisions that could benefit our shareholders.

 

   

Our growth strategy depends on external sources of capital which may not be available to us on commercially reasonable terms or at all.

 

   

Valuations and appraisals of our real estate are estimates of fair value and may not necessarily correspond to realizable value.

 

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NAV calculations are not governed by governmental or independent securities, financial or accounting rules or standards.

 

   

In the future, we may choose to acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in shareholder dilution and limit our ability to sell such assets.

 

   

Many of the properties we intend to acquire are currently owned and managed by affiliates of the Trustee.

 

   

Shareholders are bound by the vote of other shareholders on matters on which they are entitled to vote, and shareholders will not have the right to vote on certain mergers, consolidations and conversions of the Company.

 

   

Our Trustee may be removed only under limited circumstances.

 

   

The Company’s rights, and the rights of shareholders, to recover claims against our officers and our Trustee are limited.

 

   

Our Declaration of Trust contains a provision that expressly permits our Trustee, our officers and ExchangeRight, and their affiliates, to compete with us.

 

   

The special limited partner of the Operating Partnership will be entitled to incentive distributions from our Operating Partnership only if the Operating Partnership’s investors have received a return of capital plus 7% cumulative, non-compounded annual return, which may discourage ExchangeRight from facilitating a transaction that would provide liquidity for our common shareholders.

 

   

Bankruptcy of ExchangeRight or any tenant of a property owned by the entity pledged to secure the RSLCA may adversely affect the value of the ExchangeRight Secured Loans.

 

   

The value of our ExchangeRight RSLCA may be impaired, and we may be unable to realize any value upon the foreclosure of the pledges securing the ExchangeRight Secured Loans due to the terms of the underlying mortgage loans.

 

   

The failure of a secured loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.

 

   

Our cash flows and operating results could be adversely affected by required payments of debt or related interest and other risks of our debt financing, including an inability to refinance existing indebtedness.

 

   

Financing we utilize may include recourse provisions to the Company.

 

   

High interest rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make to our shareholders.

 

   

Interest-only indebtedness may increase our risk of default and ultimately may reduce our cash available for distribution.

 

   

Our current loans, and loans associated with the Identified Trust Properties which we plan to assume, may be subject to certain unfavorable provisions.

 

   

We would incur significant material adverse tax consequences if we fail to qualify as a REIT.

 

   

Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our growth opportunities.

 

   

We may become subject to litigation, which could materially and adversely affect us.

 

   

An investment in our Common Shares will have limited liquidity. There is no public trading market for our Common Shares and there may never be one; therefore, it will be difficult for you to sell your shares.

 

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Risks Related to Our Business and Real Estate

Our business depends on our tenants successfully operating their businesses and satisfying their obligations to us.

We depend on our tenants to operate the properties they lease from us in a manner that generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain specified insurance coverage, pay real estate taxes and maintain the leased properties. While a tenant may have multiple sources of funds to meet its obligations to us, its ability to meet these obligations depends significantly on the success of the business it conducts at the property it leases from us. Our tenants may be adversely affected by many factors beyond our control that might render one or more of their locations uneconomic. These factors include poor management, changes in demographics, a downturn in general economic conditions or changes in consumer trends that decrease demand for our tenants’ products or services. The occurrence of any of these factors could cause our tenants to fail to meet their obligations to us, including their obligations to pay rent, maintain specified insurance coverage, pay real estate taxes or maintain the leased property, or could cause our tenants to declare bankruptcy. We could be materially and adversely affected if a number of our tenants were unable to meet their obligations to us.

Global economic, political and market conditions, including uncertainty about the financial stability of the United States, could have a significant adverse effect on our business, financial condition and results of operations.

Downgrades by rating agencies to the U.S. government’s credit rating or concerns about its credit and deficit levels in general, could cause interest rates and borrowing costs to rise, which may negatively impact our tenants’ results of operations and, in turn, their ability to meet their obligations to us. These factors also may negatively impact our ability to access the debt markets on favorable terms. Interest rates have risen in recent months, and the risk that they may continue to do so is pronounced. In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our financial performance, the net asset value of the Company, and, in turn, the value of our Common Shares.

The current global financial market situation, as well as various social and political circumstances in the U.S. and around the world, including wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, adverse effects of climate crisis and global health epidemics, may contribute to increased market volatility and economic uncertainties or deterioration in the U.S. and worldwide. In particular, the consequences of the Russian military invasion of Ukraine, including comprehensive international sanctions, the impact on inflation and increased disruption to supply chains may impact our counterparties with which we do business, and specifically our financing counterparties and financial institutions from which we obtain financing for the purchase of our properties, result in an economic downturn or recession either globally or locally in the U.S. or other economies, reduce business activity, spawn additional conflicts (whether in the form of traditional military action, reignited “cold” wars or in the form of virtual warfare such as cyberattacks) with similar and perhaps wider ranging impacts and consequences and have an adverse impact on the Company’s returns, net income and funds from operations. We have no way to predict the duration or outcome of the situation, as the conflict and government reactions are rapidly developing and beyond our control. Prolonged unrest, military activities or broad-based sanctions may increase our funding costs or limit our access to the capital markets.

Additionally, the U.S. government’s credit and deficit concerns, the European geopolitical and economic environment and any continuing macroeconomic uncertainty with respect to China could cause interest rates to be volatile, which may negatively impact our ability to obtain debt financing on favorable terms. In this period of rising interest rates, our cost of funds may increase except to the extent we have obtained fixed rate debt, issued equity instruments with a fixed distribution rate or sufficiently hedged our interest rate risk, which could reduce our net income and funds from operations.

 

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Illiquidity of real estate investments and restrictions imposed by the Code could significantly impede our ability to respond to adverse changes in the performance of our properties.

Relative to many other types of investments, real estate in general, and our properties in particular, are difficult to sell quickly. Therefore, our ability to promptly sell one or more properties in response to changing economic, financial or investment conditions is limited. In particular, our ability to sell a property could be adversely affected by weaknesses in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers or changes in national or international economic conditions (such as the most recent economic downturn) and changes in laws, regulations or fiscal policies of the jurisdiction in which the property is located.

In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties, which are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms.

We are subject to risks associated with the current interest rate environment and increases in interest rates may negatively impact us.

We are exposed to financial market risks, especially interest rate risk. In 2022, the U.S. Federal Reserve raised short term interest rates and has suggested additional interest rate increases may come. Changing interest rates may have unpredictable effects on markets, may result in heightened market volatility and may detract from our performance to the extent we are exposed to such interest rates and/or volatility. In periods of rising interest rates, such as the current interest rate environment, to the extent we borrow money subject to a floating interest rate, our cost of funds would increase, which could reduce our net income. Further, rising interest rates could also adversely affect our performance if such increases cause our borrowing costs to rise at a rate in excess of the rate that our investments yield. Further, rising interest rates could also adversely affect our performance if we hold investments with floating interest rates, subject to specified minimum interest rates (such as a LIBOR or SOFR floor, as applicable), while at the same time engaging in borrowings subject to floating interest rates not subject to such minimums. In such a scenario, rising interest rates may increase our interest expense, even though our interest income from investments is not increasing in a corresponding manner as a result of such minimum interest rates.

As of March 31, 2023, the Company had $26.9 million of floating rate debt outstanding, which is related to a mortgage loan entered into on February 9, 2023. Concurrent with the closing of this mortgage loan, the Company entered into an interest rate swap agreement which effectively converted this floating rate debt to fixed rate debt through its maturity date.

A further increase in interest rates during this period of rising interest rates may make it more costly for us to service the debt under our financing arrangements. Rising interest rates could also cause our tenants to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their businesses and operations.

Our net income will depend, in part, upon the difference between the rate at which we borrow funds and the yields on our properties and investments. We can offer no assurance that continued significant changes in market interest rates would not have a material adverse effect on our net income. In this period of rising interest rates, our cost of funds may further increase, which could reduce our net income.

Interest rates and other factors, such as occupancy, rental rates and the financial condition of our tenants, tend to influence our performance more so than does inflation. Our leases often provide for payments of base rent

 

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with scheduled increases, based on a fixed amount and, to a lesser extent, participating rent based on a percentage of the tenant’s gross sales to help mitigate the effect of inflation. Changes in interest rates, however, do not necessarily correlate with inflation rates or changes in inflation rates and are highly sensitive to many factors which are beyond our control. Our operating results will depend heavily on the difference between the rental revenue from our properties and the interest expense incurred on our borrowings. If interest rates continue to rise, it could increase our interest expense which, without a corresponding increase in our revenue, would have a negative impact on our operating results.

Continued increases in inflation may adversely affect our financial condition, cash flows and results of operations.

Over the past two years, inflation has significantly increased and continued increases in inflation could have a more pronounced negative impact on our mortgage and debt interest and general and administrative expenses, as these costs could increase at a rate higher than our tenants’ rents. Also, inflation may adversely affect tenant leases with stated rent increases or limits on such tenant’s obligation to pay its share of operating expenses, which could be lower than the increase in inflation at any given time. It may also limit our ability to recover all of our operating expenses. Inflation could also have an adverse effect on consumer spending, which could impact our tenants’ sales and, in turn, our average rents, and in some cases, our percentage rents, where applicable. In addition, renewals of leases or future leases may not be negotiated on current terms, in which event we may recover a smaller percentage of our operating expenses.

Our assessment that certain businesses are e-commerce resistant and recession-resilient may prove to be incorrect.

We primarily invest single-tenant properties net-leased to investment-grade tenants operating in the necessity-based retail industry subject to long-term net leases where a physical location is critical to the generation of sales and profits with a focus on necessity goods and essential services in the retail sector such as pharmaceutical, grocery, healthcare, necessity-based retail, farm and rural supply, and discount retail. We believe these characteristics make our tenants’ businesses e-commerce resistant and resilient through all economic cycles. While we believe this to be the case, businesses previously thought to be internet resistant, such as the retail grocery industry, have proven to be susceptible to competition from e-commerce. Technology and business conditions, particularly in the retail industry, are rapidly changing, and our tenants may be adversely affected by technological innovation, changing consumer preferences and competition from non-traditional sources. To the extent our tenants face increased competition from non-traditional competitors, such as internet vendors, some of which may have different business models and larger profit margins, their businesses could suffer. There can be no assurance that our tenants will be successful in the face of any new competition, and a deterioration in our tenants’ businesses could impair their ability to meet their lease obligations to us and materially and adversely affect us.

We are subject to risks related to commercial real estate ownership that could reduce the value of our properties.

The Company’s business is the ownership of single-tenant properties net-leased to primarily investment-grade tenants operating in the necessity-based retail industry subject to long-term net leases. Accordingly, our operating results will be subject to risks generally incident to the ownership of real estate, including:

 

   

inability to collect rents from tenants due to financial hardship, including bankruptcy;

 

   

changes in the general economic or business climate;

 

   

changes in local real estate conditions in the markets in which we operate, including the availability of and demand for single-tenant, net lease necessity-based retail assets;

 

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changes in consumer trends and preferences that affect the demand for products and services offered by certain of our tenants;

 

   

inability to lease or sell properties upon expiration or termination of existing leases;

 

   

changes in interest rates and availability of permanent mortgage financing that may render the sale of a property difficult or unattractive;

 

   

the subjectivity of real estate valuations and changes in such valuations over time;

 

   

the illiquidity of real estate investments generally;

 

   

potential development and construction delays;

 

   

changes in tax, real estate, environmental and zoning laws; and

 

   

periods of high interest rates and tight money supply.

These risks and other factors may prevent us from being profitable or from maintaining or growing the value of our properties.

Our revenues and expenses are not directly correlated, and because a large percentage of our expenses are fixed, we may not be able to lower our cost structure to offset declines in our revenue.

Most of the expenses associated with the Company are relatively fixed and generally will not decrease with any reduction in our revenue. Also, many of our expenses will be affected by inflation, and certain expenses may increase more rapidly than the rate of inflation in any given period. Additionally, certain expense increases may exceed the rent escalation provisions contained in many of our leases. By contrast, our revenue, which primarily comes from long-term leases, is affected by many factors beyond our control, such as tenant creditworthiness, lease term and the economic conditions in the markets where our properties are located. As a result, we may not be able to fully offset rising costs by increasing our rents.

We could be subject to increased property-level operating expenses.

Our properties are subject to property-level operating expenses, such as tax, utility, insurance, repair and maintenance and other operating costs. Though our properties are generally leased under net leases that obligate tenants to pay for all or a significant portion of these expenses, we may be required to pay some of these costs or we may become obligated to pay all of these costs if a tenant defaults on its obligation to pay these expenses. Additionally, we will be responsible for these costs at any vacant property that is not subject to a net lease. Property-level operating expenses may increase, and the likelihood of our need to fund these expenses may increase if property-level expenses exceed the level of revenue a tenant is able to generate at a particular property. Additionally, we may be unable to lease properties on terms that require the tenants to pay all or a significant portion of the properties’ operating expenses or property-level expenses that we are obligated to pay may exceed our expectations.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.

Our strategy focuses primarily on single-tenant properties net-leased to investment-grade tenants operating in the necessity-based retail industry subject to long-term net leases across the United States. Our results of operations depend on our ability to continue to strategically lease our properties, including renewing expiring leases, leasing vacant space and re-leasing space in properties where leases are expiring, optimizing our tenant mix or leasing properties on more economically favorable terms. We cannot guarantee that we will be able to renew leases or re-lease space (i) without an interruption in the rental revenue from those properties, (ii) at or above our current rental rates or (iii) without having to offer substantial rent abatements, tenant improvement

 

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allowances, early termination rights or below-market renewal options. Furthermore, the Company is aware of 13 tenants that are not operating in their location but are paying full unabated rent. The difficulty, delay and cost of renewing leases, re-leasing space and leasing vacant space could materially and adversely affect us.

In addition, all of the leases of our properties contain provisions giving the tenant the right to extend the term of the lease at a rental rate specified in the lease. If such rent is below the level of rent that the property could otherwise be leased for at the termination of the lease and the tenant exercises its right to extend the lease, we will be obligated nevertheless to lease the property for the rent specified in the lease.

Our financial monitoring and periodic site inspections may fail to mitigate the risk of tenant defaults, and if a tenant defaults, we may experience difficulty or a significant delay in re-leasing or selling the property.

Our active asset management strategies, which include regular reviews of each of our properties for changes in the credit of the tenant, business performance at the property, industry trends and local real estate market conditions, may be insufficient to predict tenant defaults. If a tenant defaults, it will likely eliminate all of, or significantly reduce, our revenue from the affected property for some time. If a defaulting tenant is unable to recover financially, we may have to re-lease or sell the property. Re-leasing or selling properties may take a significant amount of time, during which the property might have a negative cash flow to us and we may incur other related expenses. We may also have to renovate the property, reduce the rent or provide an initial rent abatement or other incentive to attract a tenant or buyer. During this period, we likely will incur ongoing expenses for property maintenance, taxes, insurance and other costs. Moreover, a property which has become vacant may lead to reduced rental revenue and result in less cash available for distribution to our shareholders. In addition, because a property’s value depends principally upon its lease, leasing history and prevailing market rental rates, the value of a property with a prolonged vacancy could decline.

We are subject to risks related to tenant concentration, and an adverse development with respect to a large tenant, such as a tenant declaring bankruptcy, could materially and adversely affect us.

The five largest tenants of the Trust Properties, Dollar General, Walgreens, Tractor Supply, Family Dollar and Hobby Lobby, represent 18.2%, 15.3%, 7.3%, 6.9% and 6.3% respectively, and collectively represent over 54.0% of the current in-place net rents of the Trust Properties as of March 31, 2023. Additionally, the five largest tenants of the combined Trust Properties and the Identified Trust Properties, Walgreens, Dollar General, Tractor Supply, Kroger and CVS, represent 19.9%, 13.8%, 8.8%, 7.2% and 5.2%, respectively, and collectively represent over 54.9% of the current net operating income of the combined Trust Properties and the Identified Trust Properties as of March 31, 2023. Dollar General and Walgreens are public companies, with each company’s common stock registered with the SEC under the Exchange Act. In this connection, Dollar General’s common stock is listed on the New York Stock Exchange, and Walgreens common stock is listed on the Nasdaq Stock Market. Both Dollar General and Walgreens are investment-grade rated BBB by S&P, respectively. As a result of this concentration, our business, financial condition and results of operations, including our NAV or the amount of cash available for distribution to our shareholders, could be adversely affected if we are unable to do business with one or more of these tenants, or if one or more of these tenants were to declare bankruptcy, become unable to make lease payments because of a downturn in its business, or otherwise.

Additionally, while we anticipate our portfolio to be diversified by tenant, industry and geography as we continue growing, and our investment strategy contemplates maintaining and growing a well-diversified portfolio, we have broad authority to invest in any property that we may choose, and it is possible that future investment activity could result in a less diverse portfolio. In the event that we become significantly exposed to any one tenant, a downturn in that tenant’s business or creditworthiness could adversely affect us. Similarly, if we develop a concentration of properties in any geographic area or used in a particular industry, any situation adversely affecting that area or industry would have a magnified adverse effect on our portfolio.

Any of our tenants, or any guarantor of one of our tenant’s lease obligations could be subject to a bankruptcy proceeding pursuant to Title 11 of the United States Code (the “Bankruptcy Code”). If a tenant

 

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becomes a debtor under the Bankruptcy Code, federal law prohibits us from evicting such tenant based solely upon the commencement of such bankruptcy. Further, such a bankruptcy filing would prevent us from attempting to collect pre-bankruptcy debts from the bankrupt tenant or its properties or take other enforcement actions, unless we receive an enabling order from the bankruptcy court. Generally, post-bankruptcy debts are required by statute to be paid currently, which would include payments on our leases that come due after the date of the bankruptcy filing. Such a bankruptcy filing also could cause a decrease or cessation of current rental payments, reducing our operating cash flows and the amount of cash available for distributions to shareholders. Prior to emerging from bankruptcy, the tenant will need to decide whether to assume or reject its leases. Generally, and unless otherwise agreed to by the tenant and the lessor, if a tenant assumes a lease, all pre-bankruptcy balances and unpaid post-bankruptcy amounts owing under it must be paid in full. If a given lease or guaranty is not assumed, our operating cash flows and the amount of cash available for distribution to shareholders may be adversely affected. If a lease is rejected by a tenant in bankruptcy, we are entitled to general unsecured claims for damages. If a lease is rejected, it is questionable whether we would receive any amounts from the tenant, and our general unsecured claim would be capped at the rent reserved under the lease, without acceleration, for the greater of one year or a percentage of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. We would only receive recovery on our general unsecured claim in the event funds or other consideration was available for distribution to general unsecured creditors, and then only in the same percentage as that realized on other general unsecured claims. We may also be unable to re-lease a terminated or rejected property or to re-lease it on comparable or more favorable terms.

Credit ratings may prove to be inaccurate or be unavailable for a tenant.

A key element of our underwriting process is evaluating tenant creditworthiness. When available, we consider credit ratings assigned by major rating agencies to our tenants, their parent entities, or, where applicable, their guarantors when making investment and leasing decisions. In certain instances, there will be no rating to consider and financial information may be limited. Underwriting credit risk in the absence of a credit rating or based upon limited financial information could cause us to improperly assess tenant credit risk and lead to tenant defaults.

Additionally, a credit rating is not a guarantee and only reflects the rating agency’s opinion of an entity’s ability to meet its financial commitments, such as its payment obligations to us under the relevant lease, in accordance with their stated terms. A rating may ultimately prove not to accurately reflect the credit risk associated with a particular tenant or guarantor. Ratings are generally based upon information obtained directly from the entity being rated, without independent verification by the rating agency. If any such information contained a material misstatement or omitted a material fact, the rating based upon such information may not be appropriate. Ratings may be changed, qualified, suspended, placed on watch or withdrawn as a result of changes in, additions to or the accuracy of information, the unavailability of or inadequacy of information or for any other reason. No rating agency guarantees a tenant’s or, where applicable, its guarantor’s obligations to us. If a tenant’s or, where applicable, its guarantor’s rating is changed, qualified, suspended, placed on watch or withdrawn, such tenant or guarantor may be more likely to default in its obligations to us, and investors may view our cash flows as less stable.

We face significant competition for tenants, which may decrease the occupancy and rental rates of our properties.

We compete for tenants with numerous traded and non-traded public REITs, private REITs, private equity investors, institutional investment funds, individuals, banks and insurance companies, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our leases expire. Competition for tenants could decrease the occupancy and rental rates of our properties.

 

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We face significant competition for acquisitions, which may reduce the number of acquisitions we are able to complete, which may impede our growth and increase the costs of these acquisitions.

We face competition for acquisitions of real property from investors, including traded and non-traded public REITs, private REITs, private equity investors, institutional investment funds, individuals, banks and insurance companies, some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties and the ability to accept more risk than we can prudently manage. This competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable investment opportunities available to us which may impede our growth and increase the prices paid for such acquisition properties. This competition will increase if investments in real estate become more attractive relative to other types of investment. Accordingly, competition for the acquisition of real property could materially and adversely affect us.

We may be unable to complete the acquisitions of the newly identified ExchangeRight DST Portfolios or the other identified properties included in the Identified Trust Properties.

Our ability to achieve our desired improved returns requires us to complete acquisitions of all of the Identified Trust Properties, or other properties that meet our investment objectives, and to successfully integrate these properties into our portfolio. We have entered into agreements to acquire certain of the additional Identified Trust Properties that, subject to obtaining the consent of the current mortgage lenders secured by the corresponding Identified Trust Properties, provide the Company with the unilateral right to acquire the additional Identified Trust Properties. Our ability to acquire any of the additional Identified Trust Properties, or other properties, and successfully integrate them is also dependent on our ability to raise sufficient capital to acquire the properties. If we are not able to acquire all of the Identified Trust Properties, we may be unable to identify suitable replacement properties that meet our investment objectives and we may be unable to achieve our desired returns.

We may not acquire all of the properties that are included among the Identified Trust Properties.

Although we have entered into agreements to acquire the additional Identified Trust Properties, we must obtain the consent of the mortgage lenders with respect to certain of the properties and raise sufficient capital before we can acquire any of these properties. However, if our Trustee believes that the acquisition of different properties is in the best interests of the Company, we may acquire properties other than the Identified Trust Properties consistent with our investment objectives. The anticipated characteristics of our portfolio, including property location and quality, lease terms and tenants, and our anticipated cash available for distribution are only indicative of the investment opportunities represented by the Identified Trust Properties and may be less favorable to investors if we acquire different properties.

We may acquire portfolios of properties, which may result in the acquisition of individual properties that do not otherwise meet our investment standards, including properties that are vacant.

