What changed in this filing

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Item 1A. Risk Factors

2021-05-17 compared with 2020-11-13 · 12 added, 74 removed, 25 unchanged (77% of the section changed)

1 unchanged sentence

Risks Related to Real Estate Assets

Pandemics or other health crises may adversely affect our business and/or operations, our tenants’ financial condition and the profitability of our properties.

Our business and/or operations and the businesses of our tenants could be materially and adversely affected by the risks, or the public perception of the risks, related to a pandemic or other health crisis, such as the recent outbreak of COVID-19.

The COVID-19 outbreak and the associated “shelter-in-place” or “stay-at-home” orders or other quarantine mandates or public health guidance issued by local, state or federal authorities has adversely affected a number of our tenants’ businesses.

The extent to which the COVID-19 pandemic will impact our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the COVID-19 pandemic, the actions taken to contain the COVID-19 pandemic or mitigate its impact, and the direct and indirect economic effects of the COVID-19 pandemic and the related containment measures.

Management is evaluating rent relief requests on a case-by-case basis and not all requests for rent relief may be granted.

To the extent we grant additional requests for rent relief, either in the form of rent deferral or abatement, or to the extent our tenants default on their lease obligations, it may have a negative impact on our rental revenue and net income.

Management will continue to monitor the impact to our business, financial condition, results of operations, cash flow, and occupancy.

Accordingly, we cannot predict the significance, extent or duration of any adverse impact of the COVID-19 pandemic on our business, financial condition, results of operations or cash flows for the fiscal year ending December 31, 2020.

Moreover, certain risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.

The declaration, amount and payment of future cash distributions on our common stock are subject to uncertainty due to current market conditions.

All distributions will be declared at the discretion of our Board and will depend on our earnings, our financial condition, REIT distribution requirements, and other factors as our Board may deem relevant from time to time.

The economic impacts resulting from the COVID-19 pandemic could adversely affect our ability to pay distributions.

Our Board is under no obligation or requirement to declare future distributions and will continue to assess our common stock distribution rate on an ongoing basis, as market conditions and our financial position continue to evolve.

We cannot assure you that we will achieve results that will allow us to pay distributions on our common stock or that the level of distributions will be maintained or increased.

We have paid, and may continue to pay, some of our distributions from sources other than cash flows from operations, including borrowings and proceeds from asset sales, which may reduce the amount of capital we ultimately deploy in our real estate operations and may negatively impact the value of our common stock.

9 unchanged sentences

The following table presents distributions and the source of distributions for the periods indicated below (dollar amounts in thousands):

Nine Months Ended

September 30, 2020 Year Ended

Three Months Ended

March 31, 2021 Year Ended

December 31, 2020

6 unchanged sentences

$ 28,747 87 % $ 115,985 (2) 93 %

Proceeds from the issuance of common stock 8,308 (3) 9 % — — %

Proceeds from the issuance of debt (3)

4,159 13 % 553 — %

Proceeds from the issuance of common stock — — % 8,308 (4) 7 %

Total sources $ 32,906 100 % $ 124,846 100 %

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(1) Net cash provided by operating activities for the nine months ended September 30, 2020 and the year ended December 31, 2019 was $67.6 million and $188.6 million, respectively.

(2) Our distributions covered by cash flows from operating activities for the nine months ended September 30, 2020 and the year ended December 31, 2019 include cash flows from operating activities in excess of distributions from prior periods of $9.6 million and $5.9 million, respectively.

(1) Net cash provided by operating activities for the three months ended March 31, 2021 and the year ended December 31, 2020 was $28.7 million and $106.4 million, respectively.

(2) Our distributions covered by cash flows from operating activities for the year ended December 31, 2020 include cash flows from operating activities in excess of distributions from prior periods of $9.6 million.

(3) Net proceeds on the credit facilities, notes payable and repurchase facilities for the three months ended March 31, 2021 and the year ended December 31, 2020 were $197.0 million and $159.0 million, respectively.

(4) In accordance with GAAP, certain real estate acquisition-related fees and expenses, such as expenses and fees incurred in connection with property acquisitions accounted for as business combinations, are expensed, and therefore reduce net cash flows from operating activities.

