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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported): November 7, 2022

 

The Necessity Retail REIT, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Maryland   001-38597   90-0929989

(State or other jurisdiction

of incorporation)

  (Commission File Number)  

(I.R.S. Employer

Identification No.)

 

650 Fifth Avenue, 30th Floor
New York, New York
10019

(Address of Principal Executive Offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (212) 415-6500

 

Former name or former address, if changed since last report: Not Applicable

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
   
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
   
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
   
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which
 registered
Class A Common Stock, $0.01 par value per share   RTL   The Nasdaq Global Select Market
7.50% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share   RTLPP   The Nasdaq Global Select Market
7.375% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share   RTLPO   The Nasdaq Global Select Market
Preferred Stock Purchase Rights       The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company ¨

 

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

 

 

 

 

 

Item 8.01. Other Events.

 

In Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on February 14, 2022, February 28, 2022, March 21, 2022, April 25, 2022, May 2, 2022, May 27, 2022 and July 7, 2022 (each an “Acquisition 8-K” and collectively, the “Acquisition 8-Ks”), The Necessity Retail REIT, Inc., a Maryland corporation (the “Company”), reported, among other things, the acquisition through multiple closings, of 81 properties from certain subsidiaries of CIM Real Estate Finance Trust, Inc. (the “Sellers”) pursuant to a contract described below. A total of 56 properties were acquired through March 31, 2022 and 25 properties remained probable as of that date. On April 8, 2022, in a Current Report on Form 8-K/A (the “Initial Form 8-K/A”), the Company amended and supplemented the Acquisition 8-Ks that were filed on February 14, 2022, February 28, 2022 and March 21, 2022 to provide, among other things, the historical financial statements and unaudited pro forma information required by Item 9.01(a) and (b) of Form 8-K with respect to the 56 acquired properties reported on those Acquisition 8-Ks.  As disclosed in the Acquisition 8-Ks filed on April 25, 2022, May 2, 2022, May 27, 2022 and July 7, 2022, the Company completed the acquisition of the 25 remaining properties from the Sellers. On June 24, 2022, in a Current report on Form 8-K/A (the “Second Form 8-K/A”), the Company amended and supplemented the Acquisition 8-Ks that were filed on April 25, 2022, May 2, 2022 and May 27, 2022 to provide, among other things, the historical financial statements and unaudited pro forma information required by Item 9.01(a) and (b) of Form 8-K with respect to the 80 acquired properties reported on those Acquisition 8-Ks. All of the properties have been acquired as of the filing of this Current Report on Form 8-K. On August 9, 2022, in a Current Report on Form 8-K (the “August 2022 Form 8-K”), the Company provided historical financial statements and unaudited pro forma information required by Item 9.01(a) and (b) of Form 8-K for the Acquired CIM Properties (defined below) and reported on the Acquisition 8-Ks. This Current Report on Form 8-K provides additional unaudited pro forma information required by Item 9.01(b) of Form 8-K for the Acquired CIM Properties and reported on the Acquisition 8-Ks and should be read in conjunction with all of the Acquisition 8-Ks, the Initial Form 8-K/A, the Second Form 8-K/A and the August 2022 Form 8-K.

 

As previously disclosed, on December 17, 2021, the Company and its subsidiary, The Necessity Retail REIT Operating Partnership, a Delaware limited partnership (the “Operating Partnership”), entered into a definitive purchase and sale agreement (the “PSA”) to acquire, in the aggregate, 81 properties (together, the “CIM Portfolio”), from the Sellers for approximately $1.3 billion. The CIM Portfolio consists of 79 power centers and grocery-anchored multi-tenant retail centers, two single-tenant retail properties and a detention pond parcel, located across 27 states and aggregating approximately 9.5 million square feet. As of the filing of this Current Report on Form 8-K, the Company has acquired 81 power centers and grocery-anchored multi-tenant retail centers and a detention pond parcel at an aggregate purchase price of $1.3 billion including debt assumption of $352.8 million but excluding closing costs (the “Acquired CIM Properties”).

 

The Company is filing this Current Report on Form 8-K to provide the following financial information with respect to the Acquired CIM Properties: (1) the Company’s Unaudited Pro Forma Consolidated Financial Statements, which include the Company’s Unaudited Pro Forma Consolidated Statements of Operations for the nine months ended September 30, 2022 and for the year ended December 31, 2021 (including the notes thereto), giving effect to the Acquired CIM Properties attached hereto as Exhibit 99.1.