We may acquire portfolios of properties, including ExchangeRight DST Portfolios, which may include “dark” properties that are vacant at the time we acquire them. When considering portfolio acquisitions, the Company will consider the portfolio composition and its investment metrics as a whole and particular portfolios may include individual properties that are vacant. However, when considering portfolio acquisitions that include such properties, the Company will consider the portfolio composition as a whole and will adjust the pricing for a future re-tenanting event. Our Trustee will not agree to acquire additional properties, or portfolios of properties, unless it is anticipated to result in the equivalent to or at a premium to the then-current NAV per share of the Company. However, a property in a portfolio which has become “dark” or vacant may lead to reduced rental revenue and result in less cash available for distribution to our shareholders. In addition, because a property’s value depends principally upon its lease, leasing history and prevailing market rental rates, the value of a property with a prolonged vacancy could decline. Additionally, upon lease expiration and until the vacant

 

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property can be re-leased, we will be responsible for the property-level operating expenses. We may be unable to lease such properties on terms that require the new tenants to pay all or a significant portion of the properties’ operating expenses or property-level expenses that we are obligated to pay.

The purchase price to be paid for the Identified Trust Properties was determined by the Trustee using various valuation methodologies and not by an independent appraiser, and as a result the purchase price for any single property may not necessarily correspond to realizable market value.

The purchase price for the Identified Trust Properties was determined by the Trustee based on several factors the Trustee deemed to be relevant for achieving the purpose of the acquisition transactions and the investment goals of investors. In this regard, the Trustee primarily utilized an income-based approach by performing a discounted cash flow analysis of each of the Identified Trust Properties to provide an indication of the value of the properties. This analysis included projecting anticipated cash flows pursuant to in-place leases and a residual value for each of the properties, and then discounting those anticipated cash flows and the residual value back to the present value using a discount rate based on market factors and an anticipated weighted average cost of capital. Along with this analysis, the Trustee also employed a market-based approach to use as part of the purchase price determination, which involved researching and analyzing market data of similarly situated properties, reviewing recent transactions involving similar properties, and considering other asset-specific details, such as property location, building size, tenancy, lease rates, lease terms, and various other property characteristics and metrics the Trustee deemed relevant. Next, the Trustee evaluated the aggregate price for the properties that would need to be paid in order for the investors in the relevant DSTs subject to the acquisition transactions to achieve a full return of capital, and considered whether that price was sufficient to support the discounted cash flow and market-based analyses used to provide the indication of value described above. After applying the foregoing approaches, the Trustee then aggregated the values of the properties resulting from these analyses, which the Trustee used as the basis for the purchase price for the Identified Trust Properties.

Upon determining the purchase price for the properties as described above, the Trustee then engaged a nationally-recognized independent third party professional valuation firm to perform an independent valuation of the properties and produce a restricted appraisal report indicating a range of the high and low fair values of the subject properties. This independent valuation was used by the Trustee at the time of the identification of the properties to confirm and support the purchase price determined by the Trustee through the application of the valuation analyses described above. Moreover, the purchase price was determined by the Trustee through the application of the valuation analyses and other considerations described above. The purchase price was not determined by an independent appraiser, but rather the purchase price determined by the Trustee was confirmed and supported by the independent third-party valuation obtained by the Trustee.

Within the parameters of the Trustee’s valuation methodologies described above, the methodologies used to determine the purchase price for the Identified Trust Properties involve subjective judgments concerning factors such as comparable sales, rental and operating expense data, capitalization or discount rate, and projections of future rent and expenses. Although the Trustee’s valuation methodologies are designed to accurately and fairly determine the value of the Identified Trust Properties to be purchased, the results of the Trustee’s valuation analyses, and correspondingly the purchase price determined for the Identified Trust Properties, do not necessarily represent the fair market value of any one property being purchased or the price at which we would be able to sell the property after acquisition, because such prices would be negotiated. If the value of an Identified Trust Property decreases prior to the Company’s determination to purchase the property, the purchase price is not likely to be revised, unless under certain extraordinary circumstances. As a result, if the value of an Identified Trust Property decreases after acquisition, or we sell a property at a realized loss, this may adversely affect our NAV and shareholders may receive less than realizable value for their investment.

 

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The value of the Identified Trust Properties may fluctuate before we can complete the purchase of any or all of those properties, and we would not likely be able to adjust the purchase price for such acquisition.

Our ability to acquire the ExchangeRight DST Portfolios is dependent on obtaining the consent of the senior mortgage lenders holding security interests in those properties, and our ability to acquire any of the Identified Trust Properties is dependent on our obtaining sufficient capital to acquire the properties. If we are not able to acquire the Identified Trust Properties immediately, some or all of the properties may decline in value before we are able to complete the acquisition.

We may only obtain limited warranties when we purchase a property and may only have limited recourse in the event our due diligence did not identify any issues that lower the value of the property.

The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications (including those relating to construction of the building and environmental issues) that will survive only for a limited period after the closing. The purchase of properties with limited warranties, representations or indemnifications increases the risk that we may lose some or all of our invested capital in the property, as well as the loss of rental income from that property.

Eminent domain could lead to material losses.

Government authorities may exercise eminent domain to acquire the land on which our properties are built in order to build roads and other infrastructure. Any such exercise of eminent domain would allow us to recover only the fair value of the affected properties. In addition, “fair value” could be substantially less than the real market value of the property, and we could effectively have no profit potential from properties acquired by the government through eminent domain.

Covenants, conditions, and restrictions may restrict the uses of our properties.

Some of our properties are contiguous to other parcels that comprise a single retail center. In connection with such properties, we are often subject to significant covenants, conditions and restrictions (“CC&Rs”) that limit the use and operation of such properties. Moreover, the operation and management of the contiguous properties may adversely affect the value of our properties. Compliance with CC&Rs or the presence of contiguous businesses may make the affected properties less attractive to potential tenants and adversely affect their value.

We may be unable to identify and complete acquisitions of suitable properties, which may impede our growth, and our future acquisitions may not yield the returns we expect.

Our ability to expand through acquisitions requires us to identify and complete acquisitions or investment opportunities that are compatible with our growth strategy and to successfully integrate newly acquired properties into our portfolio. We continually evaluate investment opportunities and may acquire properties when strategic opportunities exist. Our ability to acquire properties on favorable terms and successfully operate them may be constrained by the following significant risks:

 

   

we face competition from other real estate investors with significant capital, including REITs and institutional investment funds, which may be able to accept more risk than we can prudently manage, including risks associated with paying higher acquisition prices;

 

   

we face competition from other potential acquirers which may significantly increase the purchase price for a property we acquire, which could reduce our growth prospects;

 

   

we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently unable to complete;

 

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we may acquire properties that are not accretive to our results upon acquisition, and we may be unsuccessful in managing and leasing such properties in accordance with our expectations;

 

   

in limited circumstances, we may acquire individual properties that are vacant or do not otherwise meet our standards; however, when considering portfolio acquisitions that include such properties, we will consider the portfolio composition as a whole and will adjust the pricing for a future re-tenanting event;

 

   

our cash flow from an acquired property may be insufficient to meet our required principal and interest payments with respect to debt used to finance the acquisition of such property;

 

   

we may discover unexpected items, such as unknown liabilities, during our due diligence investigation of a potential acquisition or other customary closing conditions may not be satisfied, causing us to abandon an investment opportunity after incurring expenses related thereto;

 

   

we may fail to obtain financing for an acquisition on favorable terms or at all;

 

   

we may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;

 

   

market conditions may result in higher than expected vacancy rates and lower than expected rental rates; or

 

   

we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as liabilities for clean-up of unknown environmental contamination not identified in Phase I environmental site assessment reports or otherwise through due diligence, claims by tenants, vendors or other persons dealing with the former owners of the properties, liabilities incurred in the ordinary course of business and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

If any of these risks are realized, we may be materially and adversely affected.

As we continue to acquire properties, we may decrease or fail to increase the diversification of our portfolio.

While we seek to maintain or increase our portfolio’s tenant, geographic and property type diversification with future acquisitions, it is possible that we may determine to consummate one or more acquisitions that actually decrease our portfolio’s diversification. If our portfolio becomes less diversified, our business will be more sensitive to the bankruptcy or insolvency of fewer tenants, to changes in trends affecting a particular industry, and to a general economic downturn in a particular geographic area.

A pandemic, epidemic, or outbreak of another infectious disease in the United States, such as the recent COVID-19 pandemic, could adversely affect our operating results and financial condition.

Our operating results and financial condition are dependent on the ability of our tenants to meet their lease obligations to us. A pandemic, epidemic, or outbreak of another infectious disease, such as the recent COVID-19 pandemic, or a resurgence of COVID-19, could adversely affect the ability of our tenants to meet their lease obligations by increasing their operating costs and reducing their income. While we believe the United States has largely emerged from the restrictions of COVID-19, there can be no assurance that we will not be impacted by a resurgence of this virus or another pandemic. Any such events could place substantive restrictions and impact on our tenants, and in turn, our business, operating results, and financial condition. In such a situation, we could face closing of borders, restricting of supply chains, closing of enterprises, and reductions in new potential acquisition and leasing opportunities.

The extent to which another pandemic, epidemic, or COVID-19 impacts our business, operations, and financial results is uncertain, and will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and scope of the pandemic; governmental, business, and individual actions taken in response to the pandemic and the impact of those actions on global economic activity; the actions taken in

 

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response to economic disruption; the reduced economic activity, if not closures from time to time of our tenants’ facilities, may impact our tenants’ businesses, financial condition, and liquidity, and may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations; general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow our portfolio of properties; the financial impact of any such pandemic could negatively impact our future compliance with financial covenants of our credit agreements and result in a default and potentially an acceleration of indebtedness, which non-compliance could negatively impact our ability to make additional borrowings under such facilities and pay dividends; and a deterioration in our or our tenants’ ability to operate in affected areas or delays in the supply of products or services to us or our tenants from vendors that are needed for our or our tenants’ efficient operations could adversely affect our operations and those of our tenants. As of the date of this Form 10, the COVID-19 pandemic has not had a material adverse effect on the Company’s financial performance, results of operations, liquidity, or access to financing. However, the Company’s operations and financial performance are dependent on the ability of its tenants to meet their lease obligations to the Company. To date, COVID-19 has not caused any of our tenants to be unable to meet their lease obligations to us, including their obligation to pay rent in a timely manner.

We own properties located in certain states that are particularly susceptible to various natural disasters including, without limitation, windstorms, floods, hurricanes, earthquakes, tornadoes and other natural disasters indigenous to those states.

In general, any natural disasters affecting the properties we own could affect our tenants and the ability and incentive of the tenants to make timely rental payments. Accordingly, the rates of delinquencies and defaults on the leases at the properties could be greater than with a pool of properties involving different geographic diversification.

Climate change, natural disasters or health crises could adversely affect our properties and business.

Our properties could be subject to natural disasters and may be impacted by climate change. To the extent climate change causes adverse changes in weather patterns, rising sea levels or extreme temperatures, our properties in certain markets may be adversely affected. Specifically, properties located in coastal regions could be affected by any future increases in sea levels or in the frequency or severity of hurricanes and storms, whether caused by climate change or other factors. Climate change could have a variety of direct or indirect adverse effects on our properties and business, including:

 

   

Property damage to our retail properties;

 

   

Indirect financial and operational impacts from disruptions to the operations of major tenants located in our retail properties from severe weather, such as hurricanes, floods, wildfires or other natural disasters;

 

   

Increased insurance premiums and deductibles, or a decrease in or unavailability of coverage, for properties in areas subject to severe weather, such as hurricanes, floods, wildfires or other natural disasters;

 

   

Increased insurance claims and liabilities;

 

   

Increases in energy costs impacting operational returns;

 

   

Changes in the availability or quality of water or other natural resources on which the tenant’s business depends;

 

   

Decreased consumer demand for products or services resulting from physical changes associated with climate change (e.g., warmer temperatures or decreasing shoreline could reduce demand for residential and commercial properties previously viewed as desirable);

 

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Incorrect long-term valuation of an equity investment due to changing conditions not previously anticipated at the time of the investment; and

 

   

Economic disruptions arising from the above.

Moreover, compliance with new laws or regulations related to climate change, including compliance with “green” building codes, may require us to make improvements to our existing properties or pay additional taxes and fees assessed on us or our properties. Although we strive to identify, analyze, and respond to the risk and opportunities that climate change presents, at this time there can be no assurance that climate change will have an adverse effect on us.

Some of our properties are leased to tenants or have lease guarantors that are not rated by a major rating agency.

A key element of our underwriting process is evaluating tenant creditworthiness. When available, we consider any relevant rating assigned by a major rating agency. Additionally, when we underwrite a tenant’s credit, we generally review financial statements or other financial data and, if available, property-level operating information. In certain instances, there will be no rating to consider and financial information may be limited. Underwriting credit risk in the absence of a credit rating or based upon limited financial information could cause us to improperly assess tenant credit risk and lead to tenant defaults.

If a major tenant declares bankruptcy, we may be unable to collect balances due under relevant leases.

We may experience concentration in one or more tenants across several of the properties in our portfolio. Any of our tenants, or any guarantor of one of our tenant’s lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the United States Code (the “Bankruptcy Code”). If a tenant becomes a debtor under the Bankruptcy Code, federal law prohibits us from evicting such tenant based solely upon the commencement of such bankruptcy. Further, such a bankruptcy filing would prevent us from attempting to collect pre-bankruptcy debts from the bankrupt tenant or its properties or take other enforcement actions, unless we receive an enabling order from the bankruptcy court. Generally, post-bankruptcy debts are required by statute to be paid currently, which would include payments on our leases that come due after the date of the bankruptcy filing. Such a bankruptcy filing also could cause a decrease or cessation of current rental payments, reducing our operating cash flows and the amount of cash available for distributions to shareholders. Prior to emerging from bankruptcy, the tenant will need to decide whether to assume or reject its leases. Generally, and unless otherwise agreed to by the tenant and the lessor, if a tenant assumes a lease, all pre-bankruptcy balances and unpaid post-bankruptcy amounts owing under it must be paid in full. If a given lease or guaranty is not assumed, our operating cash flows and the amount of cash available for distribution to shareholders may be adversely affected. If a lease is rejected by a tenant in bankruptcy, we are entitled to general unsecured claims for damages. If a lease is rejected, it is questionable whether we would receive any amounts from the tenant, and our general unsecured claim would be capped at the rent reserved under the lease, without acceleration, for the greater of one year or a percentage of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. We would only receive recovery on our general unsecured claim in the event funds or other consideration was available for distribution to general unsecured creditors, and then only in the same percentage as that realized on other general unsecured claims. We may also be unable to re-lease a terminated or rejected property or to re-lease it on comparable or more favorable terms.

We are exposed to risks related to increases in market lease rates and inflation, as income from long-term leases is our primary source of cash flows from operations.

We are exposed to risks related to increases in market lease rates and inflation, as income from long-term leases is the primary source of our cash flows from operations. Leases of long-term duration, or which include renewal options that specify a maximum rental rate increase, may result in below-market lease rates over time if

 

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we do not accurately estimate inflation or increases in market lease rates. Provisions of our leases designed to mitigate the risk of inflation and unexpected increases in market lease rates, such as periodic rental rate increases, may not adequately protect us from the impact of inflation or unexpected increases in market lease rates.

Real estate taxes may increase, and any such increases may not be paid for by our tenants.

Tax rates or the assessed values of our properties may increase, which would result in increased real estate taxes. Although tenants at our properties are obligated to pay these taxes (including any increases thereto) pursuant to net leases, we may be responsible for some or all of these taxes related to certain of our properties upon a property’s lease expiration. In addition, if a tenant does not meet its obligation to pay real estate taxes, we likely will be required to pay such taxes to preserve the value of our investment.

Challenging economic conditions could increase vacancy rates.

Challenging economic conditions, the availability and cost of credit, turmoil in the mortgage market and declining real estate markets have contributed to increased vacancy rates in the commercial real estate sector. If we experience higher vacancy rates, we may have to offer lower rental rates or increase tenant improvement allowances or concessions. Increased vacancies may have a greater impact on us, as compared to REITs with other investment strategies, as our investment approach relies on long-term leases in order to provide a relatively stable stream of rental income. Increased vacancies could reduce our rental revenue and the values of our properties, possibly below the amounts we paid for them. Any such reduced revenues could make it more difficult for us to meet our payment obligations with respect to any indebtedness associated with the affected properties or limit our ability to refinance such indebtedness.

As leases expire, we may be unable to renew those leases or re-lease the space on favorable terms or at all.

Our success depends, in part, upon our ability to cause our properties to be occupied and generate revenue. Current tenants may decline, or may not have the financial resources available, to renew current leases, and we cannot guarantee that we will be able to renew leases or re-lease space (i) without an interruption in the rental revenue from those properties, (ii) at or above our current rental rates, or (iii) without having to offer substantial rent abatements, tenant improvement allowances, early termination rights or below-market renewal options. The difficulty, delay and cost of renewing leases, re-leasing space and leasing vacant space could materially and adversely affect us.

In addition, all of the leases of our properties contain provisions giving the tenant the right to extend the term of the lease at a rental rate specified in the lease. If such rent is below the level of rent that the property could otherwise be leased for at the termination of the lease and the tenant exercises its right to extend the lease, we will be obligated nevertheless to lease the property for the rent specified in the lease.

We may be unable to secure funds for future tenant improvements or other capital needs.

When tenants do not renew their leases or otherwise vacate their space, it is common that, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements to the vacated space. In addition, although our leases generally require tenants to pay for routine property maintenance costs, we are often responsible for any major structural repairs, such as repairs to a property’s foundation, exterior walls or roof. In general, we expect to use a significant portion of our cash to invest in additional properties and fund distributions to our shareholders. Accordingly, if we need significant additional capital to improve or maintain our properties or for any other reason, we will likely be required to obtain funds from other sources, such as cash flow from operations, borrowings, property sales or future offerings of our securities. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for tenant improvements or other capital needs, our properties may be less attractive to future tenants or purchasers, generate lower cash flows and/or decline in value.

 

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REIT distribution requirements limit our ability to retain cash.

As a REIT, we are subject to annual distribution requirements, which limit the amount of cash we can retain for other business purposes, including to fund our growth. We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, in order for our distributed earnings not to be subject to corporate income tax. We intend to make distributions to our shareholders to comply with the REIT distribution requirements of the Code. However, timing differences between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds to meet the 90% distribution requirement of the Code, even if the prevailing market conditions are not favorable for these dispositions or borrowings.

In the future, if we do not generate sufficient earnings and cash flow from operations, we may pay distributions to our shareholders from sources other than cash flow from operations.

Since our formation in January 2019, we have paid dividends and distributions to the holders of our Common Shares, and the Operating Partnership has paid distributions to the holders of OP Units, only out of cash flow from operations and not from any other sources. However, in the future it is possible we may not generate sufficient earnings and cash flow from operations to fully fund distributions to shareholders or holders of OP Units, as the case may be, in a current period and a portion of distributions could be paid out of inception-to-date operating cash flow or we may be required to pay a distribution due to REIT qualification requirements or to avoid incurring federal income tax. In such circumstances, we may choose to use other sources to fund distributions to our shareholders or the OP Unit holders in that current period, including but not limited to, borrowings (including borrowings secured by our assets), net proceeds of public or private securities offerings, proceeds from the sale of assets, and advances on or the deferral of fees and expense reimbursements. Using certain of the foregoing sources may result in a liability to us, which would require a future repayment. Additionally, the use of sources for distributions other than cash flow from operations, and the ultimate repayment of any liabilities incurred, could adversely impact our ability to pay distributions in future periods, decrease our NAV, decrease the amount of cash we have available for operations and new real estate acquisitions, and adversely impact the value of a shareholder’s investment in our Common Shares.

We may be unable to sell a property when we desire to do so.

The real estate market is affected by many factors that are beyond our control, such as general economic conditions, the availability of financing, interest rates, and supply and demand. While the Company’s strategy is not to sell properties individually, it is possible that we could pursue those options on select properties, and for those properties, we cannot predict whether we will be able to sell a property for a price or on other terms that we determine to be acceptable. In connection with selling a property, we may determine that it is necessary to make significant capital expenditures to correct defects or to make improvements in order to facilitate a sale. We may not have the ability to fund these expenditures, which could prevent us from selling the property or adversely affect any selling terms. Additionally, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on such property. To the extent we determine to sell a property, we cannot predict the length of time needed to find a willing purchaser and to close the sale of the property or that any sale will result in the receipt of net proceeds in excess of the amount we paid for the property.

We identified a material weakness in our internal controls over technical accounting related to the allocation of the purchase price between building and site improvements for our asset acquisitions. The financial statements presented in this Form 10 reflect the corrected application of the principles set forth in ASC 805 and we believe we have fully remediated the material weakness as of the date of this Form 10. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential shareholders could lose confidence in our financial statements, which could have an adverse effect on our business and would harm our reputation.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance

 

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regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. In connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2022, our management and independent auditors identified a material weakness in our internal controls related to the accounting for our asset acquisitions completed during 2021 and prior periods related to the allocation of the purchase price between building and site improvements. Specifically, the material weakness related to a need to shift the allocation of the purchase prices in the asset acquisitions increasingly to site improvements relative to the allocation to buildings. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Prior to the discovery and remediation of this issue, we did not maintain adequate controls over our allocations of the purchase prices in our asset allocations to the relative fair values of the assets within the buildings and improvements we acquired because we incorrectly applied GAAP principles set forth in Accounting Standards Codification (“ASC”) 805 – Business Combinations. In this regard, we historically utilized a methodology for allocating the overall purchase price of asset acquisitions to building and site improvements by applying ASC 805 under the guidance of a valuation service provider that had been reviewed by our auditors. Under this methodology, we allocated the purchase price in each asset acquisition to the acquired building and improvement value which is depreciated over a 39-year period upon recognition, but we did not allocate the purchase price to site improvements, such as parking lots, landscaping, irrigation, signage, fencing, lighting, and retaining walls, which are depreciated over a shorter useful life. During the review of our purchase price allocation methodology in connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2022, we determined to change our purchase price allocation methodology to allocate the purchase prices in our asset acquisitions to site improvements consistent with the principles set forth in ASC 805. The financial statements presented in this Form 10 reflect the corrected application of the principles set forth in ASC 805.

To address this material weakness, management instituted additional controls and procedures to ensure the purchase price allocation methodology in our asset acquisitions will include allocations to site improvements consistent with ASC 805. Accordingly, as of the date of this registration statement we believe we have fully remediated the material weakness described above. If our remedial measures are insufficient, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting occur in the future, our future consolidated financial statements or other information we file with the SEC may contain material misstatements, cause us to fail to meet our reporting obligations, or cause investors to lose confidence in our reported financial information, which could have an adverse effect on our business and would harm our reputation.

We may be negatively affected by potential development and construction delays.

We may invest in properties that are under development or construction. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance may also be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate pre-construction leases.

We also must rely on rental income and expense projections and estimates of the fair market value of the property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.

If we purchase an option to acquire a property but do not exercise the option, we likely would forfeit the amount we paid for such option.

