Brookfield Real Estate Income Trust Inc.
11/15/2024 | Press release | Distributed by Public on 11/15/2024 16:17
Supplemental Prospectus - Form 424B3
PRO SUPP 11-15-24
`
Investing and Financing Activity:
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-255557
BROOKFIELD REAL ESTATE INCOME TRUST INC.
SUPPLEMENT NO. 10 DATED NOVEMBER 15, 2024
TO THE PROSPECTUS DATED APRIL 10, 2024
This prospectus supplement ("Supplement") is part of and should be read in conjunction with the prospectus of Brookfield Real Estate Income Trust Inc., dated April 10, 2024 (as supplemented to date, the "Prospectus"). Unless otherwise defined herein, capitalized terms used in this Supplement shall have the same meanings as in the Prospectus. References herein to the "Company," "we," "us," or "our" refer to Brookfield Real Estate Income Trust Inc. and its subsidiaries unless the context specifically requires otherwise.
The purposes of this Supplement are as follows:
•to provide updates on our investment portfolio;
•to disclose the transaction price for each class of our common stock sold in this public offering (the "Offering") as of December 1, 2024;
•to disclose the calculation of our October 31, 2024 net asset value ("NAV") per share for all share classes;
•to provide an update on the status of our Offering;
•to provide an update on our Affiliate Line of Credit;
•to disclose a recent transaction with the Brookfield Investor;
•to disclose certain other updates to our Prospectus; and
•to provide our Quarterly Report on Form 10-Q for the quarter ended September 30, 2024.
Investment Portfolio Updates
As of October 31, 2024, our portfolio, based on the NAV of our investments, consisted of 90% real estate properties and 10% real estate-related loans and securities. NAV is measured as the fair value of our investments less any mortgages or debt obligations related to such investments.
As of October 31, 2024, our real estate properties, based on the total asset value of our properties measured at fair value, consisted of rental housing (69%), net lease (24%), logistics (5%) and office (2%).
1
December 1, 2024 Transaction Price
The transaction price for each share class of our common stock for subscriptions accepted as of December 1, 2024 (and repurchases as of November 30, 2024) is as follows:
|
Transaction Price (per share) |
||
| Class S | $ | 10.9331 |
| Class I | $ | 11.0385 |
| Class D | $ | 11.1365 |
| Class T | $ | 11.0385 |
The December 1, 2024 transaction price for each of our share classes is equal to such class's NAV per share as of October 31, 2024. A detailed calculation of the NAV per share is set forth below. The purchase price of our common stock for each share class equals the transaction price of such class, plus applicable upfront selling commissions and dealer manager fees. The repurchase price for each share class equals the transaction price of such class. The transaction price per Class T share is equal to our Class I transaction price since no Class T shares are outstanding.
October 31, 2024 NAV Per Share
NAV per share is calculated in accordance with the valuation guidelines that have been approved by our board of directors. Our NAV per share, which is updated as of the last calendar day of each month, is posted on our website at www.BrookfieldREIT.com and is made available on our toll-free, automated telephone line at (833) 625-7348. Please refer to "Net Asset Value Calculation and Valuation Guidelines" in the Prospectus for important information about how our NAV is determined. We have included a breakdown of the components of total NAV and NAV per share for October 31, 2024 along with the immediately preceding month.
Our total NAV presented in the following tables includes the NAV of our Class S, Class I, Class D, Class T, Class C and Class E shares of common stock, as well as partnership interests in the Operating Partnership held by parties other than the Company. The following table provides a breakdown of the major components of our total NAV as of October 31, 2024 ($ and shares/units in thousands):
| Components of NAV | October 31, 2024 | |
| Investments in real estate | $ | 1,804,980 |
| Investments in real estate-related loans and securities | 81,673 | |
| Investments in unconsolidated entities | 83,177 | |
| Cash and cash equivalents | 19,226 | |
| Restricted cash | 9,745 | |
| Other assets | 19,055 | |
| Debt obligations | (1,070,355) | |
|
Accrued stockholder servicing fees(1)
|
(231) | |
| Management fee payable | (890) | |
| Dividend payable | (4,725) | |
| Subscriptions received in advance | (976) | |
| Other liabilities | (40,040) | |
| Non-controlling interests in joint ventures | (12,150) | |
| Net asset value | $ | 888,489 |
| Number of shares/units outstanding | 80,977 |
2
| (1) |
Stockholder servicing fees only apply to Class S, Class T and Class D shares. For purposes of NAV, we recognize the stockholder servicing fee as a reduction of NAV on a monthly basis as such fee is paid. Under GAAP, we accrue the full cost of the stockholder servicing fee as an offering cost at the time we sell Class S, Class T and Class D shares of our common stock. As of October 31, 2024, we had accrued under GAAP approximately $18.2 million of stockholder servicing fees payable to the Dealer Manager related to the Class S and Class D shares sold (as of October 31, 2024, we had not sold any Class T shares).
|
The following table provides a breakdown of our total NAV and NAV per share/unit by class as of October 31, 2024 ($ and shares/units in thousands, except per share/unit data):
|
Class S Shares |
Class I
Shares
|
Class D Shares |
Class T
Shares
|
Class C
Shares(1)
|
Class E Shares(1)
|
Third-party Operating Partnership Units(2)
|
Total | |||||||||
| Net asset value | $ | 306,852 | $ | 449,687 | $ | 1,414 | $ | - | $ | 91,175 | $ | 38,430 | $ | 931 | $ | 888,489 |
| Number of shares/units outstanding | 28,066 | 40,738 | 127 | - | 8,476 | 3,485 | 85 | 80,977 | ||||||||
|
NAV per share/unit as of October 31, 2024
|
$ | 10.9331 | $ | 11.0385 | $ | 11.1365 | $ | - | $ | 10.7570 | $ | 11.0273 | $ | 11.0273 |
| (1) | Class C and Class E shares of our common stock are not sold in this Offering. |
| (2) | Includes the units of the Operating Partnership held by parties other than the Company. |
As of October 31, 2024, we had not sold any Class T shares.
Set forth below are the weighted averages of the key assumptions in the discounted cash flow methodology used in the October 31, 2024 valuations, based on property types.
|
Property Type
|
Discount Rate
|
Exit Capitalization Rate
|
| Rental Housing | 7.2% | 5.8% |
| Net Lease | 6.9% | 5.9% |
| Logistics | 7.1% | 6.0% |
| Office | 8.3% | 7.5% |
A change in these assumptions would impact the calculation of the value of our property investments. For example, assuming all other factors remained unchanged, the changes listed below would result in the following effects on our investment values:
| Input |
Hypothetical Change |
Rental Housing Investment Values |
Net Lease Investment Values |
Logistics Investment Values |
Office Investment Values |
| Discount Rate | 0.25% Decrease | 1.7% | 2.2% | 2.0% | 1.9% |
| (weighted average) | 0.25% Increase | (1.7)% | (2.1)% | (2.0)% | (1.9)% |
| Exit Capitalization Rate | 0.25% Decrease | 2.8% | 2.8% | 2.7% | 1.9% |
| (weighted average) | 0.25% Increase | (2.6)% | (2.6)% | (2.5)% | (2.2)% |
The preceding tables do not include recently acquired properties, which are held at cost in accordance with our valuation guidelines.
3
The following table provides a breakdown of the major components of our total NAV as of September 30, 2024 ($ and shares/units in thousands):
| Components of NAV |
September 30, 2024
|
|
| Investments in real estate | $ | 1,804,920 |
| Investments in real estate-related loans and securities | 88,976 | |
| Investments in unconsolidated entities | 86,145 | |
| Cash and cash equivalents | 28,811 | |
| Restricted cash | 10,286 | |
| Other assets | 14,231 | |
| Debt obligations | (1,072,559) | |
|
Accrued stockholder servicing fees(1)
|
(225) | |
| Management fee payable | (899) | |
| Dividend payable | (4,762) | |
| Subscriptions received in advance | (2,713) | |
| Other liabilities | (43,058) | |
| Non-controlling interests in joint ventures | (12,406) | |
| Net asset value | $ | 896,747 |
| Number of shares/units outstanding | 81,415 |
| (1) |
Stockholder servicing fees only apply to Class S, Class T and Class D shares. For purposes of NAV, we recognize the stockholder servicing fee as a reduction of NAV on a monthly basis as such fee is paid. Under GAAP, we accrue the full cost of the stockholder servicing fee as an offering cost at the time we sell Class S, Class T and Class D shares of our common stock. As of September 30, 2024, we had accrued under GAAP approximately $18.6 million of stockholder servicing fees payable to the Dealer Manager related to the Class S and Class D shares sold (as of September 30, 2024, we had not sold any Class T shares).
|
The following table provides a breakdown of our total NAV and NAV per share/unit by class as of September 30, 2024 ($ and shares/units in thousands, except per share/unit data):
|
Class S Shares |
Class I
Shares
|
Class D Shares |
Class T Shares |
Class C
Shares(1)
|
Class E Shares(1)
|
Third-party Operating Partnership Units(2)
|
Total | |||||||||
| Net asset value | $ | 309,775 | $ | 454,512 | $ | 1,645 | $ | - | $ | 91,532 | $ | 38,354 | $ | 929 | $ | 896,747 |
| Number of shares/units outstanding | 28,225 | 41,018 | 147 | - | 8,476 | 3,465 | 84 | 81,415 | ||||||||
|
NAV Per Share/Unit as of September 30, 2024
|
$ | 10.9753 | $ | 11.0809 | $ | 11.1828 | $ | - | $ | 10.7991 | $ | 11.0677 | $ | 11.0677 |
| (1) | Class C and Class E shares of our common stock are not sold in this Offering. |
| (2) | Includes the units of the Operating Partnership held by parties other than the Company. |
As of September 30, 2024, we had not sold any Class T shares.
4
Status of Our Offering
We are currently offering on a continuous basis up to $7.5 billion in shares of common stock, consisting of up to $6.0 billion in shares in our primary offering and up to $1.5 billion in shares pursuant to our distribution reinvestment plan. As of the date hereof, we have issued and sold in this Offering (i) 33,595,756 shares of our common stock (consisting of 22,198,858 Class S shares, 11,222,995 Class I shares and 173,903 Class D shares; no Class T shares have been issued or sold) in our primary offering for total proceeds of $437,455,575 and (ii) 2,983,438 shares of our common stock (consisting of 2,584,577 Class S shares, 397,855 Class I shares and 1,006 Class D shares; no Class T shares had been issued or sold) pursuant to our distribution reinvestment plan for a total value of $37,307,004. We intend to continue selling shares in the Offering on a monthly basis.
Extension of Affiliate Line of Credit
Effective November 1, 2024, we entered into an amendment to our Affiliate Line of Credit to extend the maturity date to November 2, 2025.
The following disclosure supersedes and replaces the section of the Prospectus titled "Selected Information Regarding Our Operations-Our Indebtedness-Affiliate Line of Credit" and all other similar disclosure:
Affiliate Line of Credit
In November 2021, we entered into the Affiliate Line of Credit, providing for a discretionary, unsecured, uncommitted credit facility in a maximum aggregate principal amount of $125.0 million. The Affiliate Line of Credit had an initial maturity date of November 2, 2022, with one-year extension options subject to the lender's approval. Effective November 1, 2024, the maturity date of the Affiliate Line of Credit was extended to November 2, 2025. Borrowings under the Affiliate Line of Credit bear interest at a rate of the lowest then-current interest rate for any similar credit product offered by a third-party lender to us or our subsidiaries or, if not available, SOFR plus a 0.10% credit adjustment and a 2.25% margin. As of December 31, 2023 and September 30, 2024, there were no outstanding borrowings and $26.5 million of outstanding borrowings, respectively, on the Affiliate Line of Credit.
Brookfield Investor Transaction
On November 8, 2024, we entered into a Repurchase and Distribution Agreement by and among us, the general partner of the Operating Partnership, the Operating Partnership and an affiliate of Brookfield (a "Brookfield Investor"), pursuant to which we repurchased, at the then-current transaction price, 25,123,346.212 Class I shares and 2,173,519.737 Class E shares held by the Brookfield Investor in exchange for an in-kind distribution to the Brookfield Investor of 25,123,346.212 Class I units and 2,173,519.737 Class E units of the Operating Partnership. The Class I units and Class E units distributed to the Brookfield Investor are subject to the following repurchase limitations: (i) the Class I units and Class E units distributed to the Brookfield Investor in exchange for Class I shares and Class E shares issued in connection with the Brookfield Portfolio are subject to the Brookfield Repurchase Arrangement; (ii) the Class I units distributed to the Brookfield Investor in exchange for Class I shares issued as compensation for the performance participation allocation are not subject to the Brookfield Repurchase Arrangement, any early repurchase deduction, the limitations of our share repurchase plan or any other restrictions on transfer or redemption; and (iii) the Class I units and Class E units distributed to the Brookfield Investor in exchange for Class I shares and Class E shares issued in connection with the Subscription Agreement and our distribution reinvestment plan are not subject to the Brookfield Repurchase Arrangement but are subject to the terms of our share repurchase plan and the early repurchase deduction.
Prospectus Updates
The Pennsylvania suitability standard set forth in the "Suitability Standards" section of the Prospectus is replaced with the following:
Pennsylvania Investors. Purchasers residing in Pennsylvania may not invest more than 10% of their net worth in us.
Quarterly Report on Form 10-Q
5
On November 14, 2024, we filed our Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 with the SEC, a copy of which (without exhibits) is attached to this Supplement as Appendix A.
6
APPENDIX A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 000-56428
Brookfield Real Estate Income Trust Inc.
(Exact name of registrant as specified in its charter)
| Maryland | 82-2365593 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
250 Vesey Street, 15th Floor
New York, NY 10281
(Address of principal executive offices) (Zip Code)
(212) 417-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | X | Smaller reporting company | ☐ | |
| Emerging growth company | X |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X
As of October 31, 2024, the registrant had the following shares outstanding: 40,738,188 Class I shares, par value $0.01 per share, 28,066,343 Class S shares, par value $0.01 per share, 127,013 Class D shares, par value $0.01 per share, 8,475,900 Class C shares, no par value per share, and 3,485,034 Class E shares, no par value per share.
TABLE OF CONTENTS
|
PART I.
|
FINANCIAL INFORMATION
|
1
|
|
ITEM 1.
|
FINANCIAL STATEMENTS (Unaudited)
|
1
|
|
Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023
|
1
|
|
|
Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023
|
3
|
|
|
Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2024 and 2023
|
4
|
|
|
Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023
|
6
|
|
|
Notes to Consolidated Financial Statements
|
8
|
|
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
36
|
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
53
|
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
53
|
|
PART II.
|
OTHER INFORMATION
|
54
|
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
54
|
|
ITEM 1A.
|
RISK FACTORS
|
54
|
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
55
|
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
57
|
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
57
|
|
ITEM 5.
|
OTHER INFORMATION
|
57
|
|
ITEM 6.
|
EXHIBITS
|
58
|
|
SIGNATURES
|
59
|
WEBSITE DISCLOSURE
Investors and others should note that we use our website, www.BrookfieldREIT.com, to announce material information to investors and the marketplace. While not all of the information that we post on our website is of a material nature, some information could be deemed to be material. Accordingly, we encourage investors, the media, and others interested in us to review the information that we share on our website. Information contained on, or available through, our website is not incorporated by reference into this document.
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Brookfield Real Estate Income Trust Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands, except per share data)
| September 30, 2024 | December 31, 2023 | |||
| Assets | ||||
| Investments in real estate, net | $ | 1,601,651 | $ | 1,525,156 |
| Investments in real estate-related loans and securities, net | 88,910 | 240,108 | ||
| Investments in unconsolidated entities | 86,145 | 78,569 | ||
| Intangible assets, net | 35,948 | 41,459 | ||
| Cash and cash equivalents | 28,811 | 24,272 | ||
| Restricted cash | 10,286 | 16,429 | ||
| Accounts and other receivables, net | 11,197 | 10,794 | ||
| Other assets | 4,953 | 53,120 | ||
| Total Assets | $ | 1,867,901 | $ | 1,989,907 |
| Liabilities and Equity | ||||
| Mortgage loans, secured term loan and secured credit facility, net | $ | 1,060,615 | $ | 1,058,343 |
| Unsecured revolving credit facility | 26,500 | - | ||
| Due to affiliates | 32,381 | 43,971 | ||
| Intangible liabilities, net | 25,119 | 26,127 | ||
| Accounts payable, accrued expenses and other liabilities | 41,809 | 39,224 | ||
| Subscriptions received in advance | 2,713 | 3,003 | ||
| Total Liabilities | 1,189,137 | 1,170,668 | ||
| Commitments and contingencies | - | - | ||
| Redeemable non-controlling interests attributable to OP unitholders | 930 | 933 | ||
| Stockholders' Equity | ||||
|
Preferred stock, $0.01 par value per share, 50,000 shares authorized; no shares issued nor outstanding at September 30, 2024 and December 31, 2023, respectively
|
- | - | ||
|
Common stock - Class S shares, $0.01 par value per share, 225,000 shares authorized; 28,225 and 34,244 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively
|
282 | 342 | ||
|
Common stock - Class I shares, $0.01 par value per share, 250,000 shares authorized; 41,018 and 41,504 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively
|
410 | 415 | ||
|
Common stock - Class T shares, $0.01 par value per share, 225,000 shares authorized; no shares issued nor outstanding as of September 30, 2024 and December 31, 2023.
|
- | - | ||
|
Common stock - Class D shares, $0.01 par value per share, 100,000 shares authorized; 147 and 148 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively.
|
1 | 1 | ||
|
Common stock - Class C shares, no par value per share, 100,000 shares authorized; 8,476 and 9,347 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively
|
74 | 83 | ||
|
Common stock - Class E shares, no par value per share, 100,000 shares authorized; 3,465 and 3,353 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively
|
- | - | ||
| Additional paid-in capital | 950,684 | 1,028,028 | ||
| Accumulated deficit | (278,640) | (213,960) | ||
| Total Stockholders' Equity | 672,811 | 814,909 | ||
| Non-controlling interests attributable to third party joint ventures | 4,398 | 3,022 | ||
| Non-controlling interests attributable to preferred stockholders | 625 | 375 | ||
| Total Equity | 677,834 | 818,306 | ||
| Total Liabilities and Stockholders' Equity | $ | 1,867,901 | $ | 1,989,907 |
See accompanying notes to consolidated financial statements.
1
Table of Contents
The following table presents the assets and liabilities of investments consolidated as variable interest entities for which the Company is determined to be the primary beneficiary ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||
| Assets | ||||
| Investments in real estate, net | $ | 252,330 | $ | 199,136 |
| Intangible assets, net | 1,982 | 5,398 | ||
| Cash and cash equivalents | 3,352 | 1,374 | ||
| Restricted cash | 4,578 | 10,761 | ||
| Accounts and other receivables, net | 4,415 | 2,274 | ||
| Other assets | 1,296 | 2,651 | ||
| Total Assets | $ | 267,953 | $ | 221,594 |
| Liabilities | ||||
| Mortgage loans, net | $ | 180,593 | $ | 178,458 |
| Due to affiliates | 54 | - | ||
| Intangible liabilities, net | 13 | 18 | ||
| Accounts payable, accrued expenses and other liabilities | 6,732 | 6,362 | ||
| Total Liabilities | $ | 187,392 | $ | 184,838 |
See accompanying notes to consolidated financial statements.
2
Table of Contents
Brookfield Real Estate Income Trust Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Revenues | ||||||||
| Rental revenues | $ | 33,715 | $ | 32,076 | $ | 96,765 | $ | 96,051 |
| Other revenues | 5,676 | 3,248 | 11,366 | 9,453 | ||||
| Total revenues | 39,391 | 35,324 | 108,131 | 105,504 | ||||
| Expenses | ||||||||
| Rental property operating | 13,571 | 13,329 | 39,206 | 39,937 | ||||
| General and administrative | 2,295 | 1,855 | 6,078 | 6,400 | ||||
| Management fee | 2,715 | 3,397 | 8,544 | 10,655 | ||||
| Impairment of investments in real estate | 33,922 | - | 33,922 | - | ||||
| Depreciation and amortization | 16,209 | 12,999 | 43,307 | 38,568 | ||||
| Total expenses | 68,712 | 31,580 | 131,057 | 95,560 | ||||
| Other income (expense) | ||||||||
| Income from real estate-related loans and securities | 4,453 | 2,512 | 14,822 | 13,356 | ||||
| Interest expense | (18,957) | (15,061) | (52,284) | (43,491) | ||||
| Gain on extinguishment of debt | 32,251 | - | 32,251 | - | ||||
| Gain (loss) from unconsolidated entities | 1,554 | 1,089 | 5,278 | (1,316) | ||||
| Other income (expense), net | (476) | 3,605 | 1,707 | 8,854 | ||||
| Total other income (expense) | 18,825 | (7,855) | 1,774 | (22,597) | ||||
| Net loss | $ | (10,496) | $ | (4,111) | $ | (21,152) | $ | (12,653) |
| Net loss attributable to non-controlling interests in third party joint ventures | $ | 289 | $ | 192 | $ | 722 | $ | 235 |
| Net income attributable to non-controlling interests - preferred stockholders | (3) | - | (69) | (45) | ||||
| Net loss attributable to redeemable non-controlling interests | 10 | 4 | 20 | 10 | ||||
| Net loss attributable to stockholders | $ | (10,200) | $ | (3,915) | $ | (20,479) | $ | (12,453) |
| Per common share data: | ||||||||
| Net loss per share of common stock - basic and diluted | $ | (0.12) | $ | (0.04) | $ | (0.24) | $ | (0.13) |
| Weighted average number of shares outstanding - basic and diluted | 83,441 | 92,447 | 85,676 | 93,557 |
See accompanying notes to consolidated financial statements.
