QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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: 000-55599
Hines Global Income Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland
80-0947092
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2800 Post Oak Boulevard
Suite 5000
Houston
Texas
77056-6118
(Address of principal executive offices)
(Zip code)
(888)220-6121
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
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☒ 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☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.
☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 1, 2019, approximately 19.0 million shares of the registrant’s Class AX common stock, 20.0 million shares of the registrant’s Class TX common stock, 0.1 million shares of the registrant’s Class IX common stock, 21.0 million shares of the registrant’s Class T common stock, 5.6 million shares of the registrant’s Class D common stock and 3.7 million shares of the registrant’s Class I common stock were outstanding.
Preferred shares, $0.001 par value per share; 500,000 preferred shares authorized, none issued or outstanding as of June 30, 2019 and December 31, 2018
—
—
Common shares, $0.001 par value per share (Note 6)
62
44
Additional paid-in capital
533,778
371,274
Accumulated distributions in excess of earnings
(113,933
)
(91,711
)
Accumulated other comprehensive income (loss)
(803
)
(874
)
Total stockholders’ equity
419,104
278,733
Noncontrolling interests
—
—
Total equity
419,104
278,733
Total liabilities and equity
$
1,098,764
$
948,829
See notes to the condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2019 and 2018
1. ORGANIZATION
The accompanying interim unaudited condensed consolidated financial information has been prepared according to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly and in conformity with accounting principles generally accepted in the United States of America (“GAAP”) the financial position of Hines Global Income Trust, Inc. as of June 30, 2019 and December 31, 2018, the results of operations for the three and six months ended June 30, 2019 and 2018 and cash flows for the six months endedJune 30, 2019 and 2018 have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted according to such rules and regulations. For further information, refer to the financial statements and footnotes included in Hines Global Income Trust, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018.
Hines Global Income Trust, Inc. (the “Company”), formerly known as Hines Global REIT II, Inc., was incorporated in Maryland on July 31, 2013, to invest in a diversified portfolio of quality commercial real estate properties and other real estate investments throughout the United States and internationally, and to a lesser extent, invest in real-estate related securities. The Company is sponsored by Hines Interests Limited Partnership (“Hines”), a fully integrated global real estate investment and management firm that has acquired, developed, owned, operated and sold real estate for over 60 years. The Company is managed by Hines Global REIT II Advisors LP (the “Advisor”), an affiliate of Hines. The Company conducts substantially all of its operations through Hines Global REIT II Properties, LP (the “Operating Partnership”). An affiliate of the Advisor, Hines Global REIT II Associates LP, owns less than a 1% limited partner interest in the Operating Partnership as of June 30, 2019 and the Advisor also owns the special limited partnership interest in the Operating Partnership. The Company has elected to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2015.
As of June 30, 2019, the Company owned direct real estate investments in eleven properties totaling 7.3 million square feet that were 96% leased. The Company raises capital for its investments through public offerings of its common stock. The Company commenced its initial public offering of up to $2.5 billion in shares of its common stock (the “Initial Offering”) in August 2014, and commenced its second public offering of up to $2.5 billion in shares of common stock including $500.0 million of shares offered under its distribution reinvestment plan (the “Follow-On Offering”) in December 2017. As of August 14, 2019, the Company had received gross offering proceeds of $738.9 million from the sale of 73.8 million shares through its public offerings, including shares issued pursuant to its distribution reinvestment plan.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements of the Company included in this Quarterly Report on Form 10-Q include the accounts of Hines Global Income Trust, Inc. and the Operating Partnership (over which the Company exercises financial and operating control). All intercompany balances and transactions have been eliminated in consolidation.
Investments in Real Estate-Related Securities
In the fourth quarter of 2018, the Company made its initial investments in real estate-related securities and as of June 30, 2019 has $20.0 million invested in these securities. These securities consist of common equities, preferred equities and debt investments of publicly traded REITs. The Company has elected to classify these investments as trading securities and carry such investments at fair value. These assets are valued on a recurring basis, which resulted in a realized gain of $165,000 and an unrealized loss of $4,000 for the three months ended June 30, 2019, and a realized gain of $228,000 and an unrealized gain of $1.1 million for the six months ended June 30, 2019, both of which are recorded in “gain (loss) on investments in real estate-related securities” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In July 2019, the Company made an additional $15.0 million investment in real estate-related securities.
Tenant and other receivables consists primarily of receivables attributable to straight-line rent and receivables related to base rents and tenant reimbursements. Straight-line rent receivable consists of the difference between the tenants’ rents calculated on a straight-line basis from the date of acquisition or lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements. Straight-line rent receivables were $7.3 million and $5.8 million as of June 30, 2019 and December 31, 2018, respectively.
Other Assets
Other assets included the following (in thousands):
June 30, 2019
December 31, 2018
Prepaid insurance
$
806
$
493
Prepaid property taxes
347
80
Deferred tax assets (1)
979
844
Other
880
490
Other assets
$
3,012
$
1,907
(1)
Includes the effects of a valuation allowance of $1.7 million and $0.8 million as of June 30, 2019 and December 31, 2018, respectively.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02 which requires companies that lease assets to recognize on the balance sheet the right-of-use assets and related lease liabilities (“ASC 842”). The accounting by companies that own the assets leased by the lessee (the lessor) remains largely unchanged from the adoption of ASC 842. The Company adopted ASC 842 beginning January 1, 2019 and is using the modified retrospective approach. No adjustment to opening retained earnings was required.
In July 2018, the FASB issued ASU 2018-11, which allows lessors to account for lease and non-lease components by class of underlying assets, as a single lease component if certain criteria are met. The new standard permits companies to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption in lieu of restating prior periods and provides other optional practical expedients.
On January 1, 2019, the Company elected the following practical expedients:
•
The transition method in which the application date of January 1, 2019 is the beginning of the reporting period that the Company first applied the new guidance.
•
The practical expedient package which allows an entity not to reassess (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; (3) initial direct costs for any existing leases.
•
As an accounting policy election, a lessor may choose not to separate the non-lease components, by class of underlying assets, from the lease components and instead account for both types of components as a single component under certain conditions.
•
As an accounting policy election, a lessee may choose not to separate the non-lease components, by class of underlying assets, from the lease components and instead account for both types of components as a single component. The Company elected to apply the practical expedient for all of its leases to account for the lease and non-lease components as a single, combined operating lease component.
The Company completed its evaluation of the impact that the adoption of ASC 842 will have on the Company’s consolidated financial statements relating to its leases from both the lessee and lessor perspective. Based on the Company’s analysis, the Company identified the following changes to result from its adoption of ASC 842:
Lessor Accounting
•
The Company is entitled to receive tenant reimbursements for operating expenses for common area maintenance. Based on guidance in these ASUs, such revenue is defined as a non-lease component, which would be accounted for in accordance with ASC 606. However, the Company elected to apply the practical expedient for all of its leases to account for the lease and non-lease components as a single, combined operating lease component.
•
Capitalization of leasing costs is limited to initial direct costs. Initial direct costs have been defined as incremental costs of a lease that would not have been incurred if the lease had not been obtained. Legal costs are no longer capitalized, but expensed as incurred. There is no change in the Company’s accounting for lease inducements and commissions.
•
The Company’s existing leases continue to be classified as operating leases, however, leases entered into or modified after January 1, 2019 may be classified as either operating or sales-type leases, based on specific classification criteria. The Company believes all of its leases will continue to be classified as operating leases, and all operating leases will continue to have a similar pattern of recognition as under current GAAP.
Lessee Accounting
•
The Company has ground lease agreements in which the Company is the lessee for land underneath Bishop’s Square that the Company accounts for as an operating lease. The Company previously recognized an amount related to this ground lease as part of the allocation of the purchase price of Bishop’s Square, which was recorded to intangible lease assets, net. The lease has a remaining term of 763 years. Upon adoption of ASC 842 on January 1, 2019, the Company determined the lease liability is immaterial and reclassified approximately €29.7 million (approximately $33.9 million assuming a rate of $1.14 per EUR as of January 1, 2019, the date of adoption) from intangible lease assets, net to right-of-use asset, net in the Company’s Condensed Consolidated Balance Sheets.
New Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, "Changes to the Disclosure Requirements for Fair Value Measurement." This ASU amends and removes several disclosure requirements including the valuation processes for Level 3 fair value measurements. The ASU also modifies some disclosure requirements and requires additional disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and requires the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The Company is currently assessing the impact the adoption of this guidance will have on its financial statements.
Investment property consisted of the following amounts as of June 30, 2019 and December 31, 2018 (in thousands):
June 30, 2019
December 31, 2018
Buildings and improvements (1)
$
773,380
$
693,834
Less: accumulated depreciation
(40,003
)
(30,574
)
Buildings and improvements, net
733,377
663,260
Land
184,285
123,929
Investment property, net
$
917,662
$
787,189
(1)
In October 2017, the Company commenced construction at Bishop’s Square to add an additional floor and make various upgrades to the property. The construction was completed in July 2019. Included in buildings and improvements is approximately $16.7 million and $14.5 million of construction-in-progress related to the expansion of Bishop’s Square as of June 30, 2019 and December 31, 2018, respectively.
Recent Acquisition of Investment Property
In May 2019, the Company acquired ABC Westland, an industrial property located in The Hague, Netherlands. The net purchase price for ABC Westland was €116.4 million (approximately $130.3 million assuming a rate of $1.12 per EUR as of the acquisition date), exclusive of transaction costs and working capital reserves. The amount recognized for the asset acquisition as of the acquisition date was determined by allocating the net purchase price as follows (in thousands):
Building and Improvements
Land
In-place Lease Intangibles
Out-of-Market Lease Intangibles, Net
Total
$74,059
(1)
$59,664
$6,902
$(1,124)
$139,501
(1)
Amount includes approximately €14.1 million (approximately $15.8 million assuming a rate of $1.12 per EUR as of the acquisition date) of solar panels at date of acquisition, which are to be depreciated using the straight-line method assuming a useful life of 25 years.
As of June 30, 2019, the cost basis and accumulated amortization related to lease intangibles are as follows (in thousands):
Lease Intangibles
In-Place Leases (1)
Out-of-Market
Lease Assets
Out-of-Market
Lease Liabilities
Cost
$
87,802
$
5,692
$
(23,458
)
Less: accumulated amortization
(36,950
)
(2,458
)
5,168
Net
$
50,852
$
3,234
$
(18,290
)
(1)
The Company adopted ASC 842 beginning January 1, 2019 and reclassified certain assets from Intangible lease assets, net to Right-of-use asset, net in the Company’s Condensed Consolidated Balance Sheets. See Note 2—Summary of Significant Accounting Policies for more information on the adoption of ASC 842.
As of December 31, 2018, the cost basis and accumulated amortization related to lease intangibles were as follows (in thousands):