In determining whether to purchase a particular property, we may obtain an option to purchase such property. While not anticipated, the amount paid for an option, if any, normally is forfeited if the property is not

 

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purchased within the option exercise period and normally is credited against the purchase price if the property is purchased. If we purchase an option to acquire a property but do not exercise the option, we likely would forfeit the amount we paid for such option.

Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect us.

From time to time, we may acquire multiple properties in a single transaction. Portfolio acquisitions are more complex and may be more expensive than single property acquisitions, and the risk that a multiple-property acquisition does not close may be greater than in a single-property acquisition. Portfolio acquisitions may also result in our owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require that a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another party to acquire the unwanted properties, we may be required to hold such properties and seek to dispose of them at a later time. Acquiring multiple properties in a single transaction may require us to accumulate a large amount of cash, and holding large cash balances for significant periods of time could reduce our returns, as returns on cash are substantially lower than the returns we target from our investments in properties.

If we sell properties and provide financing to purchasers, we will be subject to the risk of default by the purchasers.

While not anticipated, in some instances, we may sell a property and provide financing to the purchaser for a portion of the purchase price. Though we do not expect to provide a significant amount of financing to purchasers relative to the overall size of our portfolio, we are not precluded from doing so. If we provide financing to purchasers, we will bear the risk that the purchaser may default on its obligations to us, including payment obligations, under the financing arrangement. Even in the absence of a purchaser default, we will not receive the full cash proceeds from such a sale until such time as our loan is repaid by the purchaser or sold by us, which will result in a delay in our ability to distribute such sales proceeds or reinvest them in other properties.

The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.

The Federal Deposit Insurance Corporation only insures amounts up to a maximum level per depositor per insured bank. We likely will have cash (including restricted cash) and cash equivalents deposited in certain financial institutions in excess of federally insured levels. If any of the banking institutions in which we deposit funds ultimately fails, we may lose a certain portion of our deposits. The loss of our deposits could reduce the amount of cash available for distribution to our shareholders or investment in new or existing properties.

Risks Related to Our Organizational Structure

We are a relatively new company and have a limited operating history.

The Company was formed on January 11, 2019 and began its operations on April 30, 2019. As such, we have a limited operating history and are subject to all the risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the NAV of the Company and, in turn, the value of our Common Shares could decline substantially. Prior to the formation of the Company, neither ExchangeRight nor Joshua Ungerecht, Warren Thomas or David Fisher (collectively “Key Principals”) had experience operating a REIT. As a result, we cannot assure you that the past experience of ExchangeRight and its Key Principals will be sufficient to successfully operate the Company as a REIT, including meeting the requirements relative to maintaining our qualification as a REIT.

 

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We are a holding company with no direct operations and will rely on funds received from our Operating Partnership to pay liabilities and make any distributions declared by our Trustee.

We are a holding company and conduct substantially all of our operations directly and indirectly through our Operating Partnership. We will not have any significant operations or, apart from our interest in the Operating Partnership, any significant assets. As a result, we will rely on distributions from the Operating Partnership to pay any distributions that our Trustee declares on our Common Shares. We will also rely on distributions from the Operating Partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from the Operating Partnership. In addition, because we are a holding company, claims by shareholders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) or any preferred equity of the Operating Partnership and its subsidiaries, including ExchangeRight’s special limited partnership interest in the Operating Partnership. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of the Operating Partnership and its subsidiaries will be able to satisfy the claims of our shareholders only after all of our and the Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

We own all of the general partnership interests in the Operating Partnership as of the date of this registration statement. In connection with our future acquisition of properties or otherwise, we may issue OP Units to third parties. Such issuances would reduce our percentage ownership interest in the Operating Partnership. Because shareholders will not directly own units of the Operating Partnership, shareholders will not have any voting rights with respect to any such issuances or other partnership level activities of the Operating Partnership.

Conflicts of interest could arise between the interests of our shareholders and the interests of holders of OP Units, which may impede business decisions that could benefit our shareholders.

Conflicts of interest could arise as a result of the relationships between us, on the one hand, and our Operating Partnership or any limited partner thereof, on the other. Our Key Principals and executive officers own 13,007 Class I Common Shares and 65,240 OP Units and have the right to acquire in connection with our acquisition of the Identified Trust Properties an aggregate of 383,355 additional OP Units. Additionally, ExchangeRight owns 77,308 OP Units and EIFG owns 600,000 Class I Common Shares. Our Trustee and officers have duties to us and our shareholders under applicable Maryland law in connection with their management of the Company. At the same time, we, as the sole general partner of our Operating Partnership, have fiduciary duties and obligations to our Operating Partnership and its limited partners under Delaware law and the partnership agreement of our Operating Partnership in connection with the management of our Operating Partnership. Our duties as the sole general partner to our Operating Partnership and its partners may come into conflict with the duties of our Trustee and officers to the Company and our shareholders. These conflicts may be resolved in a manner that is not in the best interests of our shareholders.

Our success depends on key personnel of ExchangeRight whose continued service is not guaranteed and each of whom would be difficult to replace.

Our success depends to a significant degree upon the contributions of our Key Principals and certain of our principal officers and other key personnel, each of whom would be difficult to replace. We cannot guarantee that all, or any particular one, will remain affiliated with us. If any of our key personnel were to cease their affiliation with us, our operating results could suffer. We believe that our future success depends, in large part, upon our ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and our business, financial condition, and results of operations, as well as our ability to make distributions to our shareholders, could be materially and adversely affected.

 

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There is no public trading market for our Common Shares; therefore, your ability to dispose of your shares will likely be limited.

There is no current public trading market for our Common Shares, and a market may never develop for them. Our Common Shares are not listed on any national securities exchange, and we do not intend to apply to have our Common Shares listed on a national securities exchange in the foreseeable future. In the absence of an active public trading market, shareholders may not be able to sell their Common Shares. The lack of an active market for our shares also may impair our ability to raise capital by selling shares, our ability to motivate our employees through equity incentive awards, and our ability to acquire other companies by using Common Shares as consideration. Therefore, the repurchase of Common Shares by us will likely be the only way for a shareholder to dispose of its shares. The Company has instituted a repurchase program but may choose to repurchase fewer shares than have been requested in any particular month to be repurchased under our share repurchase plan, or none at all, in our discretion at any time. If you are able to find a buyer for your shares, you will likely have to sell them at a substantial discount to your purchase price. It also is likely that your shares would not be accepted as the primary collateral for a loan.

We face risks associated with the deployment of our capital.

In light of the nature of our plans to conduct continuous offerings in relation to our investment strategy and the need to be able to deploy capital quickly to capitalize on potential investment opportunities, if we have difficulty identifying and purchasing suitable properties on attractive terms, there could be a delay between the time we receive net proceeds from the sale of Common Shares in our private offerings and the time we invest the net proceeds. We may also from time to time hold cash pending deployment into investments, which cash holdings may at times be significant, particularly at times when we are receiving high amounts of offering proceeds and/or times when there are few attractive investment opportunities. Such cash may be held in an account for the benefit of our shareholders that may be invested in money market instruments or other similar temporary investments, each of which are subject to the asset management fees.

In the event we are unable to find suitable investments such cash may be maintained for longer periods which would be dilutive to overall investment returns. This could cause a substantial delay in the time it takes for a shareholder’s investment to realize its full potential return and could adversely affect our ability to pay regular distributions of cash flow from operations to shareholders. It is not anticipated that the temporary investment of such cash into money market instruments or other similar temporary investments pending deployment into investments will generate significant interest, and shareholders should understand that such low interest payments on the temporarily invested cash may adversely affect overall returns. In the event we fail to timely invest the net proceeds of sales of our Common Shares, our results of operations and financial condition may be adversely affected.

Our growth strategy depends on external sources of capital which may not be available to us on commercially reasonable terms or at all.

We expect that over time we will seek additional sources of capital to fund our business. We may not be able to obtain such financing on favorable terms or at all. Any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:

 

   

general market conditions;

 

   

the market’s perception of our creditworthiness and growth potential;

 

   

our current debt levels and our ability to satisfy financial covenants;

 

   

our current and expected future earnings;

 

   

our cash flow, cash position and cash distributions; and

 

   

our ability to offer and sell our Common Shares or other equity securities.

 

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If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our shareholders necessary to maintain our qualification as a REIT.

In addition, in order to maintain our qualification as a REIT, we are generally required under the Code to, among other things, distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, and we will be subject to income tax at regular corporate rates to the extent we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, without access to third-party sources of capital, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations, or make the cash distributions to our shareholders necessary to maintain our qualification as a REIT.

Valuations and appraisals of our real estate are estimates of fair value and may not necessarily correspond to realizable value.

For the purposes of calculating our NAV, valuations of the portfolio will be determined based in part on quarterly valuations conducted by an independent third-party and approved by our Trustee. Additionally, the Trustee may in its discretion consider material market data and other information in valuing our assets and liabilities in calculating our NAV for a particular quarter. Although quarterly valuations of each of our real properties will be reviewed and confirmed for reasonableness, such valuations are based on asset and portfolio-level information provided by the Trustee, including historical operating revenues and expenses of the properties, lease agreements on the properties, revenues and expenses of the properties, information regarding recent or planned capital expenditures and any other information relevant to valuing the real property.

Within the parameters of our valuation guidelines, the valuation methodologies used to value our properties involve subjective judgments and projections. Valuation methodologies also involve assumptions and opinions about future events, which may or may not turn out to be correct. Valuations and appraisals of our properties will be only estimates of fair value. Ultimate realization of the value of an asset depends to a great extent on economic, market and other conditions beyond our control and the control of our independent valuation advisor. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. As such, the carrying value of an asset may not reflect the price at which the asset could be sold in the market, and the difference between carrying value and the ultimate sales price could be material. In addition, accurate valuations are more difficult to obtain in times of low transaction volume because there are fewer market transactions that can be considered in the context of the appraisal. There will be no retroactive adjustment in the valuation of such assets, the offering price of our Common Shares, the price we paid to repurchase our Common Shares or NAV-based fees we paid to ExchangeRight. Because the price an investor pays for our Common Shares, and the price at which shares may be repurchased by us pursuant to our share repurchase plan, investors may pay more than realizable value or receive less than realizable value for their investments.

NAV calculations are not governed by governmental or independent securities, financial or accounting rules or standards.

The methods used to calculate our NAV, including the components used in those calculations are not prescribed by rules of the SEC or any other regulatory agency. Further, there are no accounting rules or standards that prescribe which components should be used in calculating NAV, and our NAV is not audited by our independent registered public accounting firm. We calculate and publish NAV solely for purposes of establishing the price at which we sell and repurchase our Common Shares, and investors should not view our NAV as a measure of our historical or future financial condition or performance. The components and methodology used in calculating our NAV may differ from those used by other companies now or in the future.

 

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In addition, calculations of our NAV, to the extent that they incorporate valuations of our assets and liabilities, are not prepared in accordance with generally accepted accounting principles. These valuations may differ from liquidation values that could be realized in the event that we were forced to sell assets.

Additionally, errors may occur in calculating our NAV, which could impact the price at which we sell and repurchase our Common Shares and the amount of asset management fees. Certain policies and procedures have been implemented to address such errors in NAV calculations. If such errors were to occur, depending on the circumstances surrounding each error and the extent of any impact the error has on the price at which our Common Shares were sold or repurchased or on the amount of the asset management fees, we may determine in its sole discretion to take certain corrective actions in response to such errors, including making adjustments to prior NAV calculations.

Your interest in us may be diluted if we issue additional Common Shares or Operating Partnership interests.

Holders of our Common Shares do not have preemptive rights to purchase additional shares in connection with shares we may issue in the future. Under our Declaration of Trust, we are authorized to issue an unlimited number of Common Shares at a price or prices determined by our Trustee. Our Trustee has the power to classify or reclassify any unissued shares into classes or series of Common Shares or preferred shares and to authorize us to issue those shares, without obtaining shareholder approval. As the general partner of our Operating Partnership, we may also, without shareholder approval, cause our Operating Partnership to issue additional OP Units or other partnership interests that have rights that are senior to those of our Common Shares. Investors purchasing our Common Shares likely will suffer dilution of their equity investment in us, in the event that we (1) sell additional shares in the future, (2) sell securities, including OP Units, that are convertible into our Common Shares, (3) issue our securities or partnership interests in our Operating Partnership in a private offering of securities to institutional investors, (4) issue our securities or partnership interests in our Operating Partnership to our Trustee, officers and other employees, or (5) issue our securities or partnership interests in our Operating Partnership, including OP Units, to sellers of properties we acquire. Because the OP Units may, in the discretion of our Trustee, be exchanged for our shares, any merger, exchange or conversion between our Operating Partnership and another entity ultimately could result in the issuance of a substantial number of our shares of beneficial interest, thereby diluting the percentage ownership interest of other shareholders. If we sell additional Common Shares for a price less than the then-current NAV per share, the issuance of such shares would result in dilution of the value of a shareholder’s interest in us. Because of these and other reasons described in this “Risk Factors” section, you should not expect to be able to own a significant percentage of our shares.

In the future, we may choose to acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in shareholder dilution and limit our ability to sell such assets.

In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for OP Units, which may result in dilution to our shareholders. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time or on terms that would be favorable absent such restrictions.

Many of the properties we intend to acquire are currently owned and managed by affiliates of the Trustee.

The Company, through the Operating Partnership, currently owns 311 properties that were former ExchangeRight DST Portfolios acquired from affiliates of ExchangeRight. We anticipate using the Company’s capital to acquire additional ExchangeRight DST Portfolios, as well as future properties. The Company has entered into agreements to acquire the Identified Trust Properties, which is a diversified portfolio of single-tenant, net-leased properties leased primarily to investment-grade tenants that are mainly owned by various

 

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ExchangeRight DSTs. The agreements to acquire certain of the Identified Trust Properties are subject to obtaining the consent of the current mortgage lenders secured by the corresponding Identified Trust Properties in certain instances and provide the Company with the unilateral right to acquire the Identified Trust Properties. Our ability to acquire any of the Identified Trust Properties, or other properties, and successfully integrate them is also dependent on our ability to raise sufficient capital to acquire the properties. If we are not able to acquire all of the Identified Trust Properties immediately, some or all of the properties may decline in value before we are able to complete the acquisition, and we may be unable to identify suitable replacement properties that meet our investment objectives and we may be unable to achieve our desired returns.

There is therefore a risk in the Identified Trust Properties, which may provide a lower return to shareholders, than a potential acquisition of other properties owned or managed by unaffiliated third parties.

There are risks involved in acquiring unidentified properties.

If we are not able to acquire all of the Identified Trust Properties, or upon completion of the acquisition of the Identified Trust Properties, we may have difficulty identifying and purchasing additional suitable properties on attractive terms, if at all, in order to meet our investment objectives. The lack of information regarding such other properties, such as the operating history of the property and other relevant economic and financial information regarding such alternative properties, means that investors will not have the opportunity to evaluate for themselves the relevant information regarding any such properties. Shareholders will not have an opportunity to evaluate the specific merits or risks of any prospective property. As a result, shareholders will be dependent on the judgment of the Trustee in connection with the selection of properties and management of the proceeds of any offering of Common Shares we conduct, including the selection of any properties purchased with such proceeds, other than the Identified Trust Properties. There can be no assurance that determinations ultimately made by the Trustee will result in the Company achieving its business objectives. The number of properties the Company acquires and the diversification of its properties is dependent on the amount of proceeds raised through our offerings and will be reduced if less than the maximum offering amount is raised. We may acquire multiple properties in a single transaction. Additionally, portfolio acquisitions are more complex and may be more expensive than single property acquisitions, and the risk that a multiple-property acquisition does not close may be greater than in a single-property acquisition Accordingly, the risk of investing in the Company may be increased. Although the Trustee has established investment objectives and criteria to guide it in acquiring properties on behalf of the Company, the Trustee has broad authority and discretion when choosing properties. Consequently, investors must rely exclusively on the Trustee to make investment decisions. No assurance can be given that the Company will be able to obtain suitable properties or that the Company’s objectives will be achieved.

Our Trustee may change our investment policies without shareholder approval.

Our investment policies may change over time. The methods of implementing our investment policies also may vary, as new real estate development trends emerge and new investment techniques are developed. Except as may be required to avoid meeting the definition of an “investment company” under the Investment Company Act, our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our Trustee without the approval of our shareholders. As a result, the nature of our shareholders’ investments could change without their consent. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity risk. Changes to our policies with regard to the foregoing could materially and adversely affect us.

Our Trustee may change our financing policies without shareholder approval, and we may become more highly leveraged, which may increase our risk of default under our debt obligations.

Our financing policies are exclusively determined by our Trustee. Accordingly, our shareholders do not control these policies. Further, our organizational documents do not limit the amount or percentage of

 

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indebtedness, funded or otherwise, that we may incur. Our Trustee may adopt, alter or eliminate leverage policies at any time without shareholder approval. We could become more highly leveraged, which could result in an increase in our debt service. Higher leverage also increases the risk of default on our obligations.

Shareholders are bound by the vote of other shareholders on matters on which they are entitled to vote, and shareholders will not have the right to vote on certain mergers, consolidations and conversions of the Company.

Shareholders may vote on certain matters at a meeting of shareholders. However, a shareholder will be bound by the vote specified in our Declaration of Trust or bylaws on matters requiring approval of the shareholders even if a shareholder does not vote in favor of any such matter. Moreover, subject to certain requirements set forth in our Declaration of Trust, holders of Common Shares will not be entitled to vote on any merger, consolidation or conversion of the Company with another REIT or REITs so long as the consideration to be received by our common shareholders consists of common equity securities of the surviving REIT at an exchange ratio based on the respective NAVs of the Company and such other entity, as adjusted for transaction costs, and the only cash paid in the transaction is paid in lieu of fractional shares (a “Reorganization”). Therefore, the Trustee will have the unilateral power to effect a Reorganization without the approval of any shareholder of the Company.

If shareholders do not agree with the decisions of our Trustee, they only have limited control over changes in our policies and operations and may not be able to change such policies and operations.

Our Trustee determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our Trustee may amend or revise these and other policies without a vote of the shareholders. Under Maryland law and our Declaration of Trust, our shareholders generally have a right to vote only on the following:

 

   

the removal of the Trustee under limited circumstances and, unless the Trustee has designated its successor, the election of a successor trustee;

 

   

any amendment of our Declaration of Trust that adversely affects the contract rights of our outstanding shares of beneficial interest, except that our Trustee may amend our Declaration of Trust without shareholder approval to increase or decrease the aggregate number of our shares, to increase or decrease the number of our shares of any class or series that we have the authority to issue, to change our name, to classify or reclassify any of our unissued Common Shares or preferred shares into one or more classes or series of shares and to establish the terms of such shares, and to change the name or other designation or the par value of any class or series of our shares and the aggregate par value of our shares or to effect certain reverse share splits;

 

   

a merger or consolidation of the Company, or the sale or other disposition of all or substantially all of our assets, provided that, if such action could be taken by a Maryland corporation without the approval of its shareholders pursuant to Subtitle 1 of Title 3 of the Maryland General Corporation Law (the “MGCL”) or if such action is a Reorganization (as defined above), no vote of shareholders will be required;

 

   

such other matters as may be provided in our bylaws;

 

   

such matters that the Trustee has declared advisable and submitted to a vote of the shareholders; and

 

   

any other matters on which shareholders are required to vote by federal law, state law or, following a listing on a national securities exchange, the rules of such exchange. All other matters are subject to the discretion of our Trustee.

Our Trustee may be removed only under limited circumstances.

Pursuant to our Declaration of Trust, our Trustee may be removed only for “cause,” as defined in our Declaration of Trust, and only by the affirmative vote of two-thirds of the votes entitled to be cast generally in

 

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the election of trustees. Under the Declaration of Trust, “cause” means (i) fraud or embezzlement with respect to the Company or its affiliates, or (ii) willful misconduct as determined in a final judgment of a court of competent jurisdiction. As a result, shareholders will have limited control over the decisions regarding the management or direction of the Company.

The performance and reputation of the Trustee are critical to maintaining and developing the business of the Company, as well as relationships with the Company’s investors and third parties with whom the Company conducts business. If the Trustee is found to have committed an act of fraud, embezzlement, or willful misconduct constituting “cause” under our Declaration of Trust, and insufficient votes of our shareholders are obtained to remove the Trustee, the Trustee will continue to act as trustee of the Company, but the Trustee’s reputation may be tarnished and our investors’ confidence in the ability of the Trustee to effectively manage the Company and its business operations may be diminished. In addition, any legal action taken in connection with the removal of the Trustee is likely to distract the Trustee and the Key Principals from their duties with respect to the management of the Company’s business, which in turn may negatively affect the value of the Trust Properties. Any damage to the reputation of the Trustee and investor confidence in the ability of the Trustee to manage the Company also would have an adverse effect on the Company’s ability to raise additional capital for future operations, which would reduce the Company’s liquidity, cash flows, and ultimately distributions to shareholders. As a result, instances of fraud, embezzlement, or willful misconduct by the Trustee without a resulting removal of the Trustee by our shareholders could result in poorer than expected performance by the Company and may have a material adverse effect on the Company’s reputation and business, which could result in a loss of a shareholder’s entire investment.

The Company’s rights, and the rights of shareholders, to recover claims against our officers and our Trustee are limited.

Maryland law and our Declaration of Trust provide that the Trustee will have no liability when acting in its capacity as Trustee if it performs its duties in good faith. Our Declaration of Trust requires us to indemnify and advance expenses to (i) the Trustee, (ii) each equity holder, director, officer, employee or agent of the Trustee, and (iii) each officer of the Company (collectively, the “Covered Persons”) against any claim or liability to which any Covered Person may become subject because of his, her or its status as such, except for liability for such person’s gross negligence or intentional misconduct. Our Declaration of Trust also requires us, to the maximum extent permitted by Maryland law, to indemnify and advance expenses to each present or former holder of shares of beneficial interest against any claim or liability to which any such person may become subject because of his, her or its status as such. Finally, our Declaration of Trust limits, to the maximum extent permitted by Maryland law, the liability of Covered Persons to us and our shareholders for monetary damages. Although our Declaration of Trust does not allow us to indemnify our Trustee for any liability or loss suffered by them or hold harmless a Covered Person for any loss or liability suffered by us by reason of such person’s gross negligence or intentional misconduct, we and our shareholders may have more limited rights against a Covered Person than might otherwise exist under common law, which could reduce your and our recovery against them.

Our Declaration of Trust contains a provision that expressly permits our Trustee, our officers and ExchangeRight, and their affiliates, to compete with us.

The success of the Company is very important to and is a significant part of ExchangeRight’s overall business plan. As a result, ExchangeRight anticipates spending sufficient time and effort on the various aspects of the Company’s business to help it perform successfully, and our Trustee has a fiduciary obligation to act on behalf of our shareholders. However, ExchangeRight and other investment vehicles managed by ExchangeRight have outside business interests and may compete with us for investments in properties, tenants, access to capital and other business opportunities. There is no assurance that any conflicts of interest created by such competition will be resolved in our favor. Our Declaration of Trust provides that none of our Trustee, any of our officers, or any other Covered Person have any duty to present or offer any business opportunity to us or to refrain from competing with us. As a result, the Trustee, our officers and other Covered Persons have no duty to refrain from

 

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engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we or our subsidiaries engage or propose to engage or to refrain from otherwise competing with us. These individuals also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. These provisions may limit our ability to pursue investment opportunities that we might otherwise have had the opportunity to pursue, which could have an adverse effect on our financial condition, our results of operations, our cash flow, the value of our Common Shares and our ability to meet our debt obligations and to make distributions to our shareholders.

The special limited partner of the Operating Partnership will be entitled to incentive distributions from our Operating Partnership only if the Operating Partnerships investors have received a return of capital plus a 7% cumulative, non-compounded annual return, which may discourage ExchangeRight from facilitating a transaction that would provide liquidity for our common shareholders.

The partnership agreement of the Operating Partnership requires the Operating Partnership to pay a performance-based termination distribution to the special limited partner of the Operating Partnership, which is wholly-owned by ExchangeRight, if our Common Shares, or the common equity securities of a successor entity in a business combination, are listed on a national securities exchange or if we engage in a business combination transaction in which our common shareholders receive cash or listed common equity securities. The special limited partner will become entitled to such an incentive fee only after the Operating Partnership’s investors have received a return of capital plus a 7% cumulative, non-compounded annual return on all such capital contributions, based on the value of the consideration received by our common shareholders or the trading price of our shares after such a listing. As a result of this feature in the Operating Partnership’s partnership agreement, ExchangeRight may decide against pursuing or offering us the opportunity to participate in a particular transaction if it would not result in realizing this incentive fee.

The limit on the number of Common Shares a person may own may discourage a takeover that could otherwise result in a premium price to our shareholders.

Our Declaration of Trust, with certain exceptions, authorizes our Trustee to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exception is granted by our Trustee, no person may own more than 9.8% in value or in number, whichever is more restrictive, of our outstanding Common Shares, or 9.8% in value of the aggregate of our outstanding shares of beneficial interest. These restrictions may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or transfer of all or substantially all of our assets) that might provide a premium to the purchase price of our shares for our shareholders.

If we are required to register as an investment company under the Investment Company Act, we would not be able to operate our business according to our business plan, which may significantly reduce the value of our shareholders’ investment returns.

We intend to continue to conduct our operations so that neither we, nor our Operating Partnership nor the subsidiaries of our Operating Partnership meets the definition of an “investment company” under Section 3(a)(1) of the Investment Company Act of 1940, as amended (the “Investment Company Act”). Under the Investment Company Act, in relevant part, a company is an “investment company” if:

 

   

pursuant to Section 3(a)(1)(A), it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities; or

 

   

pursuant to Section 3(a)(1)(C), it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding, or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the “40% test”). “Investment securities”

 

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excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

We intend to monitor our operations and our assets on an ongoing basis in order to ensure that neither we nor any of our subsidiaries meet the definition of “investment company” under Section 3(a)(1) of the Investment Company Act. However, there can be no assurance that we and our subsidiaries will be able to successfully avoid operating as an investment company. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:

 

   

limitations on our capital structure;

 

   

restrictions on specified investments;

 

   

prohibitions on transactions with affiliates;

 

   

compliance with reporting, recordkeeping, voting, proxy disclosure, and other rules and regulations that would significantly change our operations; and

 

   

potentially, compliance with daily valuation requirements.

Companies primarily engaged in the business of acquiring mortgages and other liens on and interests in real estate are generally exempt from the requirements of the Investment Company Act. We believe that we have conducted our business so that we are not subject to the registration requirements of the Investment Company Act. In order to continue to do so, however, the Company and each of our subsidiaries must either operate so as to fall outside the definition of an investment company under the Investment Company Act or satisfy its own exclusion under the under the Investment Company Act. For example, to avoid being defined as an investment company, an entity may limit its ownership or holdings of investment securities so that it meets the 40% test described above. Alternatively, an entity may operate its business under an exclusion from the definition of investment company pursuant to Section 3(c)(5)(C) of the Investment Company Act. Under Section 3(c)(5)(C), as interpreted by the SEC staff, a company is required to invest at least 55% of its assets in mortgages and other liens on and interests in real estate, and other real estate-related interests, which are deemed to be “qualifying interests,” and at least 80% of its assets in qualifying interests plus a broader category of “real estate-related assets” in order to qualify for this exception. A change in the value of any of our assets could negatively affect our ability to maintain our exemption from regulation under the Investment Company Act.

To avoid meeting the definition of an “investment company” under Section 3(a)(1) of the Investment Company Act, or to maintain compliance with the applicable exemption under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. Similarly, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forego opportunities to acquire assets that we would otherwise want to acquire and would be important to our investment strategy. Accordingly, our Trustee may not be able to change our investment policies as our Trustee may deem appropriate if such change would cause us to meet the definition of an “investment company.”

If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and civil actions could be brought against us, the Trustee, and their affiliates. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

 

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We are an “emerging growth company,” and as such, we have reduced reporting requirements as compared to other public companies, including those relating to auditor’s attestation reports on the effectiveness of our system of internal control over financial reporting, accounting standards and disclosures regarding the executive compensation of our executive officers.

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1.235 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the first sale of shares pursuant to a registration statement filed under the Securities Act, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. To the extent we take advantage of some or all of the reduced reporting requirements applicable to emerging growth companies, an investment in our Common Shares may be less attractive to investors.

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, and generally requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. Under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company.”

We have elected to avail ourselves of the extended transition period for adopting new or revised accounting standards available to emerging growth companies under the JOBS Act and will, therefore, not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies, which could make our Common Shares less attractive to investors.

The JOBS Act provides that an emerging growth company can take advantage of an exemption from various reporting requirements applicable to other public companies and an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We intend to avail ourselves of these exemptions and the extended transition periods for adopting new or revised accounting standards and therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our consolidated financial statements may not be comparable to companies that comply with public company effective dates. While we intend to avail ourselves of these options, we may, subject to certain restrictions, elect to stop availing ourselves of these exemptions in the future even while we remain an “emerging growth company.” We cannot predict whether investors will find our Common Shares less attractive as a result of this election. If some investors find Common Shares less attractive as a result of this election, we may be unable to raise the desired level of capital in our offerings.

We will be subject to the requirements of the Sarbanes-Oxley Act.

As long as we remain an emerging growth company, as that term is defined in the JOBS Act, we will be permitted to gradually comply with certain of the on-going reporting and disclosure obligations of public companies pursuant to the Sarbanes-Oxley Act.

However, our management will be required to deliver a report that assesses the effectiveness of our internal controls over financial reporting, pursuant to Section 302 of the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act may require our auditors to deliver an attestation report on the effectiveness of our internal controls over financial reporting in conjunction with their opinion on our audited financial statements as of

 

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December 31 subsequent to the year in which this Form 10 becomes effective if we are no longer an “emerging growth company.” Substantial work on our part may be required to implement appropriate processes, document the system of internal control over key processes, assess their design, remediate any deficiencies identified and test their operation. This process may be both costly and challenging. We cannot give any assurances that material weaknesses will not be identified in the future in connection with our compliance with the provisions of Section 302 and 404 of the Sarbanes-Oxley Act. The existence of any material weakness described above would preclude a conclusion by management and our independent auditors that we maintained effective internal control over financial reporting. Our management may be required to devote significant time and expense to remediate any material weaknesses that may be discovered and may not be able to remediate any material weakness in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our consolidated financial statements that could require us to restate our consolidated financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could have a material adverse effect on our business, financial condition, and results of operations.

Legislative or regulatory action could adversely affect the returns to our investors.

In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in our Common Shares. Changes are likely to continue to occur in the future, and these changes could adversely affect our shareholders’ investment in our Common Shares. These changes include but are not limited to the reduction or elimination of the corporate income tax under the Code or revisions to the tax exemptions provided by Section 1031 under the Code. Any of these changes could have an adverse effect on an investment in our Common Shares or on the market price or resale potential of our Common Shares. Shareholders are urged to consult with their own tax advisor with respect to the impact that recent legislation may have on their investment and the status of legislative, regulatory or administrative developments and proposals and their potential effect on their investment in our Common Shares.

Risks Related to Our Secured Lending

Bankruptcy of ExchangeRight or any tenant of a property owned by the entity pledged to secure the RSLCA may adversely affect the value of the ExchangeRight Secured Loans.

We have entered into the RSLCA, under which we will make the ExchangeRight Secured Loans. For a description of the RSLCA and the ExchangeRight Secured Loans, see “Item 7. Certain Relationships and Related Transactions, and Director Independence – Secured Loan Program” below. While ExchangeRight and many of the tenants it focuses on have a consistent track record of profitability, bankruptcy proceedings and usual equitable principles may delay or otherwise adversely affect the enforcement of a noteholder’s rights in the property granted as security for the note. Federal bankruptcy law permits adoption of reorganization plans even though such plans have not been accepted by the holders of a first lien on property, if such holders are provided with the benefit of their original lien or the “indubitable equivalent.” In addition, if the bankruptcy court concludes that the noteholders have “adequate protection,” it may (i) substitute other security subject to the lien of the noteholders, and (ii) subordinate the lien of the noteholders (A) to claims by persons supplying goods and services to the debtor after bankruptcy, and (B) to the administrative expenses of the bankruptcy proceeding. In the event of the bankruptcy of an obligor under a note held by the Company, the amount realized by the Company might depend on the bankruptcy court’s interpretation of “indubitable equivalent” and “adequate protection” under the then-existing circumstances. It is also possible that debtors could attempt a “cramdown” in bankruptcy court pursuant to which the debtor’s obligation to the Company could be reduced below amounts otherwise owed. To confirm a Chapter 11 plan of reorganization, the court must find that creditors will receive at least what they would receive in a Chapter 7 liquidation case, and that the plan is either approved by all of the creditors, or the plan is approved by at least one class of creditors and (1) the plan does not discriminate unfairly; (2) holders of secured claims receive property under the plan with a value equal to the “value of the secured

 

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creditor’s interest in the property of the estate”; and (3) either holders of unsecured claims are paid in full with interest or junior classes with claims receive nothing. Secured creditors are much more likely to be “crammed down” than unsecured creditors.

If our mezzanine loan with ExchangeRight under the RSLCA is not extended past its original maturity date, our liquidity may be adversely affected.

In order to earn a return on the funds maintained for liquidity for the share repurchase program and other liquidity needs, the Company invested in a short-term mezzanine loan to ExchangeRight (“ExchangeRight Mezz Loans”) for ExchangeRight’s DST programs under the RSLCA. These notes receivable typically provide for liquidity within 60 to 120 days. The loan agreement, as amended, matures on April 4, 2027 and bears interest at a rate equal to 12.0% per annum, while outstanding. ExchangeRight structured the RSLCA, including the 12% interest rate, as a way to provide an enhanced risk-adjusted return to the Company. ExchangeRight entered into the ExchangeRight Mezz Loans because, as the ultimate parent entity and sponsor of the Company, the Operating Partnership, and their business, it has a strong interest in the success of both the Company’s REIT platform and ExchangeRight’s DST platform and the structure of the loans facilitates an alignment between these two platforms. In this regard, ExchangeRight may use funds from the ExchangeRight Mezz Loans to facilitate acquisitions of properties owned or managed by affiliates of ExchangeRight, including the ExchangeRight DST entities. Therefore, by entering into this loan agreement, ExchangeRight seeks to enhance the performance and liquidity of the REIT portion of the overall ExchangeRight platform, which the Company and Trustee believe ultimately inures to the benefit of the Company and its Common Shareholders. The Company and ExchangeRight will evaluate whether to extend the RSLCA agreement past the maturity date, although that is currently expected. No firm determination has yet been made by the parties to extend the ExchangeRight Mezz Loans, nor have the terms of any such extended arrangements been determined. If the Company and ExchangeRight do not extend the ExchangeRight Mezz Loans beyond the April 2027 maturity date, this would eliminate a source of liquidity for the Company and may adversely affect the Company’s cash available for use with its share repurchase program and other strategic initiatives.

Investments may include intercompany or affiliate investments.

ExchangeRight may use funds from the RSLCA for intercompany or affiliate acquisitions utilized to facilitate acquisitions of properties owned or managed by affiliates of ExchangeRight. There is therefore a risk that ExchangeRight may choose to invest in such affiliated properties and that ExchangeRight or its affiliates may receive compensation under the terms and provisions of such affiliated properties and that such acquisitions may not have underlying collateral that generates income similar to other properties and, thus, interest and fees under the RSLCA may not be paid.

Foreclosure on properties may result in insufficient funds.

Under the RSLCA, as collateral for the ExchangeRight Secured Loans, we receive certain credit enhancements and pledges of collateral. In this regard, we received a pledge under an amended and restated pledge agreement by and between ExchangeRight and our Operating Partnership whereby ExchangeRight pledged to the Operating Partnership its membership interest in the entity that indirectly owns the properties acquired by ExchangeRight (the “Pledged Entity”), which pledge also provides that, in the event ExchangeRight defaults in the payment of any interest, which has been accrued and is currently owed to us, we will receive the right to execute an assignment of the limited liability company membership interest in the Pledged Entity. See “Item  7. Certain Relationships and Related Transactions, and Director Independence – Secured Loan Program” below for additional information. In many cases we will need to look solely to the property owned by the Pledged Entity, the interests in which are pledged to secure the RSLCA, to satisfy the indebtedness in accordance with its terms. Timely payment of principal and interest under the RSLCA will primarily depend upon the success of the property underlying the interest pledged pursuant to the RSLCA and the revenues that such property generates from operations. In the event that such revenues are insufficient, our sole recourse will be to foreclose on the underlying properties. In addition to the potential problems inherent in the foreclosure process discussed above, any sale of the properties upon foreclosure may bring a price that is less than the outstanding principal amount of funds drawn under the RSLCA.

 

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Making secured, bridge and other loans subjects us to credit risk and could adversely affect us.

We will make the ExchangeRight Secured Loans and may make bridge and other loans related to net lease properties. However, these loans will subject us to credit risk and there could be defaults under these loans. Defaults may be caused by many factors beyond our control, including local and other economic conditions affecting real estate values, interest rate changes, rezoning and the failure by the borrower to develop the property. If there is a default under one of these loans, the value of our investment in the loan could be impaired or lost in its entirety. In addition, if such a loan is secured by a mortgage on the related property, we may be delayed in a foreclosure action and any sale of the mortgaged property may generate less net proceeds than we were owed under the defaulted loan.

The value of our ExchangeRight RSLCA may be impaired, and we may be unable to realize any value upon the foreclosure of the pledges securing the ExchangeRight Secured Loans due to the terms of the underlying mortgage loans.

The properties indirectly held by the entity pledged to secure the ExchangeRight RSLCA may be subject to first lien mortgage loans, which may contain terms that prohibit the pledge or assignment of the interests in the entity. This could result in the foreclosure of the mortgage on the underlying property and our inability to realize any benefit upon the foreclosure of the pledge. Such provisions may also require us to account for the value we attribute to the ExchangeRight RSLCA as impaired.

The failure of a secured loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.

The Internal Revenue Service (“IRS”) has issued Revenue Procedure 2003-65, which provides a safe harbor pursuant to which a secured loan that is secured by interests in a pass-through entity will be treated by the IRS as a real estate asset for purposes of the REIT 75% asset test, and interest derived from such loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. We may make investments in loans secured by interests in pass- through entities in a manner that complies with the various requirements applicable to our qualification as a REIT. To the extent, however, that any such loans do not satisfy all of the requirements for reliance on the safe harbor set forth in the Revenue Procedure, there can be no assurance that the IRS will not challenge the tax treatment of such loans, which could jeopardize our ability to qualify as a REIT.

Risks Related to Our Indebtedness

Our cash flows and operating results could be adversely affected by required payments of debt or related interest and other risks of our debt financing, including an inability to refinance existing indebtedness.

We are generally subject to risks associated with debt financing. These risks include: (1) our cash flow may not be sufficient to satisfy required payments of principal and interest; (2) we may not be able to refinance existing indebtedness or the terms of the refinancing may be less favorable to us than the terms of existing debt; (3) required debt payments are not reduced if the economic performance of any property declines; (4) debt service obligations could reduce cash available for distribution to our shareholders and funds available for investment; (5) any default on our indebtedness could result in acceleration of those obligations and possible loss of property to foreclosure; and (6) the risk that necessary capital expenditures cannot be financed on favorable terms. If a property is pledged to secure payment of indebtedness and we cannot make the applicable debt payments, we may have to surrender the property to the lender with a consequent loss of any prospective income and equity value from such property.

 

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We may incur substantial indebtedness.

We may provide full or partial guarantees of mortgage debt incurred by our subsidiaries that own the mortgaged properties. Under these circumstances, we will be responsible to the lender for satisfaction of the debt if it is not paid by our subsidiary. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.

Our use of indebtedness could have important consequences to us. For example, it could: (1) result in the acceleration of a significant amount of debt for non-compliance with the terms of such debt or, if such debt contains cross-default or cross-acceleration provisions, other debt; (2) result in the loss of assets, including individual properties or portfolios, due to foreclosure or sale on unfavorable terms, which could create taxable income without accompanying cash proceeds; (3) materially impair our ability to borrow unused amounts under existing financing arrangements or to obtain additional financing or refinancing on favorable terms or at all; (4) require us to dedicate a substantial portion of our cash flow to paying principal and interest on our indebtedness, reducing the cash flow available to fund our business, to make distributions, including those necessary to maintain our REIT qualification, or to use for other purposes; (5) increase our vulnerability to an economic downturn; (6) limit our ability to withstand competitive pressures; or (7) reduce our flexibility to respond to changing business and economic conditions.

Secured indebtedness exposes us to the possibility of foreclosure on our ownership interests in pledged properties.

Incurring mortgage and other secured indebtedness increases our risk of loss of our ownership interests in the pledged property because defaults thereunder, and the inability to refinance such indebtedness, may result in foreclosure action initiated by lenders. For tax purposes, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds from the foreclosure. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status.

Financing we utilize may include recourse provisions to the Company.

We intend to obtain financing on the most favorable terms reasonably available to us. We will have substantial discretion with respect to the financing we obtain, subject to our borrowing policies. Lenders may have recourse to assets not securing the repayment of the indebtedness. To the extent permitted by applicable loan agreements, we may refinance properties during the term of a loan.

High interest rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make to our shareholders.

We may be unable to finance or refinance our properties on favorable terms or at all. If interest rates are higher when we desire to mortgage a property or when existing loans mature, we may not be able to obtain suitable mortgage financing or refinance existing indebtedness. If we are unable to refinance existing indebtedness with replacement debt, we may be required to repay a portion of the maturing indebtedness with cash. Our inability to access debt capital on attractive terms to finance new investments or to refinance maturing indebtedness could reduce the number of properties we can acquire and our cash flows. Higher costs of capital also could negatively impact cash flows and returns on our investments.

Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Variable rate borrowings, if any, expose us to increased interest expense in a rising interest rate environment. Additionally, in the future, we may incur substantial additional indebtedness that bears interest at

 

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variable rates. If interest rates were to increase, our debt service obligations on variable rate indebtedness would increase even though the amount borrowed remained the same, and our cash flows would correspondingly decrease.

Interest-only indebtedness may increase our risk of default and ultimately may reduce our cash available for distribution.

We expect to finance at least a portion of our property acquisitions using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan. The Company had $549.9 million of interest-only mortgage indebtedness as of March 31, 2023.

Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the loan on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment.

To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and/or ineffective.

We may use derivative instruments to hedge our exposure to changes in interest rates. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Future hedging decisions will depend on prevailing facts and circumstances and at any point in time we may choose to hedge some, all or none of our variable interest rate exposure.

To the extent that we choose to use derivative financial instruments to hedge against interest rate fluctuations in the future, we will be exposed to credit risk, basis risk and legal enforceability risks. Credit risk refers to the potential failure of our counterparty to perform its obligations under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty generally owes us a payment, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby potentially making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract.

Income and gain from hedging transactions will be excluded from gross income for purposes of both the REIT qualification gross income tests, provided that we properly identify such hedges. For federal income tax purposes, a “hedging transaction” means either (1) any transaction entered into in the normal course of our trade or business primarily to manage the risk of interest rate, price changes, or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, (2) any transaction entered into primarily to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income test (or any property which generates such income or gain), and (3) a transaction entered into to manage the risk of any hedging transaction described in the preceding sentence if we dispose of some or all of the underlying property to which such original hedging transaction relates.

In the event we are unable to enter into a hedging transaction that may not satisfy the definition of a “hedging transaction,” or do not properly identify our hedges as such, we risk earning income that is not good

 

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income for REIT purposes. Accordingly, we may forego certain hedging opportunities even though commercially it would be beneficial to enter into such a hedge in order to minimize the risk of earning income from a hedge that is not good REIT income for the 75% and 95% tests.

Our current loans, and loans associated with the Identified Trust Properties which we plan to assume, may be subject to certain unfavorable provisions.

Our current loans, and loans associated with the Identified Trust Properties which we plan to assume, may have terms which include lender-favorable mechanisms in certain events such as debt service coverage ratio requirements, and with which compliance may be beyond our control. Our failure to comply with the terms of such debt could impact cash flow available for distribution to shareholders.

Risks Related to Our Status as a REIT and Other Tax Matters

We would incur significant material adverse tax consequences if we fail to qualify as a REIT.

We have elected to be taxed as a REIT. Our qualification as a REIT requires us to satisfy numerous requirements, some on an annual and quarterly basis, established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and which involve the determination of various factual matters and circumstances not entirely within our control. We expect that our current organization and methods of operation will enable us to continue to qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the future. In addition, U.S. federal income tax laws governing REITs and other corporations and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect our shareholders.

If we fail to qualify as a REIT in any taxable year, we would be subject to federal (and potentially state and local) income tax on our taxable income at regular corporate rates, and would not be allowed to deduct dividends paid to our shareholders in computing our taxable income. Also, we generally could not re-elect REIT status until the fifth calendar year after the year in which we first fail to qualify as a REIT. The additional tax liability from the failure to qualify as a REIT could be substantial and would reduce or eliminate the amount of cash available for distribution to our shareholders. This would likely have a significant adverse effect on the value of our securities, and consequently, on our ability to raise additional capital.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our growth opportunities.

To qualify as a REIT, we generally are required to distribute to our shareholders at least 90% of our taxable income, excluding net capital gains, each year. A REIT is subject to tax at regular corporate rates to the extent that it distributes at least 90% but less than 100% of its taxable income (including net capital gains) each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions (or deemed distributions) and the amounts of income retained on which we have paid corporate tax with respect to any calendar year are less than the sum of (i) 85% of our ordinary income for that year, (ii) 95% of our capital gain net income for that year, and (iii) 100% of our undistributed taxable income from prior years.

We intend to make distributions to our shareholders to comply with the distribution requirements of the Code as well as to reduce our exposure to federal income taxes and the nondeductible excise tax. Differences in timing between the recognition of taxable income and the actual receipt of cash may require us to borrow funds, issue additional shares or sell assets on a short-term basis to meet the 90% distribution requirement and to avoid the 4% nondeductible excise tax. In addition, the requirement to distribute a substantial portion of taxable income could cause us to (i) sell one or more properties in adverse market conditions, (ii) distribute amounts that represent a return of capital, or (iii) distribute amounts that would otherwise be spent on future acquisitions, unanticipated capital expenditures, or repayment of debt.

 

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To qualify as a REIT, we also must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and “real estate assets” (as defined in the Code), including certain mortgage loans and securities. The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a taxable REIT subsidiary (a “TRS”)) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investment opportunities. For example, if we hold an investment that jeopardizes our REIT qualification, we may be forced to liquidate such investment at an unfavorable time or at below market prices in order to retain our REIT qualification. These actions could have the effect of reducing our income and amounts available for distribution to our shareholders. These restrictions also could adversely affect our ability to optimize our portfolio of assets.

In addition to the asset tests set forth above, to qualify as a REIT we must continually satisfy tests concerning, among other things, the sources of our income and the ownership of our shares. We may be unable to pursue investment opportunities that would be otherwise advantageous to us in order to satisfy the source-of-income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

Re-characterization of sale-leaseback transactions may cause us to lose our REIT status.

We may purchase real properties and lease them back to the sellers of such real properties. The IRS could challenge our characterization of certain leases in any such sale-leaseback transactions as “true leases,” which allows us to be treated as the owner of the property for federal income tax purposes. In the event that any sale-leaseback transaction is challenged and re-characterized as a financing transaction or loan for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT qualification “asset tests” or the “income tests” and, consequently, lose our REIT status effective with the year of re-characterization. Alternatively, the amount of our REIT taxable income could be recalculated, which might also cause us to fail to meet the distribution requirement for a taxable year.

Dividends paid by REITs generally do not qualify for reduced tax rates, and the availability of tax deductions in connection with the receipt of certain REIT dividends will automatically expire unless extended by Congress.

In general, the maximum U.S. federal income tax rate for dividends that constitute “qualified dividend income” paid to individuals, trusts and estates is 20%. Unlike dividends received from a corporation that is not a REIT, our distributions generally are not eligible for the reduced rates. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, investors who are individuals, trusts and estates may perceive investments in our shares to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share NAV of our Common Shares.

Moreover, shareholders of a REIT that are individuals, trusts and estates that receive distributions characterized as ordinary dividends for U.S. federal income tax purposes are eligible to claim a tax deduction for taxable years ending prior to January 1, 2026 equal to 20% of the ordinary dividends distributed to them in each such taxable year. The eligibility of these shareholders for such tax deductions may be lost prior to January 1, 2026 if Congress enacts tax legislation that causes this tax benefit to expire prior to such time.

 

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Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income from a hedging transaction that we enter into to manage the risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets, or from certain terminations of such hedging positions, does not constitute “gross income” for purposes of the 75% or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail to properly identify any such transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may be required to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS may be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit, except that such losses could theoretically be carried back or forward against past or future taxable income in the TRS.

If our Operating Partnership fails to maintain its status as a partnership, its income may be subject to taxation, which would reduce the cash available for distribution to our shareholders.

We intend to maintain the status of our Operating Partnership as a partnership for federal income tax purposes. However, if the IRS were to successfully challenge the status of our Operating Partnership as an entity taxable as a partnership, our Operating Partnership would be taxable as a corporation and would be subject to federal, state and local income taxes on its income (currently a 21% federal rate), thereby reducing the amount of distributions that our Operating Partnership could make to us. If our interest in the Operating Partnership were no longer treated as a good REIT asset, or if the income we derive from our Operating Partnership does not qualify as good REIT income, we could lose our REIT status, and become subject to a corporate level tax on our income. This would substantially reduce the cash available to make distributions to our shareholders, and, in turn, reduce the return on our shareholders’ investments. In addition, if any of the partnerships or limited liability companies through which our Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership. Such a recharacterization of an underlying property-owning entity also could threaten our ability to maintain REIT status.

Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction.

From time to time, we may transfer or otherwise dispose of some of our properties. Under the Code, any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction and subject to a 100% penalty tax. Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The IRS may contend that certain transfers or disposals of properties by us are prohibited transactions. If the IRS were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction and we may jeopardize our ability to retain future gains on real property sales.

We could face possible state and local tax audits and adverse changes in state and local tax laws.

As discussed in the risk factors above, because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but we are subject to certain state and local taxes. From time to time, changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. A shortfall

 

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in tax revenues for states and municipalities in which we own properties may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional state and local taxes. These increased tax costs could adversely affect our financial condition and the amount of cash available for the payment of distributions to our shareholders. In the normal course of business, entities through which we own real estate may also become subject to tax audits. If such entities become subject to state or local tax audits, the ultimate result of such audits could have an adverse effect on our financial condition.

Non-U.S. shareholders may be subject to U.S. federal income tax upon their receipt of certain distributions from us or upon their disposition of our shares.

In addition to any potential withholding tax on ordinary dividends, a non-U.S. person, other than certain “qualified shareholders” or a “qualified foreign pension fund,” that disposes of a “U.S. real property interest” (“USRPI”) (which includes shares of stock of a U.S. corporation whose assets consist principally of USRPIs), or that receives a distribution from a REIT that is attributable to gains from such a disposition, is generally subject to U.S. federal income tax under the Foreign Investment in Real Property Tax Act of 1980, as amended (FIRPTA”), on the amount received from (or, in the case of a distribution, to the extent attributable to gains from) such disposition. Such tax does not apply, however, to the disposition of stock in a REIT that is “domestically controlled.” Generally, a REIT is domestically controlled if less than 50% of its stock, by value, has been owned directly or indirectly by non-U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence. While we intend to primarily target the sale of our shares to U.S. persons, we cannot control the composition of our ultimate shareholders, and therefore cannot assure you that we will qualify as a domestically controlled REIT. If we were to fail to so qualify, amounts received by a non-U.S. shareholder on certain dispositions of our shares would be subject to tax under FIRPTA, unless (a) our shares are regularly traded on an established securities market and (b) the non-U.S. shareholder did not, at any time during a specified testing period, hold more than 10% of our stock.

Legislative or other actions affecting REITs could materially and adversely affect us and our investors as well as the Operating Partnership.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect us (including our qualification as a REIT) and our investors as well as the Operating Partnership.

Our ability, and the Operating Partnership’s ability, to deduct interest expense may be limited.

The Tax Cuts and Jobs Act of 2017 (the “TCJA”), as revised by the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”), also provides a new limitation on the deduction of business interest (i.e., interest paid or accrued on indebtedness allocable to a trade or business) for U.S. federal income tax purposes. In general, and subject to certain exceptions, including for a real estate trade or business if an election is made, business interest expense (i.e., business interest in excess of a taxpayer’s business interest income for the taxable year) is not deductible to the extent such interest exceeds 30% of a taxpayer’s adjusted taxable income (as defined in Section 163(j) of the Code, as revised by the TCJA and the CARES Act). With respect to entities taxed as partnerships (including the Operating Partnership), the deduction for business interest is determined at the level of the entity incurring the expense and the amount deductible by a beneficial owner of such entity is generally calculated based on the entity’s adjusted taxable income. Business interest not allowed as a deduction by an entity taxed as a partnership is allocated to each entity owner and may be deducted in any future year against excess taxable income attributed by the entity to the entity owner for such future year. Note that the limitation on the deductibility of business interest does not apply to investment interest.

Adjusted taxable income means the taxable income of the taxpayer computed without regard to (i) any item of income, gain, deduction, or loss which is not properly allocable to a trade or business; (ii) any business interest

 

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deductions or business interest income; and (iii) the amount of any net operating loss deduction. For taxable years beginning after January 1, 2022, depreciation and amortization are taken into account to reduce adjusted taxable income for purposes of computing the limitation. As mentioned above, for debt of a partnership, such as the Operating Partnership, the limitation is applied at the partnership level. Similarly, for a REIT, the limitation applies at the REIT level. Any net business interest expense of a taxpayer in excess of the limitation is not currently deductible by the taxpayer, and is carried forward to future years.

If we are subject to this interest expense limitation, our REIT taxable income for a taxable year may be increased. Taxpayers that conduct certain real estate businesses may elect not to have this interest expense limitation apply to them, provided that they use an alternative depreciation system to depreciate certain property. We believe that we will be eligible to make this election. If we make this election, although we would not be subject to the interest expense limitation described above, our depreciation deductions may be reduced and, as a result, our REIT taxable income for a taxable year may be increased.

Regulatory and Litigation Risks

Compliance with the Americans with Disabilities Act and fire, safety, and other regulations may require us to make significant unanticipated expenditures.

Some of our properties are subject to the Americans with Disabilities Act of 1990, as amended (the “ADA”). Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Compliance with the ADA could require costly modifications at our properties to make them readily accessible to and usable by disabled individuals. In addition, failure to comply with the ADA could result in the imposition of fines or an award of damages to private litigants. Our tenants are generally obligated to maintain and repair the properties they lease from us and to comply with the ADA and other similar laws and regulations. However, if a tenant is unwilling or unable to meet its obligation to comply with the ADA, we may incur significant costs in modifying the property to achieve compliance. Additionally, as the owner of the property we could be liable for failure of one of our properties to comply with the ADA or other similar laws and regulations.

Similarly, our properties are subject to various laws and regulations relating to fire, safety, and other regulations, and in some instances, common-area obligations. While our tenants are generally obligated to comply with these laws and regulations at the properties they lease from us, it is possible that our tenants will not have the financial ability to meet these obligations. If a tenant is unwilling or unable to meet its obligation to comply with these laws and regulations, we may incur significant costs to achieve compliance, such that we may not be able to recover from the tenant. We may also face owner liability for failure to comply with these laws and regulations, which may lead to the imposition of fines or an award of damages to private litigants.

We could incur significant costs related to government regulation and litigation over environmental matters.

All real property and the operations conducted thereon are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of hazardous materials, and the remediation of contamination associated with disposals. These laws or the interpretations thereof may become more stringent over time and compliance therewith may involve significant costs. Additionally, the cost of defending against claims of liability, complying with environmental requirements, remediating any contaminated property or paying personal injury claims could be substantial. Some of these laws and regulations impose joint and several liability on tenants and current or previous owners or operators of real estate for the costs of investigation and remediation of contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property or

 

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to use such property as collateral for future borrowing. Moreover, if contamination is discovered at any of our properties, environmental laws may impose restrictions on the manner in which the affected properties may be used or the businesses that may be operated thereon or give rise to personal injury claims. We typically obtain a third-party environmental site assessment for properties we acquire, however, we may not obtain such an assessment for every property we acquire, and when we do obtain such an assessment it is possible that it will not reveal all environmental liabilities.

Although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, there can be no assurance that our tenants will be able to meet these obligations. It is possible that we could incur substantial expenditures to remediate environmental conditions at our properties or become subject to liability for environmental liabilities by virtue of our ownership of the property. Furthermore, the discovery of environmental liabilities on any of our properties could lead to significant remediation costs or other liabilities for our tenant, which may affect such tenant’s ability to make rental payments to us.

From time to time, we may invest in properties with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield an appropriate risk-adjusted return. In such an instance, we will estimate the costs of environmental investigation, cleanup and monitoring when negotiating the purchase price. To the extent we underestimate the costs of environmental matters, we could incur substantial losses. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions.

We may become subject to litigation, which could materially and adversely affect us.

In the future we may become subject to litigation, including claims relating to our operations, properties, securities offerings or other aspects of our business. Some of these claims may result in significant investigation, defense or settlement costs and, if we are unable to successfully defend against or settle such claims, may result in significant fines or judgments against us. These costs may not be covered by insurance or may exceed insured amounts. We cannot be certain of the outcomes of any claims that may arise in the future. Certain litigation or the resolution of certain litigation may limit the availability or significantly increase the cost of insurance coverage, which could expose us to increased risks.

Risks Related to Business Continuity

Natural disasters and severe weather conditions could have an adverse impact on our cash flow and operating results.

Some of our properties could be subject to potential natural or other disasters. In addition, we may acquire properties that are located in areas which are subject to natural disasters. Properties could also be affected by increases in the frequency or severity of hurricanes or other storms, whether such increases are caused by global climate changes or other factors. The occurrence of natural disasters or severe weather conditions can increase investment costs to repair or replace damaged properties, increase operating costs, increase future property insurance costs, and/or negatively impact the tenant demand for lease space. If insurance is unavailable to us, or is unavailable on acceptable terms, or if our insurance is not adequate to cover business interruption or losses from such events, our earnings, liquidity and/or capital resources could be adversely affected.

We may suffer losses that are not covered by insurance or that are in excess of insured amounts.

Generally, each of our tenants is responsible for the cost of insuring the property it leases from us against customary losses (such as casualty, liability, fire and extended coverage) at a specified level or required to reimburse us for a portion of the cost of acquiring such insurance. However, it is possible that we will incur

 

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losses in excess of insured amounts. Additionally, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, earthquakes, pollution or environmental matters, that are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. It is possible that mortgage lenders may require us to purchase additional insurance covering acts of terrorism, and additional costs associated therewith may be significant and likely would not be paid for by our tenants. Additionally, to the extent such insurance is either unavailable or prohibitively expensive, it could inhibit our ability to finance or refinance our properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance.

Inflation, changes in building codes and ordinances, environmental considerations and other factors may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed. In that situation, the insurance proceeds received may not be adequate to restore our economic position with respect to the affected property. Furthermore, in the event we experience a substantial or comprehensive loss at one of our properties, we may not be able to rebuild such property to its pre-loss specifications without capital expenditures in excess of any insurance proceeds, as repair or reconstruction of the property may require significant upgrades to meet current zoning and building code requirements.

Future terrorist attacks or civil unrest could harm the demand for, and the value of, our properties.

Recently and over the past several years, a number of highly publicized terrorists acts and shootings have occurred at domestic and international retail properties. Future terrorist attacks, civil unrest, and other acts of terrorism or war could harm the demand for, and the value of, our properties. Terrorist attacks could directly impact the value of our properties through damage, destruction, loss or increased security costs, and the availability of insurance for such acts may be limited or may be subject to substantial cost increases. To the extent that our tenants are impacted by future attacks, their ability to continue to honor obligations under their existing leases could be adversely affected. A decrease in retail demand could make it difficult for us to renew or re-lease our properties at lease rates equal to or above historical rates. These acts might erode business and consumer confidence and spending, and might result in increased volatility in national and international financial markets and economies. Any one of these events might decrease demand for real estate, decrease or delay the occupancy of our properties, and limit our access to capital or increase our cost of raising capital.

We face risks relating to cybersecurity attacks that could cause loss of confidential information and other business disruptions.

We rely extensively on computer systems to process transactions and manage our business, and our business is at risk from and may be impacted by cybersecurity attacks. These could include attempts to gain unauthorized access to our data and computer systems. Attacks can be both individual and/or highly organized attempts organized by very sophisticated hacking organizations. We employ a number of measures to prevent, detect and mitigate these threats, which include password protection, firewall protection systems, frequent backups, and a redundant data system for core applications; however, there is no guarantee such efforts will be successful in preventing a cybersecurity attack. A cybersecurity attack could compromise our confidential information as well as that of our employees, tenants and vendors. A successful attack could disrupt and affect our business operations.

Risks Related to Ownership of our Common Shares

An investment in our Common Shares will have limited liquidity. There is no public trading market for our Common Shares and there may never be one; therefore, it will be difficult for you to sell your shares.

There currently is no public market for our Common Shares and there may never be one. While the Company has instituted a limited repurchase program, there is no guarantee that such liquidity will be available

 

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to all investors and it is subject to various limitations. Though the Company may execute an eventual aggregation event, there is no guarantee that any aggregation event will occur. If you are able to find a buyer for your Common Shares, you will likely have to sell them at a substantial discount to your purchase price. It also is likely that your Common Shares would not be accepted as the primary collateral for a loan.

If we are unable to obtain key personnel, our ability to achieve our investment objectives could be delayed or hindered, which could adversely affect our ability to pay distributions to our shareholders.

Our success depends to a significant degree upon the contributions of our Key Principals and certain of our executive officers and other key personnel, each of whom would be difficult to replace. We cannot guarantee that all, or any particular one, will remain affiliated with us. If any of our key personnel were to cease their affiliation with us, our operating results could suffer. We also believe that our future success depends, in large part, upon our ability to hire and retain highly skilled managerial, operational, and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to pay distributions to our shareholders, and, as a result, the value of a shareholder’s investment may decline.

We could face possible state and local tax audits and adverse changes in state and local tax laws.

Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but we are subject to certain state and local taxes. From time to time, changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. A shortfall in tax revenues for states and municipalities in which we own properties may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional state and local taxes. These increased tax costs could adversely affect our financial condition and the amount of cash available for the payment of distributions to our shareholders. In the normal course of business, entities through which we own real estate may also become subject to tax audits. If such entities become subject to state or local tax audits, the ultimate result of such audits could have an adverse effect on our financial condition.

 

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ITEM 2.

FINANCIAL INFORMATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the audited consolidated financial statements and related notes thereto included elsewhere in this registration statement, as well as “Item 1. Business” included elsewhere in this registration statement. Some of the information contained in this discussion and analysis or set forth elsewhere in this registration statement, including information with respect to our plans and strategies for our business, includes forward-looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” and the “Forward-Looking Statements” section of this registration statement for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements.

Company Overview

ExchangeRight Income Fund, doing business as ExchangeRight Essential Income REIT, a Maryland statutory trust, is a self-administered real estate company, formed on January 11, 2019, focusing on investing in single-tenant, primarily investment-grade net-leased real estate. The Company, through the Operating Partnership, owned 337 properties in 34 states as of March 31, 2023. These properties were 99.8% leased as of March 31, 2023 and are occupied by 36 different national primarily investment-grade necessity-based retail tenants and are additionally diversified by industry, geographic region and lease term.

The Company has elected and is qualified to be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2019. The Company is the sole general partner and a limited partner of Operating Partnership, a Delaware partnership formed on January 9, 2019. Substantially all of the Company’s business is conducted through the Operating Partnership. The Trust Properties are owned and controlled by the Company and are managed by the Property Manager and the Asset Manager, which are both wholly-owned subsidiaries of ExchangeRight, pursuant to executed Management Agreements with each respective entity.

The following table provides historical consolidated summary financial data for the Company. The data is derived from the Company’s (1) unaudited financial statements as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 and (2) audited financial statements as of and for the years ended December 31, 2022 and 2021. You should not assume the results of operations for any past periods indicate results for any future period. You should read this information in conjunction with the Company’s consolidated financial statements and related notes thereto included in this registration statement on Form 10, and in conjunction with the disclosures set forth in this “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

    Three months ended March 31,     Years ended December 31,  
    2023     2022     2022     2021  

Operating Data:

       

Revenues

  $ 20,699,000     $ 13,234,000     $ 66,467,000     $ 35,006,000  

Operating expenses:

       

Property operating expenses

    (2,870,000     (1,488,000     (7,369,000     (3,349,000

Management fees to affiliates

    (621,000     (402,000     (2,082,000     (1,109,000

General and administrative expenses

    (428,000     (217,000     (997,000     (652,000

Depreciation and amortization

    (10,157,000     (5,527,000     (30,483,000     (14,535,000

Interest expense

    (7,232,000     (3,274,000     (20,614,000     (8,687,000
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (609,000     2,326,000       4,922,000       6,674,000  

 

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    Three months ended March 31,     Years ended December 31,  
    2023     2022     2022     2021  

Net loss (income) attributable to noncontrolling interests

    206,000       (505,000     (1,361,000     (1,608,000
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common shareholders

  $ (403,000   $ 1,821,000     $ 3,561,000     $ 5,066,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per common share—basic and diluted

  $ (0.03   $ 0.16     $ 0.28     $ 0.66  
 

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to common shareholders

  $ 6,423,000     $ 4,883,000     $ 22,413,000     $ 13,280,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

       

FFO (a)

  $ 9,572,000     $ 7,870,000     $ 35,493,000     $ 21,271,000  

Adjusted FFO (a)

  $ 9,716,000     $ 7,403,000     $ 34,451,000     $ 19,897,000  
          December 31,  

Balance Sheet Data:

  March 31, 2023           2022     2021  
Assets        

Real estate investments, net

  $ 984,777,000                                $ 989,086,000     $ 517,830,000  

Intangible assets, net

    73,013,000         76,387,000       42,625,000  

Notes receivable from affiliates

    43,445,000         32,730,000       72,990,000  

Cash, cash equivalents and restricted cash

    21,566,000         36,645,000       22,059,000  

Other assets

    14,047,000         13,562,000       10,757,000  
 

 

 

     

 

 

   

 

 

 

Total assets

  $ 1,136,848,000       $ 1,148,410,000     $ 666,261,000  
 

 

 

     

 

 

   

 

 

 
Liabilities        

Mortgage loans payable

  $ 556,015,000       $ 497,067,000     $ 223,462,000  

Revolving credit facilities

    —           73,311,000       87,060,000  

Intangible liabilities, net

    24,720,000         25,337,000       18,603,000  

Pending trade deposits

    3,375,000         6,446,000       9,488,000  

Other

    18,748,000         17,175,000       11,757,000  
 

 

 

     

 

 

   

 

 

 

Total liabilities

  $ 602,858,000       $ 619,336,000     $ 350,370,000  
 

 

 

     

 

 

   

 

 

 
Equity        

Shareholders’ equity

  $ 349,534,000       $ 340,843,000     $ 248,927,000  

Noncontrolling interests

    184,456,000         188,231,000       66,964,000  
 

 

 

     

 

 

   

 

 

 

Total equity

  $ 533,990,000       $ 529,074,000     $ 315,891,000  
 

 

 

     

 

 

   

 

 

 

 

(a)

FFO is a widely recognized supplemental non-GAAP measure utilized to evaluate the financial performance of a REIT. The Company presents FFO in accordance with the definition adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT generally defines FFO as net income (determined in accordance with GAAP), excluding gains (losses) from sales of real estate properties, impairment write-downs on real estate properties directly attributable to decreases in the value of depreciable real estate, plus real estate related depreciation and amortization, and adjustments for partnerships and joint ventures to reflect FFO on the same basis. The Company considers FFO to be an appropriate measure of its financial performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than other depreciable assets.

 

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The Company also considers Adjusted Funds From Operations (“Adjusted FFO”) to be an additional meaningful financial measure of financial performance as it provides supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. The Company believes Adjusted FFO further assists in comparing the Company’s performance across reporting periods on a consistent basis by excluding such items.

FFO and Adjusted FFO should be reviewed with net (loss) income attributable to common shareholders, the most directly comparable GAAP financial measure, when trying to understand the Company’s operating performance. FFO and Adjusted FFO do not represent cash generated from operating activities and should not be considered as an alternative to net (loss) income attributable to common shareholders or to cash flow from operating activities. The Company’s computations of FFO and Adjusted FFO may differ from the computations utilized by other REITs and, accordingly, may not be comparable to such REITs.

A reconciliation of net (loss) income attributable to common shareholders to FFO and Adjusted FFO for the three months ended March 31, 2023 and 2022 and years ended December 31, 2022 and 2021, is as follows:

 

     Three months ended March 31,      Years ended December 31,  
     2023      2022      2022      2021  

Net (loss) income attributable to common shareholders

   $ (403,000    $ 1,821,000      $ 3,561,000      $ 5,066,000  

Depreciation and amortization

     10,181,000        5,544,000        30,571,000        14,597,000  

Net (loss) income attributable to noncontrolling interests

     (206,000      505,000        1,361,000        1,608,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

FFO applicable to diluted common shares

     9,572,000        7,870,000        35,493,000        21,271,000  

Adjustments:

           

Straight-line rent adjustments

     (252,000      (139,000      (764,000      (442,000

Above/below market lease amortization, net

     (591,000      (450,000      (2,090,000      (1,183,000

Amortization of deferred financing costs

     204,000        77,000        501,000        214,000  

Above/below market debt amortization, net

     714,000        (26,000      1,030,000        (46,000

Straight-line ground rent adjustments

     40,000        42,000        163,000        —    

Amortization of tax incentive financing arrangement

     29,000        29,000        118,000        83,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted FFO applicable to diluted common shares

   $ 9,716,000      $ 7,403,000      $ 34,451,000      $ 19,897,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

FFO per diluted common shares

   $ 0.43      $ 0.55      $ 1.99      $ 2.11  

Adjusted FFO per diluted common shares

   $ 0.43      $ 0.51      $ 1.93      $ 1.98  

Weighted average number of diluted common shares (a):

           

Common shares

     14,786,099        11,267,246        12,908,540        7,634,357  

OP Units

     7,554,863        3,127,118        4,930,274        2,423,066  
  

 

 

    

 

 

    

 

 

    

 

 

 
     22,340,962        14,394,364        17,838,814        10,057,423  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a)

The weighted average number of diluted Common Shares used to compute FFO and Adjusted FFO applicable to diluted Common Shares includes OP Units which are excluded from the computation of diluted EPS.

 

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Activity for the Three Months Ended March 31, 2023

Property Acquisition

On March 31, 2023, the Company acquired a property from an unaffiliated entity not managed by ExchangeRight for a total purchase price of $2.3 million. ExchangeRight earned a 1.0% acquisition fee on this property acquisition totaling $22,000.

RSLCA Notes Receivable from Affiliated Party

In order to earn a return on the funds maintained for liquidity for the share repurchase program and other liquidity needs, the Company invested in a short-term mezzanine loan to ExchangeRight (“ExchangeRight Mezz Loans”) for ExchangeRight’s DST programs under the RSLCA. These notes receivable typically provide for liquidity within 60 to 120 days. The loan agreement, as amended, matures on April 4, 2027 and bears interest at a rate equal to 12.0% per annum, while outstanding. ExchangeRight structured the RSLCA, including the 12% interest rate, as a way to provide an enhanced risk-adjusted return to the Company. ExchangeRight entered into the ExchangeRight Mezz Loans because, as the ultimate parent entity and sponsor of the Company, the Operating Partnership, and their business, it has a strong interest in the success of both the Company’s REIT platform and ExchangeRight’s DST platform and the structure of the loans facilitates an alignment between these two platforms. In this regard, ExchangeRight may use funds from the ExchangeRight Mezz Loans to facilitate acquisitions of properties owned or managed by affiliates of ExchangeRight, including the ExchangeRight DST entities. Therefore, by entering into this loan agreement, ExchangeRight seeks to enhance the performance and liquidity of the REIT portion of the overall ExchangeRight platform, which the Company and Trustee believe ultimately inures to the benefit of the Company and its Common Shareholders. The Company and ExchangeRight will evaluate whether to extend the RSLCA agreement past the maturity date, although that is currently expected. No firm determination has yet been made by the parties to extend the ExchangeRight Mezz Loans, nor have the terms of any such extended arrangements been determined. Effective April 4, 2022, the capacity under the RSLCA increased to a maximum of $250.0 million outstanding at any time. ExchangeRight received net advances of $10.7 million during the three months ended March 31, 2023 increasing the balance of the RSLCA notes receivable to $37.4 million at March 31, 2023.

Mortgage Loans Payable

On February 1, 2023, the Company entered into a mortgage secured by five properties for $38.5 million. The mortgage matures on February 1, 2028, bears interest at a fixed-rate of 6.12% and requires interest only payments.

On February 9, 2023, the Company entered into a mortgage for $26.9 million. The mortgage matures on February 1, 2028, bears interest at a variable-rate of 1.70% in excess of the Secured Overnight Financing Rate and requires interest only payments. The loan is secured by four properties. Additionally, concurrent with the closing of the mortgage, the Company entered into an interest rate swap agreement which effectively converted the variable-rate mortgage to a fixed-rate mortgage of 5.80% through its maturity.

The Company repaid a $6.4 million mortgage loan payable by its contractual maturity date of February 1, 2023 utilizing cash.

Revolving Lines of Credit

During the first quarter of 2023, the Company made repayments totaling $73.3 million under borrowing notes within the Ameris Bank revolving line of credit. These repayments reduced the outstanding balance under this revolving credit facility to zero.

The Pacific Western Bank revolving line of credit agreement, as amended in April 2023, now bears interest at a rate equal to the prime rate per annum with an interest rate floor of 3.75%, while outstanding. The revolving line of credit will require monthly interest only payments, while outstanding. The Company had no outstanding balance under this revolving line of credit as of March 31, 2023.

 

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Common Shares and Noncontrolling Interests

The following table provides a summary of certain Class I, Class A and Class S Common Shares attributes during the three months ended March 31, 2023:

 

Offering price

Effective date

   Class I      Class A     

Class S

August 3, 2022

   $ 28.18      $ 29.96      $29.20

April 1, 2023

   $ 27.71      $ 29.46      $28.72

April 14, 2023

   $ 27.74      $ 29.49      $28.75

The Company issued 256,807 Class I Common Shares and 446,995 Class A Common Shares resulting in an aggregate of $20.6 million in proceeds to the Company during the three months ended March 31, 2023. No Class S Common Shares were issued during the three months ended March 31, 2023.

The Company redeemed 73,645 Class I Common Shares totaling $1.9 million, and 64,461 Class A Common Shares totaling $1.7 million during the three months ended March 31, 2023.

2022 Activity

Portfolio Acquisitions

The Company, through the Operating Partnership, acquired 186 properties via merger agreements with 10 former 1031-exchangeable portfolios that were previously managed by ExchangeRight on behalf of investors for a total purchase price of $539.7 million during 2022. Additionally, the Operating Partnership (excluding ExchangeRight’s related party activity) issued 5,044,863 OP Units totaling $141.7 million in relation to these acquisitions. The Company assumed the following mortgages in connection with these acquisitions:

 

Date of assumption

  

Amortization

   Maturity
date
     Balance at
assumption
     Contractual
interest
rate
 

2/9/2022

   Interest only      10/1/2024      $ 16,902,000        4.25

3/2/2022

   Interest only      6/6/2027        32,722,000        3.98

4/1/2022

   Interest only      6/1/2024        18,008,000        4.71

6/24/2022

   Interest only      9/1/2027        36,860,000        3.99

7/26/2022

   Interest only      12/1/2027        33,441,000        4.09

8/24/2022

   Interest only      1/11/2028        35,840,000        4.05

8/31/2022

   Interest only      12/1/2025        25,012,000        4.59

9/7/2022

   Interest only      5/1/2025        25,519,000        4.15

9/14/2022

   Interest only      4/8/2028        37,795,000        4.27

10/27/2022

   Interest only      9/6/2025        24,420,000        4.38
        

 

 

    
         $ 286,519,000     
        

 

 

    

All 2022 acquisitions were accounted for as asset acquisitions and the related purchase price allocated to the acquired tangible and identifiable intangible assets or assumed liabilities based on their relative fair value.

RSLCA Notes Receivable from Affiliated Party

In order to earn a return on the funds maintained for liquidity for the share repurchase program and other liquidity needs, the Company invested in ExchangeRight Mezz Loans for ExchangeRight’s DST programs under the RSLCA. See “– Activity for the Three Months Ended March 31, 2023 – RSLCA Notes Receivable from Affiliated Party” for additional details regarding the ExchangeRight Mezz Loans. ExchangeRight made net repayments of $46.3 million during 2022 decreasing the balance of the RSLCA notes receivable to $26.7 million at December 31, 2022.

 

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Notes Receivable from Affiliated Parties

On August 25, 2022, the Company entered into a real estate note as the lender with a two property net-leased DST managed by ExchangeRight. The real estate note matures on August 25, 2027, bears interest at a fixed-rate of 6.00% and requires interest only payments. The Company had a $3.6 million receivable under this real estate note as of December 31, 2022, which is included in notes receivable from affiliates in the consolidated balance sheets.

On November 18, 2022, the Company entered into a junior unsecured line of credit agreement as the lender with a four property net-leased DST managed by ExchangeRight. The junior unsecured line of credit agreement is for a maximum of $2.6 million, matures on November 18, 2027, bears interest at a fixed-rate of 7.25% and requires interest only payments. The Company had a $2.4 million receivable under this junior unsecured line of credit agreement as of December 31, 2022, which is included in notes receivable from affiliates in the consolidated balance sheets.

Revolving Lines of Credit

In January 2021, the Company entered into a revolving line of credit with Pacific Western Bank. The revolving line of credit agreement, as amended on February 9, 2022, has a maturity date of January 15, 2024, with a maximum of $15.0 million outstanding at any time and, as of December 31, 2022, bears interest at a rate equal to the prime rate plus 1.00% per annum with an interest rate floor of 3.75%, while outstanding. The revolving line of credit will require monthly interest only payments, while outstanding. The Company made net repayments totaling $7.5 million on its revolving line of credit with Pacific Western Bank during 2022. The Company had no outstanding balance under this revolving line of credit as of December 31, 2022.

On May 19, 2021, the Company and ExchangeRight entered into a revolving line of credit with Ameris Bank. For a summary of the material terms of this line of credit, see “2021 Activity – Revolving Lines of Credit” below. The Company made repayments of $6.2 million under a borrowing note within the Ameris Bank revolving line of credit on December 8, 2022. The Company has $73.3 million outstanding under this revolving line of credit as of December 31, 2022.

Common Shares and Noncontrolling Interests

The following table provides a summary of certain Class I, Class A and Class S Common Shares attributes during the year ended December 31, 2022:

 

Maximum offering amount

    

Offering price

 

Effective date

   Amount     

Effective date                

  Class I     Class A      Class S  

March 2, 2021

   $ 500,000,000     

November 8, 2021

  $ 26.09     $ 27.74        n/a  

April 4, 2022

   $ 2,165,000,000      January 4, 2022   $ 26.64     $ 28.33        n/a  
      April 4, 2022   $ 27.82     $ 29.58      $ 28.83  
      August 3, 2022   $ 28.18     $ 29.96      $ 29.20  

The Company issued 1,402,635 Class I Common Shares and 2,779,632 Class A Common Shares resulting in an aggregate of $119.0 million in proceeds to the Company during the year ended December 31, 2022. No Class S Common Shares were issued during 2022.

The Company redeemed 74,039 Class I Common Shares and 62,231 Class A Common Shares for a total cash outlay of $3.7 million during the year ended December 31, 2022, representing 0.6% of the Company’s total Common Shares and noncontrolling interest issuances since inception through December 31, 2022 (excluding ExchangeRight’s ownership interest in the Operating Partnership).

 

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The Operating Partnership (excluding ExchangeRight’s related party activity) issued 5,044,863 OP Units totaling $141.7 million in relation to acquisitions during the year ended December 31, 2022. ExchangeRight redeemed 315,000 OP Units for $8.2 million during the year ended December 31, 2022. ExchangeRight owned 77,308 OP Units for a total investment of $2.0 million as of December 31, 2022.

2021 Activity

Portfolio Acquisitions

The Company acquired 58 properties via merger agreements with four former 1031-exchangeable portfolios that were previously managed by ExchangeRight on behalf of investors for a total purchase price of $156.6 million during 2021. Additionally, the Operating Partnership issued 1,212,705 OP Units totaling $31.3 million in relation to these acquisitions. In connection with these acquisitions, the Company assumed the following mortgages:

 

Date of assumption

   Amortization    Maturity
date
     Balance at
assumption
     Contractual
interest
rate
 

3/25/2021

   Interest only      12/1/2026      $ 28,110,000        4.06

3/30/2021

   30 Year Amort      10/1/2023        8,035,000        5.54

11/1/2021

   Interest only      4/1/2027        31,200,000        4.38

12/9/2021

   30 Year Amort      3/1/2024        11,199,000        4.91
        

 

 

    
         $ 78,544,000     
        

 

 

    

In addition, 10 properties for a total purchase price of $132.1 million were acquired from unaffiliated entities not managed by ExchangeRight. ExchangeRight earned a 1.0% acquisition fee on these ten property acquisitions totaling $1.3 million. Furthermore, ExchangeRight received $1.1 million during 2021 in commissions that were paid by sellers and were reallowed to ExchangeRight through JRW Realty, Inc. (“JRW Realty”), a licensed real estate broker and an affiliate of ExchangeRight, in connection with these acquisitions.

All 2021 acquisitions were accounted for as asset acquisitions and the related purchase price allocated to the acquired tangible and identifiable intangible assets or assumed liabilities based on their relative fair value.

Sales-Type Leases

The Company, as lessor, has entered into long-term leases with affiliated parties that transfer the rights, title and interest of certain in-line, non-anchor tenants at certain multi-tenant properties the Company has acquired. These leases range from 50 years to 99 years, and all include 10 five-year renewal options. These in-line tenants do not fit within the Company’s investment criteria of being investment-grade necessity-based retail tenants. Simultaneously upon the acquisition of these properties, the Company transferred the rights, title and interest of the in-line tenants for consideration in the form of lump sum payments which equaled the fair value associated with the in-line tenants at their respective properties. The Company has classified these lease transactions as sales-type leases. Additionally, as the lump sum payment totaled the fair value of the in-line tenants at each respective property, these transactions had no effect on the Company’s consolidated statements of operations and other comprehensive income for the years ended December 31, 2021. The Company entered into three such sales-type lease transactions for the year ended December 31, 2021 and received lump sum lease payments totaling $16.2 million for the year ended December 31, 2021.

RSLCA Notes Receivable from Affiliated Party

In order to earn a return on the funds maintained for liquidity for the share repurchase program and other liquidity needs, the Company invested in ExchangeRight Mezz Loans for ExchangeRight’s DST programs under

 

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the RSLCA. See “– Activity for the Three Months Ended March 31, 2023 – RSLCA Notes Receivable from Affiliated Party” for additional details regarding the ExchangeRight Mezz Loans. The Company made net advances of $53.2 million during 2021 increasing the balance of the notes receivable to $73.0 million at December 31, 2021.

Revolving Lines of Credit

In January 2021, the Company entered into a revolving line of credit with Pacific Western Bank. The revolving line of credit agreement, as amended on February 9, 2022, has a maturity date of January 15, 2024, with a maximum of $15.0 million outstanding at any time, and as of December 31, 2021, bears interest at a rate equal to the prime rate plus 1.00% per annum with an interest rate floor of 3.75%, while outstanding. The revolving line of credit will require monthly interest only payments, while outstanding. The Company had $7.5 million outstanding under this revolving line of credit as of December 31, 2021.

On May 19, 2021, the Company and ExchangeRight entered into a revolving line of credit with Ameris Bank. The Company is only legally responsible for the specific borrowings related to the Company, whereas ExchangeRight is a guarantor on all outstanding borrowings. The revolving line of credit agreement, as amended, is for an initial term of two years, with a maximum of $85.0 million outstanding at any time, and will require monthly payments. Repayment of each borrowing note within the line of credit is as follows:

 

Loan to cost %

  

Repayment terms

80%

   Three months interest only followed by a 25-year amortization

75%

   Six months interest only followed by a 30-year amortization

70% or less

   12 months interest only followed by a 30-year amortization

From inception through October 2022, the interest during the interest-only period is payable at a rate equal to the prime rate. Effective October 2022, the interest during the interest-only period is payable at a rate equal to the prime rate less 50 basis points. The amortization principal period requires payments at a current interest rate of 7.0% as of December 31, 2022. Each borrowing under the facility had an initial term of 12 months, with two, six-month extension options.

Common Shares and Noncontrolling Interests

The following table provides a summary of certain Class I and Class A Common Shares attributes during the year ended December 31, 2021:

 

Maximum offering amount

     Offering price  

Effective date

   Amount      Effective date    Class I      Class A  

May 18, 2020

   $ 200,000,000      Inception    $ 25.00      $ 26.58  

March 2, 2021

   $ 500,000,000      March 2, 2021    $ 26.00      $ 27.64  
      November 8, 2021    $ 26.09      $ 27.74  

The Company issued 2,041,673 Class I Common Shares and 3,596,644 Class A Common Shares resulting in an aggregate of $151.2 million in proceeds during the year ended December 31, 2021.

The Company redeemed 43,308 Class I Common Shares for a total cash outlay of $1.1 million during the year ended December 31, 2021, representing 0.3% of the Company’s total Common Shares and noncontrolling interest issuances since inception through December 31, 2021 (excluding ExchangeRight’s ownership interest in the Operating Partnership). There were no Class A Common Shares redeemed during the year ended December 31, 2021.

 

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The Operating Partnership (excluding ExchangeRight’s related party activity) issued 1,212,705 OP Units totaling $31.3 million in relation to acquisitions during the year ended December 31, 2021. Furthermore, ExchangeRight purchased an additional 1,550,000 OP Units for $40.3 million and redeemed 1,189,692 OP Units for $30.9 million during the year ended December 31, 2021. ExchangeRight owned 392,308 OP Units for a total investment of $10.2 million as of December 31, 2021.

Results of Operations

Comparison of the Three Months Ended March 31, 2023 and 2022

The variances in the Company’s results of operations for the three months ended March 31, 2023 and 2022 were primarily attributable to the acquisition of 152 properties for $448.0 million from April 1, 2022 through March 31, 2023 in addition to a full quarter of operating results for the 35 properties acquired from January 1, 2022 through March 31, 2022 for $93.9 million. The following table details the Company’s results of operations for the three months ended March 31, 2023 and 2022, respectively:

 

     Three months ended March 31,         
     2023      2022      Change  

Rental revenue

   $ 19,527,000      $ 10,802,000      $ 8,725,000  

Interest income on notes receivable from affiliates

     1,166,000        2,421,000        (1,255,000

Other

     6,000        11,000        (5,000

Property operating expenses

     (2,870,000      (1,488,000      (1,382,000

Management fees to affiliates

     (621,000      (402,000      (219,000

General and administrative expenses

     (428,000      (217,000      (211,000

Depreciation and amortization

     (10,157,000      (5,527,000      (4,630,000

Interest expense

     (7,232,000      (3,274,000      (3,958,000
  

 

 

    

 

 

    

 

 

 

Net (loss) income

   $ (609,000    $ 2,326,000      $ (2,935,000
  

 

 

    

 

 

    

 

 

 

The following table details the Company’s rental revenue, property operating expenses, and depreciation and amortization for the three months ended March 31, 2023 segmented by period of property acquisition:

 

     Properties acquired during         
     April 1, 2022 through
March 31, 2023
     January 1, 2022
through
March 31, 2022
     2021 and
and prior
     Total for the
three months ended
March 31, 2023
 

Base rents

   $ 6,384,000      $ 1,340,000      $ 8,307,000      $ 16,031,000  

Tenant reimbursables

     791,000        208,000        1,434,000        2,433,000  

Straight-line rent adjustments

     101,000        9,000        142,000        252,000  

Above/below market lease amortization, net

     87,000        76,000        428,000        591,000  

Lease termination income

     —          —          220,000        220,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Rental revenue

   $ 7,363,000      $ 1,633,000      $ 10,531,000      $ 19,527,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Property operating expenses

   $ 916,000      $ 233,000      $ 1,721,000      $ 2,870,000  

Depreciation and amortization

   $ 4,190,000      $ 965,000      $ 5,002,000      $ 10,157,000  

 

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The following table details the Company’s rental revenue, property operating expenses, and depreciation and amortization for the three months ended March 31, 2022 segmented by period of property acquisition:

 

    Properties acquired during        
    April 1, 2022 through
March 31, 2023
    January 1, 2022
through
March 31, 2022
    2021 and
and prior
    Total for the
three months ended
March 31, 2023
 

Base rents

  $ —       $ 551,000     $ 8,309,000     $ 8,860,000  

Tenant reimbursables

    —         89,000       1,264,000       1,353,000  

Straight-line rent adjustments

    —         4,000       135,000       139,000  

Above/below market lease amortization, net

    —         20,000       430,000       450,000  

Lease termination income

    —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Rental revenue

  $ —       $ 664,000     $ 10,138,000     $ 10,802,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Property operating expenses

  $ —       $ 92,000     $ 1,396,000     $ 1,488,000  

Depreciation and amortization

  $ —       $ 292,000     $ 5,235,000     $ 5,527,000  

The following table details the variances between the Company’s rental revenue, property operating expenses, and depreciation and amortization for the three months ended March 31, 2023 versus March 31, 2022 segmented by period of property acquisition:

 

     Properties acquired during      Total variance between
the three months ended
March 31, 2023 and
March 31, 2022
 
     April 1, 2022 through
March 31, 2023
     January 1, 2022
through
March 31, 2022
     2021 and
and prior
 

Base rents

   $ 6,384,000      $ 789,000      $ (2,000    $ 7,171,000  

Tenant reimbursables

     791,000        119,000        170,000        1,080,000  

Straight-line rent adjustments

     101,000        5,000        7,000        113,000  

Above/below market lease amortization, net

     87,000        56,000        (2,000      141,000  

Lease termination income

     —          —          220,000        220,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Rental revenue

   $ 7,363,000      $ 969,000      $ 393,000      $ 8,725,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Property operating expenses

   $ 916,000      $ 141,000      $ 325,000      $ 1,382,000  

Depreciation and amortization

   $ 4,190,000      $ 673,000      $ (233,000    $ 4,630,000  

Rental revenue and property operating expenses increases were primarily attributable to the acquisition of 152 properties totaling $448.0 million from April 1, 2022 through March 31, 2023 in addition to a full quarter of rental revenue and property operating expenses for the 35 properties acquired from January 1, 2022 through March 31, 2022 for $93.9 million.

Interest income on notes receivable from affiliates includes interest earned from (1) outstanding borrowings under the RSLCA which bears interest at a rate equal to 12.0% per annum, (2) a $3.6 million real estate note receivable from an affiliated party and (3) a $2.4 million note receivable from an affiliated party. Interest income from the RSLCA was $1.4 million lower during the three months ended March 31, 2023 as a result of an approximate $45.7 million decrease in the average daily outstanding balance of the RSLCA during the three months ended March 31, 2023 versus the three months ended March 31, 2022. In addition, interest income from borrowings under the notes receivable from affiliated parties was $0.1 million and $0 during the three months ended March 31, 2023 and 2022, respectively.

 

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Management fees to affiliates increased $219,000, or 54% for the three months ended March 31, 2023 versus March 31, 2022. Management fees to affiliates were higher in the three months ended March 31, 2023 as a result of 152 property acquisitions totaling $448.0 million from April 1, 2022 through March 31, 2023. Asset and property management fees increased $0.1 million and $0.1 million during the three months ended March 31, 2023 versus 2022, respectively.

General and administrative expenses increased $211,000, or 97% for the three months ended March 31, 2023 versus March 31, 2022. General and administrative expenses were higher due to an increase in audit fees and independent valuation service fees.

Depreciation and amortization increased $4.6 million, or 84% for the three months ended March 31, 2023 versus March 31, 2022. The increase is directly attributable to the acquisition of 152 properties from April 1, 2022 through March 31, 2023 in addition to a full quarter of depreciation and amortization for the 35 properties acquired from January 1, 2022 through March 31, 2022. Acquisitions from April 1, 2022 through March 31, 2023 resulted in $353.0 million of additional depreciable assets based on the allocation of the purchase price and acquisitions costs. Additionally, acquisitions from January 1, 2022 through March 31, 2022 resulted in $79.0 million of additional depreciable assets based on the allocation of the purchase price and acquisitions costs.

Interest expense increased during the three months ended March 31, 2023 versus 2022 as a result of (1) the assumption of $236.9 million of mortgage loans payable from the acquisition of 151 properties via merger agreements with eight former 1031-exchangeable portfolios from April 1, 2022 through March 31, 2023, (2) the assumption of $49.6 million of mortgage loans payable from the acquisition of 35 properties via merger agreements with two former 1031-exchangeable portfolios from January 1, 2022 through March 31, 2022, (3) the increase of 450 basis points in the prime rate from March 31, 2022 (3.50%) to March 31, 2023 (8.00%) which is directly attributable to the increase in contractual interest expense relating to the Ameris Bank and Pacific Western Bank revolving credit facilities and (4) an increase of $0.7 million in amortization of below market debt associated with the assumption of mortgage loans payable.

Comparison of 2022 and 2021

The variances in the Company’s results of operations for the years ended December 31, 2022 and 2021 were primarily attributable to the acquisition of 186 properties for $539.7 million in 2022, in addition to a full year of operating results for the 68 properties acquired on various dates during 2021 for $288.6 million. The following table details the Company’s results of operations for the years ended December 31, 2022 and 2021, respectively:

 

     Years ended December 31,         
     2022      2021      Change  

Rental revenue

   $ 57,376,000      $ 28,144,000      $ 29,232,000  

Interest income on notes receivable from affiliates

     9,006,000        6,800,000        2,206,000  

Other

     85,000        62,000        23,000  

Property operating expenses

     (7,369,000      (3,349,000      (4,020,000

Management fees to affiliates

     (2,082,000      (1,109,000      (973,000

General and administrative expenses

     (997,000      (652,000      (345,000

Depreciation and amortization

     (30,483,000      (14,535,000      (15,948,000

Interest expense

     (20,614,000      (8,687,000      (11,927,000
  

 

 

    

 

 

    

 

 

 

Net income

   $ 4,922,000      $ 6,674,000      $ (1,752,000
  

 

 

    

 

 

    

 

 

 

 

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The following table details the Company’s rental revenue, property operating expenses, and depreciation and amortization for the year ended December 31, 2022 segmented by year of property acquisition:

 

    Properties acquired during the years ended December 31,     Total for year
ended

December 31, 2022
 
                2022                             2021                 2020 and prior  

Base rents

  $ 14,485,000     $ 16,995,000     $ 16,217,000     $ 47,697,000  

Tenant reimbursables

    1,712,000       2,649,000       2,097,000       6,458,000  

Straight-line rent adjustments

    232,000       391,000       141,000       764,000  

Above/below market lease amortization, net

    380,000       814,000       896,000       2,090,000  

Lease termination income

    —         367,000       —         367,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Rental revenue

  $ 16,809,000     $ 21,216,000     $ 19,351,000     $ 57,376,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Property operating expenses

  $ 2,014,000     $ 3,117,000     $ 2,238,000     $ 7,369,000  

Depreciation and amortization

  $ 9,874,000     $ 10,977,000     $ 9,632,000     $ 30,483,000  

The following table details the Company’s rental revenue, property operating expenses, and depreciation and amortization for the year ended December 31, 2021 segmented by year of property acquisition:

 

    Properties acquired during the years ended December 31,     Total for year
ended

December 31,2021
 
                2022                             2021                 2020 and prior  

Base rents

  $ —       $ 7,323,000     $ 16,215,000     $ 23,538,000  

Tenant reimbursables

    —         1,054,000       1,927,000       2,981,000  

Straight-line rent adjustments

    —         245,000       197,000       442,000  

Above/below market lease amortization, net

    —         278,000       905,000       1,183,000  

Lease termination income

    —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Rental revenue

  $ —       $ 8,900,000     $ 19,244,000     $ 28,144,000  
 

 

 

   

 

 

   

 

 

   

 

 

 
       

Property operating expenses

  $ —       $ 1,181,000     $ 2,168,000     $ 3,349,000  

Depreciation and amortization

  $             —       $ 4,602,000     $ 9,933,000     $ 14,535,000  

The following table details the variances between the Company’s rental revenue, property operating expenses, and depreciation and amortization for the year ended December 31, 2022 versus December 31, 2021 segmented by year of property acquisition:

 

    Properties acquired during the years ended December 31,     Total variance
between years ended

December 31,
2022 and 2021
 
                2022                             2021                 2020 and prior  

Base rents

  $ 14,485,000     $ 9,672,000     $ 2,000     $ 24,159,000  

Tenant reimbursables

    1,712,000       1,595,000       170,000       3,477,000  

Straight-line rent adjustments

    232,000       146,000       (56,000     322,000  

Above/below market lease amortization, net

    380,000       536,000       (9,000     907,000  

Lease termination income

    —         367,000       —         367,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Rental revenue

  $ 16,809,000     $ 12,316,000     $ 107,000     $ 29,232,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Property operating expenses

  $ 2,014,000     $ 1,936,000     $ 70,000     $ 4,020,000  

Depreciation and amortization

  $ 9,874,000     $ 6,375,000     $ (301,000   $ 15,948,000  

Rental revenue and property operating expenses increases were primarily attributable to the acquisition of 186 properties totaling $539.7 million in 2022, in addition to a full year of operating results for the 68 properties acquired totaling $288.7 million on various dates during 2021.

 

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Interest income on notes receivable from affiliates includes interest earned from (1) outstanding borrowings under the RSLCA which bears interest at a rate equal to 12.0% per annum, (2) a $3.6 million real estate note receivable from an affiliated party and (3) a $2.4 million note receivable from an affiliated party. Interest income from the RSLCA was $2.1 million higher during 2022 as a result of an approximate $17.4 million increase in the average daily outstanding balance of the RSLCA during 2022 versus 2021. In addition, interest income from borrowings under the notes receivable from affiliated parties was $0.1 million and $0 during 2022 and 2021, respectively.

Management fees to affiliates increased $973,000, or 88% for the year ended December 31, 2022 versus December 31, 2021. Management fees to affiliates were higher in 2022 as a result of 186 property acquisitions totaling $539.7 million during 2022 and 68 property acquisitions totaling $288.7 million during 2021. Asset and property management fees increased $0.7 million and $0.3 million in 2022 versus 2021, respectively. There was no change in the calculation of asset and property management fees to the Company in 2022 or 2021.

General and administrative expenses increased $345,000, or 53% for the year ended December 31, 2022 versus December 31, 2021. General and administrative expenses were higher in 2022 due to an increase in audit fees and independent valuation service fees.

Depreciation and amortization increased $15.9 million, or 110% for the year ended December 31, 2022 versus December 31, 2021. The increase is directly attributable to the acquisition of 186 properties in 2022, in addition to a full year of depreciation and amortization for the 68 properties acquired on various dates during 2021. Acquisitions in 2022 and 2021 resulted in $429.9 million and $258.0 million of additional depreciable assets based on the allocation of the purchase price and acquisitions costs.

Interest expense increased during 2022 versus 2021 as a result of (1) the assumption of $286.5 million of mortgage loans payable from the acquisition of 186 properties via merger agreements with 10 former 1031-exchangeable portfolios in 2022, (2) the assumption of $78.5 million of mortgage loans payable from the acquisition of 58 properties via merger agreements with four former 1031-exchangeable portfolios in 2021, (3) the increase of 425 basis points in the prime rate from December 31, 2021 (3.25%) to December 31, 2022 (7.50%) which is directly attributable to the increase in contractual interest expense relating to the Ameris Bank and Pacific Western Bank revolving credit facilities and (4) the payment of $0.4 million in financing costs related to the Ameris Bank and Pacific Western Bank revolving credit facilities during 2022 which resulted in the increase in the amortization of deferred financing charges during 2022.

The following table details the variances in interest expense for the year ended December 31, 2022 versus December 31, 2021 segmented by (1) revolving credit facility and (2) year of property acquisition:

 

     Ameris
Bank

Line of
Credit
     Pacific
Western
Bank

Line of
Credit
     Properties acquired
during the years ended December 31,
    Total variance
between years
ended
December 31,

2022 and 2021
 
     2022      2021     2020 and prior  

Contractual interest expense

   $ 2,480,000      $ 328,000      $ 5,729,000      $ 2,036,000     $ (8,000   $ 10,565,000  

Amortization of deferred financing costs

     268,000        20,000        —          —         (2,000     286,000  

Amortization of discount/premium

     —          —          1,179,000        (103,000     —         1,076,000  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 2,748,000      $ 348,000      $ 6,908,000      $ 1,933,000     $ (10,000   $ 11,927,000  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

The Company funds short-term liquidity requirements, including debt service, capital expenditures, distributions to our shareholders and distributions to holders of noncontrolling interests primarily from its

 

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operations. The Company funds acquisitions primarily from the sale of shares of its Class A and Class I common shares, the issuance of additional OP Units, and through the assumption or incurrence of debt. As of March 31, 2023, the Company has received, since inception, gross proceeds of $414.2 million from the aggregate sale of its Class A and Class I Common Shares. The Company believes that the current liquidity position is sufficient to meet its expected acquisition activity. We expect to fund our current liquidity requirements from a combination of cash on hand and cash flow generated from operations.

The Company and the net-leased properties that it manages were resilient through the COVID-19 pandemic as a result of the Company’s focus on properties that are long-term net-leased to primarily investment-grade tenants operating essential businesses that remained open and operated during the COVID-19 pandemic. The COVID-19 pandemic caused significant disruptions to the U.S. and global economy, and contributed to significant volatility and negative pressure in financial markets. The Company received payment of 100% of contractual based rents during the three months ended March 31, 2023 and during the years ended December 31, 2022 and 2021.

In order to earn a return on the funds maintained for liquidity to fund the share repurchase program and other liquidity needs, the Company has invested in a short-term mezzanine loan to ExchangeRight for ExchangeRight’s DST programs under the RSLCA. These notes receivable typically provide for liquidity within 60 to 120 days. The loan agreement, as amended, matures on April 4, 2027, with a maximum of $250.0 million outstanding at any time, and bears interest at a rate equal to 12.0% per annum, while outstanding. ExchangeRight structured the RSLCA, including the 12% interest rate, as a way to provide an enhanced risk-adjusted return to the Company as the two have a strong alignment of interest for both the REIT and DST platform to succeed. The Company and ExchangeRight will evaluate whether to extend the RSLCA agreement past the maturity date, although that is currently expected. The Company’s investment totaled $37.4 million as of March 31, 2023.

The Company’s notes receivable under the RSLCA are secured by interests in an entity that indirectly owns net-leased necessity-based retail properties similar to the Company’s acquired properties, as well as a pledge agreement and subordination agreement provided by ExchangeRight. As a result, the risk profile of an investment in this program is intended to be similar to ownership of the Company’s acquired properties while providing liquidity and an enhanced risk-adjusted return over investments with similar liquidity.

In order to continue qualifying as a REIT, the Company is required to distribute at least 90% of its “REIT taxable income”, as defined in the Code. The Company paid monthly distributions relating to its Common Shares during the three months ended March 31, 2023 and year ended December 31, 2022. While the Company intends to continue paying regular monthly distributions, future distributions declarations will continue to be at the discretion of the Trustee, and will depend on the cash flow and financial condition of the Company, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as the Trustee may deem relevant.

In January 2021, the Company entered into a revolving line of credit with Pacific Western Bank. The revolving line of credit agreement, as amended, has a maturity date of January 15, 2024, with a maximum of $15.0 million outstanding at any time, and bears interest at a rate equal to the prime rate per annum with an interest rate floor of 3.75%, while outstanding. The revolving line of credit will require monthly interest only payments, while outstanding. The Company had no outstanding balance under this revolving line of credit as of March 31, 2023.

 

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Additionally, on May 19, 2021, the Company and ExchangeRight entered into a revolving line of credit with Ameris Bank. The Company is only legally responsible for the specific borrowings related to the Company, whereas ExchangeRight is a guarantor on all outstanding borrowings. The revolving line of credit agreement, as amended, is for an initial term of two years, with a maximum of $85.0 million outstanding at any time, and will require monthly payments. Repayment of each borrowing note within the line of credit is as follows:

 

Loan to cost %

  

Repayment terms

80%

   Three months interest only followed by a 25-year amortization

75%

   Six months interest only followed by a 30-year amortization

70% or less

   12 months interest only followed by a 30-year amortization

The interest only period bears interest at a rate equal to the prime rate less 50 basis points. The amortization principal period requires payments at a current interest rate of 8.00% as of March 31, 2023. Each borrowing under the facility had an initial term of 12 months, with two, six-month extension options. Utilizing the net proceeds from the mortgages entered in February 2023 disclosed below, along with available cash, the Company made repayments totaling $73.3 million under borrowing notes within the Ameris Bank revolving line of credit during 2023. These repayments reduced the outstanding balance under this revolving credit facility to zero as of March 31, 2023.

Fixed-rate mortgage loans payable are composed of the following as of March 31, 2023:

 

                   March 31, 2023  

Description

   Amortization      Maturity
dates
     Balance
outstanding
     Contractual
interest rate
 

Fixed-rate mortgage (a)

     30 Year Amort        10/1/2023        7,789,000        5.54

Fixed-rate mortgage

     30 Year Amort        3/1/2024        10,971,000        4.91

Fixed-rate mortgage

     Interest-only        6/1/2024        18,008,000        4.71

Fixed-rate mortgage

     Interest-only        10/1/2024        16,902,000        4.25

Fixed-rate mortgage

     Interest-only        2/2/2025        21,550,000        3.97

Fixed-rate mortgage

     Interest-only        5/1/2025        25,519,000        4.15

Fixed-rate mortgage

     Interest-only        9/2/2025        24,420,000        4.38

Fixed-rate mortgage

     Interest-only        12/1/2025        25,012,000        4.59

Fixed-rate mortgage

     Interest-only        5/10/2026        24,850,000        4.66

Fixed-rate mortgage

     Interest-only        9/1/2026        24,485,000        3.82

Fixed-rate mortgage

     Interest-only        12/1/2026        28,110,000        4.06

Fixed-rate mortgage

     Interest-only        4/1/2027        31,200,000        4.38

Fixed-rate mortgage

     Interest-only        6/6/2027        32,722,000        3.98

Fixed-rate mortgage

     Interest-only        9/1/2027        36,860,000        3.99

Fixed-rate mortgage

     Interest-only        12/1/2027        33,441,000        4.09

Fixed-rate mortgage

     Interest-only        1/11/2028        35,840,000        4.05

Fixed-rate mortgage

     Interest-only        2/1/2028        38,530,000        6.12

Fixed-rate mortgage (b)

     Interest-only        2/1/2028        26,900,000        5.80

Fixed-rate mortgage

     Interest-only        4/8/2028        37,795,000        4.27

Fixed-rate mortgage

     Interest-only        10/1/2029        30,231,000        3.13

Fixed-rate mortgage

     Interest-only        1/1/2031        37,564,000        3.45
        

 

 

    
           568,699,000        4.33

Unamortized issuance costs, net

           (1,266,000   

Unamortized (discount)/premium, net

           (11,418,000   
        

 

 

    
           
         $ 556,015,000     
        

 

 

    

 

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(a)

Mortgage is currently callable by the lender as a result of the merger agreement.

(b)

Mortgage bears interest at a variable-rate of 1.70% in excess of the Secured Overnight Financing Rate and concurrent with the closing of the mortgage, the Company entered into an interest rate swap agreement which effectively converted the variable-rate mortgage to a fixed-rate mortgage. Accordingly, this mortgage has been presented as a fixed-rate mortgage.

The following table details the Company’s scheduled debt maturities as of March 31, 2023:

 

     Mortgage loans payable  

Year

   Scheduled
principal
     Balloon
payments
    Total  

Remainder of 2023

   $ 246,000      $ 7,683,000 (a)    $ 7,929,000  

2024

     31,000        45,710,000       45,741,000  

2025

     —          96,501,000       96,501,000  

2026

     —          77,445,000       77,445,000  

2027

     —          134,223,000       134,223,000  

Thereafter

     —          206,860,000       206,860,000  
  

 

 

    

 

 

   

 

 

 
   $ 277,000      $ 568,422,000     $ 568,699,000  
  

 

 

    

 

 

   

 

 

 

 

(a)

Mortgage is currently callable by the lender as a result of the merger agreement.

On February 1, 2023, the Company entered into a mortgage secured by five properties for $38.5 million. The mortgage matures on February 1, 2028, bears interest at a fixed-rate of 6.12% and requires interest only payments.

On February 9, 2023, the Company entered into a mortgage for $26.9 million. The mortgage matures on February 1, 2028, bears interest at a variable-rate of 1.70% in excess of the Secured Overnight Financing Rate and requires interest only payments. The loan is secured by four properties. Additionally, concurrent with the closing of the mortgage, the Company entered into an interest rate swap agreement which effectively converted the variable-rate mortgage to a fixed-rate mortgage of 5.80% through its maturity.

The mortgage loans payable mature at various dates from October 2023 through January 2031. The Company intends to repay the mortgage debt maturing in October 2023 with either available cash, proceeds from repayments under the RSLCA, or secured debt financing, or a combination of these options. Mortgage loans payable may require the Company to deposit certain replacement and other reserves with its lenders. Such “restricted cash” is generally available only for property-level requirements for which the reserves have been established and is not available to fund other property-level or Company-level obligations. The Company had $12.8 million in restricted cash as of March 31, 2023.

Cash Flows

The sources and uses of cash reflected in the Company’s consolidated statements of cash flows for the three months ended March 31, 2023 and 2022, and years ended December 31, 2022 and 2021 are summarized below:

 

     Three months ended March 31,      Years ended December 31,  
     2023      2022      2022      2021  

Cash flows provided by (used in):

           

Operating activities

   $ 9,842,000      $ 7,943,000      $ 36,103,000      $ 19,653,000  

Investing activities

   $ (13,213,000    $ (33,668,000    $ (71,687,000    $ (232,171,000

Financing activities

   $ (11,708,000    $ 30,490,000      $ 50,170,000      $ 227,129,000  

 

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Cash Flow Activities for the Three Months Ended March 31, 2023 compared to March 31, 2022

Operating Activities

Net cash from operating activities was $9.8 million and $7.9 million for the three months ended March 31, 2023 and 2022, respectively. The increase between the three months ended March 31, 2023 and 2022 was primarily a result of the full quarterly operating results for the 187 properties acquired on various dates from January 1, 2022 through March 31, 2023 for an aggregate purchase price of $541.9 million, which was offset by (1) an increase in cash paid for interest of $3.2 million and (2) a decrease in interest income of $1.3 million from the RSLCA and notes receivable from affiliated parties.

Investing Activities

Net cash flows used in investing activities were primarily the result of the Company’s property acquisitions, leasehold improvements, and net advances/repayments on the RLSCA and notes receivable from affiliated parties.

During the three months ended March 31, 2023, the Company had $10.7 million in net advances under the RLSCA, acquired a property for a total cash outlay of $2.3 million and incurred expenditures of $0.2 million for improvements of real estate. During the three months ended March 31, 2022, the Company acquired properties for a total cash outlay of $26.4 million, had $7.2 million in net advances under the RLSCA and incurred expenditures of $0.1 million for improvements of real estate.

Financing Activities

During the three months ended March 31, 2023, the Company had net repayments of $73.3 million from its revolving credit facilities, mortgage loans payable repayments of $6.5 million, distributions of $6.3 million to the holders of Class A and Class I Common Shares, redemptions of $3.5 million of Class A and Class I Common Shares, distributions of $3.3 million to the holders of OP Units and financing costs of $0.8 million relating to the two mortgage loans payable entered into in February 2023 offset by proceeds of $65.4 million relating to two mortgage loans payable entered into in February 2023, proceeds of $13.2 million from the issuance of Class A and Class I Common Shares and pending trade deposits of $3.4 million.

During the three months ended March 31, 2022, the Company had proceeds of $27.2 million from the issuance of Class A and Class I Common Shares, pending trade deposits of $10.7 million, proceeds of $7.5 million from its revolving credit facilities, redemptions of $8.1 million of OP Units, distributions of $4.7 million to the holders of Class A and Class I Common Shares, distributions of $1.3 million to the holders of OP Units, repayments of $0.3 million from its revolving credit facilities, redemptions of $0.2 million of Class A and Class I Common Shares, issuance costs of $0.2 million in relation to the offering and sale of OP Units, mortgage loans payable repayments of $0.1 million and financing costs of $0.1 million relating to the Company’s revolving credit facilities.

Cash Flow Activities for the Year Ended December 31, 2022 compared to December 31, 2021

Operating Activities

Net cash from operating activities was $36.1 million and $19.7 million for 2022 and 2021, respectively. The increase between 2022 and 2021 was primarily a result of (1) the acquisition of 186 properties in 2022, in addition to a full year of operating results for the 68 properties acquired on various dates in 2021 and (2) an increase in interest income of $2.2 million from the RSLCA and notes receivable from affiliated parties, which was partially offset by an increase in cash paid for interest of $10.1 million.

 

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Investing Activities

Net cash flows used in investing activities were primarily the result of the Company’s property acquisitions, leasehold improvements, and net advances/repayments on the RLSCA and notes receivable from affiliated parties.