 

The Company’s Unaudited Pro Forma Consolidated Financial Statements (including the notes thereto) are qualified in their entirety and should be read in conjunction with the combined financial statements of the Acquired CIM Properties for the fiscal year ended December 31, 2021.

 

The Company’s Unaudited Pro Forma Consolidated Financial Statements have been prepared on the basis of certain assumptions and estimates described in the notes thereto and are subject to other uncertainties and do not purport to reflect what the actual results of operations or financial condition of the Company would have been had the Acquired CIM Properties been acquired on the dates assumed for purposes of such pro forma financial statements or to be indicative of the financial condition or results of operations of the Company as of or for any future date or period. For further information, see Exhibit 99.1.

 

 

 

 

The statements in this Current Report on Form 8-K that are not historical facts may be forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results or events to be materially different. The words “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “projects,” “plans,” “intends,” “should” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are subject to a number of risks, uncertainties and other factors, many of which are outside of the Company’s control, which could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include the potential adverse effects of (i) the global COVID-19 pandemic, including actions taken to contain or treat COVID-19, and (ii) the geopolitical instability due to the ongoing military conflict between Russia and Ukraine, including related sanctions and other penalties imposed by the U.S. and European Union, and the related impact on the Company, the Company’s tenants and the global economy and financial markets, as well as those risks and uncertainties set forth in the Risk Factors section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022 and all other filings with the SEC after that date, as such risks, uncertainties and other important factors may be updated from time to time in the Company's subsequent reports. Further, forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise any forward-looking statement to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required to do so by law.

 

Item 9.01. Financial Statements and Exhibits.

 

(b) Pro Forma Financial Information.

 

The following pro forma financial information for the Company is attached as Exhibit 99.1 and is incorporated herein by reference:

 

·Unaudited Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 2022
·Notes to the Unaudited Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 2022
·Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2021
·Notes to the Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2021

 

(d) Exhibits.

 

Exhibit

Number

  Description
10.1   Agreement of Purchase and Sale, dated as of December 17, 2021, by and between the Sellers identified therein and American Finance Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 20, 2021).
10.2   First Amendment to Agreement of Purchase and Sale, dated January 3, 2022, by and between the Sellers identified therein and American Finance Operating Partnership L.P. (incorporated herein by reference to Exhibit 10.45 to the Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022).
10.3   Second Amendment to Agreement of Purchase and Sale, dated January 10, 2022, by and between the Sellers identified therein and American Finance Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.46 to the Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022).
10.4   Third Amendment to Agreement of Purchase and Sale, dated January 14, 2022, by and between the Sellers identified therein and American Finance Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.47 to the Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022).
10.5   Fourth Amendment to Agreement of Purchase and Sale, dated January 19, 2022, by and between the Sellers identified therein and American Finance Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.48 to the Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022).
10.6   Fifth Amendment to Agreement of Purchase and Sale, dated January 21, 2022, by and between the Sellers identified therein and American Finance Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.49 to the Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022).
10.7   Leasing Earnout Side Letter Agreement, dated February 9, 2022, by and between the Sellers identified therein and American Finance Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.50 to the Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022).
10.8   Sixth Amendment to Agreement of Purchase and Sale, dated February 10, 2022, by and between the Sellers identified therein and The Necessity Retail REIT Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.51 to the Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022).
10.9   Seventh Amendment to Agreement of Purchase and Sale, dated February 11, 2022, by and between the Sellers identified therein and The Necessity Retail REIT Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.52 to the Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 24, 2022).
10.10   Form of Property Management Agreement by and between Necessity Retail Properties, LLC and certain subsidiaries of The Necessity Retail REIT Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.10 to the Current Report on Form 8-K filed on April 25, 2022).
10.11   Eighth Amendment to Agreement of Purchase and Sale, dated March 9, 2022, by and between the Sellers identified therein and The Necessity Retail REIT Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 filed on August 4, 2022).
10.12   Ninth Amendment to Agreement of Purchase and Sale, dated July 26, 2022, by and between the Sellers identified therein and The Necessity Retail REIT Operating Partnership, L.P. (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 filed on August 4, 2022).
99.1   Unaudited Pro Forma Consolidated Financial Statements of the Company
104   Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document.

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

  THE NECESSITY RETAIL REIT, INC.
     
Date: November 7, 2022 By: /s/ Edward M. Weil, Jr.
    Name: Edward M. Weil, Jr.
    Title: Chief Executive Officer and President

 

 

 

 

EXHIBIT 99.1

 

THE NECESSITY RETAIL REIT, INC.

 

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

On December 17, 2021, The Necessity Retail REIT, Inc., a Maryland corporation ("RTL" or the "Company”) and its subsidiary, Necessity Retail REIT Partnership, a Delaware limited partnership (the “Operating Partnership”), entered into a definitive purchase and sale agreement (the “PSA”) to acquire, in the aggregate, 81 properties (the “CIM Portfolio”), from certain subsidiaries of CIM Real Estate Finance Trust, Inc. (the “Sellers”) for approximately $1.3 billion (the “Purchase Price”). The Purchase Price is subject to adjustment if certain of the existing tenants that have rights of first refusal to purchase an underlying property exercise those rights, if the Operating Partnership exercises limited rights to exclude certain properties not exceeding $200 million in value from those being acquired or if earn out amounts associated with certain leases are satisfied. The acquisition of the CIM Portfolio is referred to herein as the “Transaction” or the “Transactions.” The CIM Portfolio consists of 79 power centers and grocery-anchored multi-tenant retail centers, two single-tenant retail properties and a detention pond parcel, located across 27 states and aggregating approximately 9.5 million square feet. The 79 power and grocery-anchored centers are leased primarily to “necessity-based” retail tenants. Upon the closing of the Transactions, of which all 81 properties were acquired in seven closings as of September 30, 2022 (collectively, the "Acquired Properties"), the Operating Partnership has acquired all of the right, title and interest in each of the properties acquired in the CIM Portfolio owned by the applicable Sellers, which include certain leasehold interests in land parcels. The Company determined that the Transactions were accounted for as asset acquisitions.

 

As previously announced, the Company funded the Purchase Price through a combination, determined at each closing, of cash on the balance sheet, including net proceeds of $254.5 million from the sale of its Sanofi asset, borrowings under the Company’s credit facility, as well as debt currently encumbering certain of the properties that the Operating Partnership that were assumed by the Company, and the issuance of $53.4 million in value of the Company’s Class A common stock, par value $0.01 (the “Class A Common Stock”) to the Sellers. The Company funded the acquisition of the 81 properties with borrowings under its Credit Facility of $513.0 million, cash on hand of $365.8 million, which included net proceeds from the sale of its Sanofi asset and remaining proceeds from the issuance of its Senior Notes, the issuance of 6,450,107 shares of the Company's Class A common stock with a value of $53.4 million, the application of its $40.0 million deposit and the assumption of $352.8 million of fixed-rate mortgage debt.

 

The purchase and sale agreement provided for contingent considerations relating to leasing activity at each acquired property for a six-month period subsequent to the respective closing dates of each acquired property. The Company has paid $49.6 million and accrued an additional $5.2 million as of September 30, 2022 based on leases executed as of September 30, 2022. Subsequent to September 30, 2022, an additional $10.9 million is considered to be probable of payment in connection with the acquired properties that related to contingencies resolved or that are considered probable based on events subsequent to September 30, 2022 and, accordingly, were not yet recorded by the Company as of the balance sheet date. Additional amounts may be due for leases executed through January 2023 (six months following the acquisition date of the final property of the CIM Portfolio Acquisition) on the remaining two properties.

 

The unaudited pro forma statement of operations for the year ended December 31, 2021 included herein includes the impacts of the sale of the Company's Sanofi property (closed on January 6, 2022), the proceeds of which were used to fund a portion of the CIM Acquisition. The Company believes it is appropriate to make these adjustments since the completion of these transactions, and the use of the proceeds therefrom, provided the capacity needed under the Company's Credit Facility to fund a portion of the acquisition of the CIM Portfolio.

 

The unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2022 is presented as if the acquisition of the CIM Portfolio and other significant capital transactions were completed on January 1, 2021. The historical results of RTL for the nine months ended September 30, 2022 include the operating results of the 81 properties acquired in seven closings as of September 30, 2022 from their respective acquisition dates through September 30, 2022. Also, the unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2022 includes adjustments for the pre-acquisition period historical operating results of the 81 properties acquired during the nine months ended September 30, 2022 (the "Acquired Property Results Not Included in September 30, 2022 RTL").

 

The unaudited pro forma consolidated statement of operations for the year ended December 31, 2021 is presented as if the acquisition of the CIM Portfolio and other significant capital transactions were completed on January 1, 2021. Accordingly, the unaudited pro forma consolidated statement of operations for the year ended December 31, 2021 includes adjustments for the full-year historical operating results for all 81 properties that have been acquired (the "Acquired Property Results Not Included in December 31, 2021 RTL").

 

The unaudited pro forma consolidated financial statements (including notes thereto) of the Company are qualified in their entirety and should be read in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2021, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 24, 2022 and the consolidated financial statements for the three and nine months ended September 30, 2022, and related notes thereto, included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022 filed with the SEC on November  3, 2022. The unaudited pro forma consolidated financial statements (including the notes thereto) of the Company are qualified in their entirety and should be read in conjunction with the combined financial statements of the CIM Portfolio for the fiscal year ended December 31, 2021, included in the Company's Form 8-K/A filed with the SEC on April 8, 2022, and for the nine months ended September 30, 2022, and the related notes thereto. The combined financial statements of the CIM Portfolio for the six months ended June 30, 2022 (the last interim calendar period prior to the acquisition) were previously included as part of the Company’s Form 8-K dated August 9, 2022 in Exhibit 99.1 therein. The statements of operations are not necessarily indicative of what the actual operating results would have been had the acquisition of the CIM Portfolio and the other significant capital transactions occurred on January 1, 2021, respectively, nor are they indicative of future operating results of the Company.

 

 

 

 

THE NECESSITY RETAIL REIT, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022

(In thousands, except per share amounts)

 

       CIM Transaction and Financing         
   September 30,
2022 RTL
   Acquired
Property
Results Not
Included in
September 30,
2022 RTL
   Pro Forma
Adjustments
   Credit
Facility
Draw
   Disposition
of Sanofi
Property
   Pro Forma
RTL
 
    (A)    (B)    (C)    (D)    (E)      
Revenue from tenants  $328,048   $32,015   $97(G)  $   $(228)  $359,932 
                               
Operating expenses:                              
Asset management fees to related party   24,061                    24,061 
Property operating expense   74,710    11,174            8    85,892 
Impairment of real estate assets   94,942                    94,942 
Acquisition, transaction and other costs   695                    695 
Equity-based compensation   10,878                    10,878 
General and administrative   23,722                    23,722 
Depreciation and amortization   141,755        15,533(H)           157,288 
Total operating expenses   370,763    11,174    15,533        8    397,478 
Operating income before gain on sale/exchange of real estate investments   (42,715)   20,841    (15,436)       (236)   (37,546)
Gain on sale of real estate investments   68,615                (53,569)   15,046 
Operating income   25,900    20,841    (15,436)       (53,805)   (22,500)
Other (expense) income:                              
Interest expense   (84,471)       (4,899)(I)   (2,593)(I)       (91,963)
Other income   987    112                1,099 
Gain on non-designated derivatives   2,250        (2,250)(J)            
Total other expenses, net   (81,234)   112    (7,149)   (2,593)       (90,864)
Net (loss) income   (55,334)   20,953    (22,585)   (2,593)   (53,805)   (113,364)
Net income attributable to non-controlling interests   54                    54 
Allocation for preferred stock   (17,511)                   (17,511)
Net (loss) income attributable to common stockholders  $(72,791)  $20,953   $(22,585)  $(2,593)  $(53,805)  $(130,821)
                               
Weighted-average shares outstanding — Diluted (F)   131,478,484                        132,610,536 
Net loss per share attributable to common stockholders — Basic and Diluted  $(0.56)                      $(0.99)

 

 

 

 

 

Notes to Unaudited Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 2022:

 

(A)Reflects the historical consolidated statement of operations of the Company for the nine months ended September 30, 2022 as presented in the Company’s Quarterly Report on Form 10-Q (filed with the SEC on November 3, 2022), and only includes operating results from the respective property acquisition dates through September 30, 2022 for the 81 properties acquired in the first nine months of 2022.

 

(B)Represents the historical operating results from January 1, 2022 through the respective property acquisition dates in the nine months ended September 30, 2022 for the 81 properties acquired during the nine months ended September 30, 2022.

 

(C)This column represents pro forma accounting impacts of the acquisition of the CIM Portfolio as if the transaction was completed on January 1, 2021. The Company has accounted for all these transactions as asset acquisitions.

 

(D)Assumes a draw on the Company's Credit Facility to partially fund the closings of the 81 properties of the CIM Portfolio on January 1, 2021.

 

(E)This column reflects the removal of amounts related to the Company's Sanofi property, assumed to be sold on January 1, 2021 for the purposes of this pro forma financial statement. The sale closed in the first quarter of 2022.

 

(F)The pro forma weighted average common shares outstanding are calculated as if the issuance of the 6,450,107 shares that were issued to purchase the CIM Properties had occurred on January 1, 2021. These shares were issued in the three months ended March 31, 2022.

 

(G)Represents adjustments to estimated straight-line rent using the most recent data for lease terms, assuming an acquisition date of January 1, 2021 for all 81 properties of the CIM Portfolio acquisition. For purposes of this pro forma financial statement, no assumptions were made for potential lease renewals.

 

(In thousands)  Pro Forma
Adjustments (1)
 
Straight-line rent and other adjustments  $254 
Accretion of below market leases   3,330 
Amortization of above market leases   (3,487)
Total  $97 


 

(1) Includes adjustments for the 81 properties acquired in the nine months ended September 30, 2022, for the period prior to the Company's ownership.

 

(H)Represents the pro forma adjustment for depreciation and amortization expense, which is based on the Company’s basis in the assets that would have been recorded assuming the CIM Portfolio was acquired on January 1, 2021. Depreciation and amortization amounts were determined in accordance with the Company’s policies and are based on management’s valuation of the estimated useful lives of the property and intangibles. The amounts allocated to buildings and improvements are depreciated over the estimated useful life (generally 40 years for buildings and 15 years or less for improvements), beginning on the assumed acquisition date of January 1, 2021, while the amounts allocated to lease intangibles are amortized over the remaining life of the related leases. The following table details the depreciation and amortization expense for all 81 properties of the CIM Acquisition:

 

(In thousands)  Pro Forma Adjustments (1) 
Depreciation expense  $5,879 
Amortization expense — In-place leases   9,654 
Total  $15,533 


 

(1) Includes adjustments for the 81 properties acquired in the nine months ended September 30, 2022, for the period prior to the Company's ownership.

 

 

 

 

(I)Represents interest expense on debt assumed from the CIM Portfolio and the additional Credit Facility draws, as if all of these borrowings occurred on January 1, 2021, as follows:

 

   Principal   Rate   Fixed/Variable  Interest Expense 
    (In thousands)            (In thousands) 
Additional interest expense for assumed mortgage debt in the nine months ended September 30, 2022 (1)   $350,514(2)    3.92%  Fixed  $4,899 
Total interest expense adjustments related to assumed mortgage debt               $4,899 
                   
Additional interest expense for actual borrowings under the Credit Facility through September 30, 2022 (3)   $478,000    3.26%  Variable  $2,593 

 

(1) Represents estimated fair value of debt assumed for $352.8 million of principal mortgage debt.

 

(2) Represents additional interest for the period from January 1, 2021 to the dates of the respective mortgage assumptions used to fund the acquisitions of the 81 properties completed during the nine months ended September 30, 2022. Calculated using the weighted-average mortgage rates on the assumed mortgages during the nine months ended September 30, 2022.

 

(3) Represents additional interest for the period from January 1, 2022 to the dates of the respective borrowings under the Credit Facility used to fund the acquisitions of the 81 properties completed during the nine months ended September 30, 2022. Calculated using the weighted-average interest rate on the Credit Facility for the nine months ended September 30, 2022.

 

(J)The purchase and sale agreement included the planned issuance of shares of the Company’s Class A common stock or Class A units in the Operating Partnership of up to $53.4 million in value. The number of shares issued (6,450,107) was based on the value of the shares that may have been issued divided by the per-share volume weighted average price of the Company’s Class A common stock measured over a five-day consecutive trading period immediately preceding (but not including) the date on which written notice is delivered, indicating the seller’s election to receive either shares or units, to the Operating Partnership (the price of which is to be limited by a 7.5% collar in either direction from the per share volume weighted-average price of the Company’s Class A common stock measured over a ten-day consecutive trading period immediately preceding (but not including) the effective date of the PSA, which was $8.34 per share. The Company concluded that this arrangement constituted an embedded derivative which requires separate accounting. The initial value of the embedded derivative was an asset upon the signing of the PSA of $1.7 million, and was a liability of $2.3 million as of December 31, 2021 in the Company’s balance sheet. Upon consummation, the stock portion of the transaction closed at values which were within the collar and accordingly, the liability for the derivative at closing should be reduced from $2.3 million to zero. The adjusted loss represents the original value of the embedded derivative (which is also part of purchase accounting). This is expected to be a non-recurring loss.

 

 

 

 

THE NECESSITY RETAIL REIT, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2021

(In thousands, except per share amounts)

 

       CIM Transaction and Financing   Other Relevant Transactions     
   December 31,
2021 RTL
   Acquired
Property
Results Not
Included in
December 31,
2021 RTL
   Pro Forma
Adjustments
   Credit
Facility
Draw
   Issuance
of 4.50%
Senior
Notes
   Disposition
of Sanofi
Property
   Pro Forma
RTL
 
    (A)    (B)    (C)    (D)    (E)    (F)      
Revenue from tenants  $335,156   $153,408   $(2,934)(H)  $   $   $(17,195)  $468,435 
                                    
Operating expenses:                                   
Asset management fees to related party   32,804                        32,804 
Property operating expense   55,431    51,115                (104)   106,442 
Impairment of real estate assets   33,261                        33,261 
Acquisition, transaction and other costs   4,378                        4,378 
Equity-based compensation   17,264                        17,264 
General and administrative   20,856                    (4)   20,852 
Depreciation and amortization   130,464        84,829(I)           (9,432)   205,861 
Total operating expenses   294,458    51,115    84,829            (9,540)   420,862 
Operating income before gain on sale of real estate investments   40,698    102,293    (87,763)           (7,655)   47,573 
Gain on sale of real estate investments   4,757                    44,580(K)   49,337 
Operating income   45,455    102,293    (87,763)           36,925    96,910 
Other (expense) income:                                   
Interest expense   (81,784)       (13,775)(J)   (12,954)(J)   (9,804)(J)       (118,317)
Other income   91    260                    351 
Loss on non-designated derivatives   (3,950)       2,250(L)               (1,700)
Total other expenses, net   (85,643)   260    (11,525)   (12,954)   (9,804)       (119,666)
Net loss   (40,188)   102,553    (99,288)   (12,954)   (9,804)   36,925    (22,756)
Net loss attributable to non-controlling interests   9                        9 
Allocation for preferred stock   (23,262)                       (23,262)
Net loss attributable to common stockholders  $(63,441)  $102,553   $(99,288)  $(12,954)  $(9,804)  $36,925   $(46,009)
                                    
Weighted-average shares outstanding — Basic and Diluted (G)   115,404,635                             121,854,742 
Net loss per share attributable to common stockholders — Basic and Diluted  $(0.56)                           $(0.38)

 

 

 

 

Notes to Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2021:

 

(A)Reflects the historical consolidated statement of operations of the Company for the year ended December 31, 2021 as presented in the Company’s Annual Report on Form 10-K (filed with the SEC on February 24, 2022), and does not include any properties acquired in the CIM Portfolio acquisition, which began closing acquisitions during the first quarter of 2022.

 

(B)Represents the full-year historical operating results attributable to the 81 Acquired Properties in the CIM Portfolio acquisition, all of which have closed.

 

(C)This column represents pro forma accounting impacts of the acquisition of the CIM Portfolio as if the transaction was completed on January 1, 2021. The Company has accounted for all these transactions as asset acquisitions.

 

(D)Assumes a draw on the Company's Credit Facility to partially fund the closings of the 81 properties of the CIM Portfolio on January 1, 2021.

 

(E)Reflects the issuance of the Company's Senior Notes on October 7, 2021 as if this transaction had occurred on January 1, 2021.

 

(F)This column reflects the removal of amounts related to the Company's Sanofi property, assumed to be sold on January 1, 2021 for the purposes of this pro forma financial statement. The sale closed in the first quarter of 2022.

 

(G)The pro forma weighted average common shares outstanding are calculated as if the issuance of the 6,450,107 shares that were issued to purchase the CIM Properties had occurred on January 1, 2021.

 

(H)Represents adjustments to estimated straight-line rent using the most recent data for lease terms, assuming an acquisition date of January 1, 2021 for all 81 properties of the CIM Portfolio acquisition. For purposes of this pro forma financial statement, no assumptions were made for potential lease renewals.

