v3.20.2

Internalization | 6 Months Ended
--- | ---
Jun. 30, 2020
Internalization [Abstract] |
Internalization | 4. Internalization On February 7, 2020, the Company completed the Internalization and the Company’s management team and corporate staff, who were previously employed by BRE, became employees of an indirect subsidiary of the OP. The consideration paid at closing of the Internalization is summarized in the following table:
(in thousands) |  |  |  |
Issuance of 781 shares of common stock |  | $ | 66,376 |
Issuance of 1,320 OP Units |  |  | 112,159 |
Cash |  |  | 30,981 |
Base consideration |  |  | 209,516 |
Initial estimate of fair value of earnout liability |  |  | 40,119 |
Total consideration |  | $ | 249,635 |
The Company may be required to pay additional earnout consideration of up to $75,000 payable in four tranches of $10,000, $15,000, $25,000, and $25,000 if certain milestones related to either (a) the 40-day VWAP per REIT Share, following the completion of an IPO, or (b) the Company’s AFFO per share, prior to the completion of an IPO, (each, an “Earnout Trigger”) are achieved during the Earnout Periods. The consideration will consist of a combination of cash, shares of the Company’s common stock, and OP Units, based on the same proportions paid in the base consideration. The earnout tranches, applicable 40-day VWAP of a REIT Share and AFFO per share, and the applicable Earnout Periods are as follows:
(in thousands, except per share amounts) |  | If the Company has completed an IPO |  | If the Company has not completed an IPO
Earnout Tranche(a) |  | 40-Day VWAP of a REIT Share |  | Applicable Earnout Period |  | AFFO per Share |  | Applicable Earnout Period
$10,000 |  | $90.00 |  | The two-year period beginning on the earlier of (i) the IPO closing date or (ii) December 31, 2020. |  | $5.85 |  | The two-year period consisting of the calendar years ended December 31, 2020 and December 31, 2021.
$15,000 |  | $95.00 |  | The two-year period beginning on the earlier of (i) the IPO closing date or (ii) December 31, 2020. |  | $5.95 |  | The two-year period consisting of the calendar years ended December 31, 2020 and December 31, 2021.
$25,000 |  | $97.50 |  | The four-year period beginning on the date that is exactly one year after the earnout period begins for the first and second tranches above. |  | $6.30 |  | The four-year period consisting of the calendar years ended December 31, 2021, December 31, 2022, December 31, 2023 and December 31, 2024.
$25,000 |  | $100.00 |  | The four-year period beginning on the date that is exactly one year after the earnout period begins for the first and second tranches above. |  | $6.70 |  | The four-year period consisting of the calendar years ended December 31, 2021, December 31, 2022, December 31, 2023 and December 31, 2024.
| (a) | Initial contractual value of applicable earnout tranche based on an $85.00 price per share/unit of common stock and OP Units. Does not take into account the actual per share price of common stock and OP Units at the time an applicable earnout tranche may be earned and paid.
Should all earnout milestones be met, an additional 272 shares of common stock and an additional 465 OP Units would be issued, in addition to the payment of $12,349 in cash. As of the Internalization date, the Company estimated that the earnout liability had a fair value of $40,119, of which approximately $33,511 related to the potential issuance of common shares and OP Units and approximately $6,608 related to the potential payment of cash. The Company will estimate the fair value of the earnout liability at each reporting date during the contingency period and record any changes in estimated fair value in its Condensed Consolidated Statement of Income and Comprehensive Income (Loss). Redemption Rights Agreement The mezzanine equity common stock and mezzanine equity non-controlling interests issued in connection with the Internalization are economically equivalent to permanent equity common shares and OP Units with the exception of certain contingent redemption rights that are not yet exercisable as of June 30, 2020. If an IPO does not occur on or before December 31, 2020, then each holder of mezzanine equity common stock and mezzanine equity non-controlling interests shall have the right to require the Company to repurchase any or all of such holder’s shares and OP Units at a price equal to the greater of (i) the initial fair value of $85 of the common shares or OP Units at the date of the Internalization or (ii) the current fair value of such common shares or OP Units, as adjusted for interest and distributions. Such repurchases can occur during the period from January 1, 2021 until the earlier of 12 months thereafter or the date of an IPO; provided that the period shall not begin on January 1, 2021 if the Company, in connection with an IPO, shall have filed a registration statement with the SEC that has not been withdrawn as of January 1, 2021 (but the period shall begin immediately upon any such withdrawal and then continue until the earlier of 12 months thereafter or until the occurrence of an IPO); provided, further, that the period shall begin no later than July 1, 2021 (even if such registration statement shall not have been withdrawn as of July 1, 2021) and in such event shall continue until the earlier of twelve (12) months thereafter or the occurrence of an IPO. The Merger Agreement did not provide that the completion of an IPO is a condition to the closing of the Internalization. Subsequent to June 30, 2020, such repurchase rights have been irrevocably waived by each of the named executive officers. If an IPO does not occur on or before the satisfaction of any Earnout Trigger, then each holder of common shares or OP Units issued under the earnout shall have the right to require the Company to repurchase any or all of such holder’s shares or OP Units at a price equal to the greater of (i) the initial fair value of $85 of the common shares at the date of the Internalization or (ii) the current fair value of such common shares, as adjusted for interest and distributions. Such repurchases can occur during the period from the date of issuance of such earnout shares until the earlier of 12 months thereafter or the occurrence of an IPO; provided, further, that such period shall not begin on such date of issuance if the Company, in connection with an IPO, shall have filed a registration statement with the SEC that has not been withdrawn as of such date of issuance (but such period shall begin immediately upon any such withdrawal and then continue until the earlier of 12 months thereafter or the occurrence of an IPO; provided, further, that such period shall begin no later than six months after such date of issuance (even if such registration statement shall not have been withdrawn as of such date) and in such event shall continue until the earlier of 12 months thereafter or the occurrence of an IPO. Allocation of Purchase Price The Internalization was accounted for as a business combination and accordingly, the Company allocated the purchase price utilizing the acquisition method to record assets acquired and liabilities assumed at their estimated fair values. The allocation of the purchase price has not been finalized and is based upon preliminary estimates of these fair values, which is the best available information at the current time. The final determination of the fair values of the assets and liabilities will be based on the actual valuations of the tangible and intangible assets and liabilities that existed as of the date of completion of the acquisition, including the valuation of the earnout liability. The Company expects to finalize the valuations during the measurement period, not to exceed one year from the date of the Internalization. Consequently, amounts preliminarily allocated to identifiable tangible and intangible assets and liabilities could change. The following table summarizes the Company’s preliminary allocation of the purchase price associated with the Internalization:
(in thousands) |  |  |  |
Prepaid expenses and other assets |  | $ | 1,336 |
Right-of-use assets |  |  | 1,898 |
Goodwill |  |  | 339,769 |
Accounts payable and other liabilities |  |  | (986 | )
Operating lease liabilities |  |  | (1,898 | )
Debt |  |  | (90,484 | )
|  | $ | 249,635 |
In connection with the Internalization, the Company recorded goodwill of $339,769 as a result of the consideration exceeding the fair value of the net liabilities acquired. Goodwill represents the synergies and costs savings expected from the acquired management functions and the Company’s ability to generate additional portfolio growth on a lower cost structure than when it was externally managed. The Company does not expect that the goodwill will be deductible for tax purposes. In connection with the Internalization, the Company assumed $90,484 of debt which was subsequently repaid through a combination of borrowings under its Revolving Credit Facility (as defined below) and entering into a new $60,000 term loan agreement (see Note 9). The Company incurred $389 and $1,594 in non-recurring costs associated with the Internalization during the three and six months ended June 30, 2020, respectively, and $272 of such costs during the three and six months ended June 30, 2019, which were classified as Internalization expenses in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss). The effect of the Internalization has been reflected in the Company’s operating results beginning on February 7, 2020. No incremental revenues were recorded as a result of the Internalization. Subsequent to the Internalization, during the three and six months ended June 30, 2020, the Company incurred $4,572 and $8,234, respectively, in expenses as a result of being internalized. Such amounts include general and administrative expenses associated with the Company’s performance of functions previously performed by BRE and the Asset Manager (primarily employee related costs), as well as interest expense associated with the borrowings related to the Internalization. These expenses do not include the Internalization expenses discussed above, or amounts recorded to reflect changes in the fair value of the earnout liability. Condensed Pro Forma Financial Information The following pro forma information summarizes selected financial information from the Company’s combined results of operations, as if the Internalization had occurred on January 1, 2019. These results contain certain adjustments totaling $389 and $6,137 of income, respectively, for the three and six months ended June 30, 2020 and $7,343 and $13,973 of income, respectively, for the three and six months ended June 30, 2019. These pro forma adjustments reflect the elimination of Internalization expenses and asset management, property management, and disposition fees between the Company and BRE and the Asset Manager in historic financial results, and adjustments to reflect incremental interest expense associated with the borrowing related to the Internalization. This pro forma information is presented for informational purposes only, and may not be indicative of what actual results of operations would have been had the Internalization occurred at the beginning of the period, nor does it purport to represent the results of future operations. The condensed pro forma financial information is as follows for the three and six months ended June 30, 2020 and 2019:
|  | For the three months ended June 30, |  |  | For the six months ended June 30, |
(in thousands) |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Revenues |  | $ | 80,371 |  |  | $ | 69,053 |  |  | $ | 158,602 |  |  | $ | 137,483 |
Net income |  |  | 17,487 |  |  |  | 19,026 |  |  |  | 31,340 |  |  |  | 36,964 |

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- Definition Internalization. + References No definition available. + Details
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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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