3
Table of Contents
Brookfield Real Estate Income Trust Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)
| Three months ended September 30, 2024 | ||||||||||||||||||||||
| Par Value | ||||||||||||||||||||||
|
Common Stock Class I |
Common Stock Class S |
Common Stock Class C |
Common Stock Class E |
Common Stock Class D |
Additional Paid-In Capital |
Accumulated Deficit |
Total Stockholders'
Equity
|
Non-controlling Interests Attributable to Third Party Joint Ventures | Non-controlling Interests Attributable to Preferred Stockholders | Total Equity | ||||||||||||
|
Balance at June 30, 2024
|
$ | 407 | $ | 300 | $ | 74 | $ | - | $ | 2 | $ | 965,258 | $ | (254,028) | $ | 712,013 | $ | 4,637 | $ | 750 | $ | 717,400 |
| Common stock issued | 27 | 1 | - | - | - | 32,546 | - | 32,574 | - | - | 32,574 | |||||||||||
| Stock-based compensation | - | - | - | - | - | 80 | - | 80 | - | - | 80 | |||||||||||
| Distribution reinvestment | 6 | 3 | - | - | - | 8,652 | - | 8,661 | - | - | 8,661 | |||||||||||
| Contributions from non-controlling interests | - | - | - | - | - | - | - | - | 50 | - | 50 | |||||||||||
| Distributions | - | - | - | - | - | - | (14,402) | (14,402) | - | (3) | (14,405) | |||||||||||
| Common stock repurchased | (30) | (22) | - | - | (1) | (57,122) | - | (57,175) | - | (125) | (57,300) | |||||||||||
| Offering costs | - | - | - | - | - | 1,287 | - | 1,287 | - | - | 1,287 | |||||||||||
| Net (loss) income | - | - | - | - | - | - | (10,210) | (10,210) | (289) | 3 | (10,496) | |||||||||||
| Allocation to redeemable non-controlling interests | - | - | - | - | - | (17) | - | (17) | - | - | (17) | |||||||||||
|
Balance at September 30, 2024
|
$ | 410 | $ | 282 | $ | 74 | $ | - | $ | 1 | $ | 950,684 | $ | (278,640) | $ | 672,811 | $ | 4,398 | $ | 625 | $ | 677,834 |
| Three months ended September 30, 2023 | ||||||||||||||||||||||
| Par Value | ||||||||||||||||||||||
|
Common Stock Class I |
Common Stock Class S |
Common Stock Class C |
Common Stock Class E |
Common Stock Class D |
Additional Paid-In Capital |
Accumulated Deficit |
Total Stockholders'
Equity
|
Non-controlling Interests Attributable to Third Party Joint Ventures | Non-controlling Interests Attributable to Preferred Stockholders | Total Equity | ||||||||||||
|
Balance at June 30, 2023
|
$ | 423 | $ | 364 | $ | 94 | $ | - | $ | 1 | $ | 1,069,535 | $ | (142,442) | $ | 927,975 | $ | 4,127 | $ | 375 | $ | 932,477 |
| Common stock issued | 11 | 10 | - | - | - | 27,075 | - | 27,096 | - | - | 27,096 | |||||||||||
| Stock-based compensation | - | - | - | - | - | 65 | - | 65 | - | - | 65 | |||||||||||
| Distribution reinvestment | 5 | 2 | - | - | - | 9,103 | - | 9,110 | - | - | 9,110 | |||||||||||
| Contributions from non-controlling interests | - | - | - | - | - | - | - | - | 47 | - | 47 | |||||||||||
| Distributions | - | - | - | - | - | - | (15,777) | (15,777) | - | - | (15,777) | |||||||||||
| Common stock repurchased | (22) | (21) | (10) | - | - | (59,364) | - | (59,417) | - | - | (59,417) | |||||||||||
| Offering costs | - | - | - | - | - | 385 | - | 385 | - | - | 385 | |||||||||||
| Net loss | - | - | - | - | - | - | (3,919) | (3,919) | (192) | - | (4,111) | |||||||||||
| Allocation to redeemable non-controlling interests | - | - | - | - | - | (5) | - | (5) | - | - | (5) | |||||||||||
|
Balance at September 30, 2023
|
$ | 417 | $ | 355 | $ | 84 | $ | - | $ | 1 | $ | 1,046,794 | $ | (162,138) | $ | 885,513 | $ | 3,982 | $ | 375 | $ | 889,870 |
See accompanying notes to financial statements
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|
Nine Months Ended September 30, 2024
|
||||||||||||||||||||||
| Par Value | ||||||||||||||||||||||
|
Common Stock Class I |
Common Stock Class S |
Common Stock Class C |
Common Stock Class E |
Common Stock Class D |
Additional Paid-In Capital |
Accumulated Deficit |
Total Stockholders'
Equity
|
Non-controlling Interests Attributable to Third Party Joint Ventures | Non-controlling Interests Attributable to Preferred Stockholders | Total Equity | ||||||||||||
|
Balance at December 31, 2023
|
$ | 415 | $ | 342 | $ | 83 | $ | - | $ | 1 | $ | 1,028,028 | $ | (213,960) | $ | 814,909 | $ | 3,022 | $ | 375 | $ | 818,306 |
| Common stock issued | 46 | 6 | - | - | 1 | 60,260 | - | 60,313 | - | - | 60,313 | |||||||||||
| Preferred equity issued | - | - | - | - | - | - | - | - | - | 375 | 375 | |||||||||||
| Stock-based compensation | - | - | - | - | - | 219 | - | 219 | - | - | 219 | |||||||||||
| Distribution reinvestment | 15 | 7 | - | - | - | 26,267 | - | 26,289 | - | - | 26,289 | |||||||||||
| Contributions from non-controlling interests | - | - | - | - | - | - | - | - | 2,098 | - | 2,098 | |||||||||||
| Distributions | - | - | - | - | - | - | (44,181) | (44,181) | - | (69) | (44,250) | |||||||||||
| Common stock repurchased | (66) | (73) | (9) | - | (1) | (168,049) | - | (168,198) | - | (125) | (168,323) | |||||||||||
| Offering costs | - | - | - | - | - | 3,976 | - | 3,976 | - | - | 3,976 | |||||||||||
| Net loss (income) | - | - | - | - | - | - | (20,499) | (20,499) | (722) | 69 | (21,152) | |||||||||||
| Allocation to redeemable non-controlling interests | - | - | - | - | - | (17) | - | (17) | - | - | (17) | |||||||||||
|
Balance at September 30, 2024
|
$ | 410 | $ | 282 | $ | 74 | $ | - | $ | 1 | $ | 950,684 | $ | (278,640) | $ | 672,811 | $ | 4,398 | $ | 625 | $ | 677,834 |
|
Nine Months Ended September 30, 2023
|
||||||||||||||||||||||
| Par Value | ||||||||||||||||||||||
|
Common Stock Class I |
Common Stock Class S |
Common Stock Class C |
Common Stock Class E |
Common Stock Class D |
Additional Paid-In Capital |
Accumulated Deficit |
Total Stockholders'
Equity
|
Non-controlling Interests Attributable to Third Party Joint Ventures | Non-controlling Interests Attributable to Preferred Stockholders | Total Equity | ||||||||||||
|
Balance at December 31, 2022
|
$ | 424 | $ | 367 | $ | 94 | $ | - | $ | - | $ | 1,063,079 | $ | (100,750) | $ | 963,214 | $ | 4,071 | $ | 375 | $ | 967,660 |
| Common stock issued | 50 | 33 | - | - | 1 | 121,398 | - | 121,482 | - | - | 121,482 | |||||||||||
| Stock-based compensation | - | - | - | - | - | 242 | - | 242 | - | - | 242 | |||||||||||
| Distribution reinvestment | 13 | 7 | - | - | - | 28,672 | - | 28,692 | - | - | 28,692 | |||||||||||
| Contributions from non-controlling interests | - | - | - | - | - | - | - | - | 152 | - | 152 | |||||||||||
| Distributions | - | - | - | - | - | - | (48,925) | (48,925) | (6) | (45) | (48,976) | |||||||||||
| Common stock repurchased | (70) | (52) | (10) | - | - | (166,008) | - | (166,140) | - | - | (166,140) | |||||||||||
| Offering costs | - | - | - | - | - | (605) | - | (605) | - | - | (605) | |||||||||||
| Net (loss) income | - | - | - | - | - | - | (12,463) | (12,463) | (235) | 45 | (12,653) | |||||||||||
| Allocation to redeemable non-controlling interests | - | - | - | - | - | 16 | - | 16 | - | - | 16 | |||||||||||
|
Balance at September 30, 2023
|
$ | 417 | $ | 355 | $ | 84 | $ | - | $ | 1 | $ | 1,046,794 | $ | (162,138) | $ | 885,513 | $ | 3,982 | $ | 375 | $ | 889,870 |
See accompanying notes to financial statements.
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Brookfield Real Estate Income Trust Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Nine Months Ended September 30, | ||||
| 2024 | 2023 | |||
| Cash flows from operating activities: | ||||
| Net loss | $ | (21,152) | $ | (12,653) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||
| Depreciation and amortization | 43,307 | 38,568 | ||
| Impairment of investments in real estate | 33,922 | - | ||
| Management fees | 8,544 | 10,655 | ||
| Gain on extinguishment of debt | (32,251) | - | ||
| Amortization of above and below market leases and lease inducements | (583) | (768) | ||
| Amortization of restricted stock grants | 242 | 242 | ||
| Amortization of deferred financing costs | 2,642 | 2,401 | ||
| Amortization of upfront derivative acquisition costs | 1,431 | 1,428 | ||
| Provision for current expected credit losses | (134) | 1,765 | ||
| Amortization of origination fees and discount | - | (70) | ||
| Paid-in-kind interest | (653) | - | ||
| Realized gain on sale of derivatives | (2,839) | - | ||
| Realized gain on investments in real estate-related loans and securities | (7,384) | (1,246) | ||
| Unrealized (gain) on investments | (4) | (6,064) | ||
| Distributions of earnings from unconsolidated entities | 1,339 | 3,467 | ||
| Changes in assets and liabilities: | ||||
| Increase in lease inducements and origination costs | (833) | (527) | ||
| Upfront derivative acquisition costs | (369) | (10,119) | ||
| Proceeds from settlement of derivative contracts | 9,574 | - | ||
| Increase in other assets | (1,949) | (744) | ||
| Increase in accounts and other receivables | (2,751) | (2,390) | ||
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | 6,546 | (1,324) | ||
| Increase in due to affiliates | (1,901) | 544 | ||
| Net cash provided by operating activities | 34,744 | 23,165 | ||
| Cash flows from investing activities | ||||
| Acquisitions of real estate | (166,487) | (1,561) | ||
| Purchase of real estate-related loans and securities | (15,871) | (51,493) | ||
| Proceeds from sale of real estate-related loans and securities | 162,400 | 87,645 | ||
| Proceeds from principal repayments of real estate-related loans and securities | 8,926 | 13,471 | ||
| Proceeds from disposition of real estate | 25,468 | - | ||
| Capital improvements to real estate | (3,838) | (6,819) | ||
| Purchase of trading securities | (182,734) | (181,664) | ||
| Proceeds from sale of trading securities | 223,253 | 175,816 | ||
| Net cash provided by investing activities | 51,117 | 35,395 | ||
| Cash flows from financing activities: | ||||
| Borrowings from mortgage loans and secured credit facility | 157,500 | 911 | ||
| Repayment of mortgage loans | (125,413) | - | ||
| Borrowings from affiliate line of credit | 93,500 | - | ||
| Repayment of affiliate line of credit | (67,000) | - | ||
| Payment of deferred financing costs | (2,165) | (35) | ||
| Proceeds from issuance of common stock | 48,596 | 95,976 | ||
| Proceeds from issuance of preferred equity | 375 | - | ||
| Repurchases of common stock | (174,305) | (156,655) | ||
| Subscriptions received in advance | 2,713 | 2,993 | ||
| Payment of organizational and offering costs | (4,881) | (5,575) | ||
| Distributions to non-controlling interests | (125) | (6) | ||
| Contributions from non-controlling interests | 2,098 | 152 | ||
| Distributions | (18,289) | (20,292) | ||
| Distributions to non-controlling interests attributable to preferred stockholders | (69) | (45) | ||
| Net cash used in financing activities | (87,465) | (82,576) | ||
| Net change in cash and cash-equivalents and restricted cash | (1,604) | (24,016) | ||
| Cash and cash-equivalents and restricted cash, beginning of period | 40,701 | 79,999 | ||
| Cash and cash-equivalents and restricted cash, end of period | $ | 39,097 | $ | 55,983 |
See accompanying notes to financial statements.
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| Reconciliation of cash and cash equivalents and restricted cash to the consolidated balance sheets: | ||||
| Nine Months Ended September 30, | ||||
| 2024 | 2023 | |||
| Cash and cash equivalents | $ | 28,811 | $ | 41,111 |
| Restricted cash | 10,286 | 14,872 | ||
| Total cash and cash equivalents and restricted cash | $ | 39,097 | $ | 55,983 |
| Supplemental disclosures: | ||||
| Interest paid | $ | 48,396 | $ | 39,003 |
| Non-cash investing and financing activities: | ||||
| Accrued distributions | $ | (376) | $ | (6) |
| Accrued stockholder servicing fee due to affiliate | $ | (4,486) | $ | 15 |
| Accrued offering costs | $ | (45) | $ | 453 |
| Accrued capital improvements | $ | 141 | $ | (487) |
| Accrued repurchases of common stock in accounts payable | $ | (5,564) | $ | 6,007 |
| Accrued repurchases of common stock in due to affiliates | $ | (544) | $ | 3,478 |
| Decrease in assets and liabilities in connection with disposition of real estate | ||||
| Investments in real estate, net | $ | 33,922 | $ | - |
| Mortgage loans | $ | 32,251 | $ | - |
See accompanying notes to financial statements.
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Brookfield Real Estate Income Trust Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Business Purpose
Brookfield Real Estate Income Trust Inc. (the "Company") was formed on July 27, 2017 as a Maryland corporation and has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), for U.S. federal income tax purposes commencing with the taxable year ended December 31, 2019. The Company invests primarily in well-located, high-quality real estate properties that generate strong current cash flow and could further appreciate in value through proactive, best-in-class asset management. To a lesser extent, the Company invests in real estate-related debt investments, including real estate-related loans and real estate-related securities. Brookfield REIT OP GP LLC, a wholly owned subsidiary of the Company, is the sole general partner of Brookfield REIT Operating Partnership L.P. (the "Operating Partnership"). Substantially all of the Company's business is conducted through the Operating Partnership. The Company and the Operating Partnership are externally managed by Brookfield REIT Adviser LLC (the "Adviser"), an affiliate of Brookfield Asset Management Ltd. (together with its affiliates, "Brookfield"). Prior to November 2, 2021, the Company was externally managed by Oaktree Fund Advisors, LLC (the "Oaktree Adviser" or the "Sub-Adviser"), an affiliate of Oaktree Capital Management, L.P. ("Oaktree"). Brookfield holds a majority stake in Oaktree. The Company and the Adviser have engaged the Sub-Adviser to select and manage certain of the Company's liquid assets.
The Company had previously registered with the Securities and Exchange Commission (the "SEC") its initial public offering of up to $2.0 billion in shares of common stock (the "Initial Public Offering"), which was declared effective on April 30, 2018 and terminated on November 2, 2021. The Company subsequently registered a follow-on offering with the SEC of up to $7.5 billion in shares of common stock, consisting of up to $6.0 billion in shares in its primary offering and up to $1.5 billion in shares pursuant to its distribution reinvestment plan, which was declared effective on November 2, 2021 (the "Current Offering" and with the Initial Public Offering, the "Offering").
Pursuant to the Current Offering, the Company is offering to the public any combination of four classes of shares of its common stock, Class T shares, Class S shares, Class D shares and Class I shares, with a dollar value up to the maximum offering amount. The publicly offered share classes have different upfront selling commissions, dealer manager fees and ongoing stockholder servicing fees. The purchase price per share for each class of common stock varies and generally equals the Company's prior month's net asset value ("NAV") per share, as determined monthly, plus applicable upfront selling commissions and dealer manager fees. The Company intends to continue selling shares on a monthly basis.
In addition to the Current Offering, the Company is conducting private offerings of Class I and Class C shares to feeder vehicles that offer interests in such vehicles to non-U.S. persons. The offer and sale of Class I and Class C shares to the feeder vehicles is exempt from the registration provisions of the Securities Act of 1933, as amended (the "Securities Act") by virtue of Section 4(a)(2) and Regulation S promulgated thereunder. The Company is also offering Class E shares to Brookfield and its affiliates and certain of Brookfield's and Oaktree's employees and the Company's independent directors in one or more private offerings. The offer and sale of Class E shares is exempt from the registration provisions of the Securities Act by virtue of Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.
As of September 30, 2024, the Company owned 19 investments in real estate, two investments in unconsolidated real estate ventures, three investments in real estate-related loans, and 40 investments in real estate-related debt securities. The Company currently operates in five reportable segments: rental housing, net lease, office, logistics, and real estate-related loans and securities. See Note 14 - "Segment Reporting" to the Company's Consolidated Financial Statements for financial results by segment.
In October 2024, the Company launched a program (the "DST Program") to raise capital, through its Operating Partnership, through private placement offerings exempt from registration under the Securities Act by selling beneficial interests in specific Delaware statutory trusts ("DSTs") holding real properties (the "DST Properties"). As of September 30, 2024, no proceeds had been raised through the DST Program.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. All significant intercompany balances and transactions have been eliminated in consolidation. Certain comparative figures have been reclassified to conform to the current year presentation. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The accompanying unaudited
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consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC.
The Company consolidates all entities in which it retains a controlling financial interest through majority ownership or voting rights and entities that meet the definition of a variable interest entity ("VIE") for which it is deemed to be the primary beneficiary. The Company is the primary beneficiary of a VIE when it has (i) the power to direct the activities of a VIE that most significantly influence the VIE's economic performance, and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE, or the right to receive benefits from the VIE that potentially could be significant to the VIE. The Operating Partnership is considered a VIE. The Company consolidates the Operating Partnership because it has the ability to direct the most significant activities of the entity as its sole general partner. The Company also consolidates all VIEs for which it is the primary beneficiary. Where the Company does not have the power to direct the activities of the VIE that most significantly impact its economic performance, the Company's interest for those partially owned entities is accounted for using the equity method of accounting. Equity method investments for which the Company has not elected a fair value option ("FVO") are initially recorded at cost and subsequently adjusted for the Company's pro-rata share of net income, contributions, and distributions. When the Company elects the FVO, the Company records its share of net asset value of the entity and any related unrealized gains and losses.
The Operating Partnership and the Company's joint ventures are considered to be VIEs. The Company consolidates these entities, excluding its equity method investments, because it has the ability to direct the most significant activities of the entities such as purchases, dispositions, financings, budgets, and overall operating plans.
For consolidated joint ventures, the non-controlling partner's share of the assets, liabilities, and operations of each joint venture is included in non-controlling interests as equity of the Company. The non-controlling joint venture partner's interest is generally computed as the joint venture partner's ownership percentage. Certain of the joint ventures formed by the Company provide the other partner a profits interest based on certain internal rate of return hurdles being achieved. Any profits interest due to the other partner is reported within non-controlling interest.
Certain amounts in the Company's prior period Consolidated Statements of Operations have been reclassified to conform to the current period presentation. For the three and nine months ended September 30, 2023, $4.0 million and $4.3 million, respectively, of unrealized losses related to changes in the fair value of the Company's investments in real estate-related securities has been reclassified from Unrealized (loss) gain on investments, net to Income from real estate-related loans and securities to conform to the current period presentation. For the three and nine months ended September 30, 2023, $0.5 million and $0.2 million, respectively, of realized gains related to sales of investments in real estate-related loans and securities has been reclassified from Realized gain on real estate investments, net to Income from real estate-related loans and securities to conform with the current period presentation. For the three and nine months ended September 30, 2023, $1.7 million of unrealized gains and $0.8 million of unrealized losses, respectively, related to changes in the fair value of the Company's investments in unconsolidated entities has been reclassified from Unrealized (loss) gain on investments, net to Gain (loss) from unconsolidated entities to conform with the current period presentation. For the three and nine months ended September 30, 2023, $4.2 million and $4.1 million, respectively, of realized losses related the Company's foreign currency swap have been reclassified from Realized gain on financial instruments to Gain (loss) from unconsolidated entities to conform with the current period presentation. For the three and nine months ended September 30, 2023, $3.6 million and $3.6 million, respectively, of unrealized gains related the Company's foreign currency swap have been reclassified from Unrealized (loss) gain on investments, net to Gain (loss) from unconsolidated entities to conform with the current period presentation. For the three and nine months ended September 30, 2023, $3.2 million and $7.5 million, respectively, of unrealized gains related to changes in the fair value of the Company's interest rate derivatives have been reclassified from Unrealized (loss) gain on investments, net to Other income, net to conform with the current period presentation. For the three and nine months ended September 30, 2023, $0.4 million and $1.2 million, respectively, of net realized gains related to trading securities has been reclassified from Realized gain on real estate investments, net and Unrealized (loss) gain on investments, net to Other income, net to conform with the current period presentation. For the three and nine months ended September 30, 2023, $0.1 million and $0.2 million, respectively, of interest income related to operating properties has been reclassified from Income from real estate-related loans and securities to Other income, net to conform with the current period presentation.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities and accrued expenses at the date of the balance sheet. The Company believes the estimates and assumptions underlying the consolidated financial statements are reasonable and supportable based on the information available as of September 30, 2024.
Investments in Real Estate
In accordance with the guidance for business combinations, the Company determines whether the acquisition of a property qualifies as a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the
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property acquired does not constitute a business, the Company accounts for the transaction as an asset acquisition. The guidance for business combinations states that when substantially all of the fair value of the gross assets to be acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the asset or set of assets is not a business.
The Company evaluates each real estate acquisition to determine whether the integrated set of acquired assets and activities meets the definition of a business. Generally, acquisitions of real estate or in-substance real estate are not expected to meet the definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings and related intangible assets) or because 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. All property acquisitions to date have been accounted for as asset acquisitions because substantially all of the fair value was concentrated in the land, buildings and related intangible assets.
The Company capitalizes acquisition-related costs associated with asset acquisitions. Upon acquisition of a property, the Company assesses the fair value of the acquired tangible and intangible assets (including land, buildings, tenant improvements, above- or below-market leases, acquired in-place leases, and other intangible assets and assumed liabilities) and allocates the purchase price to the acquired assets and assumed liabilities. The Company assesses and considers fair value based on estimated cash flow projections that utilize discount and/or capitalization rates that it deems appropriate, as well as other available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions.
The estimated fair value of acquired in-place leases include the costs the Company would have incurred to lease the properties to their occupancy levels at the date of acquisition. Such estimates include the fair value of leasing commissions, legal costs and other direct costs that would be incurred to lease the properties to such occupancy levels. The Company evaluates avoided costs over the time period over which occupancy levels at the date of acquisition would be achieved had the property been acquired vacant. Such evaluation includes an estimate of the net market-based rental revenues and net operating costs (primarily consisting of real estate taxes, insurance and utilities) that would be incurred during the lease-up period. Acquired in-place leases are amortized over the remaining lease terms as a component of depreciation and amortization expense.
For acquired in-place leases, above- and below-market lease values are recorded based on the present value (using an interest rate that reflects the risks associated with the lease acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market value lease rates for the corresponding in-place leases. The values of acquired above- and below-market leases are amortized over the terms of the related leases and recognized as either increases (for below-market leases) or decreases (for above-market leases) to rental revenue. Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to amortization expense and the unamortized portion of the above- or below-market lease value is charged to rental revenue.
Significant improvements to properties are capitalized and depreciated over their estimated useful life. Expenditures for ordinary repairs and maintenance are expensed to operations as incurred.
The cost of buildings and improvements includes the purchase price of the Company's properties and any acquisition-related costs, along with any subsequent improvements to such properties. The Company's investments in real estate are stated at cost and are generally depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
| Description | Depreciable Life |
| Building |
30-40 years
|
| Building and site improvements |
5-21 years
|
| Furniture, fixtures and equipment |
1-9 years
|
| Tenant improvements | Shorter of estimated useful life or lease term |
| In-place lease intangibles | Over lease term |
| Above and below market leases | Over lease term |
| Lease origination costs | Over lease term |
| Present value of tax abatement savings | Over tax abatement period |
When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period.
The Company's management reviews its real estate properties for impairment when there is an event or change in circumstances that indicates an impaired value. In reviewing the portfolio, the Company's management examines the type of asset, the economic situation in the area in which the asset is located, the economic situation in the industry in which the tenant is involved and the timeliness of the payments made by the tenant under its lease, changes in holding period, as well as any current correspondence that may have been had with the tenant, including property inspection reports. For each real estate asset
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for which indicators of impairment are identified, the Company performs a recoverability analysis that compares future undiscounted cash flows expected to result from the Company's use and eventual disposition of the asset to its carrying value. If the undiscounted cash flow analysis yields an amount that is less than the asset's carrying amount, an impairment loss will be recorded equal to the amount by which the carrying value of the asset exceeds its estimated fair value. Since cash flows on real estate properties considered to be "long-lived assets to be held and used" are considered on an undiscounted basis to determine whether an asset has been impaired, the Company's strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If the Company's strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material to the Company's results. During the periods presented, no such impairment occurred.
Assets Held for Sale
The Company classifies the assets and liabilities related to its real estate investments as held for sale when a sale is probable to occur within one year. The Company considers a sale to be probable when a binding contract has been executed, the buyer has posted a non-refundable deposit, and there are limited contingencies to closing. The Company classifies held for sale assets and liabilities at the lower of depreciated cost or fair value less closing costs. There were no properties held for sale as of September 30, 2024 and December 31, 2023.
Investments in Unconsolidated Entities
The Company has elected the FVO for its investment in unconsolidated entities and therefore reports this investment at fair value. As such, the resulting unrealized gains and losses are recorded as a component of Gain (loss) from unconsolidated entities on the Company's Consolidated Statements of Operations. For further details on the Company's investments in unconsolidated entities, see Note 4 - "Investments in Unconsolidated Entities" to the Company's Consolidated Financial Statements.
Investments in Real Estate-Related Loans and Securities
Real estate-related loans that the Company has the intent and ability to hold for the foreseeable future are classified as held for investment. Originated loans are recorded at amortized cost, or outstanding unpaid principal balance less net deferred loan fees. Net deferred loan fees include unamortized origination and other fees charged to the borrower less direct incremental loan origination costs incurred by the Company. Purchased loans are recorded at amortized cost, or unpaid principal balance plus purchase premium or less unamortized discount. Costs to purchase loans are expensed as incurred.
Interest income related to the Company's loans is recognized based upon the contractual interest rate and unpaid principal balance of the loans as a component of Income from real estate-related loans and securities on the Company's Consolidated Statements of Operations. Net deferred loan fees on originated loans are deferred and amortized as adjustments to interest income over the expected life of the loans using the effective yield method. Premium or discount on purchased loans are amortized as adjustments to interest income over the expected life of the loans using the effective yield method. When a loan is prepaid, prepayment fees and any excess of proceeds over the carrying amount of the loan are recognized as additional interest income.
The Company assesses the collectability of its real estate-related loans to estimate credit losses over the contractual term of each loan on a periodic basis. The Company's estimate of credit losses is based on relevant factors, including historical realized loss rates, current market conditions, and reasonable and supportable forecasts that affect the collectability of its investments. The Company also considers, among other things, payment status, lien position, borrower or tenant financial resources, and underlying collateral. The Company recognizes an allowance for credit loss when the carrying amount of a loan differs from the amount expected to be collected. For further details on the Company's allowance for credit loss, see Note 6 - "Investments in Real Estate-Related Loans and Securities" to the Company's Consolidated Financial Statements.
The Company has elected to classify its real estate debt securities as trading securities and carry such investments at fair value. As such, the resulting unrealized gains and losses of such securities are recorded as a component of Income from real estate-related loans and securities on the Company's Consolidated Statements of Operations. Interest income from trading securities is recognized based on the stated terms of the security. Interest income from real estate-related debt securities is recorded as a component of Income from real estate-related loans and securities on the Company's Consolidated Statements of Operations.
