Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K
2018-11-13
Other Events, Regulation FD, Exhibits
8-K
2018-02-08
Other Events, Regulation FD, Exhibits
Comparables
CAH
Cardinal Health
14,940
WYNN
Wynn Resorts
14,670
CTXS
Citrix Systems
12,800
WF
Woori Bank
7,910
CUBE
CubeSmart
6,120
WBS
Webster Financial
4,750
DKS
Dicks Sporting Goods
3,440
CRCM
Care.com
485
ACV
Alberto-Culver
251
SVVC
Firsthand Technology Value Fund
78
TSIF 2019-06-30
Content
Part I - Financial Information
Item 1. Financial Statements.
Note 1. Business
Note 2. Summary of Significant Accounting Policies
Note 3. Investment and Fair Value
Note 4. Related Party Transactions
Note 5. Commitments and Contingencies
Note 6. Members' Capital
Note 7. Financial Highlights
Note 8. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
Exhibits
EX-31.1
tsif56301910-qex311.htm
EX-31.2
tsif56301910-qex312.htm
EX-32
tsif56301910-qex32.htm
Terra Secured Income Fund 5 Earnings 2019-06-30
TSIF 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 tsif56301910q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-55780
Terra Secured Income Fund 5, LLC
(Exact name of registrant as specified in its charter)
Delaware
90-0967526
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
805 Third Avenue, 8th Floor
New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 753-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934: Units of Limited Liability Company Interests
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 þ 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 þ 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 ¨
Smaller reporting company þ
Emerging growth company þ
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. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of August 9, 2019, the registrant had 6,638.4 units of limited liability company interests outstanding.
See notes to consolidated financial statements (unaudited).
2
Terra Secured Income Fund 5, LLC
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2019
2018
2019
2018
Investment income — controlled
Dividend income
$
—
$
6,808,108
$
3,922,875
$
12,341,913
Investment income
Other operating income
90
460
392
1,003
Total investment income
90
6,808,568
3,923,267
12,342,916
Operating expenses
Professional fees
98,119
99,290
271,333
207,836
Other
6,076
4,022
8,959
7,941
Total operating expenses
104,195
103,312
280,292
215,777
Net investment (loss) income
(104,105
)
6,705,256
3,642,975
12,127,139
Net change in unrealized appreciation (depreciation) on investment — controlled
1,609,008
(63,131
)
3,198,259
(175,754
)
Net increase in members’ capital resulting from operations
$
1,504,903
$
6,642,125
$
6,841,234
$
11,951,385
Per unit data:
Net investment (loss) income per unit
$
(16
)
$
1,005
$
549
$
1,815
Net increase in members’ capital resulting from
operations per unit
$
227
$
996
$
1,030
$
1,789
Weighted average units outstanding
6,639
6,669
6,639
6,683
See notes to consolidated financial statements (unaudited).
3
Terra Secured Income Fund 5, LLC
Consolidated Statements of Changes in Members’ Capital (Unaudited)
Three and Six Months Ended June 30, 2019 and 2018
Managing Member
Non-Managing Members
Total
Balance, April 1, 2019
$
—
$
260,948,679
$
260,948,679
Capital distributions
—
(7,468,095
)
(7,468,095
)
Increase in members’ capital resulting from operations:
Net investment loss
—
(104,105
)
(104,105
)
Net change in unrealized appreciation on investment
—
1,609,008
1,609,008
Net increase in members’ capital resulting from operations
—
1,504,903
1,504,903
Balance, June 30, 2019
$
—
$
254,985,487
$
254,985,487
Managing Member
Non-Managing Members
Total
Balance, April 1, 2018
$
—
$
273,287,351
$
273,287,351
Capital distributions
—
(7,502,561
)
(7,502,561
)
Capital redemptions
—
(1,622,419
)
(1,622,419
)
Increase in members’ capital resulting from operations:
Net investment income
—
6,705,256
6,705,256
Net change in unrealized depreciation on investment
—
(63,131
)
(63,131
)
Net increase in members’ capital resulting from operations
—
6,642,125
6,642,125
Balance, June 30, 2018
$
—
$
270,804,496
$
270,804,496
Managing Member
Non-Managing Members
Total
Balance, January 1, 2019
$
—
$
263,080,442
$
263,080,442
Capital distributions
—
(14,936,189
)
(14,936,189
)
Increase in members’ capital resulting from operations:
Net investment income
—
3,642,975
3,642,975
Net change in unrealized appreciation on investment
—
3,198,259
3,198,259
Net increase in members’ capital resulting from operations
—
6,841,234
6,841,234
Balance, June 30, 2019
$
—
$
254,985,487
$
254,985,487
Managing Member
Non-Managing Members
Total
Balance, January 1, 2018
$
—
$
275,549,455
$
275,549,455
Capital distributions
—
(15,017,413
)
(15,017,413
)
Capital redemptions
—
(1,678,931
)
(1,678,931
)
Increase in members’ capital resulting from operations:
Net investment income
—
12,127,139
12,127,139
Net change in unrealized depreciation on investment
—
(175,754
)
(175,754
)
Net increase in members’ capital resulting from operations
—
11,951,385
11,951,385
Balance, June 30, 2018
$
—
$
270,804,496
$
270,804,496
See notes to consolidated financial statements (unaudited).
4
Terra Secured Income Fund 5, LLC
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
2019
2018
Cash flows from operating activities:
Net increase in members’ capital resulting from operations
$
6,841,234
$
11,951,385
Adjustments to reconcile net increase in members’ capital resulting from
operations to net cash provided by operating activities:
Return of capital on investment
11,260,039
4,485,246
Net change in unrealized depreciation (appreciation) on investment
(3,198,259
)
175,754
Changes in operating assets and liabilities:
Increase in other assets
(14,260
)
(22,985
)
Increase in accounts payable and accrued expenses
8,804
37,186
Net cash provided by operating activities
14,897,558
16,626,586
Cash flows from financing activities:
Distributions paid
(14,936,189
)
(15,017,384
)
Payments for capital redemptions
—
(1,678,931
)
Net cash used in financing activities
(14,936,189
)
(16,696,315
)
Net decrease in cash and cash equivalents
(38,631
)
(69,729
)
Cash and cash equivalents at beginning of period
131,784
212,366
Cash and cash equivalents at end of period
$
93,153
$
142,637
Supplemental Disclosure of Cash Flows Information:
Cash paid for income taxes
$
—
$
—
Cash paid for interest
$
—
$
—
See notes to consolidated financial statements (unaudited).