 

(In thousands)  Pro Forma
Adjustments
 
Straight-line rent and other adjustments  $(2,725)
Accretion of below market leases   4,440 
Amortization of above market leases   (4,649)
Total  $(2,934)

 

(I)Represents the pro forma adjustment for depreciation and amortization expense, which is based on the Company’s basis in the assets that would have been recorded assuming the CIM Portfolio was acquired on January 1, 2021. Depreciation and amortization amounts were determined in accordance with the Company’s policies and are based on management’s valuation of the estimated useful lives of the property and intangibles. The amounts allocated to buildings and improvements are depreciated over the estimated useful life (generally 40 years for buildings and 15 years or less for improvements), beginning on the assumed acquisition date of January 1, 2021, while the amounts allocated to lease intangibles are amortized over the remaining life of the related leases. The following table details the depreciation and amortization expense for both the Acquired Property Results Not Included in December 31, 2021 RTL for the year ended December 31, 2021:

 

(In thousands)  Pro Forma
Adjustments
 
Depreciation expense  $27,320 
Amortization expense — In-place leases   57,509 
Total  $84,829 

 

(J)Represents interest expense on debt assumed from the CIM Portfolio, the additional Credit Facility draw and the issuance of the Senior Notes, partially offset by the removal of interest expense from the Sanofi mortgage and credit facility paydown, as if all of these borrowings occurred on January 1, 2021, as follows:

 

 

 

 

   Principal   Rate   Fixed/Variable  Interest Expense 
    (In thousands)            (In thousands) 
Assumed mortgage debt — Acquired Property Results Not Included in December 31, 2021 RTL (1)   $350,514    3.93%  Fixed  $13,775 
                   
Borrowings on the Credit Facility — Acquired Property Results Not Included in December 31, 2021 RTL (2)   $478,000    2.71%  Variable  $12,954 
                   
Issuance of the Senior Notes (3)   $500,000    4.50%  Fixed  $17,187 
Removal of interest expense related to the Credit Facility repayment   186,242    2.71%  Variable   (5,047)
Removal of interest expense related to the Sanofi mortgage   125,000    3.27%  Fixed by swap   (3,350)
Amortization of deferred financing costs from Senior Notes (3)                 1,014 
Total interest expense adjustments related to issuance of Senior Notes               $9,804 

 

(1) Includes estimated fair value of debt assumed for $352.8 million of principal mortgage debt assumed with the closing of the Acquired Property Results Not Included in December 31, 2021 RTL.

 

(2) Calculated using the weighted average interest rate on the Credit Facility for the year ended December 31, 2021.

 

(3) Represents the incremental amount of interest adjustments to assume a January 1, 2021 issuance of the Senior Notes, which were issued on October 7, 2021.

 

(K)Reflects the gain on the sale of the Sanofi property as if it occurred on January 1, 2021. This is a one-time, non-recurring transaction and therefore is only included in the consolidated pro forma statement of operations for the year ended December 31, 2021. Additional details are as follows:

 

   (In thousands) 
Net proceeds from sale of the Sanofi property — closed January 6, 2022  $254,518 
Net carrying value of the Sanofi-property related assets and liabilities as of December 31, 2021   (200,506)
Pro forma gain on sale of Sanofi property if closed as of December 31, 2021   54,012 
Less: Depreciation from January 1, 2021 to December 31, 2021   (9,432)
Pro forma gain on sale of Sanofi property if closed as of January 1, 2021  $44,580 

 

(L)The purchase and sale agreement included the planned issuance of shares of the Company’s Class A common stock or Class A units in the Operating Partnership of up to $53.4 million in value. The number of shares issued (6,450,107) was based on the value of the shares that may have been issued divided by the per-share volume weighted average price of the Company’s Class A common stock measured over a five-day consecutive trading period immediately preceding (but not including) the date on which written notice is delivered, indicating the seller’s election to receive either shares or units, to the Operating Partnership (the price of which is to be limited by a 7.5% collar in either direction from the per share volume weighted-average price of the Company’s Class A common stock measured over a ten-day consecutive trading period immediately preceding (but not including) the effective date of the PSA, which was $8.34 per share. The Company concluded that this arrangement constituted an embedded derivative which requires separate accounting. The initial value of the embedded derivative was an asset upon the signing of the PSA of $1.7 million, and was a liability of $2.3 million as of December 31, 2021 in the Company’s balance sheet. Upon consummation, the stock portion of the transaction closed at values which were within the collar and accordingly, the liability for the derivative at closing should be reduced from $2.3 million to zero. The adjusted loss represents the original value of the embedded derivative (which is also part of purchase accounting). This is expected to be a non-recurring loss.