Revenue Recognition
Rental revenue primarily consists of base rent arising from tenant leases at the Company's properties. Base rent is recognized on a straight-line basis over the life of the lease, including any rent steps or abatement provisions. The Company begins to recognize revenue upon the acquisition of the related property or when a tenant takes possession of the leased space. Other rental revenues include amounts due from tenants for costs related to common area maintenance, real estate taxes, and other recoverable costs included in lease agreements. The Company recognizes the reimbursement of such costs incurred as tenant reimbursement income.
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The Company evaluates the collectability of receivables related to rental revenue on an individual lease basis. In making this determination, the Company considers the length of time a receivable has been outstanding, tenant creditworthiness, payment history, available information about the financial condition of the tenant, and current economic trends, among other factors. Tenant receivables that are deemed uncollectible are recognized as a reduction to rental revenue. The Company will recognize revenue from such leases prospectively, based on actual amounts received. If the Company subsequently determines that it is probable it will collect substantially all of the lessee's remaining lease payments under the lease term, the Company will reinstate the receivables balance. As of September 30, 2024 and December 31, 2023, the allowance for doubtful accounts was approximately $1.2 million and $1.0 million, respectively. These amounts are included in Accounts and other receivables on the Company's Consolidated Balance Sheets.
Cash and Cash Equivalents
Cash and cash equivalents represent cash held in banks, cash on hand, and liquid investments with original maturities of three months or less. The Company may have bank balances in excess of federally insured amounts; however, the Company deposits its cash and cash equivalents with high credit-quality institutions to minimize credit risk exposure.
Restricted Cash
Restricted cash primarily consists of tenant security deposits and reserves held in escrow related to real estate taxes, interest rate derivatives, capital expenditures and insurance in connection with mortgages at certain of the Company's properties. Restricted cash also consists of cash received for subscriptions prior to the date in which the subscriptions are effective, which is held in a bank account controlled by the Company's transfer agent but in the name of the Company.
Trading Securities
Trading securities consist of U.S. government securities that are available to support the Company's current operations and liquidity. Trading securities are measured at fair value. As such, the resulting unrealized gains and losses of such securities are recorded as a component of Other income (expense), net on the Company's Consolidated Statements of Operations. Interest income from trading securities is recognized based on the stated terms of the security and is recorded as a component of Other income (expense), net on the Company's Consolidated Statements of Operations. During the three and nine months ended September 30, 2024, income from trading securities was $0.3 million and $0.8 million, respectively. During the three and nine months ended September 30, 2023, income from trading securities was $0.4 million and $1.2 million, respectively.
Foreign Currency
In the normal course of business, the Company makes investments in real estate outside the United States through subsidiaries that have a non-U.S. dollar functional currency. Non-U.S. dollar denominated assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the prevailing exchange rate at the reporting date and income, expenses, gains, and losses are translated at the average exchange rate over the applicable period. Gains and losses from translation of foreign denominated transactions into U.S. dollars are included in current results of operations as a component of Gain (loss) from unconsolidated entities on the Company's Consolidated Statements of Operations.
Deferred Charges
The Company's deferred charges include financing and leasing costs. Deferred financing costs include legal, structuring, and other loan costs incurred by the Company for its financing agreements. Deferred financing costs related to the Company's mortgage notes and term loans are recorded as an offset to the related liability and amortized over the term of the applicable financing instruments. Deferred financing costs related to the Company's revolving credit facility are recorded as a component of Other assets on the Company's Consolidated Balance Sheets and amortized over the term of the applicable financing agreements. Deferred leasing costs incurred in connection with new leases, which consist primarily of brokerage and legal fees, are recorded as a component of Other assets on the Company's Consolidated Balance Sheets and amortized over the life of the related lease.
Derivative Instruments
In the normal course of business, the Company is exposed to the effect of interest rate changes and, with regard to its non-U.S. investments, changes in foreign currency exchange rates. The Company seeks to manage these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate and currency rate risk. These financial instruments may include interest rate swaps and other derivative contracts. Upfront costs paid in connection with acquiring interest rate swaps and caps are amortized over the term of the applicable derivative instrument as a component of Interest expense on the Company's Consolidated Statements of Operations.
The Company recognizes all derivatives as either assets or liabilities in the accompanying Consolidated Balance Sheets and measures those instruments at fair value. Realized and unrealized gains or losses on the Company's interest rate swaps and caps are recorded in current-period earnings as a component of Other income (expense), net on the Company's Consolidated
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Statements of Operations. The Company recognized $0.9 million of net losses and $0.6 million of net gains during the three and nine months ended September 30, 2024, respectively. The Company recognized $3.2 million and $7.5 million of net gains during the three and nine months ended September 30, 2023, respectively. Realized and unrealized gains or losses on foreign currency derivatives are related to the Company's unconsolidated non-U.S investment and are recorded as a Gain (loss) from unconsolidated entities on the Company's Consolidated Statements of Operations. The Company recognized $4.1 million and $3.6 million of net losses on its foreign currency swap contracts during the three and nine months ended September 30, 2024, respectively. The Company recognized $2.6 million of net gains and $1.2 million of net losses on its foreign currency swap contracts during the three and nine months ended September 30, 2023, respectively.
As of September 30, 2024, the Company's derivative instruments consisted of the following ($ and £ in thousands):
| Number of Instruments | Notional Amount | Weighted Average Strike Rate | Weighted Average Maturity (years) | ||
| Interest Rate Swaps | 1 | $ | 100,000 | 3.7% | 1.9 |
| Interest Rate Caps | 5 | $ | 498,310 | 5.6% | 0.3 |
| Foreign Currency Swap Contracts | 1 | £ | 62,100 | N/A | 0.8 |
Refer to Note 6 - "Investments in Real Estate-Related Loans and Securities" for information regarding the Company's interest rate derivatives related to its investments in real estate-related securities.
Fair Value Measurement
Under normal market conditions, the fair value of an investment is the amount that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). Additionally, there is a hierarchical framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment and the state of the marketplace, including the existence and transparency of transactions between market participants. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following levels within the fair value hierarchy:
Level 1 - quoted prices are available in active markets for identical investments as of the measurement date. The Company does not adjust the quoted price for these investments.
Level 2 - quoted prices are available in markets that are not active or model inputs are based on inputs that are either directly or indirectly observable as of the measurement date.
Level 3 - pricing inputs are unobservable and include instances where there is minimal, if any, market activity for the investment. These inputs require significant judgment or estimation by management or third parties when determining fair value and generally represent anything that does not meet the criteria of Levels 1 and 2. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had a ready market for these investments existed.
Valuation of Assets and Liabilities Measured at Fair Value
The Company's investments in real estate-related securities and trading securities are reported at fair value. The Company generally determines the fair value of its investments in real estate-related securities and trading securities by utilizing third-party pricing service providers. In determining the value of a particular investment, the pricing service providers may use broker-dealer quotations, reported trades or valuation estimates from their internal pricing models to determine the reported price. The pricing service providers' internal models for securities such as real estate debt generally consider the attributes applicable to a particular class of the security (e.g., credit rating, seniority), current market data, and estimated cash flows for each class and incorporate deal collateral performance such as prepayment speeds and default rates, as available. The inputs used in determining the Company's real estate-related securities and trading securities reported at fair value are considered Level 2 and Level 3.
The Company's derivative financial instruments are reported at fair value. The Company's interest rate swaps are valued using a discounted cash flow analysis based on the terms of the contract and the forward interest rate curve adjusted for the Company's nonperformance risk. The Company's interest rate caps are valued using models developed by the respective counterparty as well as third-party pricing service providers that use as their basis readily observable market parameters (such as forward yield curves and credit default swap data). The fair value of the Company's foreign currency swap is determined by comparing the contracted forward exchange rate to the current market exchange rate. The current market exchange rates are
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determined by using market spot rates, forward rates and interest rate curves for the underlying instruments. The inputs used in determining the Company's derivative financial instruments reported at fair value are considered Level 2.
The Company has elected the FVO for its equity method investment and therefore, reports this investment at fair value. As such, the resulting unrealized gains and losses are recorded as a component of Gain (loss) from unconsolidated entities on the Company's Consolidated Statements of Operations. The Company separately values the assets and liabilities of the equity method investment. To determine the fair value of the assets of the equity method investments, the Company utilizes a discounted cash flow methodology, taking into consideration various factors including discount rate and exit capitalization rate. The Company determines the fair value of the indebtedness of the equity method investment by modeling the cash flows required by the debt agreements and discounting them back to the present value using an estimated market yield. Additionally, the Company considers current market rates and conditions by evaluating similar borrowing agreements with comparable loan-to-value ratios and credit profiles. After the fair value of the assets and liabilities are determined, the Company applies its ownership interest to the net asset value and reflects this amount as its equity method investment at fair value. The inputs used in determining the Company's equity method investment carried at fair value are considered Level 3.
The Company's carrying values of cash and cash equivalents, restricted cash, accounts receivable and other receivables, accounts payable, accrued liabilities and other liabilities approximate fair value because of the short-term nature of these instruments.
The following table details the Company's assets and liabilities measured at fair value on a recurring basis ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||
| Assets: | ||||||||||||||||
| Investments in real estate-related securities | $ | - | $ | 63,267 | $ | 7,940 | $ | 71,207 | $ | - | $ | 223,605 | $ | - | $ | 223,605 |
| Investments in unconsolidated entities | - | - | 86,145 | 86,145 | - | - | 78,569 | 78,569 | ||||||||
| Trading securities | - | - | - | - | - | 39,824 | - | 39,824 | ||||||||
| Derivatives | - | 357 | - | 357 | - | 10,657 | - | 10,657 | ||||||||
| Interest rate swaps related to investments in real estate-related securities | - | 412 | - | 412 | - | - | - | - | ||||||||
| Total | $ | - | $ | 64,036 | $ | 94,085 | $ | 158,121 | $ | - | $ | 274,086 | $ | 78,569 | $ | 352,655 |
The following table details the Company's assets measured at fair value on a recurring basis using Level 3 inputs ($ in thousands):
| Investments in real estate-related securities | Investments in unconsolidated entities | Total Assets | ||||
|
Balance as of December 31, 2023
|
$ | - | $ | 78,569 | $ | 78,569 |
| Transfer into Level 3 | 9,283 | - | 9,283 | |||
| Distributions of earnings from unconsolidated entities | - | (1,339) | (1,339) | |||
| Unrealized (loss) gain | (1,343) | 4,774 | 3,431 | |||
| Gain on foreign currency translation | - | 4,141 | 4,141 | |||
|
Balance as of September 30, 2024
|
$ | 7,940 | $ | 86,145 | $ | 94,085 |
The following tables contain the quantitative inputs and assumptions used for items categorized in Level 3 of the fair value hierarchy ($ in thousands):
|
September 30, 2024
|
||||||
| Fair Value | Valuation Technique | Unobservable Inputs | Average | Impact to Valuation from an Increase in Input | ||
| Investments in real estate-related securities | $ | 7,940 | Discounted cash flow | Discount rate | 14.2% | Decrease |
| Investments in unconsolidated entities | $ | 86,145 | Discounted cash flow | Discount rate | 6.3% | Decrease |
| Exit capitalization rate | 5.2% | Decrease |
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| December 31, 2023 | ||||||
| Fair Value | Valuation Technique | Unobservable Inputs | Average | Impact to Valuation from an Increase in Input | ||
| Investments in unconsolidated entities | $ | 78,569 | Discounted cash flow | Discount rate | 5.8% | Decrease |
| Exit capitalization rate | 4.8% | Decrease |
Valuation of Assets Measured at Fair Value on a Nonrecurring Basis
Certain of the Company's assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments, such as when there is evidence of impairment, and therefore measured at fair value on a nonrecurring basis. The Company reviews its real estate properties for impairment each quarter or when there is an event or change in circumstances that could indicate the carrying amount of the real estate value may not be recoverable. Upon execution of the purchase and sale agreement on August 28, 2024 related to an office property, the Company recognized a $33.9 million impairment charge on the property.
Valuation of Liabilities Not Measured at Fair Value
The fair value of the Company's indebtedness is estimated by modeling the cash flows required by the Company's debt agreements and discounting them back to the present value using an appropriate discount rate. Additionally, the Company considers current market rate and conditions by evaluating similar borrowing agreements with comparable loan-to-value ratios and credit profiles. The inputs used in determining the fair value of the Company's indebtedness are considered Level 3. As of September 30, 2024, the fair value of the Company's mortgage loans and other indebtedness was approximately $20.5 million below the outstanding principal balance.
Income Taxes
The Company believes that it qualifies to be taxed as a REIT for U.S. federal income tax purposes. The Company generally will not be subject to federal corporate income tax to the extent it distributes 90% of its taxable income to its stockholders. REITs are subject to a number of other organizational and operational requirements. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.
The Company has formed wholly-owned subsidiaries that are taxed as taxable REIT subsidiaries ("TRSs") that are subject to taxation at the federal, state and local levels, as applicable, at regular corporate tax rates. In general, a TRS may perform additional services for the Company's tenants and generally may engage in any real estate or non-real estate-related business. For the three and nine months ended September 30, 2024, the Company recognized income tax expense of $0.1 million and $0.5 million, respectively, related to its TRSs within General and administrative on the Company's Consolidated Statements of Operations. For the three and nine months ended September 30, 2023, the Company recognized income tax expense of $0.0 million and $0.2 million, respectively, related to its TRSs within General and administrative on the Company's Consolidated Statements of Operations.
The Company accounts for applicable income taxes by utilizing the asset and liability method. As such, the Company records deferred tax assets and liabilities for the future tax consequences resulting from the difference between the carrying value of existing assets and liabilities and their respective tax basis. A valuation allowance for deferred tax assets is provided if the Company believes all or some portion of the deferred tax asset may not be realized. The Company has not recorded a deferred tax asset related to its non-U.S. investment as it is more likely than not that it will not realize the benefit.
Organization and Offering Expenses
Organizational expenses are expensed as incurred on the Company's Consolidated Statements of Operations, and offering costs are charged to equity as incurred on the Company's Consolidated Statements of Changes in Stockholders' Equity.
The Adviser and its affiliates advanced $13.6 million of organization and offering expenses on the Company's behalf through July 5, 2023 subject to the following reimbursement terms (1) the Company reimburses the Adviser for all such advanced expenses paid through July 5, 2022 ratably over the 60 months following July 6, 2022; and (2) the Company reimburses the Adviser for all such advanced expenses paid from July 6, 2022 through July 5, 2023 ratably over the 60 months following July 6, 2023. Beginning July 6, 2023, the Company reimburses the Adviser for any organization and offering expenses that it incurs on the Company's behalf as and when incurred.
Earnings Per Share
The Company uses the two-class method in calculating earnings per share ("EPS") when it issues securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the Company when, and if, the Company declares dividends on its common stock. Basic earnings per share ("Basic EPS") for the Company's common stock are computed by dividing net income allocable to common stockholders by the weighted average number of shares of common
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stock outstanding for the period, respectively. Diluted earnings per share ("Diluted EPS") is calculated similarly, however, it reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower earnings per share amount.
The Company includes unvested shares of restricted stock in the computation of diluted EPS by using the more dilutive of the two-class method or treasury stock method. Any anti-dilutive securities are excluded from the diluted EPS calculation. For the three and nine months ended September 30, 2024 and 2023, there were no dilutive participating securities.
Stockholder Servicing Fee
The Company has entered into a dealer manager agreement with Brookfield Oaktree Wealth Solutions LLC, a registered broker-dealer affiliated with the Adviser ("Dealer Manager"), to serve as the dealer manager for the Current Offering. The Dealer Manager is entitled to receive upfront selling commissions and dealer manager fees of up to 3.5% of the transaction price and ongoing stockholder servicing fees of 0.85% per annum of the aggregate NAV for outstanding Class S and Class T shares with a limit of up to, in the aggregate, 8.75% of the gross proceeds from such shares. The Dealer Manager is entitled to receive upfront selling commissions of up to 1.5% of the transaction price and ongoing stockholder servicing fees of 0.25% per annum of the aggregate NAV for outstanding Class D shares with a limit of up to, in the aggregate, 8.75% of the gross proceeds from such shares. There are no upfront selling commissions, dealer manager fees or ongoing stockholder servicing fees with respect to Class I shares. The Dealer Manager has entered into agreements with the selected dealers distributing the Company's shares in the Current Offering, which provide, among other things, for the re-allowance of the full amount of the selling commissions and dealer manager fees and all or a portion of the stockholder servicing fees received by the Dealer Manager to such selected dealers. The Company accrues the full cost of the stockholder servicing fee as an offering cost at the time each Class T, Class S and Class D share is sold, which is recorded as a component of Due to affiliates in the Company's Consolidated Balance Sheets.
Recent Accounting Pronouncements
In August 2023, the FASB issued ASU 2023-05, an update to ASC Topic 805, Business Combinations. ASU 2023-05 clarifies existing guidance by requiring a joint venture to recognize and initially measure assets contributed and liabilities assumed at fair value, upon its formation. These amendments are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025, with early adoption permitted. The Company will apply the provisions of ASU 2023-05 to new joint ventures, as applicable, but does not believe the adoption of ASU 2023-05 will have a material impact on the Company's consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 aims to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss. The update also requires disclosure regarding the chief operating decision maker and expands the interim segment disclosure requirements. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of ASU 2023-07 on the Company's consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 requires entities to disclose additional information with respect to the effective tax rate reconciliation and to disclose the disaggregation by jurisdiction of income tax expense and income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of ASU 2023-09 on the Company's consolidated financial statements.
In March 2024, the SEC issued a final rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors that requires registrants to provided climate disclosures in their annual reports and registration statements beginning with annual reports for the years ended December 31, 2027, for calendar year end non-accelerated filers. Registrants must provide information about specified financial statement effects of severe weather events and other natural conditions, certain carbon offsets and renewable energy certificates, and material impacts on financial estimates and assumptions that are due to severe weather events and other natural conditions or disclosed climate-related targets or transition plans. Disclosures required outside of the financial statements include governance and oversight of material climate-related risks, the material impact of climate risks on the company's strategy, business model, and outlook, risk management processes for material climate-related risks and, material climate targets and goals. The Company is currently evaluating the impact of this rule on the Company's consolidated financial statements.
In March 2024, the FASB issued ASU 2024-02 Codification Improvements - Amendments to Remove References to the Concepts Statements (the "Codification"). ASU 2024-02 contains amendments to the Codification that remove references to various Concepts Statements. In most instances, the references are extraneous and not required to understand or apply the
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guidance. In other instances, the references were used in prior Statements to provide guidance in certain topical areas. The amendments in ASU 2024-02 affect a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance and are effective for public business entities for fiscal years beginning after December 15, 2024. Early application of the amendments is permitted. The Company is currently evaluating the impact of ASU 2024-02, but does not believe the adoption of ASU 2024-02 will have a material impact on the Company's consolidated financial statements.
3. Investments in Real Estate
As of September 30, 2024 and December 31, 2023, the Company's investments in real estate, net, consisted of the following ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||
| Building and building improvements | $ | 1,361,001 | $ | 1,304,336 |
| Land and land improvements | 293,241 | 262,323 | ||
| Tenant improvements | 29,146 | 35,877 | ||
| Furniture, fixtures and equipment | 42,735 | 29,071 | ||
| Total | 1,726,123 | 1,631,607 | ||
| Accumulated depreciation | (124,472) | (106,451) | ||
| Investments in real estate, net | $ | 1,601,651 | $ | 1,525,156 |
Acquisitions
During the nine months ended September 30, 2024, the Company acquired $167.9 million of investments in real estate, comprised of 181 single-family rental properties and one student housing property, which are included in the Company's rental housing segment.
During the year ended December 31, 2023, the Company acquired $1.7 million of real estate investments, comprised of six single-family rental properties, which are included in the Company's rental housing segment.
The following table provides further details of the properties acquired during the nine months ended September 30, 2024 and year ended December 31, 2023 ($ in thousands):
| Investment | Ownership Interest | Location | Segment | Acquisition Date | Units |
Purchase Price(1)
|
|
| Single-Family Rentals | 100% | Various | Rental Housing | Various 2023 | 6 | $ | 1,681 |
| Single-Family Rentals | 100% | Various | Rental Housing | Various 2024 | 181 | 50,448 | |
| Reflection | 97% | Atlanta, GA | Rental Housing | June 2024 | 741 | 117,408 | |
| Total | $ | 169,537 |
| (1) | Purchase price is inclusive of closing costs. |
The following table summarizes the purchase price allocation of the properties acquired during the nine months ended September 30, 2024 and year ended December 31, 2023 ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||
| Building and building improvements | $ | 114,073 | $ | 1,418 |
| Land and land improvements | 36,503 | 263 | ||
| Tenant improvements | 115 | - | ||
| Furniture, fixtures and equipment | 13,933 | - | ||
| In-place lease intangibles | 3,171 | - | ||
| Lease origination costs | 61 | - | ||
|
Total purchase price(1)
|
$ | 167,856 | $ | 1,681 |
| (1) | Purchase price is inclusive of closing costs. |
Dispositions
During the three months ended September 30, 2024, the Company disposed of an office property for a gross sales price of $27.6 million. In connection with the sale, the Company repaid $25.5 million of the mortgage loan secured by the property and the
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lender extinguished the loan, resulting in a $32.3 million gain on extinguishment of debt. The Company did not receive any net sales proceeds from the disposition.
4. Investments in Unconsolidated Entities
The Company holds two investments in unconsolidated joint ventures that it has elected to account for using the FVO, as the Company's ownership interests in the joint ventures do not meet the requirements for consolidation.
On December 15, 2023, the Company acquired a 2% equity interest in The Avery, a condo and multifamily property located in San Francisco, California, through an indirect interest in a joint venture that owns the property. The Company did not pay any consideration for its interest, which was granted to the Company by the borrower on the Company's investments in The Avery Senior Loan and The Avery Mezzanine Loan. As of September 30, 2024 and December 31, 2023, the fair value of the Company's equity interest in The Avery was zero.
The Company holds a 20% interest in Principal Place, a net lease property located in London, United Kingdom, through an indirect interest in the joint venture that owns the property. As of September 30, 2024 and December 31, 2023, the fair value of the Company's interest in Principal Place was $86.1 million and $78.6 million, respectively.
The following tables provide summarized financial information of the joint venture that owns Principal Place as of and for the periods set forth below ($ in thousands):
|
As of September 30, 2024
|
As of December 31, 2023
|
|||
| Total Assets | $ | 1,079,181 | $ | 1,042,957 |
| Total Liabilities | 659,108 | 634,183 | ||
| Total Equity | $ | 420,073 | $ | 408,774 |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Total Revenues | $ | 12,654 | $ | 11,945 | $ | 37,590 | $ | 35,428 |
| Total Expenses | 12,577 | 14,310 | 38,778 | 41,096 | ||||
| Net Loss | $ | 77 | $ | (2,365) | $ | (1,188) | $ | (5,668) |
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5. Intangibles
The gross carrying amount and accumulated amortization of the Company's intangible assets and liabilities consisted of the following as of September 30, 2024 and December 31, 2023 ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||
| Intangible assets: | ||||
| In-place lease intangibles | $ | 30,268 | $ | 32,513 |
| Lease origination costs | 12,108 | 14,203 | ||
| Lease inducements | - | 2,690 | ||
| Tax intangibles | 5,249 | 5,249 | ||
| Above-market lease intangibles | 114 | 114 | ||
| Total intangible assets | 47,739 | 54,769 | ||
| Accumulated amortization: | ||||
| In-place lease intangibles | (6,196) | (6,644) | ||
| Lease origination costs | (3,702) | (4,188) | ||
| Lease inducements | - | (1,101) | ||
| Tax intangibles | (1,843) | (1,340) | ||
| Above-market lease intangibles | (50) | (37) | ||
| Total accumulated amortization | (11,791) | (13,310) | ||
| Intangible assets, net | $ | 35,948 | $ | 41,459 |
| Intangible liabilities: | ||||
| Below-market lease intangibles | $ | (28,909) | $ | (28,919) |
| Accumulated amortization | 3,790 | 2,792 | ||
| Intangible liabilities, net | $ | (25,119) | $ | (26,127) |
The weighted average amortization periods of the Company's intangible assets is 193 months and intangible liabilities is 266 months.