During 2022, the Company acquired properties for a total cash outlay of $111.4 million, had $6.0 million in advances for notes receivable with affiliated parties, and incurred expenditures of $0.6 million for improvements of real estate, which was partially offset by $46.3 million in net repayments under the RLSCA. During 2021, the Company acquired properties for a total cash outlay of $195.0 million, had $53.2 million in net advances under the RLSCA and incurred expenditures of $0.2 million for improvements of real estate, which was offset by proceeds from sales-type lease transactions totaling $16.2 million.

Financing Activities

During 2022, the Company had proceeds of $103.5 million from the issuance of Class A and Class I Common Shares, pending trade deposits of $6.4 million, distributions of $21.8 million to the holders of Class A and Class I Common Shares, net repayments of $13.7 million from its revolving credit facilities, redemptions of $8.1 million of OP Units, distributions of $7.9 million to the holders of OP Units, issuance costs of $3.8 million in relation to the offering and sale of OP Units, redemptions of $3.7 million of Class A and Class I Common Shares, mortgage loans payable repayments of $0.5 million and financing costs of $0.4 million relating to the Company’s revolving credit facilities.

During 2021, the Company had proceeds of $139.9 million from the issuance of Class A and Class I Common Shares, net proceeds of $87.1 million from its revolving credit facilities, proceeds of $39.6 million from the issuance of OP Units, pending trade deposits of $9.5 million, redemptions of $30.6 million of OP Units, distributions of $12.5 million to the holders of Class A and Class I Common Shares, distributions of $4.1 million to the holders of OP Units, redemptions of $1.1 million of Class A and Class I Common Shares, financing costs of $0.4 million relating to mortgage loans payable and mortgage loans payable repayments of $0.3 million.

Distributions

The amount of distributions payable to the Company shareholders is determined by the Trustee and is dependent on a number of factors, including funds available for distribution, the Company’s financial condition, capital expenditure requirements, requirements of Maryland law and annual distribution requirements needed to qualify and maintain its status as a REIT. Our distribution policy is for our inception-to-date cash flow from operations to always exceed our distributions that have been declared or paid, rather than making distributions out of investor equity or financing, subject only to REIT qualification requirements or to avoid incurring federal income tax. The Trustee has authorized, and the Company has declared, distributions through June 30, 2023. The distributions are payable on approximately the 15th day following each month end to shareholders of record at the close of business on the last day of the prior month. Distributions in the aggregate amount of $3.3 million were declared but not yet paid as of March 31, 2023.

The following table provides a summary of the monthly distributions declared and paid per Class A Common Share and Class I Common Share for the three months ended March 31, 2023, respectively:

 

     2023  
     Class A      Class I  

January

   $ 0.1449      $ 0.1449  

February

   $ 0.1449      $ 0.1449  

March

   $ 0.1449      $ 0.1449  
  

 

 

    

 

 

 
   $ 0.4347      $ 0.4347  
  

 

 

    

 

 

 

 

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The following table provides a summary of the monthly distributions declared and paid per Class A Common Share and Class I Common Share for the years ended December 31, 2022 and 2021, respectively:

 

     Years ended December 31,  
     2022      2021  
     Class A      Class I      Class A      Class I  

January

   $ 0.1445      $ 0.1445      $ 0.1435      $ 0.1435  

February

   $ 0.1445      $ 0.1445      $ 0.1435      $ 0.1435  

March

   $ 0.1445      $ 0.1445      $ 0.1445      $ 0.1445  

April

   $ 0.1449      $ 0.1449      $ 0.1445      $ 0.1445  

May

   $ 0.1449      $ 0.1449      $ 0.1445      $ 0.1445  

June

   $ 0.1449      $ 0.1449      $ 0.1445      $ 0.1445  

July

   $ 0.1449      $ 0.1449      $ 0.1445      $ 0.1445  

August

   $ 0.1449      $ 0.1449      $ 0.1445      $ 0.1445  

September

   $ 0.1449      $ 0.1449      $ 0.1445      $ 0.1445  

October

   $ 0.1449      $ 0.1449      $ 0.1445      $ 0.1445  

November

   $ 0.1449      $ 0.1449      $ 0.1445      $ 0.1445  

December

   $ 0.1449      $ 0.1449      $ 0.1445      $ 0.1445  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1.7376      $ 1.7376      $ 1.7320      $ 1.7320  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contractual Obligations

The following table sets forth the Company’s significant debt repayments, interest payments and operating lease obligations at March 31, 2023:

 

Year

   Mortgage loans
payable
    Interest
payments (b)
     Operating ground
lease obligation
     Total  

Remainder of 2023

   $ 7,929,000 (a)    $ 18,372,000      $ 214,000      $ 26,515,000  

2024

     45,741,000       23,087,000        285,000        69,113,000  

2025

     96,501,000       20,168,000        285,000        116,954,000  

2026

     77,445,000       16,819,000        285,000        94,549,000  

2027

     134,223,000       12,366,000        285,000        146,874,000  

Thereafter

     206,860,000       6,356,000        29,004,000        242,220,000  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 568,699,000     $ 97,168,000      $ 30,358,000      $ 696,225,000  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(a)

Includes a $7.7 million balloon payment for a mortgage with a contractual maturity date in October 2023 that is currently callable by the lender as a result of the merger agreement.

(b)

The interest rates used in this calculation are the rates in effect for all debt obligations as of March 31, 2023.

On February 1, 2023, the Company entered into a mortgage secured by five properties for $38.5 million. The mortgage matures on February 1, 2028, bears interest at a fixed-rate of 6.12% and requires interest only payments.

Furthermore, on February 9, 2023, the Company entered into a mortgage for $26.9 million. The mortgage matures on February 1, 2028, and bears interest at a variable-rate of 1.70% in excess of the Secured Overnight Financing Rate and requires interest only payments. The loan is secured by four properties. Additionally, concurrent with the closing of the mortgage, the Company entered into an interest rate swap agreement which effectively converted the variable-rate mortgage to a fixed-rate mortgage of 5.80% through its maturity.

Related and Affiliated Party Transactions and Agreements

The Company has entered into agreements with ExchangeRight and its affiliates whereby we have paid, and may continue to pay, certain fees to, or reimburse certain expenses of, ExchangeRight or its affiliates for

 

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acquisition fees and actual incurred out-of-pocket expenses, but specifically excluding reimbursement related to employee compensation. The Company is also subject to a fee arrangement with ExchangeRight and its affiliates for organization and offering costs and asset and property management fees. See “Item  7. Certain Relationships and Related Transactions, and Trustee Independence – Organization and Offerings Costs,” “– Asset Management Fees to the Asset Manager,” and “– Property Management Fees to the Property Manager” for additional information.

ExchangeRight incurs certain organization and offering costs in connection with the Company’s current private securities offering of its Common Shares and the organization of the Company. These costs include, but are not limited to, fees related to special purpose entity formation, legal and accounting fees, valuation fees related to any expansion of the offering, marketing expenses and other costs and expenses directly related to the offering and organization of the Company. All of these expenses are paid by ExchangeRight or its affiliates. ExchangeRight earns a percentage of the gross proceeds from the offering which is expected to offset the organizational and offering costs incurred described above. This amount is equal to 1.00% of the net transaction price of sales of Common Shares. Offering costs of $0.2 million, $2.6 million and $1.9 million were included in equity for the three months ended March 31, 2023 and years ended December 31, 2022 and 2021, respectively, for which the Company was obligated to reimburse ExchangeRight. As of March  31, 2023, the Company is obligated to reimburse ExchangeRight for $20,000 of these reimbursable offering costs.

See Item 7. Certain Relationships and Related Transactions, and Trustee Independence for a discussion of the various related-party transactions, agreements and fees.

Off-Balance Sheet Arrangements

Other than the items disclosed in the Contractual Obligations section above, the Company had no off-balance sheet arrangements as of March 31, 2023 that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies

The Company’s most critical accounting policies are summarized below. Other accounting policies are summarized in Note 2, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements in this registration statement on Form 10.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Operating Partnership, its subsidiaries and any single member limited liability companies or other entities which are consolidated in accordance with GAAP. The Company consolidates variable interest entities (“VIEs”) when it is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. Generally, a VIE is an entity with one or more of the following characteristics: (1) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (2) as a group, the holders of the equity investment at risk (a) lack the power through voting or similar rights to make decisions about the entity’s activities that significantly impact the entity’s performance, (b) have no obligation to absorb the expected losses of the entity, or (c) have no right to receive the expected residual returns of the entity, or (3) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately fewer voting rights. A VIE is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE has (1) the power to direct the activities that most significantly impact the entity’s economic performance, and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. Significant judgments related to these

 

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determinations include estimates about the current values, performance of real estate held by these VIEs, and general market conditions.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant assumptions and estimates relate to the useful lives of real estate assets, lease accounting, real estate impairment assessments and allocation of fair value of purchase consideration. These estimates are based on historical experience and other assumptions which management believes are reasonable. The Company evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates.

Investment in Real Estate

Real estate assets are stated at cost, less accumulated depreciation and amortization. Assets are recognized at fair value at acquisition date.

The Company evaluates each acquisition transaction to determine whether the acquired asset meets the definition of a business and therefore accounted for as a business combination or if the acquisition transaction should be accounted for as an asset acquisition. Under Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), an acquisition does not qualify as a business when substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that qualify as asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred.

The Company allocates the purchase price of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, buildings, site improvements and tenant improvements. Intangible assets include the value of in-place leases and above-market leases and intangible liabilities include below-market leases. The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the relative fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions as well as costs to execute similar leases based on the specific characteristics of each tenant’s lease. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including tenant improvements, leasing commissions, legal and other related expenses.

The values of acquired above-market and below-market leases are recorded based on the present values (using discount rates which reflect the risks associated with the leases acquired) of the differences between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of the acquisitions. Such valuations include consideration of the noncancelable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions. The values of the above-market and below-market leases are amortized over the term of the respective leases,

 

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including certain renewal options (as applicable), as an adjustment to rental revenue on the Company’s consolidated statements of operations and comprehensive income. The value of other intangible assets (including leasing commissions, tenant improvements, etc.) is amortized to expense over the applicable terms of the respective leases. If a lease were to be terminated prior to its stated expiration or not renewed, all unamortized amounts relating to that lease would be recognized in operations at that time. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources and also considers information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate; e.g., location, size, demographics, value and comparative rental rates; tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business. Additionally, the Company considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets and liabilities acquired. The Company’s methodology for measuring and allocating the fair value of real estate acquisitions includes both observable market data (categorized as level 2 on the three-level valuation hierarchy of Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement), and unobservable inputs that reflect the Company’s own internal assumptions (categorized as level 3 under ASC Topic 820). Given the significance of the unobservable inputs the Company believes the allocations of fair value of real estate acquisitions should be categorized as level 3 under ASC Topic 820.

Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability of real estate investments held for use is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, capital expenditures, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value.

Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The Company considers the period of future benefit of each respective asset to determine its appropriate useful life. The estimated useful lives of the Company’s real estate assets by class are generally as follows:

 

Description

  

Depreciable life

Buildings    39 years
Building and site improvements    Ranging from 5 to 20 years
Tenant improvements    Shorter of the term of the related lease or useful life
Intangible lease assets and liabilities    Term of the related lease

Expenditures for improvements that substantially extend the useful lives of the assets are capitalized. Expenditures for maintenance, repairs and betterments that do not substantially prolong the normal useful life of an asset are charged to operations as incurred.

Revenue Recognition and Receivables

Management has determined that predominantly all of the Company’s leases with its various tenants are operating leases. The Company recognizes 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 collectability is reasonably assured and records amounts expected to be received in later years as deferred rent receivable. Deferred rent receivable represents rent earned in excess of rent received as a result of straight-lining rents over the terms of the leases, in accordance with the guidance and is included in receivables on the accompanying consolidated balance sheets. Deferred rent liability represents rent received in excess of

 

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rent earned as a result of straight-lining rents over the terms of the leases. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period the related expenses are incurred.

A limited number of operating leases contain contingent rent provisions under which tenants are required to pay, as additional rent, a percentage of their sales in excess of a specified amount. The Company defers recognition of contingent rental income until those specified sales targets are met. Revenues also may include items such as lease termination fees, which tend to fluctuate more than rents from year to year. Termination fees are fees that the Company has agreed to accept in consideration for permitting certain tenants to terminate their lease prior to the contractual expiration. The Company recognizes lease termination income when the following conditions are met: (1) the lease termination agreement has been executed, (2) the lease termination fee is determinable, (3) all the Company’s landlord services pursuant to the terminated lease have been rendered, and (4) collectability of the lease termination fee is assured.

If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by the Company. When the Company is the owner of the tenant improvements, the tenant is typically 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 that is funded is treated as a lease incentive and amortized as a reduction of 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 tenant improvement allowance may be spent;

 

   

whether the amount of a tenant improvement allowance is in excess of market rates;

 

   

whether the tenant or landlord retains legal title to the improvements at the end of the lease term;

 

   

whether the tenant improvements are unique to the tenant or general-purpose in nature; and

 

   

whether the tenant improvements are expected to have any residual value at the end of the lease.

Noncontrolling Interests

The Company presents noncontrolling interests, which represents OP Units, and classifies such interests as a component of equity, separate from the Company’s shareholders’ equity. Noncontrolling interests were created as part of contribution and merger agreements with former 1031-exchangeable portfolios that were previously managed by ExchangeRight on behalf of investors and recognized at fair value as of the date of the transaction. The holders of OP Units have the right to exchange their OP Units for the same number of shares of the Company’s Class I Common Shares, subject to a one-year holding period from the date of initial investment.

Income Taxes

The Company has elected and is qualified to be taxed as a REIT, as it complies with the related provisions under the Internal Revenue Code of 1986, as amended. Accordingly, the Company generally is not and will not be subject to U.S. federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and share ownership tests are met. To qualify as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its shareholders and meet certain other requirements. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. The Company may also be subject to certain state, local and franchise taxes. If the Company fails to meet these requirements, it will be subject to U.S. federal income tax, which could have a material adverse impact on its results of operations and amounts available for distributions to its shareholders. Application of tax laws and regulations to various types of transactions is susceptible to varying interpretations. Therefore, amounts reported in the financial statements could be changed at a later date upon final determination by the taxing authorities. No such examinations by taxing authorities are presently in process.

 

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The Company provides for uncertain tax positions based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because assumptions are used in determining whether a tax benefit is more likely than not to be sustained upon examination by tax authorities, actual results may differ from the Company’s estimates under different assumptions or conditions.

Non-GAAP Financial Measures

FFO and Adjusted FFO

The Company presents FFO in accordance with the definition adopted by NAREIT. NAREIT generally defines FFO as net income (determined in accordance with GAAP), excluding gains (losses) from sales of real estate properties, impairment write-downs on real estate properties directly attributable to decreases in the value of depreciable real estate, plus real estate related depreciation and amortization, and adjustments for partnerships and joint ventures to reflect FFO on the same basis. The Company considers FFO to be an appropriate measure of its financial performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than other depreciable assets.

The Company also considers Adjusted FFO to be an additional meaningful financial measure of financial performance as it provides supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. The Company believes Adjusted FFO further assists in comparing the Company’s performance across reporting periods on a consistent basis by excluding such items.

A reconciliation of net (loss) income attributable to common shareholders to FFO and Adjusted FFO for the three months ended March 31, 2023 and 2022 and years ended December 31, 2022 and 2021 is disclosed within “Item 2 Financial Information” above.

Net Asset Value

The Company calculates NAV per share in accordance with the valuation guidelines that have been approved by our Trustee. Our Trustee has adopted valuation procedures, as amended from time to time, that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV. To calculate our NAV for the purpose of establishing a purchase and redemption price for our shares, our Trustee has adopted a model which adjusts the value of certain of our investments in real estate assets from historical cost to fair value. Our Trustee oversees the process of determining our estimated NAV per share, which includes considering estimated values of our commercial real estate assets and investments, including related liabilities, based upon, in certain instances, reports of the discounted cash flows generated by the underlying real estate provided by an independent valuation firm. The Trustee, upon its receipt and review of such valuation report, will determine a reasonable range for our estimated NAV per share and an estimated NAV per share. The independent valuation firm is not responsible for, and does not prepare, our NAV per share. The final determination of our NAV per share is made by our Trustee. The estimated NAV per share will represent approximately the mid-point of the range of values reflecting the effect of using different discount rates and terminal capitalization rates in the sensitivity analysis. Such NAV may be declared prior to the finalization, and ultimate issuance, of our quarterly or annual financial statements which may result in an immaterial variance in the declared NAV per share to the final reconciliation of NAV per share after the review and issuance of such financial statements is completed. If any such variance was ever determined to be material, our Trustee would declare a revised NAV per share for the quarter. Our Trustee has used the mid-point of the independent valuation firm’s real estate value range in setting the NAV per share since our formation.

We will cause our real property portfolio to be valued quarterly by an independent valuation firm, which will apply the fair value methodologies detailed within the Financial Accounting Standards Board ASC Topic

 

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820, Fair Value Measurements and Disclosures. An independent valuation firm will review information provided by our Trustee regarding the properties we own as of the end of the quarter including location, building size, tenancy, lease rates, lease term and various other relevant metrics. The independent valuation firm will also research and analyze market data and valuation benchmarks in connection with each quarterly valuation. The independent valuation firm will principally focus on the income approach with each quarterly valuation and may perform the following actions in connection with its quarterly valuations:

 

   

Hold interviews with the employees of our Trustee regarding historical valuation methodology, expertise of the portfolio, and industry expertise;

 

   

independently research comparable portfolio transactions and individual property transactions;

 

   

review third party market reports; and

 

   

Perform a discounted cash flow (“DCF”) approach on our portfolio.

In performing each quarterly valuation, our Trustee will provide the independent valuation firm with certain data, including but not limited to the following:

 

   

Real property listing: a master list of all leased properties including all relevant details of each such property including location, lease terms, and other relevant factors.

 

   

Leases and lease amendments: the lease files provide data such as property type, address, lease terms and rent details for the leased real property.

 

   

Estoppels and move-in notices: the documents utilized to verify commencement of leases for build-to-suit properties.

 

   

Property surveys: the documents that verify the size of each leased premise.

The Company’s total NAV presented in the following tables includes the NAV of our Class A, I and S Common Shares, as well as the OP Units as of March 31, 2023 and December 31, 2022. NAV per share/unit is identical for Class A, I and S Common Shares and OP Units. The Trustee previously declared a $28.50 NAV per share/unit for our Common Shares and OP Units as of December 31, 2022, which was $0.02 lower than the reconciled results utilizing the midpoint of the independent valuation of real estate. The following table provides a breakdown of the major components of the Company’s NAV as of March 31, 2023 and December 31, 2022:

 

Components

   March 31, 2023      December 31, 2022  

Investments in real estate

   $ 1,126,350,000      $ 1,140,500,000  

RSLCA notes receivable from affiliates

     37,435,000        26,723,000  

Notes receivable from affiliates

     6,010,000        6,007,000  

Cash and cash equivalents

     8,717,000        22,439,000  

Restricted cash

     12,849,000        14,206,000  

Receivables

     6,307,000        5,821,000  

Other assets

     912,000        1,378,000  

Mortgage loan payable

     (556,015,000      (497,067,000

Revolving credit facilities

     —          (73,311,000

Pending trade deposits

     (3,375,000      (6,446,000

Accounts payable, accrued expenses and other liabilities

     (9,313,000      (9,207,000

Distributions payable

     (3,271,000      (3,189,000

Due (to)/from affiliates, net

     (205,000      54,000  
  

 

 

    

 

 

 

NAV

   $ 626,401,000      $ 627,908,000  
  

 

 

    

 

 

 

Class A Common Shares

     9,650,642        9,268,108  

Class I Common Shares

     5,377,103        5,193,941  

 

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Components

   March 31, 2023      December 31, 2022  

Class S Common Shares

     —          —    

OP Units

     7,554,945        7,554,622  
  

 

 

    

 

 

 

Total outstanding Common Shares/OP Units

     22,582,690        22,016,671  
  

 

 

    

 

 

 

NAV per share/unit

   $ 27.74      $ 28.52  
  

 

 

    

 

 

 

The following table reconciles shareholders’ equity per the Company’s consolidated balance sheet to the Company’s NAV as of March 31, 2023 and December 31, 2022:

 

Reconciliation of Shareholders’ Equity to NAV

   March 31, 2023      December 31, 2022  

Total shareholders’ equity

   $ 349,534,000      $ 340,843,000  

Noncontrolling interests attributable to operating partnership

     184,456,000        188,231,000  
  

 

 

    

 

 

 

Total equity per GAAP

     533,990,000        529,074,000  

Adjustment:

     

Fair value adjustment of real estate investments

     92,411,000        98,834,000  
  

 

 

    

 

 

 

NAV

   $ 626,401,000      $ 627,908,000  
  

 

 

    

 

 

 

The Company’s investments in real estate are presented under historical cost in our GAAP consolidated financial statements. As such, any increases or decreases in the fair market value of the Company’s investments in real estate are not recorded in the Company’s GAAP results other than in the event of an impairment or upon a sale. The Company’s mortgage loans payable and revolving credit facilities are valued at GAAP carrying value in the Company’s NAV calculation for any financings that are anticipated to be held to maturity. In addition, because the Company plans to utilize interest rate hedges to stabilize interest payments (i.e. to fix all-in interest rates through interest rate swaps or to limit interest rate exposure through interest rate caps) on individual loans and intends to hold each interest rate hedge until maturity, each interest rate hedge will be valued at par and thus its market value in accordance with GAAP will be excluded from the calculation of NAV. The Company entered into an interest rate swap agreement concurrent with the closing of the $26.9 million mortgage entered into in February 2023. $0.9 million is included in accounts payable, accrued expenses and other liabilities relating to the fair value of this interest rate swap agreement at March 31, 2023. The Company had no interest rate swap agreements as of December 31, 2022.

While the Company believes that the independent valuation firm’s assumptions and inputs are reasonable, a change in these assumptions and inputs may significantly impact the fair value of the real estate properties and the Company’s estimated NAV per share. For purposes of determining the Company’s NAV, the Company’s investments in real estate as of (1) March 31, 2023 are recorded at fair value using a weighted average discount rate of 6.45% with a range of 6.35% to 6.55% and weighted average exit capitalization rate of 5.70% with a range of 5.60% to 5.80% and (2) December 31, 2022 are recorded at fair value using a weighted average discount rate of 6.35% with a range of 6.25% to 6.45% and weighted average exit capitalization rate of 5.65% with a range of 5.55% to 5.75%. Assuming all other factors remain unchanged, the tables below present the estimated increase or decrease to the Company’s March 31, 2023 and December 31, 2022 NAV for the changes in the weighted average discount and exit capitalization rate.

 

March 31, 2023

 

Input

   Hypothetical change     

NAV per share/unit

 

Discount rate (weighted average)

     25 bps decrease      $           29.06  

Discount rate (weighted average)

     25 bps increase      $ 26.49  

Exit capitalization rate (weighted average)

     25 bps decrease      $ 28.66