5
Terra Secured Income Fund 5, LLC
Consolidated Schedules of Investments
June 30, 2019 (unaudited) and December 31, 2018
As of June 30, 2019 and December 31, 2018, the Company’s only investment is its equity interest in a wholly-owned subsidiary as presented below:
Number of Shares of Common Stock
June 30, 2019
December 31, 2018
Investment — Controlled
Date Acquired
Cost
Fair Value
% of Members’ Capital
Cost
Fair Value
% of Members’ Capital
Terra Property Trust, Inc. — 100% Owned
1/1/2016 and 3/7/2016
14,912,990
$
253,940,210
$
255,030,805
100.0
%
$
265,200,249
$
263,092,585
100.0
%
The following table presents a schedule of loans held for investment by Terra Property Trust, Inc. (“Terra Property Trust”), the Company’s wholly-owned subsidiary, as of June 30, 2019:
Portfolio Company
Collateral Location
Property Type
Coupon Rate
Current Interest Rate
Exit Fee
Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% (2)
Loans held for investment — non-controlled:
Mezzanine loans:
150 Blackstone River Road, LLC
US - MA
Industrial
8.5
%
8.5
%
—
%
9/21/2017
9/6/2027
$
7,000,000
$
7,000,000
$
7,047,817
2.8
%
221 W. 17th Street Owner, LLC (8)
US - NY
Condominium
12.8
%
12.8
%
1.0
%
1/19/2018
9/30/2019
4,661,438
4,708,053
4,707,556
1.8
%
2539 Morse, LLC (3)(4)(5)
US - CA
Student housing
11.0
%
11.0
%
1.0
%
10/20/2017
11/1/2020
7,000,000
7,066,909
7,067,437
2.8
%
37 Gables Member LLC (4)(5)
US - FL
Multifamily
13.0
%
13.0
%
1.0
%
6/16/2016
12/16/2019
5,750,000
5,807,500
5,806,875
2.3
%
575 CAD I LLC (3)(4)(5)(9)
US - NY
Condominium
12.0% current 2.5% PIK
14.5
%
1.0
%
1/31/2017
7/31/2019
14,855,685
14,994,925
14,993,990
5.9
%
Austin H. I. Owner LLC (3)(5)
US - TX
Hotel
12.5
%
12.5
%
1.0
%
9/30/2015
10/6/2020
3,500,000
3,529,834
3,531,736
1.4
%
High Pointe Mezzanine Investments, LLC (4)(5)
US - SC
Student housing
13.0
%
13.0
%
1.0
%
12/27/2013
1/6/2024
3,000,000
3,292,856
3,107,283
1.2
%
LD Milipitas Mezz, LLC (10)
US - CA
Hotel
LIBOR +10.25% (2.75% Floor)
13.0
%
1.0
%
6/27/2018
6/27/2021
746,152
730,449
751,891
0.3
%
SparQ Mezz Borrower, LLC (3)(4)(5)
US - CA
Multifamily
12.0
%
12.0
%
1.0
%
9/29/2017
10/1/2020
8,700,000
8,781,155
8,784,378
3.4
%
Stonewall Station Mezz LLC (5)(6)
US - NC
Hotel
12.0% current 2.0% PIK
14.0
%
1.0
%
5/31/2018
5/20/2021
9,679,478
9,758,072
9,679,968
3.8
%
64,892,753
65,669,753
65,478,931
25.7
%
6
Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2019 (unaudited) and December 31, 2018
Terra Property Trust Schedule of Loans Held for Investment as of June 30, 2019 (Continued):
Obligations under participation agreements (3)(4)(5)(6)(7)
(98,020,504
)
(98,700,002
)
(98,620,770
)
(38.7
)%
Net loans held for investment
$
289,660,262
$
291,087,806
$
291,974,607
114.5
%
7
Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2019 (unaudited) and December 31, 2018
Terra Property Trust Schedule of Loans Held for Investment as of June 30, 2019 (Continued):
Operating real estate:
Description
Acquisition Date
Real estate owned, net
Encumbrance
Net Investment
% (14)
Multi-tenant office building in Santa Monica, CA (12)
7/30/2018
$
54,380,553
$
44,873,520
$
9,507,033
3.7
%
Land in Conshohocken, PA (13)
1/9/2019
13,395,430
—
13,395,430
5.3
%
$
67,775,983
$
44,873,520
$
22,902,463
9.0
%
___________________________
(1)
Because there is no readily available market for these loans, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.
(2)
Percentages are based on the fair value of the Company’s investment in Terra Property Trust of $255.0 million as of June 30, 2019.
(3)
Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by Terra REIT Advisors.
(4)
Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Income Fund International, an affiliated fund advised by Terra REIT Advisors.
(5)
The loan participations from Terra Property Trust do not qualify for sale accounting and therefore, the gross amount of these loans remain in the consolidated statements of financial condition.
(6)
Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors, LLC (“Terra Income Advisors”), an affiliate of our sponsor and Terra Property Trust’s manager.
(7)
Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Property Trust 2, Inc., an affiliated fund managed by Terra REIT Advisors.
(8)
In June 2019, the maturity of this loan was extended to September 30, 2019.
(9)
In August 2019, this loan was repaid in full.
(10)
On June 27, 2018, Terra Property Trust entered into a participation agreement with Terra Income Fund 6, Inc. to purchase a 25% interest, or $4.3 million, in a mezzanine loan. As of June 30, 2019, the unfunded commitment was $3.5 million.
(11)
These loans were used as collateral for $82.1 million of borrowings under a repurchase agreement.
(12)
Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage. Real estate owned, net amount includes building and building improvements, tenant improvements and lease intangible assets and liabilities, net of accumulated depreciation and amortization.
(13)
Terra Property Trust acquired the collateral for this loan via deed in lieu of foreclosure. On June 30, 2019, Terra Property Trust recorded an impairment charge of $1.6 million on the land in order to reduce the carrying value of the land to its estimated fair value, which is the estimated selling price less the cost of sale.
(14)
Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).