As of September 30, 2024, the estimated future amortization of the Company's intangibles for each of the next five years and thereafter is as follows ($ in thousands):
| In-place Lease Intangibles | Above-market Lease Intangibles | Other Intangibles | Below-market Lease Intangibles | |||||
| 2024 (remaining) | $ | 593 | $ | 5 | $ | 496 | $ | (336) |
| 2025 | 1,670 | 18 | 1,912 | (1,340) | ||||
| 2026 | 1,566 | 18 | 1,745 | (1,332) | ||||
| 2027 | 1,457 | 7 | 1,646 | (1,327) | ||||
| 2028 | 1,374 | 5 | 1,210 | (1,327) | ||||
| 2029 | 1,320 | 5 | 1,039 | (1,327) | ||||
| Thereafter | 16,092 | 6 | 3,764 | (18,130) | ||||
| Total | $ | 24,072 | $ | 64 | $ | 11,812 | $ | (25,119) |
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6. Investments in Real Estate-Related Loans and Securities
The following table summarizes the components of investments in real estate-related loans and securities as of September 30, 2024 and December 31, 2023 ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||
| Real estate-related securities | $ | 71,207 | $ | 223,605 |
| Real estate-related loans | 17,291 | 16,503 | ||
| Interest rate swaps | 412 | - | ||
| Total investments in real estate-related loans and securities | $ | 88,910 | $ | 240,108 |
The following tables detail the Company's real estate-related loan investments as of September 30, 2024 and December 31, 2023 ($ in thousands):
|
September 30, 2024
|
||||||||||
| Investment | Collateral |
Interest Rate(1)
|
Maturity Date | Payment Terms | Face Amount | Allowance Adjustment | Carrying Amount | |||
| IMC/AMC Bond Investment |
International Markets Center AmericasMart Atlanta |
SOFR+8.15%
|
June 2026 | Principal due at maturity | $ | 10,000 | $ | - | $ | 10,000 |
|
The Avery Senior Loan(2)
|
The Avery Condominium San Francisco, California |
10.00%
|
December 2024 |
Principal due at maturity(3)
|
7,407 | (1,560) | 5,847 | |||
|
The Avery Mezzanine Loan(2)
|
The Avery Condominium San Francisco, California |
10.00%
|
December 2024 |
Principal due at maturity(3)
|
1,794 | (350) | 1,444 | |||
| Total | $ | 19,201 | $ | (1,910) | $ | 17,291 |
|
December 31, 2023
|
||||||||||
| Investment | Collateral |
Interest Rate(1)
|
Maturity Date | Payment Terms | Face Amount | Allowance Adjustment | Carrying Amount | |||
| IMC/AMC Bond Investment |
International Markets Center AmericasMart Atlanta |
SOFR+8.15%
|
June 2026 | Principal due at maturity | $ | 10,000 | $ | - | $ | 10,000 |
|
The Avery Senior Loan(2)
|
The Avery Condominium San Francisco, California |
10.00%
|
December 2024 |
Principal due at maturity(3)
|
6,878 | (1,670) | 5,208 | |||
|
The Avery Mezzanine Loan(2)
|
The Avery Condominium San Francisco, California |
10.00%
|
December 2024 |
Principal due at maturity(3)
|
1,669 | (374) | 1,295 | |||
| Total | $ | 18,547 | $ | (2,044) | $ | 16,503 |
| (1) |
As of September 30, 2024 and December 31, 2023, SOFR was 4.84% and 5.38%, respectively.
|
| (2) |
The Company's investment is held through its membership interest in an entity which aggregates the Company's interest with interests held by other funds managed by the Sub-Adviser. The Company has been allocated its proportionate share of the loan based on its membership interest in the aggregating entity. In December 2023, the loan agreements were amended to change the interest rate to 10.00 and extend the maturity date to December 2024.
|
| (3) |
The maturity date may be extended for additional one-year periods, but no later than February 2028, subject to the borrower meeting minimum annual repayment requirements. Generally, loan repayments are made simultaneous with the closing of the sale of any condominium unit.
|
For the three months ended September 30, 2024, the Company recognized an estimated credit loss of $0.1 million related to its investments in real-estate related loans. For the nine months ended September 30, 2024, the Company recognized an allowance recovery of $0.1 million for estimated credit loss, which is recorded as a component of Income from real estate-related loans and securities on the Company's Consolidated Statements of Operations. The estimated credit loss is related to The Avery Senior Loan and The Avery Mezzanine Loan and is based on the expected timing of loan repayments, forecasted cash flows from the underlying collateral, and the current macroeconomic environment. The Company estimates its credit loss allowance primarily using the discounted cash flow method based on projected future principal cash flows for each individual loan. For the year ended December 31, 2023, the Company recognized $2.0 million as an allowance adjustment for estimated credit loss. There have been no write-offs related to the Company's investments in real estate-related loans.
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The Company's investments in real estate-related securities consist of commercial mortgage-backed securities ("CMBS"), residential mortgage-backed securities ("RMBS"), and interest rate swap contracts related to its investments in real estate-related securities.
The following tables detail the Company's investments in real estate-related securities as of September 30, 2024 and December 31, 2023 ($ in thousands):
| September 30, 2024 | |||||||||
| Type of Security | Number of Positions |
Weighted Average Coupon(1)
|
Weighted Average Maturity Date(2)
|
Face Amount | Cost Basis | Fair Value | |||
| CMBS - floating | 4 |
SOFR+3.84%
|
August 2026 | $ | 27,669 | $ | 25,527 | $ | 24,857 |
| CMBS - fixed | 9 | 4.56% | May 2026 | 23,413 | 20,650 | 9,528 | |||
| RMBS - fixed | 27 | 5.39% | August 2026 | 37,182 | 36,228 | 36,822 | |||
| Interest rate swaps | 2 |
4.40%
|
September 2026 | - | - | 412 | |||
| Total | 42 |
6.08%(3)
|
July 2026 | $ | 88,264 | $ | 82,405 | $ | 71,619 |
| December 31, 2023 | |||||||||
| Type of Security | Number of Positions |
Weighted Average Coupon(1)
|
Weighted Average Maturity Date(2)
|
Face Amount | Cost Basis | Fair Value | |||
| CMBS - floating | 29 |
SOFR+3.64%
|
November 2025 | $ | 149,282 | $ | 141,971 | $ | 143,423 |
| CMBS - fixed | 7 | 4.26% | April 2026 | 37,913 | 33,413 | 24,322 | |||
| RMBS - floating | 6 |
SOFR+1.58%
|
October 2024 | 10,752 | 10,757 | 10,765 | |||
| RMBS - fixed | 30 | 4.71% | July 2026 | 46,611 | 45,105 | 45,095 | |||
| Total | 72 | 7.37% | January 2026 | $ | 244,558 | $ | 231,246 | $ | 223,605 |
| (1) |
As of September 30, 2024 and December 31, 2023, SOFR was equal to 4.84% and 5.38%, respectively.
|
| (2) | Weighted average maturity date is based on the fully extended maturity date of the investments. |
| (3) | Total weighted average coupon is calculated on CMBS and RMBS and excludes interest rate swaps. |
During the three and nine months ended September 30, 2024, the Company recorded net gains of $2.1 million and net gains of $3.5 million, respectively, on its investments in real estate-related securities. During the three and nine months ended September 30, 2023, the Company recorded net losses on its investments in real estate-related securities of $3.5 million and $4.1 million, respectively. Such amounts are recorded as components of Income from real estate-related loans and securities on the Company's Consolidated Statements of Operations.
Certain of the Company's investments in real estate-related securities are floating rate and indexed to SOFR. As such, the Company is exposed to interest rate risk and net income will increase or decrease depending on interest rate movements. The Company seeks to manage this risk by entering into interest rate swap contracts related to its investments in real estate-related securities. As of September 30, 2024, the Company had two interest rate swap contracts related to its investments in real estate-related securities with an aggregate notional amount of $24.0 million and a weighted average strike rate of 4.40%. The Company did not have any interest rate swap contracts related to its investments in real estate-related securities as of December 31, 2023. Interest paid or received by the Company related to such instruments is recorded as a component of Income from real estate-related loans and securities on the Company's Consolidated Statements of Operations. The Company measures its interest rate swap contracts at fair value and records the value of such instruments as a component of Investments in real estate-related loans and securities, net in its Consolidated Balance Sheets and any realized and unrealized gains or losses as a component of Income from real estate-related loans and securities on its Consolidated Statements of Operations.
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7. Accounts and Other Receivables, Net and Other Assets
The following tables summarize the components of Accounts and other receivables, net and Other assets as of September 30, 2024 and December 31, 2023 ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||
| Straight-line rent receivables | $ | 6,214 | $ | 5,058 |
| Accounts receivable, net | 4,401 | 4,700 | ||
| Interest receivable | 582 | 1,036 | ||
| Total accounts and other receivables, net | $ | 11,197 | $ | 10,794 |
| September 30, 2024 | December 31, 2023 | |||
| Derivative instruments | $ | 357 | $ | 10,657 |
| Other | 1,317 | 469 | ||
| Prepaid expenses | 3,279 | 2,170 | ||
| Trading securities | - | 39,824 | ||
| Total other assets | $ | 4,953 | $ | 53,120 |
8. Accounts Payable, Accrued Expenses and Other Liabilities
The following table summarizes the components of Accounts payable, accrued expenses and other liabilities as of September 30, 2024 and December 31, 2023 ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||
| Accounts payable and accrued expenses | $ | 13,111 | $ | 7,547 |
| Stock repurchases payable | 8,334 | 13,898 | ||
| Real estate taxes payable | 5,761 | 3,665 | ||
| Distributions payable | 4,756 | 5,132 | ||
| Tenant security deposits | 4,002 | 3,400 | ||
| Accrued interest expense | 1,908 | 4,204 | ||
| Derivative instruments | 3,334 | - | ||
| Prepaid rent | 603 | 1,378 | ||
| Total accounts payable, accrued expenses and other liabilities | $ | 41,809 | $ | 39,224 |
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9. Mortgage Loans, Secured Term Loan and Secured Credit Facility, Net
The following table summarizes the components of Total indebtedness, net as of September 30, 2024 and December 31, 2023 ($ in thousands):
| Principal Balance Outstanding | |||||||
| Indebtedness |
Weighted Average Interest Rate(1)
|
Weighted Average Maturity Date(2)
|
Maximum Facility Size | September 30, 2024 | December 31, 2023 | ||
| Fixed rate loans: | |||||||
| Fixed rate mortgages | 3.84% | December 2029 | N/A | $ | 395,720 | $ | 263,720 |
| Total fixed rate loans | 395,720 | 263,720 | |||||
| Variable rate loans: | |||||||
| Floating rate mortgages |
SOFR+1.73%
|
September 2027 | N/A | 524,705 | 680,410 | ||
|
Secured credit facility(3)
|
SOFR+2.00%
|
January 2025 | $300,000 | 144,485 | 118,985 | ||
|
Affiliate line of credit(4)
|
SOFR+2.25%
|
November 2025 | $125,000 | 26,500 | - | ||
| Total variable rate loans | 695,690 | 799,395 | |||||
| Total indebtedness | 1,091,410 | 1,063,115 | |||||
| Deferred financing costs, net | (4,295) | (4,772) | |||||
| Total indebtedness, net | $ | 1,087,115 | $ | 1,058,343 |
| (1) |
As of September 30, 2024 and December 31, 2023, SOFR was 4.84% and 5.38%, respectively.
|
| (2) | Includes the fully extended maturity date for loans with extension options that are at the Company's discretion and the Company currently expects to be able to exercise. |
| (3) |
As of September 30, 2024, borrowings on the Secured Credit Facility (defined below) were secured by the following properties: 6123-6227 Monroe Court, 2003 Beaver Road, 187 Bartram Parkway, and certain single-family rentals. As of December 31, 2023 borrowings on the Secured Credit Facility were secured by the following properties: 6123-6227 Monroe Court, 2003 Beaver Road, 187 Bartram Parkway, and certain single-family rentals.
|
| (4) |
Borrowings under the Affiliate Line of Credit (defined below) bear interest at a rate of the lowest then-current interest rate for any similar credit product offered by a third-party lender to the Company or its subsidiaries or, if not available, SOFR plus a 0.10% credit adjustment and a 2.25% margin.
|
The following table presents the future principal payments due under the Company's mortgage loans and other indebtedness as of September 30, 2024 ($ in thousands):
| Year | Amount | |
| 2024 (remaining) | $ | 108 |
| 2025 | 198,110 | |
| 2026 | 50,099 | |
| 2027 | 360,786 | |
| 2028 | 118,097 | |
| 2029 | 254,335 | |
| Thereafter | 109,875 | |
| Total | $ | 1,091,410 |
The mortgage loans and Secured Credit Facility are subject to various financial and operational covenants. These covenants require the Company to maintain certain financial ratios, which may include leverage, debt yield, and debt service coverage, among others. As of September 30, 2024, the Company is in compliance with all of its loan covenants that could result in a default under such agreements.
Mortgage Loans
During the nine months ended September 30, 2024, the Company obtained a $65.0 million fixed rate mortgage loan related to the acquisition of a property and obtained a $67.0 million fixed rate mortgage loan in relation to the DST Program. During the year ended December 31, 2023, the Company did not obtain any new mortgage loans but received $0.9 million of additional borrowings on an existing mortgage loan. During the nine months ended September 30, 2024, the Company repaid $125.4 million of mortgage loans, including a $25.5 million mortgage loan secured by an office property that the Company
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disposed in September 2024 and recognized $32.3 million gain on extinguishment of debt related to the sale of an office property. During year ended December 31, 2023, the Company did not repay any mortgage loans.
Secured Credit Facility
In November 2021, the Company entered into a credit agreement with a lender (the "Secured Credit Facility") providing for a senior secured credit facility to be used for the acquisition or refinancing of properties. Borrowings on the Secured Credit Facility are secured by certain properties owned by the Company.
The initial maximum aggregate principal amount of the facility was $250.0 million, which was increased to $500.0 million in March 2022. In May 2022, the interest rate benchmark was converted from LIBOR to SOFR plus 1.95%. The Secured Credit Facility had an initial maturity date in November 2022, which was extended to January 2023.
In December 2022, the Company refinanced the Secured Credit Facility with the lender. The maximum aggregate principal amount of the facility was amended to $300.0 million, inclusive of a $100.0 million revolving credit amount that the Company may repay and re-borrow upon request, subject to certain conditions. The Company may increase the available capacity on the Secured Credit Facility by an additional $1.2 billion, subject to lender approval. The Secured Credit Facility bears interest at a rate of SOFR plus 2.00% and has a maturity date of January 2025.
During the nine months ended September 30, 2024, the Company drew $25.5 million of additional borrowings on the Secured Credit Facility related to the acquisition of properties.
Affiliate Line of Credit
In November 2021, the Company entered into a revolving line of credit with an affiliate of Brookfield (the "Affiliate Line of Credit"), providing for a discretionary, unsecured, uncommitted credit facility in a maximum aggregate principal amount of $125.0 million. The Affiliate Line of Credit had an initial maturity date of November 2, 2022, with one-year extension options subject to the lender's approval. Effective November 1, 2024, the maturity date of the Affiliate Line of Credit was extended to November 2, 2025. As of September 30, 2024, there was 26.5 million of outstanding borrowings on the Affiliate Line of Credit. As of December 31, 2023, there were no outstanding borrowings on the Affiliate Line of Credit.
10. Related Party Transactions
Advisory Agreement
Pursuant to the advisory agreement among the Adviser, the Operating Partnership and the Company (the "Advisory Agreement"), the Adviser is entitled to a management fee as compensation for the services it provides to the Company and the Operating Partnership. The Company pays the Adviser a management fee equal to 1.25% per annum of the Company's NAV on its Class T, Class S, Class D, Class I and Class C shares of common stock, payable monthly. The Operating Partnership pays the Adviser a management fee equal to 1.25% per annum of the Operating Partnership's NAV of its Class T, Class T-1, Class S, Class S-1, Class D, Class D-1, Class I and Class C units held by unitholders other than the Company, payable monthly. In addition, the Company and the Operating Partnership pay the Adviser a management fee equal to 1.25% per annum of the aggregate DST Property consideration, payable monthly, for all DST Properties subject to a fair market option Option held by the Operating Partnership. For avoidance of doubt, the Adviser will not receive a duplicative management fee with respect to any DST Property. In calculating the management fee, the Company will use its NAV and the Operating Partnership's NAV before giving effect to any accruals for the management fee, the performance fee, the stockholder servicing fee, the investor servicing fee or distributions payable on its shares or the Operating Partnership's units. No management fee is paid with respect to Class E shares or Class E units.
The management fee can be paid, at the Adviser's election, in cash or shares of the Company's common stock. To date, the Adviser has elected to receive the management fee in Class I and Class E shares of the Company's common stock. During the three and nine months ended September 30, 2024, management fees earned by the Adviser were $2.7 million and $8.5 million, respectively. During the three and nine months ended September 30, 2023, management fees earned by the Adviser were $3.4 million and $10.7 million, respectively.
During the nine months ended September 30, 2024, the Company issued 756,623 unregistered Class I shares of common stock to the Adviser for the payment of management fees earned from December 2023 through August 2024. The Company also had an accrued payable of $0.9 million related to the management fee as of September 30, 2024, which is included in Due to affiliates on the Company's Consolidated Balance Sheets. During October 2024, the Adviser was issued 81,599 unregistered Class I shares as payment for the $0.9 million management fee accrued as of September 30, 2024.
The Adviser is entitled to a performance fee based on the total return of the Company's Class C, Class D, Class I, Class S and Class T shares of common stock (no performance fee is paid on the Class E shares). Total return is defined as distributions paid or accrued plus the change in the Company's NAV, adjusted for subscriptions and repurchases. Pursuant to the Advisory
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Agreement, the performance fee is equal to 12.5% of the total return in excess of a 5% total return (after recouping any loss carryforward amount), subject to a catch-up. The performance fee becomes payable at the end of each calendar year and can be paid, at the Adviser's election, in cash, shares of the Company's common stock, or units of the Operating Partnership. During the three and nine months ended September 30, 2024 and 2023, the Company accrued no performance fees in the Company's Consolidated Statements of Operations.
Repurchase of Adviser Shares
During the nine months ended September 30, 2024, the Company repurchased 787,288 shares of Class I common stock from the Adviser outside of its share repurchase plan for total consideration of $8.9 million. During the nine months ended September 30, 2023, the Company repurchased 1,321,224 shares of Class I common stock from the Adviser outside of its share repurchase plan for total consideration of $17.1 million.
Sub-Adviser Agreement
The Company and the Adviser have engaged the Sub-Adviser to select and manage certain of the Company's liquid assets (cash, cash equivalents, other short-term investments, U.S. government securities, agency securities, corporate debt, liquid real estate-related, equity or debt securities, private debt investments and other investments for which there is reasonable liquidity) (the "Investment Sleeve") in accordance with, and subject to, the Company's investment objectives, strategy, guidelines, policies and limitations pursuant to a sub-advisory agreement among the Company, the Adviser, the Operating Partnership and the Sub-Adviser (the "Sub-Advisory Agreement").
The Sub-Adviser earns management and performance fees pursuant to the terms of the Sub-Advisory Agreement. These fees are paid by the Adviser out of the management and performance fees earned by the Adviser; therefore, no management or performance fees related to the Sub-Advisory Agreement have been recognized in the Company's Consolidated Statements of Operations.
Dealer Manager Agreements
The Company has engaged the Dealer Manager, a registered broker-dealer affiliated with the Adviser, as the dealer manager for the Current Offering. The Company pays to the Dealer Manager selling commissions, dealer manager fees and stockholder servicing fees in connection with sales of the Company's common stock in the Current Offering. The Company accrues the full amount of the future stockholder servicing fees payable to the Dealer Manager for Class S, Class T, and Class D shares up to the 8.75% of gross proceeds limit at the time such shares are sold. The Dealer Manager has entered into agreements with the selected dealers distributing the Company's shares in the Current Offering, which provide, among other things, for the re-allowance of the full amount of the selling commissions and dealer manager fees and all or a portion of the stockholder servicing fees received by the Dealer Manager to such selected dealers.
In connection with the launch of the DST Program, Brookfield Real Estate Exchange LLC, (the "DST sponsor"), the Dealer Manager and, solely with respect to its obligations with respect to the investor servicing fee, the Operating Partnership, entered into a DST dealer manager agreement (the "DST Dealer Manager Agreement"), pursuant to which the Dealer Manager serves as the dealer manager for the DST Offerings on a "best efforts" basis. Under the DST Dealer Manager Agreement, each DST will pay the Dealer Manager upfront selling commissions of up to 5.0% of the total cash purchase price paid per DST Interest sold, upfront dealer manager fees of up to 1.0% of the total cash purchase price paid per DST Interest sold, and placement fees in an amount up to 1.0% of the total cash purchase price paid per DST Interest sold. Additionally, each DST will pay to the Dealer Manager an ongoing investor servicing fee of up to 0.25% per annum of the total cash purchase price paid for the DST Interests sold in the applicable DST Offering.
The Operating Partnership will pay the Dealer Manager, solely with respect to Operating Partnership units issued in connection with the FMV Option in exchange for DST Interests and only until the fee limit (if any) set forth in the applicable agreement between the Dealer Manager and the participating distribution agent that sold such DST Interests in a DST Offering has been reached, an investor servicing fee equal to 0.85% per annum of the aggregate NAV for the applicable Class T-1 units, an investor servicing fee equal to 0.85% per annum of the aggregate NAV for the applicable Class S-1 units and an investor servicing fee equal to 0.25% per annum of the aggregate NAV for the applicable Class D-1 units. No investor servicing fee will be paid for Class I units. All or a portion of the selling commissions, dealer manager fees, and investor servicing fees may be reallowed to participating distribution agents, as set forth in the applicable agreement between the Dealer Manager and such participating distribution agent.
Advanced Organization and Offering Costs
The Adviser and its affiliates advanced all of the Company's organization and offering expenses (other than upfront selling commissions, dealer manager fees and stockholder servicing fees) through July 5, 2023, subject to the following reimbursement terms: (1) the Company reimburses the Adviser for all such advanced expenses paid through July 5, 2022 ratably over the 60 months following July 6, 2022; and (2) the Company reimburses the Adviser for all such advanced expenses paid from July 6,
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2022 through July 5, 2023 ratably over the 60 months following July 6, 2023. The Company reimburses the Adviser for any organization and offering expenses that it incurs on the Company's behalf as and when incurred after July 6, 2023.
Affiliate Line of Credit
In November 2021, the Company entered into the Affiliate Line of Credit, providing for a discretionary, unsecured, uncommitted credit facility in a maximum aggregate principal amount of $125.0 million. For further details on the Affiliate Line of Credit, see Note 9 - "Mortgage loans, secured term loan and secured credit facility, net" to the Company's Consolidated Financial Statements.
Affiliate Loan to DST Property
In September 2024, the Company entered into a mortgage loan agreement with an affiliate of Brookfield. The loan is secured by a rental housing property that is expected to be a part of the DST Program. Under the terms of the loan agreement, the Company borrowed an aggregate principal amount of $67.0 million at a fixed rate of 4.2% with a maturity date of September 30, 2034.
Brookfield Repurchase Arrangement
One or more affiliates of Brookfield (individually or collectively, as the context may require, the "Brookfield Investor") was issued shares of the Company's common stock and Class E units of the Operating Partnership ("OP Units") in connection with its contribution of certain properties on November 2, 2021 (the "Brookfield Portfolio"). The Company and the Operating Partnership have entered into a repurchase arrangement with the Brookfield Investor (the "Brookfield Repurchase Arrangement") pursuant to which the Company and the Operating Partnership will offer to repurchase shares of common stock or Class E OP Units from the Brookfield Investor at a price per unit equal to the most recently determined NAV per share or unit immediately prior to each repurchase. The Brookfield Investor has agreed to not seek repurchase of the shares of common stock and Class E OP Units that it owns if doing so would bring the value of its equity holdings in the Company and the Operating Partnership below $50.0 million. In addition, the Brookfield Investor has agreed to hold all of the shares of common stock and Class E OP Units that it received in consideration for the contribution of the Brookfield Portfolio until the earlier of (i) the first date that the Company's NAV reaches $1.5 billion and (ii) the date that is the third anniversary of November 2, 2021. Following such date, the Brookfield Investor may cause the Company to repurchase its shares and Class E OP Units (above the $50.0 million minimum), in an amount equal to the sum of (a) the amount available under the Company's share repurchase plan's 2% monthly and 5% quarterly caps (after accounting for third-party investor repurchases) and (b) 25% of the amount by which net proceeds from the Offering and the Company's private offerings of common stock for a given month exceed the amount of repurchases for such month pursuant to the Company's share repurchase plan. The Company will not effect any such repurchase during any month in which the full amount of all shares requested to be repurchased by third-party investors under the share repurchase plan is not repurchased. The Brookfield Repurchase Arrangement does not apply to shares of common stock or OP Units held by affiliates of Brookfield that are feeder vehicles primarily created to offer interests in such feeder vehicles to non-U.S. persons. During the nine months ended September 30, 2024, the Company and the Operating Partnership did not repurchase any shares or Class E OP Units from the Brookfield Investor as part of the Brookfield Repurchase Arrangement.
Brookfield Investor Subscriptions
On November 30, 2021, the Operating Partnership and the Brookfield Investor entered into a subscription agreement (the "Brookfield Subscription Agreement") pursuant to which the Brookfield Investor agreed to purchase up to $83.0 million of Class E OP Units upon the request of the general partner of the Operating Partnership, of which the Company is the sole member. On December 1, 2021, the Brookfield Investor was issued 3,756,480 Class E OP Units in exchange for $45.0 million. On January 3, 2022, the Brookfield Investor was issued 3,075,006 Class E OP Units in exchange for $38.0 million. On June 29, 2022, the Company, the Operating Partnership and the Brookfield Investor entered into an agreement pursuant to which all such Class E OP Units issued to the Brookfield Investor in connection with the Brookfield Subscription Agreement were converted to Class I shares of the Company's common stock at the then-applicable conversion factor per unit based on the most recently determined NAV of Class E OP Units and Class I shares.