Therefore, for consistency, proceeds from the issuance of common stock used as a source of distributions for the nine months ended September 30, 2020 include the amount by which real estate acquisition-related fees and expenses have reduced net cash flows from operating activities in those prior periods.

(4) Net proceeds on the credit facilities, notes payable and repurchase facilities for the nine months ended September 30, 2020 was $242.1 million.

Changes in banks’ inter-bank lending rate reporting practices or the method pursuant to which LIBOR is determined may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.

LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform.

Some of these reforms are already effective while others are still to be implemented.

These reforms may cause such benchmarks to perform differently than in the past, or have other consequences which cannot be predicted.

It currently appears that, over time, U.S.

Dollar LIBOR may be replaced by the SOFR published by the Federal Reserve Bank of New York.

However, the manner and timing of this shift is currently unknown.

Market participants are still considering how various types of financial instruments and securitization vehicles would react to a discontinuation of LIBOR.

It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time, and it is possible that not all of our assets and liabilities will transition to the same alternative reference rate, in each case increasing the difficulty of hedging.

For example, switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread.

Industry organizations are attempting to structure the spread calculation in a manner that minimizes the possibility of value transfer between counterparties, borrowers, and lenders by virtue of the transition, but there is no assurance that the calculated spread will be fair and accurate or that all asset types and all types of securitization vehicles will use the same spread.

The Company and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management.

The process of transition involves operational risks.

It is also possible that no transition will occur for many financial instruments.

At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be implemented.

Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the market for or value of any securities on which the interest or dividend is determined by reference to LIBOR, loans, derivatives and other financial obligations or on our overall financial condition or results of operations.

More generally, any of the above changes or any other

consequential changes to LIBOR or any other “benchmark” as a result of international, national or other proposals for reform or other initiatives, or any further uncertainty in relation to the timing and manner of implementation of such changes, could have a material adverse effect on the value of and return on any securities based on or linked to a “benchmark.”

Risks Related to the Mergers

Failure to complete the Mergers could negatively impact the future of our business and financial results.

If the Mergers are not completed, the ongoing business of our Company could be materially adversely affected and we will be subject to a variety of risks associated with the failure to complete the Mergers, including the following:

• CCIT III and CCPT V may be unable to pay us the termination fees per the Merger Agreements of $710,000 and $9.85 million, respectively, and may not be able to reimburse us for expenses incurred in connection with the Merger of up to $130,000 and $1.79 million, respectively;

• we may have to bear certain costs incurred by us relating to the Mergers, such as legal, accounting, financial advisor, filing, printing and mailing fees;

• the diversion of our management’s focus and resources from operational matters and other strategic opportunities while working to implement the Mergers.

If the Mergers are not completed, these risks could materially affect our business and financial results.

The pendency of the Mergers, including as a result of the restrictions on the operation of our business and the respective businesses of CCIT III and CCPT V during the period between signing the Merger Agreements and the completion of the Mergers, could adversely affect the business and operations of our Company, the other parties to the Mergers, or both.

In connection with the pending Mergers, some of our business partners or vendors and those of the other parties to the Mergers may delay or defer decisions, which could negatively impact the revenues, earnings, cash flows and expenses of our Company, CCIT III or CCPT V, regardless of whether the Mergers are completed.

In addition, due to operating covenants in the Merger Agreements, we and the other parties to the Mergers may be unable, during the pendency of the Mergers, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in our ordinary course of business, even if such actions would prove beneficial.

In certain circumstances, either we or either of the Target REITs may terminate the Merger Agreements.

Either we or either of the Target REITs may terminate the Merger Agreements if the Mergers have not been consummated by the Outside Date.

Also, the Merger Agreements may be terminated in certain circumstances if a final and non-appealable order is entered prohibiting the transactions contemplated by the applicable Merger Agreement, upon a material uncured breach by the other parties that would cause the closing conditions not to be satisfied, or if the stockholders of the applicable Target REIT fail to approve the applicable Merger or the amendment to their charter that is required to consummate the Mergers.

In addition, at any time prior to the applicable Stockholder Approval, the applicable Target REIT has the right to terminate the applicable Merger Agreement in order to enter into an Alternative Acquisition Agreement with respect to a Superior Proposal.