8
Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2019 (unaudited) and December 31, 2018
The following table presents a schedule of loans held for investment held by Terra Property Trust as of December 31, 2018:
Portfolio Company
Collateral Location
Property Type
Coupon Rate
Current Interest Rate
Exit Fee
Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% (2)
Loans held for investment — non-controlled:
Mezzanine loans:
150 Blackstone River Road, LLC
US - MA
Industrial
8.5
%
8.5
%
—
%
9/21/2017
9/6/2027
$
7,000,000
$
7,000,000
$
6,895,383
2.6
%
140 Schermerhorn Street Mezz LLC (3)(5)(6)
US - NY
Hotel
12.0
%
12.0
%
1.0
%
11/16/2016
12/1/2019
15,000,000
15,134,200
15,148,494
5.8
%
221 W. 17th Street Owner, LLC (3)(4)(5)(6)
US - NY
Condominium
12.8
%
12.8
%
1.0
%
1/19/2018
3/31/2019
4,700,000
4,745,513
4,746,499
1.8
%
2539 Morse, LLC (3)(4)(5)
US - CA
Student housing
11.0
%
11.0
%
1.0
%
10/20/2017
11/1/2020
7,000,000
7,057,092
7,063,795
2.7
%
37 Gables Member LLC (4)(5)(8)
US - FL
Multifamily
13.0
%
13.0
%
1.0
%
6/16/2016
6/16/2019
5,750,000
5,804,127
5,806,875
2.2
%
575 CAD I LLC (3)(4)(5)
US - NY
Condominium
12.0% current 2.5% PIK
14.5
%
1.0
%
1/31/2017
7/31/2019
14,627,148
14,755,657
14,758,825
5.6
%
Austin H. I. Owner LLC (3)(5)
US - TX
Hotel
12.5
%
12.5
%
1.0
%
9/30/2015
10/6/2020
3,500,000
3,528,012
3,512,468
1.3
%
High Pointe Mezzanine Investments, LLC (4)(5)
US - SC
Student housing
13.0
%
13.0
%
1.0
%
12/27/2013
1/6/2024
3,000,000
3,322,499
3,088,463
1.2
%
LD Milipitas Mezz, LLC (9)
US - CA
Hotel
LIBOR +10.25% (2.75% Floor)
13.0
%
1.0
%
6/27/2018
6/27/2021
—
—
—
—
%
SparQ Mezz Borrower, LLC
US - CA
Multifamily
12.0
%
12.0
%
1.0
%
9/29/2017
10/1/2020
8,150,000
8,215,918
8,224,401
3.1
%
Stonewall Station Mezz LLC (5)(6)
US - NC
Hotel
12.0% current 2.0% PIK
14.0
%
1.0
%
5/31/2018
5/20/2021
8,548,954
8,609,379
8,618,238
3.3
%
WWML96MEZZ, LLC (10)
US - NY
Condominium
13.0
%
13.0
%
1.0
%
12/18/2015
1/14/2019
15,950,638
16,110,144
16,108,411
6.1
%
93,226,740
94,282,541
93,971,852
35.7
%
9
Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2019 (unaudited) and December 31, 2018
Terra Property Trust Schedule of Loans Held for Investment as of December 31, 2018 (Continued):
Portfolio Company
Collateral Location
Property Type
Coupon Rate
Current Interest Rate
Exit Fee
Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% (2)
Loans held for investment — non-controlled:
Preferred equity investments:
370 Lex Part Deux, LLC (5)(6)(7)
US - NY
Office
LIBOR + 8.25% (2.44% Floor)
10.8
%
—
%
12/17/2018
1/9/2022
$
43,500,000
$
43,500,000
$
43,500,000
16.5
%
ASA Mgt. Holdings, LLC
US - AL
Multifamily
16.0
%
16.0
%
1.0
%
4/7/2012
8/1/2022
2,100,000
2,135,189
2,120,720
0.8
%
City Gardens 333 LLC (5)(6)(7)
US - CA
Student housing
LIBOR + 9.95% (2.0% Floor)
12.5
%
—
%
4/11/2018
4/1/2021
20,816,038
20,816,038
20,816,038
7.9
%
Greystone Gables Holdings Member LLC (4)(5)(8)
US - FL
Multifamily
13.0
%
13.0
%
1.0
%
6/16/2016
6/16/2019
500,000
504,707
504,946
0.2
%
NB Private Capital, LLC (5)(6)(7)
US - IL
US - OH
Student housing
LIBOR +10.5% (3.5% Floor)
14.0
%
1.0
%
7/27/2018
7/27/2020
25,500,000
25,704,182
25,704,182
9.8
%
Nelson Brothers Professional Real Estate, LLC (11)
US - CO
Student housing
14.0
%
14.0
%
1.0
%
7/27/2016
2/1/2019
4,027,736
4,068,014
4,067,543
1.5
%
Orange Grove Property Investors, LLC (5)(6)
US - CA
Condominium
LIBOR + 8.0% (4.0% Floor)
12.0
%
1.0
%
5/24/2018
6/1/2021
8,350,000
8,414,582
8,415,618
3.2
%
REEC Harlem Holdings Company, LLC
US - NY
Infill land
LIBOR + 12.5% (no Floor)
15.0
%
—
%
3/9/2018
3/9/2023
20,619,375
20,619,375
20,619,375
7.8
%
RS JZ Driggs, LLC (5)(6)
US - NY
Multifamily
12.3
%
12.3
%
1.0
%
5/1/2018
5/1/2020
4,041,350
4,075,613
4,075,613
1.5
%
SVA Mgt. Holdings, LLC
US - AL
Multifamily
16.0
%
16.0
%
1.0
%
4/7/2012
8/1/2022
1,600,000
1,628,607
1,615,786
0.6
%
The Bristol at Southport, LLC (3)(4)(5)(7)
US - WA
Multifamily
10.0% current 2.0% PIK
12.0
%
1.0
%
9/22/2017
9/22/2022
23,115,541
23,258,826
23,185,858
8.8
%
Windy Hill PV Seven CM, LLC (3)(4)(5)
US - CA
Office
10.0% current 2.5% PIK
12.5
%
1.0
%
1/9/2018
1/9/2021
19,001,150
19,146,400
19,146,400
7.3
%
WWML96, LLC (10)
US - NY
Condominium
13.0
%
13.0
%
1.0
%
12/18/2015
1/14/2019
1,549,420
1,564,914
1,564,746
0.6
%
174,720,610
175,436,447
175,336,825
66.5
%
First mortgages:
CGI 1100 Biscayne Management LLC (12)
US - FL
Hotel
LIBOR + 5.65% (2.3% Floor)
8.2
%
2.0
%
11/19/2018
11/19/2020
57,269,351
58,244,986
58,286,097
22.2
%
Millennium Waterfront Associates, L.P. (13)
US - PA
Infill land
12.0
%
12.0
%
1.0
%
7/2/2015
12/28/2018
14,325,000
14,325,000
14,325,000
5.4
%
OHM Atlanta Owner, LLC (5)(6)(7)(14)
US - GA
Infill land
LIBOR + 9.0% (3.0% Floor)
12.0
%
1.0
%
6/20/2017
1/24/2019
27,500,000
27,775,000
27,772,240
10.6
%
TSG-Parcel 1, LLC (3)(5)(6)
US - CA
Infill land
LIBOR + 10.0% (2.0% Floor)
12.5
%
1.0
%
7/10/2015
12/31/2019
18,000,000
18,180,000
18,178,116
6.9
%
117,094,351
118,524,986
118,561,453
45.1
%
Total gross loans held for investment
385,041,701
388,243,974
387,870,130
147.4
%
Obligations under participation agreements (3)(4)(5)(6)(7)
(113,458,723
)
(114,298,591
)
(114,189,654
)
(43.4
)%
Net loans held for investment
$
271,582,978
$
273,945,383
$
273,680,476
104.0
%
10
Terra Secured Income Fund 5, LLC
Consolidated Schedule of Investments (Continued)
June 30, 2019 (unaudited) and December 31, 2018
Terra Property Trust Schedule of Loans Held for Investment as of December 31, 2018 (Continued):
Operating real estate:
Description
Real estate owned, net (15)
Encumbrance
Acquisition Date
% (16)
Multi-tenant office building in Santa Monica, CA
$
55,984,868
$
45,000,000
7/30/2018
4.2
%
___________________________
(1)
Because there is no readily available market for these loans, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra REIT Advisors, Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.
(2)
Percentages are based on the fair value of the Company’s investment in Terra Property Trust of $263.1 million as of December 31, 2018.
(3)
Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by Terra REIT Advisors.
(4)
Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Income Fund International, an affiliated fund advised by Terra REIT Advisors.
(5)
The loan participations from Terra Property Trust do not qualify for sale accounting and therefore, the gross amount of these loans remain in the consolidated statements of financial condition.
(6)
Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors, an affiliate of our sponsor and Terra Property Trust’s manager.
(7)
Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Property Trust 2, Inc., an affiliated fund managed by Terra REIT Advisors.
(8)
In January 2019, the borrower extended the maturity of the loan to December 16, 2019.
(9)
On June 27, 2018, Terra Property Trust entered into a participation agreement with Terra Income Fund 6, Inc. to purchase a 25% interest, or $4.3 million, in a mezzanine loan. As of December 31, 2018, none of the commitment has been funded.
(10)
This loan was repaid in January 2019.
(11)
In February 2019, Terra Property Trust entered into a forbearance agreement with the borrower whereby the borrower has until April 15, 2019 to repay the loan in full.
(12)
This loan was used as collateral for a $34.2 million borrowing under a repurchase agreement.
(13)
In January 2019, Terra Property Trust acquired the collateral for this loan via deed in lieu of foreclosure.
(14)
In January 2019, the borrower made a partial repayment of $18.5 million on this loan. In connection with the repayment, the maturity of the loan was extended to March 5, 2019. On March 5, 2019, the loan was repaid in full.
(15)
Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage. Amount includes building and building improvements, tenant improvements and lease intangible assets and liabilities, net of accumulated depreciation and amortization.
(16)
Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).
See notes to consolidated financial statements (unaudited).
11
Terra Secured Income Fund 5, LLC
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2019
Note 1. Business
Terra Secured Income Fund 5, LLC (and, together with its consolidated subsidiaries, the “Company”), is a specialized real estate finance company that originates, structures, funds and manages high yielding commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. The Company’s investments finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. The Company focuses on smaller, middle market loans in the approximately $3 million to $50 million range which are financing properties in primary and secondary markets because it believes these loans are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. The Company was formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. The Company makes substantially all of its investments and conducts substantially all of its real estate lending business through Terra Property Trust, which has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. The Company’s objectives are to (i) preserve its members’ capital contributions, (ii) realize income from its investments and (iii) make monthly distributions to its members from cash generated from investments. There can be no assurances that the Company will be successful in meeting its objectives.
In December 2015, the members approved the merger of Terra Secured Income Fund, LLC (“Terra Fund 1”), Terra Secured Income Fund 2, LLC (“Terra Fund 2”), Terra Secured Income Fund 3, LLC (“Terra Fund 3”) and Terra Secured Income Fund 4, LLC (“Terra Fund 4”) with and into subsidiaries of the Company (individually, each a “Terra Fund” and collectively, the “Terra Funds”) through a series of separate mergers effective January 1, 2016 (collectively, the “Merger”). Following the Merger, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust, a newly-formed and wholly-owned subsidiary of the Company that elected to be taxed as a REIT, in exchange for the shares of common stock of Terra Property Trust. Upon completion of the Merger, the Company became the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and began conducting substantially all of its real estate lending business through, Terra Property Trust. The Company does not consolidate Terra Property Trust as Terra Property Trust is not an investment company.
The Company’s investment activities were externally managed by Terra Income Advisors, a private investment firm affiliated with the Company until February 8, 2018 when Terra Capital Partners, LLC (“Terra Capital Partners”), the Company’s sponsor, caused a new subsidiary of Terra Capital Partners, Terra Fund Advisors, LLC (“Terra Fund Advisors”), to be admitted as the replacement manager of the Company. When used herein the term “Manager” refers to Terra Income Advisors for periods prior to February 8, 2018 and refers to Terra Fund Advisors beginning on such date. The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or its affiliates or by individuals who were contracted by the Company or by the Manager or its affiliates to work on behalf of the Company pursuant to the terms of the operating agreement, as amended.
The Company will continue in existence until December 31, 2023; however, the Company expects to be terminated or to consummate an alternative liquidity transaction on or prior to the five-year anniversary of the completion of the Company’s original offering, which was January 31, 2015, unless extended for up to a maximum of two one-year extensions at the discretion of the Manager, in order to facilitate an orderly liquidation or to consummate such alternative liquidity transaction.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include all of the Company’s accounts and those of its consolidated subsidiaries. All intercompany balances and transactions have been eliminated. The accompanying interim financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. The Company is an investment company, as defined under U.S. GAAP, and applies accounting and reporting guidance in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services - Investment Companies.
12
Notes to Consolidated Financial Statements
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of gains (losses), income and expenses during the reporting period. Actual results could significantly differ from those estimates. The most significant estimates inherent in the preparation of the Company’s consolidated financial statements is the valuation of its investment (Note 3).
Equity Investment in Terra Property Trust
Equity investment in Terra Property Trust represents the Company’s equity interest in Terra Property Trust, which was initially recorded at cost. Subsequent to the asset contribution, the equity investment is reported, at each reporting date, at fair value on the consolidated statements of financial condition. Change in fair value is reported in net change in unrealized appreciation or depreciation on investment on the consolidated statements of operations.
Revenue Recognition
Dividend Income: Dividend income associated with the Company’s ownership of Terra Property Trust is recognized on the record date as declared by Terra Property Trust. Any excess of dividends over Terra Property Trust’s cumulative net income are recorded as return of capital.
Other Operating Income: All other income is recognized when earned.
Cash and Cash Equivalents
The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents. Cash and cash equivalents are exposed to concentrations of credit risk. The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
Income Taxes
No provision for U.S. federal and state income taxes has been made in the accompanying consolidated financial statements, as individual members are responsible for their proportionate share of the Company’s taxable income. The Company, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the three and six months ended June 30, 2019 and 2018, none of the Company’s income was subject to the NYC UBT.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the consolidated financial statements and tax basis assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Such deferred tax assets and liabilities were not material.
The Company did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, Income Taxes, nor did the Company have any unrecognized tax benefits as of the periods presented herein. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its consolidated statements of operations. For the three and six months ended June 30, 2019 and 2018, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, its primary tax jurisdiction is federal. The Company’s 2015-2019 federal tax years remain subject to examination by the Internal Revenue Service.
Recent Accounting Pronouncement
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the model under ASC 840, Leases (“ASC 840”), with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new standard also replaces the sale-leaseback guidance under ASC 840 with a new model applicable to both lessees and lessors. Additionally, the new standard requires extensive quantitative and qualitative disclosures. ASU 2016-02 was effective for U.S. GAAP public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
13
Notes to Consolidated Financial Statements
The Company adopted ASU 2016-02 on January 1, 2019. The adoption of ASU 2016-02 did not have any impact on the Company’s consolidated financial statements and disclosures as the Company does not have any lease arrangements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of information required by U.S. GAAP. The amendments in ASU 2018-13 added, removed and modified certain fair value measurement disclosure requirements. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements and disclosures.
In August 2018, the Securities and Exchange Commission (the “SEC”) adopted a final rule that eliminates or amends disclosure requirements that have become duplicative, overlapping, or outdated in light of other SEC disclosure requirements, U.S. GAAP, or changes in the information environment (the “Final Rule”). The Final Rule is intended to simplify and update the disclosure of information to investors and reduce compliance burdens for companies, without significantly altering the total mix of information available to investors. Among other items, the Final Rule requires registrants to include in their interim financial statements a reconciliation of changes in net assets or stockholders’ equity in the notes or as a separate statement. The Final Rule was effective for all filings made on or after November 5, 2018; however, the SEC would not object if a filer’s first presentation of the changes in net assets or stockholders' equity was included in its Form 10-Q for the quarter that begins after the effective date of the Final Rule. The Company adopted the Final Rule in the first quarter of fiscal year 2019. The adoption of the Final Rule did not have a material impact on the Company’s consolidated financial statements and disclosures.
Note 3. Investment and Fair Value
Equity Investment in Terra Property Trust
The Company invests substantially all of its equity capital in the purchase of common shares of Terra Property Trust.
The following table presents a summary of the Company’s investment at June 30, 2019 and December 31, 2018:
June 30, 2019
December 31, 2018
Investment
Cost
Fair Value
% of Members’ Capital
Cost
Fair Value
% of Members’ Capital
14,912,990 common shares
of Terra Property Trust, Inc.
$
253,940,210
$
255,030,805
100.0
%
$
265,200,249
$
263,092,585
100.0
%
For the three months ended June 30, 2019 and 2018, the Company received approximately $7.6 million and $9.1 million of distributions from Terra Property Trust, respectively, of which $7.6 million and $2.3 million were returns of capital, respectively. For the six months ended June 30, 2019 and 2018, the Company received approximately $15.2 million and $16.8 million of distributions from Terra Property Trust, respectively, of which $11.3 million and $4.5 million were returns of capital, respectively.
14
Notes to Consolidated Financial Statements
The following tables present the summarized financial information of Terra Property Trust:
June 30, 2019
December 31, 2018
Carrying value of loans held for investment
$
389,787,808
$
388,243,974
Real estate owned, net
79,498,242
68,004,577
Other assets
60,471,701
35,306,172
Total assets
529,757,751
491,554,723
Mortgage loan payable, repurchase agreement payable and obligations under
participation agreements
(223,417,271
)
(190,687,574
)
Accounts payable, accrued expenses and other liabilities
(40,747,200
)
(23,555,081
)
Lease intangible liabilities
(11,722,259
)
(12,019,709
)
Total liabilities
(275,886,730
)
(226,262,364
)
Stockholder’s equity
$
253,871,021
$
265,292,359
Three Months Ended June 30,
Six Months Ended June 30,
2019
2018
2019
2018
Revenues
$
13,332,694
$
12,570,307
$
26,070,628
$
22,962,992
Expenses
(13,486,179
)
(5,762,199
)
(22,301,238
)
(10,621,079
)
Net (loss) income
$
(153,485
)
$
6,808,108
$
3,769,390
$
12,341,913
Fair Value Measurements
The Company adopted the provisions of ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy 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, 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, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.
Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.
Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments are determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
15
Notes to Consolidated Financial Statements
Assets and Liabilities Reported at Fair Value
The following table summarizes the Company’s equity investment in Terra Property Trust at fair value on a recurring basis as of June 30, 2019 and December 31, 2018:
June 30, 2019
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Investment:
Equity investment in Terra Property Trust
$
—
$
—
$
255,030,805
$
255,030,805
December 31, 2018
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Investment:
Equity investment in Terra Property Trust
$
—
$
—
$
263,092,585
$
263,092,585
Changes in Level 3 investment for the six months ended June 30, 2019 and 2018 were as follows:
Equity Investment in Terra Property Trust
Six Months Ended June 30,
2019
2018
Beginning balance
$
263,092,585
$
275,428,953
Return of capital
(11,260,039
)
(4,485,246
)
Net change in unrealized appreciation (depreciation) on investment
3,198,259
(175,754
)
Ending balance
$
255,030,805
$
270,767,953
Net change in unrealized appreciation (depreciation) on investment for the period
relating to those Level 3 assets that were still held by the Company
$
3,198,259
$
(175,754
)
Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the six months ended June 30, 2019 and 2018, there were no transfers.
The Company estimated that its other financial assets and liabilities had fair values that approximated their carrying values at June 30, 2019 and December 31, 2018 due to their short-term nature.
Valuation Process for Fair Value Measurement
Market quotations are not readily available for the Company’s investment in Terra Property Trust, which is included in Level 3 of the fair value hierarchy. The fair value of the Company’s sole investment takes into consideration the fair value of Terra Property Trust’s assets and liabilities which are valued utilizing a yield approach, i.e. a discounted cash flow methodology. In following this methodology, loans are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of Terra Property Trust’s loans, relevant factors, including available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions; the portfolio company’s ability to make payments, its net operating income, debt-service coverage ratio; construction progress reports and construction budget analysis; the nature, quality, and realizable value of any collateral (and loan-to-value ratio); and the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates, replacement costs and the anticipated duration of each real estate-related loan.
The Manager designates a valuation committee to oversee the entire valuation process of Terra Property Trust’s Level 3 investments. The valuation committee is comprised of members of the Manager’s senior management, deal and portfolio management teams, who meet on a quarterly basis, or more frequently as needed, to review Terra Property Trust investments being valued as well as the inputs used in the proprietary valuation model. Valuations determined by the valuation committee are supported
16
Notes to Consolidated Financial Statements
by pertinent data and, in addition to a proprietary valuation model, are based on market data, third-party valuation data and discount rates or other methods the valuation committee deems to be appropriate.
The following tables summarize the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 investments as of June 30, 2019 and December 31, 2018. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
Fair Value
Primary Valuation Technique
Unobservable Inputs
June 30, 2019
Asset Category
Minimum
Maximum
Weighted Average
Assets:
Equity investment in Terra Property Trust
$
255,030,805
Discounted cash flow (1)
Discount rate (1)
4.75
%
15.03
%
14.07
%
Fair Value
Primary Valuation Technique
Unobservable Inputs
December 31, 2018
Asset Category
Minimum
Maximum
Weighted Average
Assets:
Equity investment in Terra Property Trust
$
263,092,585
Discounted cash flow (1)
Discount rate (1)
5.02
%
16.00
%
14.19
%
_______________
(1)
Discounted cash flows and discount rates applied to Terra Property Trust’s assets and liabilities.
Risks and Uncertainties
The Company’s investment in Terra Property Trust is highly illiquid and there is no assurance that the Company will achieve its investment objectives, including targeted returns. Terra Property Trust’s loans are highly illiquid. Due to the illiquidity of the loans, valuation of the loans may be difficult, as there generally will be no established markets for these loans. As the Company’s investment is carried at fair value with fair value changes recognized in the consolidated statements of operations, any changes in fair value would directly affect the Company’s members’ capital.
Note 4. Related Party Transactions
Axar Transaction
On February 8, 2018, Terra Capital Partners caused (i) a new subsidiary of Terra Capital Partners, Terra REIT Advisors to become the external manager of Terra Property Trust, (ii) a new subsidiary of Terra Capital Partners, Terra Fund Advisors, to be admitted as the replacement manager of the Company and the equity interests in Terra Fund Advisors to be distributed to the equity owners of Terra Capital Partners on a pro rata basis and (iii) the equity interests in another subsidiary of Terra Capital Partners, Terra Income Advisors, which also serves as the external adviser to Terra Income Fund 6, Inc. (“Terra Fund 6”), to be distributed to the equity owners of Terra Capital Partners on a pro rata basis. After the completion of the above steps, a pooled investment vehicle advised by Axar Capital Management L.P. (“Axar”) entered into an investment agreement with Terra Capital Partners and its affiliates (which is referred to collectively as the “Axar Transaction”), pursuant to which Axar acquired from the respective owners thereof: (i) a 49% economic interest in Terra Fund Advisors; (ii) a 65.7% economic and voting interest in Terra Capital Partners (and thereby Terra REIT Advisors); and (iii) an initial 49% economic interest in Terra Income Advisors. On November 30, 2018, Axar acquired the remaining 34.3% economic interest in Terra Capital Partners. On April 30, 2019, Axar acquired the remaining 51% economic interest in Terra Income Advisors.
Operating Agreement
The Company had an operating agreement, as amended, with Terra Income Advisors whereby Terra Income Advisors was responsible for the Company’s day-to-day operations. As part of the Axar Transaction, on February 8, 2018, Terra Income Advisors assigned all of its rights, title and interest in the Company pursuant to the Amended and Restated Limited Liability Company Agreement of the Company, dated January 1, 2016, to Terra Fund Advisors. The operating agreement, as amended, is scheduled to terminate on December 31, 2023 unless the Company is dissolved earlier. Starting January 1, 2016, the Company conducts all of its real estate lending business through Terra Property Trust. As such, Terra Property Trust is responsible for management compensation paid and operating expenses reimbursed to its manager pursuant to a management agreement with the manager.
17
Notes to Consolidated Financial Statements
Management Agreement
As part of the Axar Transaction, Terra Income Advisors, Terra Property Trust’s manager prior to February 8, 2018, assigned all of its rights, title and interest in and to its then current external management agreement with Terra Property Trust to Terra REIT Advisors and immediately thereafter, Terra REIT Advisors and Terra Property Trust amended and restated such management agreement. Such amended and restated management agreement has the same economic terms and is in all material respects otherwise on the same terms as the management agreement between Terra Income Advisors and Terra Property Trust in effect immediately prior to the Axar Transaction, except for the identity of the manager.
Dividend Income
As discussed in Note 3, for the three months ended June 30, 2019 and 2018, the Company received approximately $7.6 million and $9.1 million of distributions from Terra Property Trust, respectively, of which $7.6 million and $2.3 million were returns of capital, respectively. For the six months ended June 30, 2019 and 2018, the Company received approximately $15.2 million and $16.8 million of distributions from Terra Property Trust, respectively, of which $11.3 million and $4.5 million was a return of capital, respectively.
Note 5. Commitments and Contingencies
The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. The Manager has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.
The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.
Note 6. Members’ Capital
As of June 30, 2019 and December 31, 2018, the Company had 6,638.4 units and 6,638.4 units outstanding, respectively, and the net asset value per unit was $38,411 and $39,630, respectively.
Capital Contributions
As of January 31, 2015, the offering period ended, and the Company stopped accepting capital contributions. In connection with the Merger, the Company offered existing members of the Terra Funds the opportunity to invest in the Company through purchase of additional units (the “Rights Offering”). The Rights Offering was completed on May 17, 2016.
Capital Distributions
At the discretion of the Manager, the Company may make distributions from net cash flow from operations, net disposition proceeds, or other cash available for distribution. Distributions are made to holders of Continuing Income Units (regular units of limited liability company interest in the Company) in proportion to their unit holdings until they receive a return of their initial Deemed Capital Contribution, as defined in the operating agreement, plus a preferred return ranging from 8.5% to 9.0% depending on the historical preferred return applicable to their Terra Fund units, after which time distributions are made 15% to the Manager which the Company referred to as the carried interest distribution, and 85% to the holders of Continuing Income Units. The preferred return applicable to the Continuing Income Units sold in the offering concurrent with the Merger is 8.5%.
In addition, holders of Termination Units (membership interest in the Company that were issued to members of Terra Funds 1 through 4 who chose to enter the liquidation phase of their investments) received monthly distributions at a fixed rate of 6.0% per annum of the Unreturned Invested Capital (capital contributions less cumulative stated distributions of principal and less any amounts paid in redemption).
For the three months ended June 30, 2019 and 2018, the Company made total distributions to non-manager members of $7.5 million and $7.5 million, respectively. For the six months ended June 30, 2019 and 2018, the Company made total distributions
18
Notes to Consolidated Financial Statements
to non-manager members of $14.9 million and $15.0 million, respectively. For the three and six months ended June 30, 2019 and 2018, the Company did not make any carried interest distributions to the Manager.
Capital Redemptions
In the Merger, members of Terra Funds 1 through 4 who wished to enter the liquidation phase of their investments chose to receive Termination Units as merger consideration. These Termination Units were redeemed on the original expected liquidation dates of the funds. As of June 30, 2019 and December 31, 2018, there were no Termination Units outstanding. For the six months ended June 30, 2019, the Company did not redeem any units. For the six months ended June 30, 2018, the Company redeemed 3.6 Continuing Income Units for $0.1 million and 37.9 Termination Units for $1.6 million.
At the discretion of the Manager, a reserve of 5% of cash from operations may be established in order to repurchase units from non-managing members. The Manager is under no obligation to redeem non-managing members’ units. As of June 30, 2019 and December 31, 2018, no such reserve was established.
Allocation of Income (Loss)
Profits and losses are allocated to the members in proportion to the units held in a given calendar year.
Member Units
Each membership interest through the original offering was offered for a price of $50,000 per unit. The membership interests in Terra Funds 1 through 4 were exchanged for units of the Company at a price of $43,410 per unit, which was the exchange value per unit of the Company on December 31, 2015, and the units in the Rights Offering were offered at a price of $47,000 per unit. The following table provides a roll forward of the units outstanding of the Company for the six months ended June 30, 2019 and 2018:
Six Months Ended June 30, 2019
Six Months Ended June 30, 2018
Managing
Member
Non-Managing Members
Total
Managing Member
Non-Managing Members
Total
Units outstanding, beginning of period
—
6,638.4
6,638.4
—
6,697.4
6,697.4
Early redemption of Continuing
Income Units
—
—
—
—
(3.6
)
(3.6
)
Termination Units redeemed
—
—
—
—
(37.9
)
(37.9
)
Units outstanding, end of period
—
6,638.4
6,638.4
—
6,655.9
6,655.9
Note 7. Financial Highlights
The financial highlights represent the per unit operating performance, return and ratios for the non-managing members’ class, taken as a whole, for the six months ended June 30, 2019 and 2018. These financial highlights consist of the operating performance, the internal rate of return (“IRR”) since inception of the Company, and the expense and net investment income ratios which are annualized except for the non-recurring expenses.
The IRR, net of all fees and carried interest (if any), is computed based on actual dates of the cash inflows (capital contributions), outflows (capital distributions), and the ending capital at the end of the respective period (residual value) of the non-managing members’ capital account.
19
Notes to Consolidated Financial Statements
The following summarizes the Company’s financial highlights for the six months ended June 30, 2019 and 2018:
Six Months Ended June 30,
2019
2018
Per unit operating performance:
Net asset value per unit, beginning of period
$
39,630
$
41,143
Increase in members’ capital from operations (1):
Net investment income
549
1,815
Net change in unrealized appreciation (depreciation) on investment
481
(26
)
Total increase in members’ capital from operations
1,030
1,789
Distributions to member (2):
Capital distributions
(2,249
)
(2,247
)
Net decrease in members’ capital resulting from distributions
(2,249
)
(2,247
)
Capital share transactions:
—
1
Net asset value per unit, end of period
$
38,411
$
40,686
Ratios to average net assets:
Expenses
0.21
%
0.16
%
Net investment income
2.76
%
8.92
%
IRR, beginning of period
6.56
%
6.26
%
IRR, end of period
6.46
%
6.62
%
_______________
(1)
The per unit data was derived by using the weighted average units outstanding during the applicable periods, which were 6,639 units and 6,683 units for the six months ended June 30, 2019 and 2018, respectively.
(2)
The per unit data for distributions reflects the actual amount of distributions paid per unit during the periods.
Note 8. Subsequent Events
Management has evaluated subsequent events through the date the consolidated financial statements were available to be issued. Management has determined that there are no material events that would require adjustment to, or disclosure in, the Company’s consolidated financial statements.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto and other financial information included elsewhere in this quarterly report on Form 10-Q. In this report, “we,” “us” and “our” refer to Terra Secured Income Fund 5, LLC and its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this quarterly report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. The forward-looking statements contained in this quarterly report on Form 10-Q may include, but are not limited to, statements as to:
•
our expected financial performance, operating results and our ability to make distributions to our members in the future;
•
the availability of attractive risk-adjusted investment opportunities in our target asset class and other real estate-related investments that satisfy our investment objectives and strategies;
•
the acquisition of our targeted assets, including the timing of acquisitions;
•
volatility in our industry, interest rates and spreads, the debt or equity markets, the general economy or the real estate market specifically, whether the results of market events or otherwise;
•
changes in our investment objectives and business strategy;
•
the availability of financing on acceptable terms or at all;
•
the performance and financial condition of our borrowers;
•
changes in interest rates and the market value of our assets;
•
borrower defaults or decreased recovery rates from our borrowers;
•
changes in prepayment rates on our investments;
•
our use of financial leverage;
•
actual and potential conflicts of interest with any of the following affiliated entities: Terra Fund Advisors, LLC (“Terra Fund Advisors”), Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Income Advisors, LLC (“Terra Income Advisors”); Terra Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra Secured Income Fund, LLC (“Terra Fund 1”); Terra Secured Income Fund 2, LLC (“Terra Fund 2”); Terra Secured Income Fund 3, LLC (“Terra Fund 3”); Terra Secured Income Fund 4, LLC (“Terra Fund 4”); Terra Secured Income Fund 5 International; Terra Income Fund International; Terra Secured Income Fund 7, LLC; Terra Property Trust, Inc. (“Terra Property Trust”), our wholly-owned subsidiary; Terra Property Trust 2, Inc., a subsidiary of Terra Secured Income Fund 7, LLC; Terra Capital Advisors, LLC; Terra Capital Advisors 2, LLC; Terra Income Advisors 2, LLC; or any of their affiliates;
•
our dependence on our Manager or its affiliates and the availability of its senior management team and other personnel;
•
liquidity transactions that may be available to us in the future, including a liquidation of our assets, a sale of our company or an initial public offering and listing of the shares of common stock of Terra Property Trust on a national securities exchange, and the timing of any such transactions;
•
actions and initiatives of the U.S. federal, state and local government and changes to the U.S. federal, state and local government policies and the execution and impact of these actions, initiatives and policies;
•
limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our exclusion from registration under the Investment Company Act of 1940, as amended (the “1940 Act”), and Terra Property Trust to maintain its qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; and
21
•
the degree and nature of our competition.
In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2018. Other factors that could cause actual results to differ materially include:
•
changes in the economy;
•
risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and
•
future changes in laws or regulations and conditions in our operating areas.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Members are advised to consult any additional disclosures that we may make directly to members or through reports that we may file in the future with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
We are a specialized real estate finance company that originates, structures, funds and manages high yielding commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. Our investments finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on smaller, middle market loans in the approximately $3 million to $50 million range which are financing properties in primary and secondary markets because we believe these loans are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. We were formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. We make substantially all of our investments and conduct substantially all of our real estate lending business through Terra Property Trust, which has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. Our objectives are to (i) preserve our members’ capital contributions, (ii) realize income from our investments and (iii) make monthly distributions to our members from cash generated from investments. There can be no assurances that we will be successful in meeting our objectives.
On January 1, 2016, Terra Fund 1, Terra Fund 2, Terra Fund 3 and Terra Fund 4 merged with and into our subsidiaries (individually, each a “Terra Fund” and collectively, the “Terra Funds”) through a series of separate mergers (collectively, the “Merger”). Following the Merger, we contributed the consolidated portfolio of net assets of the Terra Funds to Terra Property Trust in exchange for all of the common shares of Terra Property Trust. We elected to engage in these transactions, which we refer to as the “REIT formation transactions,” to make our investments through Terra Property Trust and to provide our members with a more broadly diversified portfolio of assets, while at the same time providing us with enhanced access to capital and borrowings, lower operating costs and enhanced opportunities for growth.
On February 8, 2018, Terra Capital Partners caused (i) a new subsidiary of Terra Capital Partners, Terra REIT Advisors, to become the external manager of Terra Property Trust, (ii) a new subsidiary of Terra Capital Partners, Terra Fund Advisors, to be admitted as the replacement manager of the Company and the equity interests in Terra Fund Advisors to be distributed to the equity owners of Terra Capital Partners on a pro rata basis and (iii) the equity interests in another subsidiary of Terra Capital Partners, Terra Income Advisors, which also serves as the external advisor to Terra Income Fund 6, Inc. (“Terra Fund 6”), to be distributed to the equity owners of Terra Capital Partners on a pro rata basis. After the completion of the above steps, a pooled investment vehicle advised by Axar Capital Management L.P. (“Axar”) entered into an investment agreement with Terra Capital Partners and its affiliates (which is referred to collectively as the “Axar Transaction”), pursuant to which Axar acquired from the respective owners thereof: (i) a 49% economic interest in Terra Fund Advisors; (ii) a 65.7% economic and voting interest in Terra Capital Partners (and thereby Terra REIT Advisors); and (iii) an initial 49% economic interest in Terra Income Advisors. On November 30, 2018, Axar acquired the remaining 34.3% economic interest in Terra Capital Partners. On April 30, 2019, Axar acquired the remaining 51% economic interest in Terra Income Advisors. When used herein the term “Manager” refers to Terra Income Advisors for periods prior to February 8, 2018 and refers to Terra Fund Advisors beginning on such date.
22
Portfolio Summary
The following tables provide a summary of Terra Property Trust’s net loan portfolio as of June 30, 2019 and December 31, 2018:
June 30, 2019
Fixed Rate
Floating Rate (1)(2)(3)
Total Gross Loans
Obligations under Participation Agreements
Total Net Loans
Number of loans
13
12
25
17
25
Principal balance
$
117,585,920
$
270,094,846
$
387,680,766
98,020,504
$
289,660,262
Amortized cost
118,819,253
270,968,555
389,787,808
98,700,002
291,087,806
Fair value
118,570,027
272,025,350
390,595,377
98,620,770
291,974,607
Weighted average coupon rate
12.44
%
9.95
%
10.71
%
12.24
%
10.19
%
Weighted-average remaining
term (years)
1.99
2.05
2.03
1.75
2.13
December 31, 2018
Fixed Rate
Floating Rate (1)(2)(3)
Total Gross Loans
Obligations under Participation Agreements
Total Net Loans
Number of loans
20
9
29
18
29
Principal balance
$
163,486,937
$
221,554,764
$
385,041,701
113,458,723
$
271,582,978
Amortized cost
164,989,811
223,254,163
388,243,974
114,298,591
273,945,383
Fair value
164,578,464
223,291,666
387,870,130
114,189,654
273,680,476
Weighted average coupon rate
12.54
%
11.35
%
11.86
%
12.22
%
11.70
%
Weighted-average remaining
term (years)
1.84
2.05
1.96
1.84
2.01
_______________
(1)
These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”) plus a fixed spread. Coupon rate shown was determined using LIBOR of 2.40% and 2.50% as of June 30, 2019 and December 31, 2018.
(2)
As of June 30, 2019 and December 31, 2018, amounts included a $125.8 million and $57.3 million, respectively, of senior mortgages used as collateral for $82.1 million and a $34.2 million, respectively, of borrowings under a repurchase agreement. These borrowings bear interest at an annual rate of LIBOR plus a spread ranging from 2.25% to 2.50%.
(3)
As of June 30, 2019 and December 31, 2018, eleven and eight of these loans, respectively, are subject to a LIBOR floor.
In addition to its net loan portfolio, as of June 30, 2019, Terra Property Trust owns 4.9 acres of adjacent land acquired via deed in lieu of foreclosure and a multi-tenant office building acquired via foreclosure. The land and building and related lease intangible assets and liabilities had a net carrying value of $67.8 million and $56.0 million as of June 30, 2019 and December 31, 2018, respectively. The mortgage loan payable encumbering the office building had an outstanding principal amount of $44.9 million and $45.0 million as of June 30, 2019 and December 31, 2018, respectively.
Portfolio Investment Activity
For the three months ended June 30, 2019 and 2018, Terra Property Trust invested $8.6 million and $27.6 million in add-on loans, respectively, and had $9.8 million and $6.1 million of repayments, respectively, resulting in net repayments of $1.2 million and net investments of $21.5 million, respectively. Amounts are net of obligations under participation agreements, mortgage loan payable and repurchase agreement payable.
For the six months ended June 30, 2019 and 2018, Terra Property Trust invested $28.3 million and $61.8 million in new and add-on loans, respectively, and had $45.2 million and $45.0 million of repayments, respectively, resulting in net repayments of $16.9 million and net investments of $16.8 million, respectively. Amounts are net of obligations under participation agreements, mortgage loan payable and repurchase agreement payable. In addition, on January 9, 2019, Terra Property Trust acquired 4.9 acres of adjacent land encumbering a $14.3 million first mortgage via deed in lieu of foreclosure in exchange for the relief of the first mortgage and related fees and expenses.
23
Portfolio Information
The tables below set forth the types of loans in Terra Property Trust’s loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents Terra Property Trust’s proportionate share of the loans, based on its economic ownership of these loans.