On April 3, 2023, the Brookfield Investor was issued 756,475 Class I shares in the Current Offering in exchange for $10.0 million. On May 1, 2023, the Brookfield Investor was issued 617,909 Class I shares in the Current Offering in exchange for $8.0 million. The Class I shares held by the Brookfield Investor in connection with the Brookfield Subscription Agreement and subsequent subscriptions are not subject to the Brookfield Repurchase Arrangement, but the Brookfield Investor may request the Company repurchase its shares, in whole or in part, subject to the terms and conditions of the Company's share repurchase plan.
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Affiliate Service Provider Expenses
The Company may retain certain of the Adviser's affiliates for necessary services relating to the Company's investments or its operations, including any administrative services, construction, special servicing, leasing, development, property oversight and other property management services, as well as services related to group purchasing, healthcare, consulting/brokerage, capital markets/credit origination, loan servicing, property, title and/or other types of insurance, management consulting and other similar operational matters.
The Company has engaged Brookfield Properties, a Brookfield affiliate, to provide operational services (including, without limitation, property management, leasing, and construction management) and corporate support services (including, without limitation, accounting and administrative services) for the Company and certain of its properties. The Company has also engaged Maymont Homes, a Brookfield affiliate, to provide operational services (including, without limitation, property management, renovation, leasing, and turnover and maintenance oversight) for the Company's single-family rental properties.
The Company also reimburses Brookfield Properties, Maymont Homes and other Brookfield affiliates for corporate support and operating personnel expenses, including, but not limited to, employees who provide on-site maintenance, leasing, administrative and operational support services. Such employees may be fully dedicated or a shared resource amongst other investments. Employees' compensation and expenses continue to be an expense of the affiliate, and if they are a shared resource, the affiliate allocates such expense to the Company according to their policies and procedures. Personnel expenses may include IT costs, HR support (i.e. payroll and benefits), rent and office services, basic financial services (i.e., account receivables, bank account administration), professional development, travel, professional fees and similar expenses.
The following table summarizes the Company's affiliate service provider expenses for the three and nine months ended September 30, 2024 and 2023 ($ in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
|
Property management fees(1)
|
$ | 899 | $ | 710 | $ | 2,484 | $ | 2,142 |
|
Single-family rental leasing, maintenance and turnover oversight fees(1)
|
216 | 163 | 532 | 442 | ||||
|
Capitalized construction management fees(2)
|
9 | 29 | 51 | 66 | ||||
|
Capitalized single-family rental renovation oversight fees(2)
|
(2) | 8 | (1) | 40 | ||||
|
Reimbursed personnel costs(3)
|
1,911 | 1,812 | 5,598 | 5,125 | ||||
| Total | $ | 3,033 | $ | 2,722 | $ | 8,664 | $ | 7,815 |
| (1) |
Included in Rental property operating expenses on the Company's Consolidated Statements of Operations.
|
| (2) |
Included in Investments in real estate, net on the Company's Consolidated Balance Sheets.
|
| (3) |
For the three and nine months ended September 30, 2024, $1.7 million and $4.9 million, respectively, included in Rental property operating expenses and $0.2 million and $0.7 million, respectively, included in General and administrative expenses on the Company's Consolidated Statements of Operations. For the three and nine months ended September 30, 2023, $1.6 million and $4.4 million, included in Rental property operating expenses and $0.3 million and $0.7 million included in General and administrative expenses on the Company's Consolidated Statements of Operations.
|
Captive Insurance Company
BPG Bermuda Insurance Limited ("BAM Insurance Captive"), a Brookfield affiliate, provides property and liability insurance for certain of the Company's properties. For the three and nine months ended September 30, 2024, the Company incurred an insignificant amount for insurance premiums. For the three and nine months ended September 30, 2023, the Company incurred $0.0 million and $0.2 million, respectively, for insurance premiums.
On March 31, 2023, Obsidian Mutual IC ("Obsidian"), a Brookfield affiliate, replaced BAM Insurance Captive in providing property insurance for certain of the Company's properties. For the three and nine months ended September 30, 2024, the Company incurred an insignificant amount for insurance premiums provided by Obsidian.
On March 15, 2024, Onyx Mutual Insurance IC ("Onyx"), a Brookfield affiliate, replaced BAM Insurance Captive in providing liability insurance for certain of the Company's properties. For the three and nine months ended September 30, 2024, the Company incurred an insignificant amount for insurance premiums provided by Onyx.
Terrorism Insurance Provider
Liberty IC Casualty LLC, a Brookfield affiliate, provides terrorism insurance for certain of the Company's properties. For the three and nine months ended September 30, 2024 and 2023, the insurance premiums incurred by the Company were insignificant.
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Submetering Services
Certain of the Company's properties sold submetering infrastructure and associated equipment to Metergy, a Brookfield affiliate. Sale proceeds earned by the Company for the three and nine months ended September 30, 2024 and 2023 was zero. Metergy provides submetering services to certain of the Company's properties. For the three and nine months ended September 30, 2024 and 2023, the Company incurred fees of an insignificant amount.
Due to Affiliates
The following table details the components of Due to affiliates as of September 30, 2024 and December 31, 2023 ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||
| Accrued stockholder servicing fee | $ | 18,593 | $ | 25,507 |
| Advanced organization and offering costs | 7,694 | 9,734 | ||
| Stock repurchase payable to the Adviser for management fees | 2,809 | 3,353 | ||
|
Other(1)
|
1,479 | 2,410 | ||
| Accrued management fee | 899 | 1,046 | ||
| Accrued affiliate service provider expenses | 901 | 1,915 | ||
| OP Units distributions payable | 6 | 6 | ||
| Total | $ | 32,381 | $ | 43,971 |
| (1) | Represents costs advanced by the Adviser and the Sub-Adviser on behalf of the Company for general corporate expenses provided by unaffiliated third parties. |
11. Stockholders' Equity and Redeemable Non-controlling Interests
Authorized Capital
On April 30, 2018, the SEC declared effective the Company's registration statement on Form S-11 for the Initial Public Offering. On November 2, 2021, the SEC declared effective the Company's registration statement on Form S-11 (File No. 333-255557) for the Current Offering of up to $6.0 billion in shares in its primary offering and up to $1.5 billion in shares pursuant to its distribution reinvestment plan. The Initial Public Offering terminated upon the commencement of the Current Offering. Pursuant to the Current Offering, the Company is offering to sell any combination of four classes of shares of its common stock, Class S shares, Class I shares, Class T shares and Class D shares, with a dollar value up to the maximum offering amount. The share classes have different upfront selling commissions, dealer manager fees and ongoing stockholder servicing fees. The Company is also offering Class I, Class C and Class E shares in private offerings exempt from registration. Other than the differences in upfront selling commissions, dealer manager fees, ongoing stockholder servicing fees, management fees and performance fees, each class of common stock has the same economic and voting rights.
| Classification |
No. of Authorized Shares (in thousands) |
Par Value Per Share |
|
| Preferred stock | 50,000 | $ | 0.01 |
| Class S common stock | 225,000 | $ | 0.01 |
| Class I common stock | 250,000 | $ | 0.01 |
| Class T common stock | 225,000 | $ | 0.01 |
| Class D common stock | 100,000 | $ | 0.01 |
| Class C common stock | 100,000 | $ | 0.00 |
| Class E common stock | 100,000 | $ | 0.00 |
| 1,050,000 |
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Common Stock
The following table details the movement in the Company's outstanding shares of common stock for the nine months ended September 30, 2024 (in thousands):
| Nine Months Ended September 30, 2024 | |||||||
| Class S | Class I | Class D |
Class T(1)
|
Class C | Class E | Total | |
| December 31, 2023 | 34,244 | 41,504 | 148 | - | 9,347 | 3,353 | 88,596 |
|
Common stock issued(2)
|
597 | 4,630 | 18 | - | - | 71 | 5,316 |
| Distribution reinvestment | 675 | 1,455 | 1 | - | - | 166 | 2,297 |
| Common stock repurchased | (7,291) | (6,571) | (20) | - | (871) | (125) | (14,878) |
| September 30, 2024 | 28,225 | 41,018 | 147 | - | 8,476 | 3,465 | 81,331 |
| (1) |
As of September 30, 2024, no Class T shares had been issued.
|
| (2) |
Includes conversions between share classes.
|
Distributions
The Company generally intends to distribute substantially all of its taxable income, which does not necessarily equal net income as calculated in accordance with GAAP, to its stockholders each year to comply with the REIT provisions of the Code.
Each class of the Company's common stock receives the same gross distribution per share. The net distribution varies for each class based on the applicable stockholder servicing fees, management fees and performance fees, which are deducted from the monthly distribution per share.
The following table details the aggregate net distributions declared for each applicable class of common stock for the three and nine months ended September 30, 2024:
| Three Months Ended September 30, 2024 | ||||||||||||
| Class S | Class I | Class D |
Class T(1)
|
Class C | Class E | |||||||
| Aggregate gross distributions declared per share of common stock | $ | 0.2142 | $ | 0.2142 | $ | 0.2142 | $ | - | $ | 0.2142 | $ | 0.2142 |
| Stockholder servicing fee per share of common stock | (0.0236) | - | (0.0071) | - | - | - | ||||||
| Management fee per share of common stock | (0.0345) | (0.0348) | (0.0351) | - | (0.0339) | - | ||||||
| Net distributions declared per share of common stock | $ | 0.1561 | $ | 0.1794 | $ | 0.1720 | $ | - | $ | 0.1803 | $ | 0.2142 |
| Nine Months Ended September 30, 2024 | ||||||||||||
| Class S | Class I | Class D |
Class T(1)
|
Class C | Class E | |||||||
| Aggregate gross distributions declared per share of common stock | $ | 0.6447 | $ | 0.6447 | $ | 0.6447 | $ | - | $ | 0.6447 | $ | 0.6447 |
| Stockholder servicing fee per share of common stock | (0.0718) | - | (0.0214) | - | - | - | ||||||
| Management fee per share of common stock | (0.1056) | (0.1065) | (0.1073) | - | (0.1040) | - | ||||||
| Net distributions declared per share of common stock | $ | 0.4673 | $ | 0.5382 | $ | 0.5160 | $ | - | $ | 0.5407 | $ | 0.6447 |
| (1) |
No Class T shares of common stock were issued or outstanding, thus no distributions were declared for Class T common stock during the nine months ended September 30, 2024.
|
Distribution Reinvestment Plan
The Company has adopted a distribution reinvestment plan whereby stockholders will have their cash distributions attributable to the shares they own automatically reinvested in additional shares of common stock; provided, however, that clients of certain participating broker-dealers that do not permit automatic enrollment in the distribution reinvestment plan and stockholders that are residents of certain states that do not permit automatic enrollment in the distribution reinvestment plan will automatically receive their distributions in cash unless they elect to participate in the distribution reinvestment plan. The per share purchase price for shares purchased pursuant to the distribution reinvestment plan will be equal to the offering price before upfront selling commissions and dealer manager fees (the "transaction price") at the time the distribution is payable, which will generally be equal to the Company's prior month's NAV per share for that share class. Stockholders will not pay upfront selling commissions or dealer manager fees when purchasing shares pursuant to the distribution reinvestment plan. The stockholder servicing fees with respect to shares of the Company's Class T shares, Class S shares and Class D shares are calculated based
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on the NAV for those shares and may reduce the NAV or, alternatively, the distributions payable with respect to shares of each such class, including shares issued in respect of distributions on such shares under the distribution reinvestment plan. During the nine months ended September 30, 2024 and 2023, $26.3 million and $28.7 million of distributions were reinvested for 2,295,766 and 2,209,359 shares of common stock, respectively.
Non-controlling Interests Attributable to Preferred Shareholders
Certain subsidiaries of the Company have elected to be treated as REITs for U.S. federal income tax purposes. These subsidiaries have issued preferred non-voting shares to be held by investors to ensure compliance with the Code requirement that REITs have at least 100 shareholders. The preferred shares have a price of $1,000 and an annual dividend payable ranging between 12.0% and 12.5%. As of September 30, 2024, there were $625,000 of preferred non-voting shares outstanding.
Redeemable Non-controlling Interest
The Brookfield Investor was issued Class E OP Units in connection with its contribution of the Brookfield Portfolio on November 2, 2021 and subsequent cash contributions to the Operating Partnership pursuant to the Brookfield Subscription Agreement. Because the Brookfield Investor has the ability to redeem its Class E OP Units for shares of common stock or cash, subject to certain restrictions, the Company has classified the Class E OP Units held by the Brookfield Investor as Redeemable non-controlling interest in mezzanine equity on the Company's Consolidated Balance Sheets. The Redeemable non-controlling interest is recorded at the greater of the carrying amount, adjusted for its share of the allocation of income or loss and dividends, or the redemption value, which is equivalent to fair value, of such units at the end of each measurement period.
The following table summarizes the Redeemable non-controlling interest activity for the nine months ended September 30, 2024 and 2023 ($ in thousands):
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||
| Balance at beginning of the year | $ | 933 | $ | 990 |
| GAAP net loss allocation | (20) | (10) | ||
| Distributions | (53) | (75) | ||
| Distributions reinvested | 53 | 74 | ||
| Fair value allocation | 17 | (16) | ||
| Ending balance | $ | 930 | $ | 963 |
Share Repurchase Plan
The Company has adopted a share repurchase plan, whereby, subject to certain limitations, stockholders may request on a monthly basis that the Company repurchase all or any portion of their shares. Should repurchase requests, in the Company's judgment, place an undue burden on its liquidity, adversely affect its operations or risk having an adverse impact on the Company as a whole, or should the Company otherwise determine that investing its liquid assets in real properties or other illiquid investments rather than repurchasing its shares is in the best interests of the Company as a whole, then the Company may choose to repurchase fewer shares than have been requested to be repurchased, or none at all. Further, the Company's board of directors may modify and suspend the Company's share repurchase plan if it deems such action to be in the Company's best interest and the best interest of its stockholders.
In addition, the total amount of shares that the Company will repurchase is limited, in any calendar month, to shares whose aggregate value (based on the repurchase price per share on the date of the repurchase) is no more than 2% of its aggregate NAV attributable to its stockholders as of the last day of the previous calendar month and, in any calendar quarter, to shares whose aggregate value is no more than 5% of its aggregate NAV attributable to its stockholders as of the last day of the previous calendar quarter. The Company measures the repurchase limitations based on net repurchases during a month or quarter. The term "net repurchases" means, during the applicable period, the excess capital outflows over capital inflows. The term "capital outflows" means share repurchases under the Company's share repurchase plan in a given period. The term "capital inflows" means proceeds from share subscriptions received in a given period that are accepted as of the first calendar day of the next month, plus purchases pursuant to the Company's distribution reinvestment plan. For any given calendar quarter, the maximum amount of repurchases during that quarter will be equal to (1) 5% of the aggregate NAV attributable to the Company's stockholders as of the last calendar day of the previous calendar quarter, plus (2) capital inflows during such calendar quarter. The same would apply for a given month, except that repurchases in a month would be subject to the 2% limit described above (subject to potential carry-over capacity), and netting would be measured on a monthly basis.
With respect to future periods, the Company's board of directors may choose whether the limitations will be applied to "gross repurchases" rather than to net repurchases. If repurchases for a given month or quarter are measured on a gross basis rather
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than on a net basis, the repurchase limitations would limit the amount of shares repurchased in a given month or quarter without regard to any capital inflows for that month or quarter. In order for the Company's board of directors to change the application of the limitations from net repurchases to gross repurchases or vice versa, the Company will provide notice to stockholders in a prospectus supplement or special or periodic report filed by us, as well as in a press release or on the Company's website, at least 10 days before the first business day of the quarter for which the new test will apply. The determination to measure repurchases on a gross basis or net basis will only be made for an entire quarter, and not particular months within a quarter.
The monthly and quarterly repurchase limits exclude shares repurchased from the Adviser that were issued as payment of management or performance fees. In the event that the Company determines to repurchase some but not all of the shares submitted for repurchase during any month, shares repurchased at the end of the month will be repurchased on a pro rata basis. All unsatisfied repurchase requests must be resubmitted after the start of the next month or quarter, or upon the recommencement of the share repurchase plan, as applicable.
Shares are repurchased at a price equal to the transaction price on the applicable repurchase date, subject to any early repurchase deduction. Shares that have not been outstanding for at least one year are repurchased at 98% of the transaction price.
During the nine months ended September 30, 2024 and 2023, the Company repurchased 14,090,675 and 11,663,360 shares of common stock representing a total of $159.3 million and $149.0 million, respectively, under its share repurchase plan. The Company satisfied all repurchase requests during the nine months ended September 30, 2024 and 2023.
12. Commitments and Contingencies
From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2024, the Company was not subject to any material litigation nor was the Company aware of any material litigation threatened against it. The Company may, from time to time, enter into payment guarantees related to mortgage loans at its investments in unconsolidated entities. As of September 30, 2024, the Company has a payment guarantee of $1.6 million.
13. Leases
The Company's rental revenue primarily consists of rent earned from operating leases at the Company's rental housing, office, logistics, and net lease properties. Leases at the Company's office, logistics, and net lease properties generally include a fixed base rent and certain leases also contain a variable component. The variable component of the Company's operating leases at its office, logistics, and net lease properties primarily consist of the reimbursement of operating expenses such as real estate taxes, insurance, and common area maintenance costs. Rental revenue earned from leases at the Company's rental housing properties primarily consist of a fixed base rent and certain leases contain a variable component that allows for the pass-through of certain operating expenses such as utilities.
The following table details the components of operating lease income from leases in which the Company is the lessor for the periods set forth below ($ in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Fixed lease payments | $ | 31,742 | $ | 29,678 | $ | 90,679 | $ | 88,005 |
| Variable lease payments | 1,973 | 2,398 | 6,086 | 8,046 | ||||
| Total rental revenues | $ | 33,715 | $ | 32,076 | $ | 96,765 | $ | 96,051 |
The following table details the undiscounted future minimum rents the Company expects to receive for its logistics, net lease, and office properties as of September 30, 2024. The table below excludes the Company's rental housing properties as substantially all leases are shorter term in nature ($ in thousands):
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| Year | Future Minimum Rents | |
| 2024 (remaining) | $ | 6,828 |
| 2025 | 26,676 | |
| 2026 | 25,401 | |
| 2027 | 24,426 | |
| 2028 | 23,757 | |
| 2029 | 22,066 | |
| Thereafter | 101,472 | |
| Total | $ | 230,626 |
14. Segment Reporting
As of September 30, 2024, the Company operates in five reportable segments: rental housing, office, logistics, net lease and real estate-related loans and securities. The Company continually evaluates the financial information used by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company allocates resources and evaluates results based on the performance of each segment individually. The Company believes that segment net operating income is the key performance metric that captures the unique operating characteristics of each segment.
The following table sets forth the Company's assets by segment ($ in thousands):
| September 30, 2024 | December 31, 2023 | |||
| Rental Housing | $ | 1,199,831 | $ | 1,061,941 |
| Office | 34,921 | 103,179 | ||
| Logistics | 105,670 | 108,329 | ||
| Net Lease | 416,807 | 415,282 | ||
| Real estate-related loans and securities | 88,910 | 240,108 | ||
| Other (Corporate) | 21,762 | 61,068 | ||
| Total assets | $ | 1,867,901 | $ | 1,989,907 |
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The following table sets forth the financial results by segment for the three months ended September 30, 2024 ($ in thousands):
| Rental Housing | Office | Logistics | Net Lease | Real estate-related loans and securities | Total | |||||||
| Revenues: | ||||||||||||
| Rental revenues | $ | 24,028 | $ | 2,505 | $ | 2,004 | $ | 5,178 | $ | - | $ | 33,715 |
| Other revenues | 5,312 | 350 | 3 | 11 | - | 5,676 | ||||||
| Total revenues | 29,340 | 2,855 | 2,007 | 5,189 | - | 39,391 | ||||||
| Expenses: | ||||||||||||
| Rental property operating | 10,397 | 1,515 | 458 | 1,201 | - | 13,571 | ||||||
| Total expenses | 10,397 | 1,515 | 458 | 1,201 | - | 13,571 | ||||||
| Income from real estate-related loans and securities | - | - | - | - | 4,453 | 4,453 | ||||||
| Segment net operating income | $ | 18,943 | $ | 1,340 | $ | 1,549 | $ | 3,988 | $ | 4,453 | $ | 30,273 |
| Gain from unconsolidated entities | 1,554 | |||||||||||
| Other expense, net | (476) | |||||||||||
| Impairment of investments in real estate | (33,922) | |||||||||||
| Gain on extinguishment of debt | 32,251 | |||||||||||
| Depreciation and amortization | (16,209) | |||||||||||
| General and administrative expenses | (2,295) | |||||||||||
| Management fee | (2,715) | |||||||||||
| Interest expense | (18,957) | |||||||||||
| Net loss | $ | (10,496) | ||||||||||
| Net loss attributable to non-controlling interests in third party joint ventures | 289 | |||||||||||
| Net income attributable to non-controlling interests - preferred stockholders | (3) | |||||||||||
| Net loss attributable to redeemable non-controlling interests | 10 | |||||||||||
| Net loss attributable to stockholders | $ | (10,200) |
The following table sets forth the financial results by segment for the three months ended September 30, 2023 ($ in thousands):
| Rental Housing | Office | Logistics | Net Lease | Real estate-related loans and securities | Total | |||||||
| Revenues: | ||||||||||||
| Rental revenues | $ | 21,192 | $ | 3,579 | $ | 2,127 | $ | 5,178 | $ | - | $ | 32,076 |
| Other revenues | 3,130 | 95 | 2 | 21 | - | 3,248 | ||||||
| Total revenues | 24,322 | 3,674 | 2,129 | 5,199 | - | 35,324 | ||||||
| Expenses: | ||||||||||||
| Rental property operating | 10,200 | 1,632 | 571 | 926 | - | 13,329 | ||||||
| Total expenses | 10,200 | 1,632 | 571 | 926 | - | 13,329 | ||||||
| Income from real estate-related loans and securities | - | - | - | - | 2,512 | 2,512 | ||||||
| Segment net operating income | $ | 14,122 | $ | 2,042 | $ | 1,558 | $ | 4,273 | $ | 2,512 | $ | 24,507 |
| Gain from unconsolidated entities | 1,089 | |||||||||||
| Other income, net | 3,605 | |||||||||||
| Depreciation and amortization | (12,999) | |||||||||||
| General and administrative expenses | (1,855) | |||||||||||
| Management fee | (3,397) | |||||||||||
| Interest expense | (15,061) | |||||||||||
| Net loss | $ | (4,111) | ||||||||||
| Net loss attributable to non-controlling interests in third party joint ventures | 192 | |||||||||||
| Net loss attributable to redeemable non-controlling interests | 4 | |||||||||||
| Net loss attributable to stockholders | $ | (3,915) |
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The following table sets forth the financial results by segment for the nine months ended September 30, 2024 ($ in thousands):
The following table sets forth the financial results by segment for the nine months ended September 30, 2023 ($ in thousands):
| Rental Housing | Office | Logistics | Net Lease | Real estate-related loans and securities | Total | |||||||
| Revenues: | ||||||||||||
| Rental revenues | $ | 67,207 | $ | 7,999 | $ | 6,025 | $ | 15,534 | $ | - | $ | 96,765 |
| Other revenues | 10,667 | 667 | - | 32 | - | 11,366 | ||||||
| Total revenues | 77,874 | 8,666 | 6,025 | 15,566 | - | 108,131 | ||||||
| Expenses: | ||||||||||||
| Rental property operating | 29,940 | 4,357 | 1,521 | 3,388 | - | 39,206 | ||||||
| Total expenses | 29,940 | 4,357 | 1,521 | 3,388 | - | 39,206 | ||||||
| Income from real estate-related loans and securities | - | - | - | - | 14,822 | 14,822 | ||||||
| Segment net operating income | $ | 47,934 | $ | 4,309 | $ | 4,504 | $ | 12,178 | $ | 14,822 | $ | 83,747 |
| Gain from unconsolidated entities | 5,278 | |||||||||||
| Other income, net | 1,707 | |||||||||||
| Impairment of investments in real estate | (33,922) | |||||||||||
| Gain on extinguishment of debt | 32,251 | |||||||||||
| Depreciation and amortization | (43,307) | |||||||||||
| General and administrative expenses | (6,078) | |||||||||||
| Management fee | (8,544) | |||||||||||
| Interest expense | (52,284) | |||||||||||
| Net loss | $ | (21,152) | ||||||||||
| Net loss attributable to non-controlling interests in third party joint ventures | 722 | |||||||||||
| Net income attributable to non-controlling interests - preferred stockholders | (69) | |||||||||||
| Net loss attributable to redeemable non-controlling interests | 20 | |||||||||||
| Net loss attributable to stockholders | $ | (20,479) |
| Rental Housing | Office | Logistics | Net Lease | Real estate-related loans and securities | Total | |||||||
| Revenues: | ||||||||||||
| Rental revenues | $ | 62,900 | $ | 9,818 | $ | 5,808 | $ | 17,525 | $ | - | $ | 96,051 |
| Other revenues | 8,865 | 513 | 3 | 72 | - | 9,453 | ||||||
| Total revenues | 71,765 | 10,331 | 5,811 | 17,597 | - | 105,504 | ||||||
| Expenses: | ||||||||||||
| Rental property operating | 28,705 | 4,582 | 1,854 | 4,796 | - | 39,937 | ||||||
| Total expenses | 28,705 | 4,582 | 1,854 | 4,796 | - | 39,937 | ||||||
| Income from real estate-related loans and securities | - | - | - | - | 13,356 | 13,356 | ||||||
| Segment net operating income | $ | 43,060 | $ | 5,749 | $ | 3,957 | $ | 12,801 | $ | 13,356 | $ | 78,923 |
| Loss from unconsolidated entities | (1,316) | |||||||||||
| Other income, net | 8,854 | |||||||||||
| Depreciation and amortization | (38,568) | |||||||||||
| General and administrative expenses | (6,400) | |||||||||||
| Management fee | (10,655) | |||||||||||
| Interest expense | (43,491) | |||||||||||
| Net loss | $ | (12,653) | ||||||||||
| Net loss attributable to non-controlling interests in third party joint ventures | 235 | |||||||||||
| Net income attributable to non-controlling interests - preferred stockholders | (45) | |||||||||||
| Net loss attributable to redeemable non-controlling interests | 10 | |||||||||||
| Net loss attributable to stockholders | $ | (12,453) |
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15. Subsequent Events
On November 8, 2024, the Company, the Operating Partnership, the general partner of the Operating Partnership and BUSI II-C L.P., an affiliate of Brookfield ("BUSI II-C"), entered into an agreement pursuant to which the Company repurchased, at the then-current transaction price, 25,123,346.212 Class I shares and 2,173,519.737 Class E shares held by BUSI II-C in exchange for an in-kind distribution to BUSI II-C of 25,123,346.212 Class I OP Units and 2,173,519.737 Class E OP Units.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References herein to the "Company," "we," "us," or "our" refer to Brookfield Real Estate Income Trust Inc. and its subsidiaries unless the context specifically requires otherwise.
The following discussion should be read in conjunction with the unaudited financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Terms used and not defined herein have the meanings set forth elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q that are not historical facts, particularly those in the section entitled "Recent Developments - Business Outlook" and "Liquidity and Capital Resources", are based on our current expectations, estimates, projections, opinions, and/or beliefs. Such statements are not facts and involve known and unknown risks, uncertainties, and other factors. Investors should not rely on these statements as if they were fact. Certain information contained in this Quarterly Report on Form 10-Q constitutes "forward-looking statements," which can be identified by the use of forward-looking terminology such as "may," "will," "should," "expect," "anticipate," "project," "target," "estimate," "intend," "continue," "forecast," or "believe" or the negatives thereof or other variations thereon or other comparable terminology. Due to various risks and uncertainties, including those described under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023 and under Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q and elsewhere in this Quarterly Report on Form 10-Q, actual events or results or our actual performance may differ materially from those reflected or contemplated in such forward-looking statements. No representation or warranty is made as to future performance or such forward-looking statements. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans, which we consider to be reasonable, will be achieved. We do not undertake to revise or update any forward-looking statements.
Overview
We are a Maryland corporation formed on July 27, 2017 to invest in commercial real estate assets. We seek to invest in well- located, high quality real estate properties that generate strong current cash flow and could further appreciate in value through our proactive, best-in-class asset management strategies. Our real estate-related debt strategy seeks to achieve high current income and superior risk-adjusted returns, as well as provide a source of liquidity.
We are externally managed by Brookfield REIT Adviser LLC (the "Adviser"), an affiliate of Brookfield Asset Management Ltd. (together with its affiliates, "Brookfield"). We are structured as an umbrella partnership real estate investment trust ("UPREIT"), which means that we own substantially all of our assets through our operating partnership, Brookfield REIT Operating Partnership L.P. (the "Operating Partnership"), a Delaware limited partnership, of which we are the sole general partner.
On April 30, 2018, the Securities and Exchange Commission (the "SEC"), declared effective our registration statement on Form S-11 (File No. 333-223022) for our initial public offering of up to $2.0 billion in shares of our common stock (the "Initial Public Offering"). On November 2, 2021, the SEC declared effective our registration statement on Form S-11 (File No. 333-255557) for our follow-on public offering of up to $7.5 billion in shares of our common stock in any combination of purchases of Class S, Class T, Class D and Class I shares of our common stock (the "Current Offering"). The share classes have different upfront selling commissions and ongoing stockholder servicing fees. The Initial Public Offering terminated upon the commencement of the Current Offering.
In addition to the Current Offering, we are conducting private offerings of Class I and Class C shares to feeder vehicles that offer interests in such vehicles to non-U.S. persons. The offer and sale of Class I and Class C shares to the feeder vehicles is exempt from the registration provisions of the Securities Act by virtue of Section 4(a)(2) and Regulation S promulgated thereunder. We are also offering Class E shares to Brookfield, Oaktree and certain of their affiliates, employees and our independent directors in one or more private offerings. The offer and sale of Class E shares is exempt from the registration provisions of the Securities Act by virtue of Section 4(a)(2) and Regulation D promulgated thereunder.
We qualified as a REIT for U.S. federal income tax purposes beginning with our taxable year ending December 31, 2019, and we generally will not be subject to U.S. federal income taxes on our taxable income to the extent we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT.
As of September 30, 2024, we owned and operated 19 investments in real estate and held investments in two unconsolidated real estate interests, three real estate-related loans, 40 short-term real estate-related debt securities and two interest rate derivatives related to its investments in real estate-related securities. We are not aware of any material trends or uncertainties,
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favorable or unfavorable, other than national economic conditions affecting real estate generally, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from owning properties or real estate-related loans.
DST Program
On October 1, 2024, we initiated, through the Operating Partnership, a program (the "DST Program") to issue and sell up to a maximum aggregate offering amount of $1.0 billion of beneficial interests ("DST Interests") in specific Delaware statutory trusts ("DSTs") holding one or more real properties (each, a "DST Property" and, collectively, the "DST Properties"). These DST Interests will be issued and sold to "accredited investors," as that term is defined under Regulation D promulgated by the SEC under the Securities Act of 1933, as amended (the "Securities Act"), in one or more offerings (the "DST Offerings"). Under the DST Program, each DST Property will be sourced from our real properties or from third parties, which will be held in a DST and subsequently leased by one of our wholly owned subsidiaries in accordance with a certain master lease agreement. Each master lease agreement will be guaranteed by the Operating Partnership, which will hold a fair market value option (the "FMV Option"), giving it the right, but not the obligation, to acquire the DST Interests in the applicable DST from the investors in exchange for Operating Partnership units or cash, at the Operating Partnership's discretion. Such FMV Option shall be exercisable during a one-year option period, beginning two years following the sale of the last DST Interest in any such DST Offering. The Operating Partnership, in its sole and absolute discretion, may assign its rights in the FMV Option to a subsidiary, an affiliate, a successor entity to the Operating Partnership or the acquirer of a majority of the Operating Partnership's assets. After a one-year holding period, investors who acquire Operating Partnership units pursuant to the FMV Option generally have the right to cause the Operating Partnership to redeem all or a portion of their Operating Partnership units for, at our sole discretion, shares of our common stock, cash, or a combination of both.
We expect that the DST Program will give us the opportunity to expand and diversify our capital-raising strategies by offering what we believe to be an attractive investment product for investors that may be seeking like-kind replacement properties to complete tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code of 1986, as amended (the
"Code"). Affiliates of the Adviser have provided and may continue to provide mortgage financing with respect to certain DST Properties and are expected to receive fees in connection with the sale of the DST Interests and the management of the DSTs. We intend to use the net offering proceeds from the DST Program to make investments in accordance with our investment strategy and policies, reduce our borrowings, repay indebtedness, fund the repurchase of shares of all classes of our common stock under our share repurchase plan and for other corporate purposes. We have not allocated specific amounts of the net proceeds from the DST Program for any specific purpose.
Recent Developments
Business Outlook
Portfolio performance for the quarter was positive as real estate fundamentals have continued to be resilient and property valuations have stabilized after a prolonged period of volatility. Inflation in the United States has declined significantly since its peak in 2022, while broader economic conditions remain favorable. In September, the U.S. Federal Reserve issued its first rate cut in four years, with additional rate cuts widely expected in the coming months. The change in rate policy and decline in interest rates should create favorable conditions for private real estate, including positive impacts to property values and cash flows.
Debt capital markets have also benefited from the recent relief from elevated interest rates, with new issuance volume increasing significantly from the same period last year. The increased availability of debt and tightening of credit spreads should drive an increase of real estate transaction volume heading into 2025. We believe we are well-positioned to capitalize on these opportunities going forward, with no unsatisfied repurchase requests and approximately $350 million of total liquidity as of September 30, 2024.
Please refer to Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023, and elsewhere in this Quarterly Report on Form 10-Q for additional disclosure relating to material trends or uncertainties that may impact our business.
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Q3 2024 Highlights
Operating and Capital Raising Results:
•Year-to-date total returns through September 30, 2024, excluding upfront selling commissions, were -2.06% for Class S shares, -1.30% for Class I shares and -1.25% for Class D shares. Negative year-to-date performance is primarily attributable to increases during the first half of the year to discount and exit cap rates assumptions used in our property valuations. Total return is calculated as the percent change in the NAV per share from the beginning of the applicable period, plus the amount of any net distributions per share declared in the period. Management believes total return is a useful measure of the overall performance of our shares. As of September 30, 2024, no Class T shares of common stock had been issued.
•Annualized total returns from inception through September 30, 2024, excluding upfront selling commissions, were 6.47% for Class S, 7.54% for Class I, and -3.11% for Class D shares. Since inception returns for Class D shares are calculated from June 1, 2022, the date the first Class D shares were issued.
•Raised $29.8 million of gross proceeds from the sale of our common stock through public and private offerings during the three months ended September 30, 2024.
•Declared monthly net distributions totaling $14.4 million during the three months ended September 30, 2024. As of September 30, 2024, the annualized net distribution rate was 5.75% for Class S shares, 6.51% for Class I shares and 6.20% for Class D shares.
•Reinvested distributions of $8.7 million during the three months ended September 30, 2024.
Investing and Financing Activity:
•As of September 30, 2024, our leverage ratio was 52.3. Our leverage ratio is calculated by dividing (i) the consolidated property-level and entity-level debt, excluding any third-party interests in such debt, net of cash, loan-related restricted cash, and trading securities by (ii) the gross asset value of real estate equity investments (calculated using the greater of fair value and cost of gross real estate assets), excluding any third-party interests in such investments, plus our equity in real estate-related debt investments. There is no indebtedness on our real estate-related debt investments. The leverage ratio would be higher if our pro rata share of debt within our unconsolidated investment was included in the calculation.
•During the three months ended September 30, 2024, we sold Two Liberty Center for a gross sales price of $27.6 million ($0 of net sale proceeds after repayment of debt) and recognized a gain on debt extinguishment of $32.3 million.
•During the three months ended September 30, 2024, we refinanced The Parker at Huntington Metro with a $67.0 million mortgage loan from an affiliate of Brookfield in connection with the launch of our DST Program. We also repaid $93.5 million on a secured term loan to release The Parker at Huntington Metro.
Current Portfolio:
•As of September 30, 2024, our investment portfolio, based on the NAV of our investments, consisted of 90% real estate properties and 10% real estate-related loans and securities. NAV is measured as the fair value of our investments less any mortgages or debt obligations related to such investments. There is no indebtedness on our real estate-related debt investments.
•Our real estate properties as of September 30, 2024, based on fair value, consisted of rental housing (69%), net lease (21%), logistics (9%) and office (1%).
•As of September 30, 2024, our real estate-related loans and securities consisted of 45 investments with an aggregate fair value of $89.0 million.
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Portfolio
Investments in Real Estate
The following table provides information regarding our portfolio of real estate properties as of September 30, 2024:
|
Investment(1)
|
Location | Property Type | Acquisition Date |
Ownership Percentage(2)
|
Purchase Price(3)
|
Square Feet/ Number of Units |
Occupancy Rate(4)
|
|
| Anzio Apartments | Atlanta, GA | Rental Housing | April 2019 | 90% | $ | 59.2 | 448 | 94% |
| Arbors of Las Colinas | Dallas, TX | Rental Housing | December 2020 | 90% | 63.5 | 408 | 84% | |
| 1110 Key Federal Hill | Baltimore, MD | Rental Housing | September 2021 | 100% | 73.6 | 224 | 91% | |
| Domain | Orlando, FL | Rental Housing | November 2021 | 100% | 74.1 | 324 | 90% | |
| The Burnham | Nashville, TN | Rental Housing | November 2021 | 100% | 129.0 | 328 | 93% | |
| Flats on Front | Wilmington, NC | Rental Housing | December 2021 | 100% | 97.5 | 273 | 95% | |
| Verso | Beaverton, OR | Rental Housing | December 2021 | 100% | 74.0 | 172 | 92% | |
| 2626 South Side Flats | Pittsburgh, PA | Rental Housing | January 2022 | 100% | 90.0 | 264 | 94% | |
| The Parker at Huntington Metro | Alexandria, VA | Rental Housing | March 2022 | 100% | 136.0 | 360 | 93% | |
| Briggs + Union | Mount Laurel, NJ | Rental Housing | April 2022 | 100% | 158.0 | 490 | 93% | |
| Single-Family Rentals | Various | Rental Housing | Various | 100% | 178.5 | 667 | 91% | |
| Reflection | Atlanta, GA | Rental Housing | June 2024 | 97% | 116.0 | 741 | 79% | |
|
Principal Place(5)
|
London, UK | Net Lease | November 2021 | 20% | 99.8 | 644,000 | 100% | |
| DreamWorks Animation Studios | Glendale, CA | Net Lease | December 2021 | 100% | 326.5 | 497,000 | 100% | |
| Lakes at West Covina | Los Angeles, CA | Office | February 2020 | 95% | 41.0 | 177,000 | 91% | |
| 6123-6227 Monroe Ct | Morton Grove, IL | Logistics | November 2021 | 100% | 17.2 | 208,000 | 100% | |
| 8400 Westphalia Road | Upper Marlboro, MD | Logistics | November 2021 | 100% | 27.0 | 100,000 | 100% | |
| McLane Distribution Center | Lakeland, FL | Logistics | November 2021 | 100% | 26.7 | 211,000 | 100% | |
| 2003 Beaver Road | Landover, MD | Logistics | February 2022 | 100% | 9.4 | 38,000 | 100% | |
| 187 Bartram Parkway | Franklin, IN | Logistics | February 2022 | 100% | 28.8 | 300,000 | 100% | |
| Total | $ | 1,825.8 |
| (1) | Investments in real estate properties includes our consolidated property investments and our unconsolidated investment in Principal Place. |
| (2) | The joint venture agreements entered into by us (other than the Principal Place joint venture) provide the other partner a profits interest based on achieving certain internal rate of return hurdles. Such investments are consolidated by us and any profits interest due to the other partners is reported within non-controlling interests. |
| (3) | Purchase price is presented in millions and excludes acquisition costs. |
| (4) |
For rental housing investments, except single-family rentals, occupancy represents the percentage of all leased units divided by the total available units as of September 30, 2024. Single-family rentals occupancy represents all occupied homes divided by the total stabilized homes as of the date indicated. For office, net lease and logistics investments, occupancy represents the percentage of all leased square footage divided by the total available square footage as of September 30, 2024.
|
| (5) |
Purchase price represents our initial equity investment in the joint venture of £73.3 million GBP converted to USD using the spot rate on the acquisition date. |
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Investments in Real Estate-Related Loans and Securities
The following table details our investments in real estate-related loans as of September 30, 2024 ($ in thousands):
| Investment | Collateral |
Interest Rate(1)
|
Maturity Date | Payment Terms | Face Amount | Allowance Adjustment | Carrying Amount | |||
| IMC/AMC Bond Investment |
International Markets Center AmericasMart Atlanta |
SOFR+8.15%
|
June 2026 | Principal due at maturity | $ | 10,000 | $ | - | $ | 10,000 |
|
The Avery Senior Loan(2)
|
The Avery Condominium San Francisco, California |
10.00% | December 2024 |
Principal due at maturity(3)
|
7,407 | (1,560) | 5,847 | |||
|
The Avery Mezzanine Loan(2)
|
The Avery Condominium San Francisco, California |
10.00% | December 2024 |
Principal due at maturity(3)
|
1,794 | (350) | 1,444 | |||
| Total | $ | 19,201 | $ | (1,910) | $ | 17,291 |
| (1) |
As of September 30, 2024, SOFR was 4.84%.
|
| (2) | Our investment is held through our membership interest in an entity that aggregates our interest with interests held by other funds managed by the Sub-Adviser. We have been allocated our proportionate share of the loan based on our membership interest in the aggregating entity. In December 2023, the loan agreements were amended to change the interest rate to 10.00% and extend the maturity date to December 2024. |
| (3) |
The maturity date may be extended for additional one-year periods, but no later than February 16, 2028, subject to the borrower meeting minimum annual repayment requirements. Generally, loan repayments are made simultaneous with the closing of the sale of any condominium unit.
|
The following table details our investments in real estate-related securities as of September 30, 2024 ($ in thousands):
| September 30, 2024 | |||||||||
| Type of Security | Number of Positions |
Weighted Average Coupon(1)
|
Weighted Average Maturity Date(2)
|
Face Amount | Cost Basis | Fair Value | |||
| CMBS - floating | 4 | SOFR+3.84% | August 2026 | $ | 27,669 | $ | 25,527 | $ | 24,857 |
| CMBS - fixed | 9 | 4.56% | May 2026 | 23,413 | 20,650 | 9,528 | |||
| RMBS - fixed | 27 | 5.39% | August 2026 | 37,182 | 36,228 | 36,822 | |||
| Interest rate swaps | 2 | 4.40% | September 2026 | - | - | $ | 412 | ||
| Total | 42 |
6.62%(3)
|
July 2026 | $ | 88,264 | $ | 82,405 | $ | 71,619 |
| (1) |
As of September 30, 2024, SOFR was 4.84%.
|
| (2) | Weighted average maturity date is based on the fully extended maturity date of the investments. |
| (3) | Total weighted average coupon is calculated on CMBS and RMBS and excludes interest rate swaps. |
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Lease Expirations
The following table details the expiring leases at our consolidated office, logistics, and net lease properties by annualized base rent and square footage as of September 30, 2024 ($ and square feet data in thousands). The table below excludes our rental housing properties as substantially all leases at such properties expire within 12 months.
| Year | Number of Expiring Leases |
Annualized Base Rent(1)
|
% of Total
Annualized Base
Rent Expiring
|
Square Feet | % of Total Square Feet Expiring | |||
| 2024 (remaining) | 2 | $ | 125 | - | % | 4 | - | % |
| 2025 | 12 | 1,654 | 6 | % | 75 | 5 | % | |
| 2026 | 6 | 1,542 | 6 | % | 67 | 4 | % | |
| 2027 | 6 | 744 | 3 | % | 46 | 3 | % | |
| 2028 | 9 | 1,541 | 6 | % | 75 | 5 | % | |
| 2029 | 9 | 1,656 | 6 | % | 172 | 11 | % | |
| 2030 | 6 | 1,166 | 4 | % | 72 | 5 | % | |
| 2031 | 2 | 260 | 1 | % | 8 | 1 | % | |
| 2032 | 1 | 1,366 | 5 | % | 211 | 14 | % | |
| 2033 | 2 | 106 | - | % | 3 | - | % | |
| Thereafter | 3 | 16,759 | 63 | % | 767 | 52 | % | |
| Total | 58 | $ | 26,919 | 100 | % | 1,500 | 100 | % |
| (1) |
Annualized base rent is determined from the annualized base rent per leased square foot of the applicable year and excludes tenant recoveries, straight-line rent, and above-market and below-market lease amortization.
|
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Results of Operations
The following table sets forth information regarding our consolidated results of operations ($ in thousands):
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||
| 2024 | 2023 | $ | 2024 | 2023 | $ | |||||||
| Revenues | ||||||||||||
| Rental revenues | $ | 33,715 | $ | 32,076 | $ | 1,639 | $ | 96,765 | $ | 96,051 | $ | 714 |
| Other revenues | 5,676 | 3,248 | 2,428 | 11,366 | 9,453 | 1,913 | ||||||
| Total revenues | 39,391 | 35,324 | 4,067 | 108,131 | 105,504 | 2,627 | ||||||
| Expenses | ||||||||||||
| Rental property operating | 13,571 | 13,329 | 242 | 39,206 | 39,937 | (731) | ||||||
| General and administrative | 2,295 | 1,855 | 440 | 6,078 | 6,400 | (322) | ||||||
| Management fee | 2,715 | 3,397 | (682) | 8,544 | 10,655 | (2,111) | ||||||
| Impairment of investments in real estate | 33,922 | - | 33,922 | 33,922 | - | 33,922 | ||||||
| Depreciation and amortization | 16,209 | 12,999 | 3,210 | 43,307 | 38,568 | 4,739 | ||||||
| Total expenses | 68,712 | 31,580 | 37,132 | 131,057 | 95,560 | 35,497 | ||||||
| Other income (expense) | ||||||||||||
| Income from real estate-related loans and securities | 4,453 | 2,512 | 1,941 | 14,822 | 13,356 | 1,466 | ||||||
| Interest expense | (18,957) | (15,061) | (3,896) | (52,284) | (43,491) | (8,793) | ||||||
| Gain on extinguishment of debt | 32,251 | - | 32,251 | 32,251 | - | 32,251 | ||||||
| Gain (loss) from unconsolidated entities | 1,554 | 1,089 | 465 | 5,278 | (1,316) | 6,594 | ||||||
| Other income (expense), net | (476) | 3,605 | (4,081) | 1,707 | 8,854 | (7,147) | ||||||
| Total other income (expense) | 18,825 | (7,855) | 26,680 | 1,774 | (22,597) | 24,371 | ||||||
| Net loss | $ | (10,496) | $ | (4,111) | $ | (6,385) | $ | (21,152) | $ | (12,653) | $ | (8,499) |
| Net loss attributable to non-controlling interests in third party joint ventures | 289 | 192 | 97 | 722 | 235 | 487 | ||||||
| Net income attributable to non-controlling interests - preferred stockholders | (3) | - | (3) | (69) | (45) | (24) | ||||||
| Net loss attributable to redeemable non-controlling interests | 10 | 4 | 6 | 20 | 10 | 10 | ||||||
| Net loss attributable to stockholders | $ | (10,200) | $ | (3,915) | $ | (6,285) | $ | (20,479) | $ | (12,453) | $ | (8,026) |
| Per common share data: | ||||||||||||
| Net loss per share of common stock - basic and diluted | $ | (0.12) | $ | (0.04) | $ | (0.08) | $ | (0.24) | $ | (0.13) | $ | (0.11) |
| Weighted average number of shares outstanding - basic and diluted | 83,441 | 92,447 | (9,006) | 85,676 | 93,557 | (7,881) |
Revenues
Revenues primarily consist of base rent arising from tenant leases at our rental housing, net lease, office and logistics properties. During the three and nine months ended September 30, 2024, revenues increased $4.1 million to $39.4 million and increased $2.6 million to $108.1 million compared to the three and nine months ended September 30, 2023, respectively. The increase was primarily due to property acquisitions at our rental housing properties, which was partially offset by decreased rental revenues at our office properties.
The components of revenue during these periods are as follows ($ in thousands):
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||
| 2024 | 2023 | $ | 2024 | 2023 | $ | |||||||
| Rental revenue | $ | 31,354 | $ | 29,698 | $ | 1,656 | $ | 89,780 | $ | 87,125 | $ | 2,655 |
| Tenant reimbursements | 2,361 | 2,378 | (17) | 6,985 | 8,926 | (1,941) | ||||||
| Ancillary income and fees | 5,676 | 3,248 | 2,428 | 11,366 | 9,453 | 1,913 | ||||||
| Total revenue | $ | 39,391 | $ | 35,324 | $ | 4,067 | $ | 108,131 | $ | 105,504 | $ | 2,627 |
Rental Property Operating Expenses
Rental property operating expenses consist of the costs of ownership and operation of our real estate properties, including real estate taxes, repairs and maintenance expenses, utilities, property management fees, and insurance expenses. During the three and nine months ended September 30, 2024, rental property operating expenses increased $0.2 million to $13.6 million and decreased $0.7 million to $39.2 million compared to the three and nine months ended September 30, 2023, respectively. The increase in operating expenses for the three month period is attributable to acquisition activity in 2024. The decrease for the
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nine months ended was primarily driven by a decrease in real estate taxes, offset by increase operating expenses attributable to acquisition activity.
General and Administrative Expenses
General and administrative expenses are corporate-level expenses that relate mainly to our compliance and administration costs, including legal fees, audit fees, professional tax fees, valuation fees, board of director fees and other professional fees. During the three and nine months ended September 30, 2024, general and administrative expenses increased $0.4 million to $2.3 million and decreased $0.3 million to $6.1 million compared to the three and nine months ended September 30, 2023, respectively. The decrease in general and administrative expenses for the nine months ended was primarily driven by a decrease in professional fees.
Management Fee
Management fees are earned by our Adviser for providing services pursuant to the Advisory Agreement. During the three and nine months ended September 30, 2024, management fees decreased $0.7 million to $2.7 million and decreased $2.1 million to $8.5 million compared to the three and nine months ended September 30, 2023, respectively. Management fees are calculated based on our aggregate NAV of Class S, Class I, Class T, Class D, and Class C shares (no management fees are paid on Class E shares) and are paid monthly. The decrease in management fees for three and nine months ended September 30, 2024, compared to the corresponding periods in the prior year was due to a lower average NAV during the current periods.
Impairment of Investments in Real Estate
During the three and nine months ended September 30, 2024, we recognized an impairment charge of $33.9 million related to an office property. The impairment was related to the property being classified as held for sale upon entering into a contract to sell the property. We did not recognize any impairment during the corresponding periods in 2023.
Depreciation and Amortization
During the three and nine months ended September 30, 2024, depreciation and amortization increased $3.2 million to $16.2 million and increased $4.7 million to $43.3 million compared to the three and nine months ended September 30, 2023, respectively. The increase was primarily attributable to net growth in our portfolio as a result of acquisition activity, partially offset by the full amortization of certain intangible assets and the disposition of an office property.
Income from Real Estate-Related Loans and Securities
During the three and nine months ended September 30, 2024, income from real estate-related loans and securities increased $1.9 million to $4.5 million and increased $1.5 million to $14.8 million compared to the three and nine months ended September 30, 2023, respectively. The increase is attributable to changes in expected credit loss on real estate-related loans and the fair value of real estate-related securities, offset by a decrease in interest income from the sales of real estate-related securities.
Interest Expense
Interest expense is primarily related to interest incurred on our mortgage loans, Secured Credit Facility and Affiliate Line of Credit. Interest expense increased $3.9 million to $19.0 million and increased $8.8 million to $52.3 million during the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023, respectively. The increase is attributable to the interest incurred on mortgage loans for properties acquired in the past nine months and the termination of interest rate derivatives. As of September 30, 2024, our weighted average cost of leverage, including the impact of our interest rate derivatives, was 5.58%, compared to 5.07% as of September 30, 2023.
Gain on Extinguishment of Debt
During the three and nine months ended September 30, 2024, we recognized a gain on extinguishment of debt of $32.3 million related to the sale of an office property. We did not recognize any gain on extinguishment of debt during the corresponding periods in 2023.
Gain (Loss) from Unconsolidated Entities
Gain (loss) from unconsolidated entities consists of changes in the fair value of our investments in unconsolidated entities that are held at fair value, as well as realized and unrealized gains and losses on our foreign currency swap contracts related to our unconsolidated non-U.S. investment in Principal Place. During the three and nine months ended September 30, 2024 there were gains of $1.6 million and $5.3 million, respectively, from unconsolidated entities. During the three and nine months ended September 30, 2023 there were gains of $1.1 million and losses of $1.3 million, respectively, from unconsolidated entities. The gains and losses were primarily due to changes in the fair value of our unconsolidated interest in Principal Place.
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Other Income (Expense), Net
Other income, net consists of realized and unrealized gains and losses on our interest rate derivatives and income from our trading securities. During the three and nine months ended September 30, 2024, other income decreased $4.1 million to $0.5 million and decreased $7.1 million to $1.7 million compared to the three and nine months ended September 30, 2023, respectively. The decrease was primarily due to net losses on our derivative contracts.
Net Loss Attributable to Redeemable Non-Controlling Interests
Net loss attributable to redeemable non-controlling interests was less than $0.0 million for the nine months ended September 30, 2024 and 2023. The income or loss allocable to redeemable non-controlling interests is related to interests held in the Operating Partnership by parties other than us.
Reimbursement by the Adviser
Pursuant to the Advisory Agreement, the Adviser will reimburse us for any expenses that cause our Total Operating Expenses (as defined in our charter) in any four consecutive fiscal quarters to exceed the greater of: (i) 2% of our Average Invested Assets or (ii) 25% of our Net Income (each as defined in our charter) (the "2%/25% Limitation"). For the four consecutive quarters ended September 30, 2024, our Total Operating Expenses did not exceed the 2%/25% Limitation.
Liquidity and Capital Resources
Our primary needs for liquidity are to fund investments, to make distributions to our stockholders, to repurchase shares of our common stock pursuant to our share repurchase plan, to pay our offering and operating expenses, to fund capital expenditures at our properties and to pay debt service on our outstanding indebtedness. Our operating expenses include, among other things, fees and expenses related to managing our properties and other investments, the management and performance fees we pay to the Adviser (to the extent the Adviser elects to receive such fees in cash) and general corporate expenses.
We believe that our current liquidity position is sufficient to meet the operating needs of our business, with $282.8 million of liquidity as of September 30, 2024, consisting of $28.8 million of unrestricted cash and cash equivalents, $155.5 million of undrawn available capacity on our Secured Credit Facility and $98.5 million of undrawn available capacity on our Affiliate Line of Credit. We may also generate additional liquidity through the sale of our real estate-related securities, which totaled $71.6 million as of September 30, 2024.
Our portfolio remains conservatively leveraged at 52.3 as of September 30, 2024, and we can generate additional liquidity by incurring indebtedness secured by our investments. Our leverage ratio is calculated by dividing (i) the consolidated property-level and entity-level debt, excluding any third-party interests in such debt, net of cash, loan-related restricted cash, and trading securities by (ii) the gross asset value of real estate equity investments (calculated using the greater of fair value and cost of gross real estate assets), excluding any third-party interests in such investments, plus our equity in real estate-related debt investments. Additionally, there is no indebtedness on our real estate-related debt investments.
Our cash needs for acquisitions and other investments will be funded primarily from the sale of shares of our common stock and through the assumption or incurrence of debt. During the three months ended September 30, 2024, we received $29.8 million of proceeds from the sale of shares of our common stock. In addition, during the three and nine months ended September 30, 2024, we repurchased $54.4 million and $159.3 million, respectively, in shares of our common stock under our share repurchase plan. Since inception, we have satisfied 100% of repurchase requests.
The following table is a summary of our indebtedness as of September 30, 2024 ($ in thousands):
| Principal Balance Outstanding | |||||
| Indebtedness |
Weighted Average Interest Rate(1)
|
Weighted Average Maturity Date(2)
|
Maximum Facility Size | September 30, 2024 | |
| Fixed rate loans: | |||||
| Fixed rate mortgages | 3.84% | December 2029 | N/A | $ | 395,720 |
| Total fixed rate loans | 395,720 | ||||
| Variable rate loans: | |||||
| Floating rate mortgages | SOFR+1.73% | September 2027 | N/A | 524,705 | |
|
Secured credit facility(3)
|
SOFR+2.00% | January 2025 | $300,000 | 144,485 | |
|
Affiliate line of credit(4)
|
SOFR+2.25% | November 2025 | $125,000 | 26,500 | |
| Total variable rate loans | 695,690 | ||||
| Total indebtedness | 1,091,410 | ||||
| Deferred financing costs, net | (4,295) | ||||
| Total indebtedness, net | $ | 1,087,115 |
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| (1) | As of September 30, 2024 and December 31, 2023, SOFR was 4.84% and 5.38%, respectively. |
| (2) | Includes the fully extended maturity date for loans with extension options that are at our discretion and we currently expect to be able to exercise. |
| (3) |
As of September 30, 2024, borrowings on the Secured Credit Facility were secured by the following properties: 6123-6227 Monroe Court, 2003 Beaver Road, 187 Bartram Parkway, Cannondale Court, Timber Leaf and certain single-family rentals.
|
| (4) | Borrowings under the Affiliate Line of Credit bear interest at a rate of the lowest then-current interest rate for any similar credit product offered by a third-party lender to us or our subsidiaries or, if not available, SOFR plus a 0.10% credit adjustment and a 2.25% margin. |
Cash Flows
The following table provides a breakdown of the net change in our cash and cash equivalents and restricted cash ($ in thousands):
| Nine months ended | ||||
| September 30, 2024 | September 30, 2023 | |||
| Cash flows provided by operating activities | $ | 34,744 | $ | 23,165 |
| Cash flows provided by investing activities | 51,117 | 35,395 | ||
| Cash used in financing activities | (87,465) | (82,576) | ||
| Net change in cash and cash equivalents and restricted cash | $ | (1,604) | $ | (24,016) |
Cash flows provided by operating activities increased $11.6 million during the nine months ended September 30, 2024, compared to the corresponding period in 2023. The increase is primarily due to $9.6 million of proceeds received in the current period from the settlement of interest rate swap contracts.
Cash flows provided by investing activities increased $15.7 million for the nine months ended September 30, 2024, compared to the corresponding period in 2023. The increase is primarily due to a $46.3 million increase in cash from the sale of trading securities (net of purchases of trading securities) and a $110.4 million increase in cash from the sale of real estate-related securities (net of purchases of real estate-related securities), partially offset by a $139.5 million increase in cash used in the acquisition of real estate (net of dispositions of real estate).
Cash flows used in financing activities increased $4.9 million for the nine months ended September 30, 2024, compared to the corresponding period in 2023. The increase is primarily due to a $47.4 million decrease in proceeds from the issuance of common stock and a $17.7 million increase in repurchases of common stock, partially offset by $57.7 million of net proceeds received in the current period from borrowings on mortgage loans, the Secured Credit Facility, and the Affiliate Line of Credit.
Net Asset Value
Our board of directors, including a majority of our independent directors, has adopted valuation guidelines that contain a comprehensive set of methodologies to be used by the Adviser and our independent valuation advisor in connection with estimating the values of our assets and liabilities for purposes of our NAV calculation. The calculation of our NAV is intended to be a calculation of the fair value of our assets less our outstanding liabilities and will likely differ from the book value of our equity reflected in our financial statements. The purchase and repurchase price per share for each class of our common stock is the then-current transaction price, which generally equals our prior month's NAV per share, as determined monthly, plus, for purchases only, applicable selling commissions and dealer manager fees.
For more information on the calculation of our NAV and the valuation method used, please refer to Item 5 of our Annual Report on Form 10-K for the year ended December 31, 2023.
Our total NAV presented in the following tables includes the NAV of our Class S, Class I, Class T, Class D, Class C and Class E shares of common stock, as well as partnership interests in the Operating Partnership held by parties other than us. The
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following table provides a breakdown of the major components of our NAV as of September 30, 2024 ($ and shares/units in thousands):
| Components of NAV | September 30, 2024 | |
| Investments in real estate | $ | 1,804,920 |
| Investments in real estate-related loans and securities | 88,976 | |
| Investments in unconsolidated entities | 86,145 | |
| Cash and cash equivalents | 28,811 | |
| Restricted cash | 10,286 | |
| Other assets | 14,231 | |
| Debt obligations | (1,072,559) | |
|
Accrued stockholder servicing fees(1)
|
(225) | |
| Management fee payable | (899) | |
| Dividend payable | (4,762) | |
| Subscriptions received in advance | (2,713) | |
| Other liabilities | (43,058) | |
| Non-controlling interests in joint ventures | (12,406) | |
| Net asset value | $ | 896,747 |
| Number of shares/units outstanding | 81,415 |
| (1) |
Stockholder servicing fees only apply to Class S, Class T and Class D shares. For purposes of NAV, we recognize the stockholder servicing fee as a reduction of NAV on a monthly basis as such fee is paid. Under GAAP, we accrue the full cost of the stockholder servicing fee as an offering cost at the time we sell Class S, Class T and Class D shares of our common stock. As of September 30, 2024, we have accrued under GAAP approximately $18.6 million of stockholder servicing fees.
|
The following table provides a breakdown of our total NAV and NAV per share/unit by class as of September 30, 2024 ($ and shares/units in thousands, except per share/unit data):
| NAV Per Share/Unit |
Class S Shares |
Class I Shares |
Class D Shares |
Class T Shares |
Class C Shares(1)
|
Class E Shares(1)
|
Third-party
OP Units(2)
|
Total | ||||||||
| Net asset value | $ | 309,775 | $ | 454,512 | $ | 1,645 | $ | - | $ | 91,532 | $ | 38,354 | $ | 929 | $ | 896,747 |
| Number of shares/units outstanding | 28,225 | 41,018 | 147 | - | 8,476 | 3,465 | 84 | 81,415 | ||||||||
|
NAV Per Share/Unit as of September 30, 2024
|
$ | 10.9753 | $ | 11.0809 | $ | 11.1828 | $ | - | $ | 10.7991 | $ | 11.0677 | $ | 11.0677 |
| (1) | Class C and Class E shares of our common stock are offered to investors pursuant to private offerings. |
| (2) | Includes the OP Units held by parties other than us. |
As of September 30, 2024, no Class T shares had been issued.
Set forth below are the weighted averages of the key assumptions in the discounted cash flow methodology used in the September 30, 2024 valuations, based on property types.
| Property Type | Discount Rate | Exit Capitalization Rate |
| Rental Housing | 7.2% | 5.8% |
| Net Lease | 6.8% | 5.9% |
| Office | 8.3% | 7.5% |
| Logistics | 7.1% | 6.0% |
These assumptions are determined by our independent valuation advisor and our independent third-party appraisal firms (other than international properties, which are determined by the Adviser and reviewed by our independent valuation advisor). A change in these assumptions would impact the calculation of the value of our property investments. For example, assuming all other factors remain unchanged, the changes listed below would result in the following effects on our investment values:
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| Input | Hypothetical Change |
Rental Housing Investment Values |
Net Lease Investment Values |
Office Investment Values |
Logistics Investment Values |
| Discount Rate | .25% Decrease | 1.7% | 2.2% | 1.9% | 2.0% |
| (weighted average) | .25% Increase | (1.7)% | (2.1)% | (1.9)% | (2.0)% |
| Exit Capitalization Rate | .25% Decrease | 2.8% | 2.8% | 2.2% | 2.8% |
| (weighted average) | .25% Increase | (2.6)% | (2.6)% | (2.2)% | (2.4)% |
The preceding tables do not include recently acquired properties, which are held at cost in accordance with our valuation guidelines.
The following table reconciles Stockholders' Equity per our Consolidated Balance Sheets to our NAV ($ in thousands):
|
Reconciliation of Stockholders' Equity to NAV
|
September 30, 2024 | |
| Stockholders' equity under U.S. GAAP | $ | 672,811 |
| Redeemable non-controlling interest | 930 | |
| Total partners' capital of Operating Partnership under GAAP | 673,741 | |
| Adjustments: | ||
| Accrued stockholder servicing fee | 18,368 | |
| Deferred rent | (6,214) | |
| Advanced organizational and offering costs | 7,891 | |
| Unrealized net real estate appreciation | 15,568 | |
| Accumulated depreciation and amortization | 187,393 | |
| NAV | $ | 896,747 |
The following details the adjustments to reconcile stockholders' equity under GAAP to our NAV:
•Accrued stockholder servicing fee represents the accrual for the full cost of the stockholder servicing fee for Class S and Class D shares. Under GAAP, we accrued the full cost of the stockholder servicing fee payable over the life of each share (assuming such share remains outstanding the length of time required to pay the maximum stockholder servicing fee) as an offering cost at the time we sold such share. Refer to Note 2 - "Summary of Significant Accounting Policies" to our consolidated financial statements for further details of the GAAP treatment regarding the stockholder servicing fee. For purposes of calculating NAV, we recognize the stockholder servicing fee as a reduction of NAV on a monthly basis when such fee is paid.
•Deferred rent represents straight line rental revenue recorded under GAAP. For purposes of calculating NAV, deferred rental revenues are excluded.
•The Adviser and its affiliates advanced organization and offering expenses on our behalf (other than upfront selling commissions, dealer manager fees and stockholder servicing fees) through July 5, 2023, subject to the following reimbursement terms: (1) all such advanced expenses paid through July 5, 2022 are reimbursed ratably over the 60 months following July 6, 2022; and (2) all such advanced expenses paid from July 6, 2022 through July 5, 2023 are reimbursed ratably over the 60 months following July 6, 2023. Under GAAP, organization costs are expensed as incurred and offering costs are charged to equity as such amounts are incurred. For purposes of calculating NAV, such costs are recognized as a reduction to NAV as they are reimbursed to the Adviser.
•Our investments in real estate are presented at their depreciated historical cost basis in our GAAP consolidated financial statements. Our investments in real estate-related loans are presented at their amortized cost basis in our GAAP consolidated financial statements. Additionally, our mortgage loans, term loans, and credit facilities ("Debt") are presented at their carrying value in our GAAP consolidated financial statements. As such, any changes in the fair market value of our investments in real estate, investments in real estate-related loans or Debt are not included in our GAAP results. For purposes of calculating NAV, our investments in real estate, investments in real estate-related loans, and our Debt are recorded at fair value and any changes in fair value are recognized as unrealized net real estate appreciation.
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•We depreciate our investments in real estate and amortize certain other assets and liabilities in accordance with GAAP. For the purposes of calculating NAV, such depreciation and amortization is excluded.
Funds from Operations, Adjusted Funds from Operations and Funds Available for Distribution
We believe funds from operations ("FFO") is a meaningful non-GAAP supplemental measure of our operating results. Our Consolidated Financial Statements are presented under historical cost accounting which, among other things, requires depreciation of real estate investments to be calculated on a straight-line basis. As a result, our operating results imply that the value of our real estate investments will decrease evenly over a set time period. However, we believe that the value of real estate investments will fluctuate over time based on market conditions and as such, depreciation under historical cost accounting may be less informative. FFO is a standard REIT industry metric defined by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO, as defined by NAREIT and presented below, is calculated as net income or loss (computed in accordance with GAAP), excluding (i) gains or losses from sales of depreciable real property, (ii) impairment write-downs on depreciable real property, plus (iii) real estate-related depreciation and amortization, and (iv) after adjustments for our share of consolidated and unconsolidated joint ventures.
We also believe that adjusted FFO ("AFFO") is a meaningful non-GAAP supplemental measure of our operating results. AFFO further adjusts FFO in order for our operating results to reflect the specific characteristics of our business by adjusting for items we believe are not related to our operations. Our adjustments to FFO to arrive at AFFO include removing the impact of (i) straight-line rental income, (ii) amortization of above- and below-market lease intangibles, (iii) amortization of mortgage premium/discount, (iv) organization costs, (v) amortization of restricted stock awards, (vi) unrealized gains and losses from changes in fair value of real estate-related loans and securities, (vii) non-cash performance fee or other non-cash incentive compensation, and (viii) similar adjustments for unconsolidated joint ventures.
We also believe funds available for distribution ("FAD") is an additional meaningful non-GAAP supplemental measure that provides useful information for considering our operating results and certain other items relative to the amount of our distributions. FAD is calculated as AFFO adjusted for (i) management fees paid in shares or operating partnership units, even if subsequently repurchased by us, (ii) realized gains and losses on investments in real estate-related loans and securities, (iii) realized gains and losses on financial instruments, (iv) stockholder servicing fees paid during the period, and (v) similar adjustments for unconsolidated joint ventures. FAD is not indicative of cash available to fund our cash needs and does not represent cash flows from operating activities in accordance with GAAP, as it excludes adjustments for working capital items and actual cash receipts from interest income recognized on real estate related securities. Cash flows from operating activities in accordance with GAAP would generally be adjusted for such items. Furthermore, FAD is adjusted for stockholder servicing fees which are not considered when determining cash flows from operating activities in accordance with GAAP.
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The following table presents a reconciliation of FFO, AFFO and FAD to net loss attributable to our stockholders and redeemable non-controlling interests. We believe it is meaningful to include redeemable non-controlling interests since it is a component of our NAV ($ in thousands):
| For the three months ended |
For the nine months ended
|
|||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||
| Net loss attributable to REIT shareholders including Redeemable non-controlling interest | $ | (10,210) | $ | (3,919) | $ | (20,499) | $ | (12,463) |
| Adjustments to arrive at FFO: | ||||||||
| Depreciation and amortization | 16,209 | 12,999 | 43,307 | 38,568 | ||||
| Impairment of investments in real estate | 33,922 | - | 33,922 | - | ||||
| Gain on extinguishment of debt | (32,251) | - | (32,251) | - | ||||
| Amount attributed to non-controlling interests of third party joint ventures for above adjustments | (210) | (208) | (645) | (605) | ||||
| FFO attributable to stockholders and redeemable non-controlling interests | 7,460 | 8,872 | 23,834 | 25,500 | ||||
| Adjustments to arrive at AFFO: | ||||||||
| Straight-line rental income | (536) | (484) | (2,163) | $ | (1,298) | |||
| Amortization of above and below market lease intangibles, net | (206) | (230) | (583) | (768) | ||||
| Amortization of deferred financing costs | 1,052 | 811 | 2,642 | 2,401 | ||||
| Amortization of upfront derivative acquisition costs | 427 | 517 | 1,431 | - | 1,427 | |||
| Amortization of origination fees and discount | - | (22) | - | (70) | ||||
| Amortization of restricted stock awards | 81 | 65 | 242 | 242 | ||||
|
Unrealized gain on investments, net(1)
|
(708) | (4,497) | (27) | (6,064) | ||||
| Provision for current expected credit losses | 96 | 465 | (134) | 1,765 | ||||
| Amount attributed to non-controlling interests of third party joint ventures for above adjustments | (61) | (71) | (129) | 133 | ||||
| AFFO attributable to stockholders and redeemable non-controlling interests | 7,605 | 5,426 | 25,113 | 23,268 | ||||
| Adjustments to arrive at FAD: | ||||||||
| Non-cash management fee | 2,715 | 3,397 | 8,544 | 10,655 | ||||
| Realized gain on sale of real estate-related loans and securities | (3,130) | (742) | (7,384) | (1,246) | ||||
|
Realized (gain) loss on financial instruments(2)
|
776 | 4,175 | (2,839) | 4,070 | ||||
| Stockholder servicing fees | (693) | (965) | (2,272) | (3,002) | ||||
| FAD attributable to stockholders and redeemable non-controlling interests | $ | 7,273 | $ | 11,291 | $ | 21,162 | $ | 33,745 |
| (1) |
Unrealized gain on investments, net relates to provisions for current estimated credit losses and mark-to-market changes on our investments in real estate-related securities, derivative contracts, and investments in unconsolidated entities reported at fair value. For the three and nine months ended 2024 unrealized gain on investments, net includes $1.4 million and $4.1 million, respectively, of net operating income less interest expense attributable to our unconsolidated investment in Principal Place. For the three and nine months ended 2023 unrealized gain on investments, net includes $0.9 million and $3.0 million, respectively, of net operating income less interest expense attributable to our unconsolidated investment in Principal Place.
|
| (2) | Realized gain on financial instruments relates to settlements on our derivatives contracts. |
FFO, AFFO, and FAD should not be considered more relevant or accurate than the GAAP methodology in calculating net income (loss) or in evaluating our operating performance. In addition, FFO, AFFO, and FAD should not be considered as alternatives to net income (loss) as indications of our performance or as alternatives to cash flows from operating activities as indications of our liquidity, but rather should be reviewed in conjunction with these and other GAAP measurements. Further, FFO, AFFO, and FAD are not intended to be used as liquidity measures indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders.
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Distributions
We generally intend to distribute substantially all of our taxable income, which does not necessarily equal net income as calculated in accordance with GAAP, to our stockholders each year to satisfy the requirements for qualification as a REIT under the Code.
In December 2019, we began declaring monthly distributions for each class of our common stock, which are generally paid 20 days after month-end. Each class of our common stock receives the same aggregate gross distribution per share. The net distribution varies for each class based on the applicable stockholder servicing fees, management fees and performance fees, which are deducted from the monthly distribution per share.
The following table details the aggregate net distributions declared for each applicable class of common stock for the three months ended September 30, 2024:
| Three Months Ended September 30, 2024 | ||||||||||||
| Class S | Class I | Class D |
Class T(1)
|
Class C | Class E | |||||||
| Aggregate gross distributions declared per share of common stock | $ | 0.2142 | $ | 0.2142 | $ | 0.2142 | $ | - | $ | 0.2142 | $ | 0.2142 |
| Stockholder servicing fee per share of common stock | (0.0236) | - | (0.0071) | - | - | - | ||||||
| Management fee per share of common stock | (0.0345) | (0.0348) | (0.0351) | - | (0.0339) | - | ||||||
| Net distributions declared per share of common stock | $ | 0.1561 | $ | 0.1794 | $ | 0.1720 | $ | - | $ | 0.1803 | $ | 0.2142 |
| Nine Months Ended September 30, 2024 | ||||||||||||
| Class S | Class I | Class D |
Class T(1)
|
Class C | Class E | |||||||
| Aggregate gross distributions declared per share of common stock | $ | 0.6447 | $ | 0.6447 | $ | 0.6447 | $ | - | $ | 0.6447 | $ | 0.6447 |
| Stockholder servicing fee per share of common stock | (0.0718) | - | (0.0214) | - | - | - | ||||||
| Management fee per share of common stock | (0.1056) | (0.1065) | (0.1073) | - | (0.1040) | - | ||||||
| Net distributions declared per share of common stock | $ | 0.4673 | $ | 0.5382 | $ | 0.5160 | $ | - | $ | 0.5407 | $ | 0.6447 |
| (1) |
We did not have any Class T shares of common stock issued or outstanding, thus no distributions were declared for Class T during the nine months ended September 30, 2024.
|
The following tables summarize our distributions declared during the three and nine months ended September 30, 2024 and 2023 ($ in thousands):
| Three months ended September 30, 2024 | Three months ended September 30, 2023 | |||||||
| Amount | Percentage | Amount | Percentage | |||||
| Distributions | ||||||||
| Payable in cash | $ | 5,741 | 40 | % | $ | 6,756 | 43 | % |
| Reinvested in shares | 8,661 | 60 | % | 9,021 | 57 | % | ||
| Total distributions | $ | 14,402 | 100 | % | $ | 15,777 | 100 | % |
| Sources of Distributions | ||||||||
| Cash flows from operating activities | $ | 6,733 | 47 | % | $ | 15,777 | 100 | % |
|
Cash flow from other sources(2)
|
7,669 | 53 | % | - | - | % | ||
| Total sources of distributions | $ | 14,402 | 100 | % | $ | 15,777 | 100 | % |
| Cash flows from operating activities | $ | 6,733 | $ | 6,394 | ||||
|
Funds from Operations(1)
|
$ | 7,460 | $ | 8,872 | ||||
|
Adjusted Funds from Operations(1)
|
$ | 7,605 | $ | 4,514 | ||||
|
Funds Available for Distribution(1)
|
$ | 7,273 | $ | 10,379 |
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| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||
| Amount | Percentage | Amount | Percentage | |||||
| Distributions | ||||||||
| Payable in cash | $ | 17,892 | 40 | % | $ | 20,298 | 41 | % |
| Reinvested in shares | 26,289 | 60 | % | 28,668 | 59 | % | ||
| Total distributions | $ | 44,181 | 100 | % | $ | 48,966 | 100 | % |
| Sources of Distributions | ||||||||
| Cash flows from operating activities | $ | 34,744 | 79 | % | $ | 55,058 | 100 | % |
|
Cash flow from other sources(2)
|
9,437 | 21 | % | - | - | % | ||
| Total sources of distributions | $ | 44,181 | 100 | % | $ | 55,058 | 100 | % |
| Cash flows from operating activities | $ | 34,744 | $ | 23,165 | ||||
|
Funds from Operations(1)
|
$ | 23,834 | $ | 25,500 | ||||
|
Adjusted Funds from Operations(1)
|
$ | 25,113 | $ | 19,937 | ||||
|
Funds Available for Distribution(1)
|
$ | 21,162 | $ | 30,414 |
| (1) |
See "Funds from Operations, Adjusted Funds from Operations and Funds Available for Distribution" below for descriptions of Funds from Operations (FFO), Adjusted Funds from Operations (AFFO), and Funds Available for Distribution (FAD), for reconciliations of these metrics to GAAP Net loss attributable to stockholders and redeemable non-controlling interests, and for considerations on how to review these metrics.
|
| (2) | Includes cash flows from investing activities, such as proceeds from sales of trading securities and real estate-related securities. |
Distribution Policy
We intend to distribute sufficient income so that we satisfy the requirements for qualification as a REIT. In order to qualify as a REIT, we are required to distribute 90% of our annual REIT taxable income, determined without regard to the dividends-paid deduction and excluding net capital gains, to our stockholders. Generally, income distributed to stockholders will not be taxable to us under the Code if we distribute at least 90% of our REIT taxable income, determined without regard to the dividends-paid deduction and excluding net capital gains.
Distribution Reinvestment Plan
We have adopted a distribution reinvestment plan whereby stockholders will have their cash distributions attributable to the shares they own automatically reinvested in additional shares of common stock; provided, however, that clients of certain participating broker-dealers that do not permit automatic enrollment in the distribution reinvestment plan and stockholders that are residents of certain states that do not permit automatic enrollment in the distribution reinvestment plan will automatically receive their distributions in cash unless they elect to participate in the distribution reinvestment plan. The per share purchase price for shares purchased pursuant to the distribution reinvestment plan will be equal to the offering price before upfront selling commissions and dealer manager fees (the "transaction price") at the time the distribution is payable, which will generally be equal to our prior month's NAV per share for that share class. Stockholders will not pay upfront selling commissions or dealer manager fees when purchasing shares pursuant to the distribution reinvestment plan. The stockholder servicing fees with respect to our Class T, Class S and Class D shares are calculated based on the NAV for those shares and may reduce the NAV or, alternatively, the distributions payable with respect to shares of each such class, including shares issued in respect of distributions on such shares under the distribution reinvestment plan.
Critical Accounting Estimates
The preparation of these financial statements in accordance with GAAP involve significant judgement and assumptions and require estimates about matters that are inherently uncertain. These judgments will affect our reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. The following is a summary of our significant accounting policies that we believe are the most affected by our judgements, estimates, and assumptions.
Refer to Note 2 - "Summary of Significant Accounting Policies" to our financial statements in this Quarterly Report on Form 10-Q for a summary of our critical accounting policies.
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Principles of Consolidation and Variable Interest Entities
We consolidate entities in which we retain a controlling financial interest or entities that meet the definition of a variable interest entity ("VIE") for which we are deemed to be the primary beneficiary. In performing our analysis of whether we are the primary beneficiary, at initial investment and at each quarterly reporting period, we consider whether we individually have the power to direct the activities of the VIE that most significantly affect the entity's economic performance and also have the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The determination of whether an entity is a VIE, and whether we are the primary beneficiary, involves significant judgments, including the determination of which activities most significantly affect the entity's performance, estimates about the current and future fair values and performance of assets held by the entity and/or general market conditions.
Investments in Real Estate
In accordance with the guidance for business combinations, we determine whether the acquisition of a property qualifies as a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the property acquired is not a business, we account for the transaction as an asset acquisition. We evaluate each real estate acquisition to determine whether the integrated set of acquired assets and activities meets the definition of a business.
Upon acquisition of a property, we assess the fair value of the acquired tangible and intangible assets (including land, buildings, tenant improvements, "above-market" and "below-market" leases, acquired in-place leases, other identified intangible assets and assumed liabilities) and we allocate the purchase price to the acquired assets and assumed liabilities. The most significant portion of the allocation is to building and land and requires the use of market based estimates and assumptions. We assess and consider fair value based on estimated cash flow projections that utilize discount and/or capitalization rates that we deem appropriate, as well as other available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends and market and economic conditions.
We also consider an allocation of the purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants' credit quality and expectations of lease renewals. For acquired in-place leases, above- and below-market lease values are recorded at their fair values (using a discount rate that reflects the risks associated with the lease acquired) equal to the difference between the contractual amounts to be paid pursuant to the in-place leases and management's estimate of fair market value lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant's lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.
Impairment of Long-Lived Assets
We review our real estate properties for impairment each quarter or when there is an event or change in circumstances that indicates the carrying amount of an asset may not be recoverable. If the carrying amount of the real estate investment is no longer recoverable and exceeds the fair value of such investment, an impairment loss is recognized. The impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated future cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Since cash flows on real estate properties considered to be "long-lived assets to be held and used" are considered on an undiscounted basis to determine whether an asset has been impaired, our strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized, and such loss could be material to our results. If we determine that an impairment has occurred, the affected assets must be reduced to their fair value.
Recent Accounting Pronouncements
See Note 2 - "Summary of Significant Accounting Policies" to our financial statements in this Quarterly Report on Form 10-Q for a discussion concerning recent accounting pronouncements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk with respect to our variable-rate indebtedness, where an increase in interest rates would directly result in higher interest expense costs. We seek to manage our exposure to interest rate risk by utilizing a mix of fixed and floating rate financings with staggered maturities and through interest rate protection agreements to fix or cap a portion of our variable rate debt. As of September 30, 2024, the outstanding principal balance of our variable rate indebtedness was $695.7 million.
Certain of our mortgage loans and other indebtedness are variable rate and indexed to the U.S. Dollar denominated Secured Overnight Financing Rate ("SOFR"). For the nine months ended September 30, 2024, a 10% increase in SOFR would have resulted in increased interest expense of $2.8 million. We have executed interest rate swaps and caps with an aggregate notional amount of $598.3 million as of September 30, 2024, to hedge the risk of increasing interest rates.
Investments in Real Estate-Related Loans and Securities
As of September 30, 2024, we held $88.9 million of investments in real estate-related loans and securities. Certain of our investments are floating rate and indexed to the SOFR. As such, we are exposed to interest rate risk and our net income will increase or decrease depending on interest rate movements. While we cannot predict factors which may or may not affect interest rates, for the nine months ended September 30, 2024, a 10% increase or decrease in SOFR would have resulted in an increase or decrease to income from our real estate-related loans and securities of $0.5 million. We have executed interest rate swaps with an aggregate notional amount of $24.0 million as of September 30, 2024 to hedge the risk of decreasing interest rates.
We may also be exposed to market risk with respect to our investments in real estate-related securities due to changes in the fair value of our investments. We seek to manage our exposure to market risk with respect to our investments in real estate-related securities by making investments in securities backed by different types of collateral and varying credit ratings. The fair value of our investments may fluctuate, thus the amount we will realize upon any sale of our investments is unknown. As of September 30, 2024, the fair value at which we may sell our investments in real estate-related securities is not known, but a 10% change in the fair value of our investments in real estate-related securities may result in an unrealized gain or loss of $7.1 million.
Foreign Currency Risk
We may be exposed to currency risks related to our non-U.S. investments that are denominated in currencies other than the U.S. Dollar ("USD"). We seek to manage or mitigate our exposure to the effects of currency changes by entering into derivative financial instruments to the extent it is cost effective to do so. However, our currency hedging strategies may not eliminate all of our currency risk due to, among other things, changes in the timing or amount of foreign currency denominated cash flows from our non-U.S. investments. As of September 30, 2024, we have one foreign currency derivative with a notional hedged amount of £62.1 million GBP.
Credit Risk
Credit risk includes the failure of the counterparty to perform under the terms of a derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Quarterly Report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon this evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (a) were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms and (b) included, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
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Changes in Internal Controls over Financial Reporting
There have been no changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2024, we were not subject to any material litigation nor were we aware of any material litigation threatened against us.
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes to the risk factors previously disclosed under Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2023 and Item 1A of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2024 and June 30, 2024.
The DST Program could subject us to liabilities from litigation or otherwise.
In connection with the launch of the DST Program, we, through the Operating Partnership, expect to raise capital in private placements exempt from registration under the Securities Act through the sale of DST Interests to "accredited investors" in specific DSTs holding one or more DST Properties. We expect that the DST Program will give us the opportunity to expand and diversify our capital-raising strategies by offering what we believe to be an attractive investment product for investors that may be seeking like-kind replacement properties to complete tax-deferred exchange transactions under Section 1031 of the Code. However, there is no guarantee that the DST Program will provide the tax benefits expected by investors. Investors who acquire DST Interests through such private placements may be seeking certain tax benefits that depend on the interpretation of, and compliance with, federal and state income tax laws and regulations. As the sole member of the general partner of the Operating Partnership, we may become subject to liability, from litigation or otherwise, as a result of the DST Program, including in the event an investor fails to qualify for any desired tax benefits.
The DST Program will not shield us from risks related to the performance of the DST Properties held through such structures.
Under the DST Program, certain of our existing real properties and real properties acquired from third parties may be placed into DSTs, the DST Interests of which will be sold to investors. We, through a wholly owned subsidiary, will hold long-term leasehold interests in each DST Property under a master lease, which will be fully guaranteed by the Operating Partnership. Under each master lease, we, through such subsidiary or applicable master tenant, will be responsible for subleasing the applicable DST Property to occupying tenants until the earlier of the expiration of the master lease or the Operating Partnership's exercise of the FMV Option, which means that we bear the risk that the underlying cash flow from a DST Property may be less than the master lease payments. Therefore, even though we will no longer own such applicable DST Property, because of the fixed terms of the master lease guaranteed by the Operating Partnership, negative performance by a DST Property could affect cash available for distributions to our stockholders and would likely have an adverse effect on our results of operations. In addition, although the Operating Partnership will hold a FMV Option to reacquire each DST Property, the purchase price will be based on the then-current fair market value of the applicable DST Property subject to the master lease. Therefore, we may pay more for a DST Property upon the FMV Option exercise if it appreciates while held by the applicable DST than if we had not placed such property in the DST Program.
We may own DST Interests in DSTs owning DST Properties that will be subject to the agreements under our DST Program, which may have an adverse effect on our results of operations, relative to if the DST Program agreements did not exist.
In connection with the launch of the DST Program, we may own DST Interests in DSTs owning one or more DST Properties that are subject to the terms of the agreements governing our DST Program. The DST Program agreements may limit our ability to encumber, lease or dispose of our DST Interests. Such agreements could affect our ability to turn our DST Interests into cash and could affect cash available for distributions to our stockholders. The DST Program agreements, and in some cases the financing documents used in connection with the DST Program, could also impair our ability to take actions that would otherwise be in the best interests of our stockholders and, therefore, may have an adverse effect on our results of operations and NAV, relative to if the DST Program agreements did not exist.
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DST Properties may be less liquid than other assets, which could impair our ability to utilize cash proceeds from sales of such DST Properties for other purposes such as paying down debt, distributions or additional investments.
DST Properties may later be reacquired by the Operating Partnership through the exercise of the FMV Option. In such cases, the investors who become limited partners in the Operating Partnership will generally still be tied to the applicable DST Property in terms of basis and built-in-gain. As a result, if a DST Property is subsequently sold, unless we effectuate a like-kind exchange under Section 1031 of the Code, then tax will be triggered on the investors' built-in-gain. Although we are not contractually obligated to do so, we intend to execute 1031 exchanges in such situations rather than trigger gain. Any replacement property acquired in connection with a 1031 exchange will similarly be tied to such investors with similar considerations if such replacement property ever is sold. As a result of these factors, placing real properties into the DST Program may limit our ability to access liquidity from such real properties or replacement properties through sale without triggering taxes due to the built-in-gain tied to investors in the DST Program. Such reduced liquidity could impair our ability to utilize cash proceeds from sales for other purposes such as paying down debt, paying distributions, funding repurchases or making additional investments.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
For the three months ended September 30, 2024, all equity securities that were sold and not registered under the Securities Act were previously reported on Current Reports on Form 8-K.
Share Repurchases
We have adopted a share repurchase plan, whereby on a monthly basis, stockholders may request that we repurchase all or any portion of their shares. We may choose to repurchase all, some or none of the shares that have been requested to be repurchased at the end of any particular month, in our discretion, subject to any limitations in the share repurchase plan.
The total amount of shares that we will repurchase is limited, in any calendar month, to shares whose aggregate value (based on the repurchase price per share on the date of the repurchase) is no more than 2% of its aggregate NAV attributable to its stockholders as of the last day of the previous calendar month and, in any calendar quarter, to shares whose aggregate value is no more than 5% of our aggregate NAV attributable to our stockholders as of the last day of the previous calendar quarter. We measure the repurchase limitations based on net repurchases during a month or quarter. The term "net repurchases" means, during the applicable period, the excess capital outflows over capital inflows. The term "capital outflows" means share repurchases under our share repurchase plan in a given period. The term "capital inflows" means proceeds from share subscriptions received in a given period that are accepted as of the first calendar day of the next month, plus purchases pursuant to our distribution reinvestment plan. For any given calendar quarter, the maximum amount of repurchases during that quarter will be equal to (1) 5% of the aggregate NAV attributable to our stockholders as of the last calendar day of the previous calendar quarter, plus (2) capital inflows during such calendar quarter. The same would apply for a given month, except that repurchases in a month would be subject to the 2% limit described above (subject to potential carry-over capacity), and netting would be measured on a monthly basis.
With respect to future periods, our board of directors may choose whether the limitations will be applied to "gross repurchases" rather than to net repurchases. If repurchases for a given month or quarter are measured on a gross basis rather than on a net basis, the repurchase limitations would limit the amount of shares repurchased in a given month or quarter without regard to any capital inflows for that month or quarter. In order for our board of directors to change the application of the limitations from net repurchases to gross repurchases or vice versa, we will provide notice to stockholders in a prospectus supplement or special or periodic report filed by us, as well as in a press release or on our website, at least 10 days before the first business day of the quarter for which the new test will apply. The determination to measure repurchases on a gross basis or net basis will only be made for an entire quarter, and not particular months within a quarter.
Under our share repurchase plan, to the extent we choose to repurchase shares in any particular month, we will only repurchase shares as of the opening of the last calendar day of that month (each such date, a "Repurchase Date"). Repurchases will be made at the transaction price in effect on the Repurchase Date (which will generally be equal to our prior month's NAV per share), except that shares that have not been outstanding for at least one year will be repurchased at 98% of the transaction price (an "Early Repurchase Deduction") subject to certain limited exceptions. Settlements of share repurchases will be made within three business days of the Repurchase Date. The Early Repurchase Deduction will not apply to shares acquired through our distribution reinvestment plan, to shares the Adviser elects to receive instead of cash in respect of its management or performance fees, or to shares issued to an affiliate of Brookfield in exchange for Class E OP Units that were issued to such entity in connection with its contribution of certain assets to the Operating Partnership. In addition, shares of our common stock are sold to certain feeder vehicles primarily created to hold our shares that in turn offer interests in such feeder vehicles to non-
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U.S. persons. For such feeder vehicles and similar arrangements in certain markets, we may not apply the Early Repurchase Deduction to the feeder vehicles or underlying investors, often because of administrative or systems limitations.
Should repurchase requests, in our judgment, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the company as a whole, or should we otherwise determine that investing our liquid assets in real estate properties or other illiquid investments rather than repurchasing our shares is in the best interests of the Company as a whole, then we may choose to repurchase fewer shares than have been requested to be repurchased, or none at all. Further, our board of directors may modify or suspend our share repurchase plan if it deems such action to be in our best interest and the best interest of our stockholders. In the event that we determine to repurchase some but not all of the shares submitted for repurchase during any month, shares repurchased at the end of the month will be repurchased on a pro rata basis.
Pursuant to the Brookfield Repurchase Arrangement, we and the Operating Partnership will offer to repurchase shares of common stock or Class E OP Units, as applicable, from the Brookfield Investor at a price per share or unit equal to the most recently determined NAV per share or unit immediately prior to each repurchase. The Brookfield Investor has agreed to not seek repurchase of the shares of common stock and Class E OP Units that it owns if doing so would bring the value of its equity holdings in us and the Operating Partnership below $50.0 million. In addition, the Brookfield Investor has agreed to hold all of the shares of common stock and Class E OP units that it received in consideration for the contribution of the Brookfield Portfolio until the earlier of (i) the first date that our NAV reaches $1.5 billion and (ii) the date that is the third anniversary of November 2, 2021. Following such date, the Brookfield Investor may cause us to repurchase its shares and Class E OP Units (above the $50.0 million minimum), in an amount equal to the sum of (a) the amount available under our share repurchase plan's 2% monthly and 5% quarterly caps (after accounting for third-party investor repurchases) and (b) 25% of the amount by which net proceeds from the Offering and our private offerings of common stock for a given month exceed the amount of repurchases for such month pursuant to our share repurchase plan. We will not effect any such repurchase during any month in which the full amount of all shares requested to be repurchased by third-party investors under our share repurchase plan is not repurchased. The Brookfield Repurchase Arrangement does not apply to shares of our common stock or OP Units held by affiliates of Brookfield that are feeder vehicles primarily created to offer interests in such feeder vehicles to non-U.S. persons. Shares of our common stock or Class E OP Units held by the Brookfield Investor that were not issued as consideration for the contribution of the Brookfield Portfolio are not subject to the Brookfield Repurchase Arrangement, but may be redeemed, in whole or in part, for cash upon the request of the Brookfield Investor, subject to the limitations of our share purchase plan. For the nine months ended September 30, 2024, we and the Operating Partnership did not repurchase any shares or OP Units as part of the Brookfield Repurchase Arrangement.
During the three months ended September 30, 2024, we repurchased shares of our common stock in the following amounts, which represented all of the share repurchase requests received for the same period.
| Month of: |
Total Number of Shares Repurchased(1)
|
Repurchases as a Percentage of Shares Outstanding(2)
|
Average Price Paid Per Share | Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares Pending Repurchase Pursuant to Publicly Announced Plans or Programs(3)
|
||
| July 2024 | 1,357,620 | 1.6 | % | $ | 11.1968 | 1,357,620 | - |
| August 2024 | 1,155,722 | 1.4 | % | $ | 11.1047 | 1,155,722 | - |
|
September 2024(4)
|
756,303 | 0.9 | % | $ | 10.9803 | 501,367 | - |
| Total | 3,269,645 | 3,014,709 |
| (1) |
Repurchases are limited under the share repurchase plan as described above.
|
| (2) |
Includes shares repurchased outside of the share repurchase plan. For purposes of calculating the monthly and quarterly limits under our share repurchase plan, net repurchases as a percentage of aggregate NAV were 1.6, 1.4 and 0.6 for the months of July 2024, August 2024 and September 2024, respectively, and 3.6 for the calendar quarter ended September 30, 2024.
|
| (3) | All repurchase requests under our share repurchase plan were satisfied during the period. |
| (4) |
Includes 254936 Class I shares repurchased from the Adviser outside of the share repurchase plan related to shares that were previously issued to the Adviser as payment of management fees.
|
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
On November 8, 2024, we, the Operating Partnership, the general partner of the Operating Partnership and BUSI II-C entered into an agreement pursuant to which we repurchased, at the then-current transaction price, 25,123,346.212 Class I shares and 2,173,519.737 Class E shares held by BUSI II-C in exchange for an in-kind distribution to BUSI II-C of 25,123,346.212 Class I OP Units and 2,173,519.737 Class E OP Units.
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ITEM 6. EXHIBITS
|
Exhibit Number
|
Description | |
| 3.1 | Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-11 filed on April 12, 2018 and incorporated herein by reference) | |
| 3.2 | Articles of Amendment of Oaktree Real Estate Income Trust, Inc. dated June 13, 2018 (filed as Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q filed on June 14, 2018 and incorporated herein by reference) | |
| 3.3 | Articles Supplementary of Oaktree Real Estate Income Trust, Inc. (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on February 16, 2021 and incorporated herein by reference) | |
| 3.4 | Second Articles of Amendment of Brookfield Real Estate Income Trust Inc. (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on November 8, 2021 and incorporated herein by reference) | |
|
|
||
| 3.5 | Articles Supplementary of Brookfield Real Estate Income Trust Inc. (filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on November 8, 2021 and incorporated herein by reference) | |
| 3.6 | Certificate of Correction to Brookfield Real Estate Income Trust Inc.'s Articles Supplementary (filed as Exhibit 3.3 to the Registrant's Current Report on Form 8-K filed on November 8, 2021 and incorporated herein by reference) | |
| 3.7 | Third Articles of Amendment of Brookfield Real Estate Income Trust Inc. (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on January 10, 2022 and incorporated herein by reference) | |
| 3.8 | Fourth Articles of Amendment of Brookfield Real Estate Income Trust Inc. (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on November 22, 2022 and incorporated herein by reference) | |
| 3.9 | Amended and Restated Bylaws (filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q filed on November 14, 2022 and incorporated herein by reference) | |
| 4.1 | Distribution Reinvestment Plan (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on March 13, 2023 and incorporated herein by reference) | |
| 10.1 | Fourth Amended and Restated Limited Partnership Agreement of Brookfield REIT Operating Partnership L.P. dated September 25, 2024 (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on October 1, 2024 and incorporated herein by reference) | |
| 10.2 | Repurchase and Distribution Agreement dated November 8, 2024 by and among Brookfield Real Estate Income Trust Inc., BUSI II-C L.P, Brookfield REIT OP GP LLC and Brookfield REIT Operating Partnership L.P. (filed as Exhibit 4 to the Registrant's Schedule 13D/A filed on November 12, 2024 and incorporated herein by reference) | |
| 31.1* | Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1+ | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2+ | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| + | This exhibit shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act or the Exchange Act. |
| * | Filed herewith. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Brookfield Real Estate Income Trust Inc. | ||
| November 14, 2024 | /s/ Brian W. Kingston | |
| Date | Brian W. Kingston | |
| Chief Executive Officer and Chairman of the Board | ||
| (Principal Executive Officer) | ||
| November 14, 2024 | /s/ Theodore C. Hanno | |
| Date | Theodore C. Hanno | |
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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