Finally, at any time prior to the time the stockholders of the other parties to the Mergers approve the Mergers and the amendments to their charters that are required to consummate the Mergers, we have the right to terminate the applicable Merger Agreement upon an Adverse Recommendation Change, upon the commencement of a tender offer or exchange offer for any shares of the common stock of the applicable Target REIT that constitutes an Acquisition Proposal if the board of directors of the applicable Target REIT fails to recommend against acceptance of such tender offer or exchange offer or to publicly reaffirm such board of directors’ recommendation after being requested to do so by us or if the applicable Target REIT breaches or fails to comply in any material respect with certain of their obligations regarding the solicitation of and response to Acquisition Proposals.

We and the Target REITs each expect to incur substantial expenses related to the Mergers.

We and CCIT III and CCPT V each expect to incur substantial expenses in connection with completing the Mergers and integrating our properties and operations with the other parties to the Mergers.

While we and each of the Target REITs each have assumed that a certain level of transaction expenses would be incurred, there are a number of factors beyond the control of each company that could affect the total amount or the timing of such expenses.

Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time.

As a result, the transaction expenses associated with the Mergers could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings following the completion of the Mergers.

The Mergers may be dilutive to estimated net income for our stockholders.

The Mergers may be dilutive to estimated net income for our stockholders, which would potentially decrease the amount of funds available to distribute to our stockholders as stockholders of the fully combined company following the Mergers (the “Fully Combined Company”).

For instance, on a pro forma basis, assuming the Mergers had been consummated on January 1, 2020, the net income per share of the Fully Combined Company for the six months ended June 30, 2020 would have been less than the actual net income per share of our common stock during the same period.

The market value ascribed to the shares of common stock of the other parties to the Mergers upon a liquidity event may be significantly lower than the estimated per share NAV of our common stock considered by our Board in approving and recommending the Mergers.

In approving and recommending the Mergers, our Board considered, among other things, the most recent estimated per share NAV of our common stock and the common stock of the other parties to the Mergers as determined by our Board and the other parties’ respective boards of directors, with the assistance of their respective third-party valuation experts.

The estimated per share NAV of our common stock may not be immediately determined following the consummation of the Mergers.

In the event that the Fully Combined Company completes a liquidity event after consummation of the Mergers, such as a listing of its shares on a national securities exchange, a merger in which stockholders of the Fully Combined Company receive securities that are listed on a national securities exchange, or a sale of the Fully Combined Company for cash, the market value of the shares of the Fully Combined Company upon consummation of such liquidity event may be significantly lower than the current estimated value considered by our Board and the estimated per share NAV of the common stock of CCIT III or CCPT V that may be reflected on the account statements of stockholders of the Fully Combined Company after consummation of the Mergers.

For example, if the shares of the Fully Combined Company are listed on a national securities exchange at some point after the consummation of the Mergers, the trading price of the shares may be significantly lower than the most recent estimated per share NAV of our common stock of $7.31 as of June 30, 2020.

If the Mergers do not qualify as tax-free reorganizations, there may be adverse tax consequences.

The Mergers are intended to qualify as tax-free reorganizations within the meaning of Section 368(a) of the Code.

The closing of the Mergers is conditioned on the receipt by us and the other parties to the Mergers of an opinion of counsel to the effect that the Mergers will qualify as tax-free reorganizations within the meaning of Section 368(a) of the Code.

However, these legal opinions will not be binding on the Internal Revenue Service or on the courts.

If, for any reason, the Mergers were to fail to qualify as tax-free reorganizations, then each stockholder generally would recognize gain or loss, as applicable, equal to the difference between (1) the merger consideration (i.e.

the fair market value of the shares of our common stock) received by such stockholder in the Mergers;

and (2) such stockholder’s adjusted tax basis in our common stock.

Therefore, for consistency, proceeds from the issuance of common stock used as a source of distributions for the year ended December 31, 2020 include the amount by which real estate acquisition-related fees and expenses have reduced net cash flows from operating activities in those prior periods.

Unregistered Sales of Equity Securities and Use of Proceeds

Defaults Upon Senior Securities

Mine Safety Disclosures

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors