Correspondence 0001193125-23-165125 from ExchangeRight Income Fund (CIK 0001771514)
ExchangeRight Income Fund (CIK 0001771514)
Date: June 12, 2023 · CIK: 0001771514 · Accession: 0001193125-23-165125
AI Filing Summary & Sentiment
File numbers found in text: 000-56543
Referenced dates: May 25, 2023
Letter
Via EDGAR Division of Corporation Finance Office of Real Estate & Construction Re: ExchangeRight Income Fund Form 10-12G Filed April 27, 2023 File No. 000-56543
Dear Ms. Gorman and Mr. Gabor:
This letter is being submitted on behalf of ExchangeRight Income Fund (the “Company”) in response to the comments of the Staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) with respect to the Company’s Registration Statement on Form 10 filed on April 27, 2023 (the “Registration Statement”), as set forth in your letter dated May 25, 2023 addressed to David Van Steenis, Chief Financial Officer of the Company (the “Comment Letter”). The Company is concurrently filing Amendment No. 1 to the Registration Statement (“Amendment No. 1”), which includes revisions to reflect responses to the Staff’s comments.
For your convenience, your comments have been reproduced in bold below followed by the responses in regular type. Unless otherwise indicated, page references in the Staff’s comments refer to the Registration Statement, and page references in the responses refer to Amendment No. 1. All capitalized terms not otherwise defined herein have the meanings set forth in the Amendment No. 1.
* * * * * * *
Form 10-12G filed April 27, 2023
Item 1. Business
Investment Objectives and Strategy, page 4
1. We note your disclosure that you will primarily focus on investment-grade tenants. Please clarify how you determine a tenant is “investment-grade” if it is not rated by an agency. Additionally, we note, on page 8, you rely on the parent company’s credit rating. Please advise, to the extent a company is a subsidiary, if the parent company has provided guarantees for its subsidiaries. To the extent it has not, please advise why you believe it is appropriate to use the parent company’s credit rating or revise.
U.S. Securities and Exchange Commission
June 12, 2023
Page
Response: The Company focuses its business on securing necessity-based retail properties that are leased to national tenants which are backed by an investment-grade rated entity. In this regard, the Company defines an “investment-grade” tenant as a tenant which (i) is a parent entity that enters into a lease directly with the Operating Partnership, (ii) is backed directly by its parent entity through a lease guarantee, or (iii) is publicly disclosed as a significant subsidiary of a parent entity, and, in each such case, the parent entity carries a credit rating of at least BBB- issued by Standard & Poor’s, Baa3 issued by Moody’s, or NAIC2 issued by the National Association of Insurance Commissioners. The Company focuses its business on securing tenants meeting the investment-grade standard above, and such tenants comprise the vast majority of its lessees. Approximately 85.6% of the annual base rent of the Company as of March 31, 2023 is from tenants meeting the foregoing standard of “investment-grade”. In further response to the Staff’s comment, the Company has revised the Registration Statement to clarify the disclosures regarding the references to “investment-grade” tenants. I refer you to page 4 of Amendment No. 1 for the revised disclosures.
With respect to the Staff’s comment regarding parent company credit rating disclosures in the Registration Statement, the Company’s leases are either entered into directly with the parent company, are guaranteed by the parent company, or the lessee is a significant subsidiary critical to the operations of the parent company. In the latter case, the Company has disclosed in the Registration Statement situations where the leases are entered into with a wholly owned subsidiary of the parent to identify this distinction. See page 9 of the Registration Statement for these disclosures. The Company believes the nature of these tenants’ operations and the fact that they are significant subsidiaries and critical to the operations of the parent entity are key drivers of the creditworthiness of the parent entity itself. For these reasons, the Company believes it is appropriate to refer to the parent’s credit rating in these disclosures.
That said, in further response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement to clarify that not all of the Company’s leases are guaranteed directly by the lessee’s parent entity which has the credit rating. I refer you to page 9 of Amendment No. 1 for the revised disclosures.
2. Please disclose the average age of the properties in your portfolio.
Response: The average age of the properties in the Company’s portfolio is 17.5 years. Please see the revised disclosures on page 1 and page 8 of Amendment No. 1 in response to the Staff’s comment.
3. We note that you focus on net leases that obligate the tenant to pay not only their rent, but also the costs of property taxes, insurance and property maintenance, often including repairs and replacements. Please revise to clarify the percentage of properties, broken down by each tenant, that are triple net leased. It may be helpful to include an additional column in your tenant summary to include the type of lease.
U.S. Securities and Exchange Commission
June 12, 2023
Page
Response: In response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement as you requested. In this regard, the Company has included new columns in the tenant table beginning on page 8 of Amendment No. 1 in the section captioned “Real Estate Investments” clarifying the properties that are triple net leased and double net leased, broken down by tenant. Also, the Company has included an additional column in the table beginning on page 86 of Amendment No. 1 in “Item 3. Properties,” disclosing the type of lease applicable to each such property. I refer you to page v of Amendment No. 1 for additional revised disclosures in response to the Staff’s comment.
Clearly-defined aggregation strategy . . ., page 7
4. Please revise to separately discuss your redemption plan. Additionally, in this new section, please clarify that affiliates may seek to have their shares repurchased. Please disclose if they are subject to the same limitations as the common shareholders. Please similarly revise your disclosure on page 121.
Response: In response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement as you requested. I refer you to page 8 and page 130 of Amendment No. 1 for the revised disclosures.
Real Estate Investments, page 7
5. Please add a footnote to the table to clarify how your rental disclosures take into account tenant concessions and abatements. Please make similar revisions to your disclosure on page 80.
Response: In response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement as you requested. In this regard, the Company has added a footnote to the tables on pages 9, 10, 11 and 12 of Amendment No. 1 in the section captioned “Real Estate Investments” clarifying the treatment of tenant concessions and abatements. Also, the Company has included on page 93 a footnote in the table beginning on page 86 of Amendment No. 1 in “Item 3. Properties” containing similar revisions.
Stable distributions paid monthly that are covered by cash flow from operations, page
6. We note that it is your intent to pay distributions out of cash flow from operations, subject to REIT qualification requirements. Please clarify whether you have paid distributions from other sources, and, if so, please disclose the sources used. Further, please revise your disclosure on page 107 to quantify the amount paid from each source. Additionally, please add a risk factor to disclose the risk that distributions have been paid and may in the future be paid from sources other than cash flow from operations.
Response: Since the Company’s formation in January 2019, the Company has paid dividends and distributions to the holders of its Common Shares, and the Operating Partnership has paid distributions to the holders of its OP Units, only out of cash flow from operations and not from any other sources. In this regard, the Company has revised its disclosures on page 7 of
U.S. Securities and Exchange Commission
June 12, 2023
Page
Amendment No. 1 to provide further clarification on this matter, as you requested. Additionally, the Company has revised its disclosures on page 116 of Amendment No. 1 under the heading “Distributions” to clarify the source of distributions paid from inception, as you requested. Finally, please see the revised disclosure on page 33 of Amendment No. 1 for the additional risk factor regarding the sources of distributions, as you requested.
Identified Trust Properties, page 11
7. Please clarify how the purchase price for the properties was determined. If the price was not determined by independent appraisers, please add risk factor disclosure to address the risk. Further, please clarify, if the value of a property decreases prior to your determination to purchase it, will the overall purchase price be revised to reflect the decrease in value. Please file the agreement in accordance with Item 601(b)(10) of Regulation S-K.
Response: The purchase price for the Identified Trust Properties was determined by the Trustee based on several factors the Trustee deemed to be relevant for achieving the purpose of the acquisition transactions and the investment goals of investors.
In this regard, the Trustee primarily utilized an income-based approach by performing a discounted cash flow analysis of each of the Identified Trust Properties to provide an indication of the value of the properties. This analysis included projecting anticipated cash flows pursuant to in-place leases and a residual value for each of the properties, and then discounting those anticipated cash flows and the residual value back to the present value using a discount rate based on market factors and an anticipated weighted average cost of capital. Along with this analysis, the Trustee also employed a market-based approach to use as part of the purchase price determination, which involved researching and analyzing market data of similarly situated properties, reviewing recent transactions involving similar properties, and considering other asset-specific details, such as property location, building size, tenancy, lease rates, lease terms, and various other property characteristics and metrics the Trustee deemed relevant. Next, the Trustee evaluated the aggregate price for the properties that would need to be paid in order for the investors in the relevant DSTs subject to the acquisition transactions to achieve a full return of capital, and considered whether that price was sufficient to support the discounted cash flow and market-based analyses used to provide the indication of value described above. After applying the foregoing approaches, the Trustee then aggregated the values of the properties resulting from these analyses, which the Trustee used as the basis for the purchase price for the Identified Trust Properties.
Upon determining the purchase price for the properties as described above, the Trustee then engaged a nationally-recognized independent third party professional valuation firm to perform an independent valuation of the properties and produce a restricted appraisal report indicating a range of the high and low fair values of the subject properties. This independent valuation was used by the Trustee at the time of the identification of the properties to confirm and support the purchase price determined by the Trustee through the application of the valuation analyses described above. In this regard, the Company has revised its disclosures on page 12 of Amendment No. 1 to provide further clarification on this matter, as you requested. Moreover, the purchase price was determined by the Trustee through the application of the valuation analyses
U.S. Securities and Exchange Commission
June 12, 2023
Page
and other considerations described above. The purchase price was not determined by an independent appraiser, but rather the purchase price determined by the Trustee was confirmed and supported by the independent third-party valuation obtained by the Trustee. As a result, the Company has revised its disclosures on page 27 of Amendment No. 1 to add appropriate risk factor disclosure in this regard, as you requested.
The value of any Identified Trust Property may fluctuate after the Company identifies the property and before the Company determines to purchase it, as well as after the Company determines to purchase the property but before the completion of the purchase. If the value of a property decreases prior to the Company’s determination to purchase the property, the purchase price is not likely to be revised, unless in the event of a significant tenant vacating a property, a material credit downgrade of a tenant, or another similar material adverse change. In this regard, the Company has revised its disclosures on page 13 of Amendment No. 1 to provide further clarification on this matter, as you requested.
The Company acknowledges the Staff’s comment with respect to filing the agreement in accordance with Item 601(b)(10) of Regulation S-K. The Company previously filed a copy of the form of Agreement and Plan of Merger by and among an ExchangeRight net leased portfolio DST and the Operating Partnership, attached as Exhibit 10.3 to the Registration Statement, as well as a copy of the form of Interest Assignment Agreement between ExchangeRight, the Operating Partnership, and the ExchangeRight master lessee entity, attached as Exhibit 10.4 to the Registration Statement. These are the forms of agreements pursuant to which the Company will acquire the Identified Trust Properties.
Item 1.A Risk Factors
Risk Factors Summary, page 16
8. We note that your summary risk factors are now six pages in length. Please revise to limit to two pages and disclose only the principal factors that make an investment in the registrant or offering speculative or risky, as required by Item 105(b) of Regulation S-K.
Response: In response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement as you requested. I refer you to pages 18 - 19 of Amendment No. 1 under the caption “Risk Factors Summary” for the revised disclosure, which limits the summary risk factors to two pages and discloses only the principal factors that, in the Company’s determination, make an investment in the Company speculative or risky, as per Item 105(b) of Regulation S-K.
We are subject to risks associated with the current interest rate environment . . ., page 22
9. Please revise to quantify the amount of your floating rate debt outstanding.
Response: As of March 31, 2023, the Company had $26.9 million of floating rate debt outstanding, which is related to a mortgage loan entered into on February 9, 2023. Concurrent with the closing of this mortgage loan, the Company entered into an interest rate swap agreement which effectively converted this floating rate debt to fixed rate debt through its maturity date. In this regard, the Company has revised its disclosures on page 21 of Amendment No. 1, as you requested.
U.S. Securities and Exchange Commission
June 12, 2023
Page
We are subject to risks related to tenant concentration, and an adverse development . . ., page 25
10. Given the significant amount of current in-place net rents and current net ope
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CORRESP 1 filename1.htm CORRESP David P. Hooper 11 S. Meridian Street Indianapolis, IN 46204-3535 U.S.A. (317) 236-1313 Fax (317) 231-7433 www.btlaw.com Partner (317) 231-7333 david.hooper@btlaw.com June 12, 2023 Via EDGAR U.S. Securities and Exchange Commission Division of Corporation Finance Office of Real Estate & Construction Attn: Stacie Gorman and Jeffrey Gabor 100 F Street, N.E. Washington, D.C. 20549 Re: ExchangeRight Income Fund Form 10-12G Filed April 27, 2023 File No. 000-56543 Dear Ms. Gorman and Mr. Gabor: This letter is being submitted on behalf of ExchangeRight Income Fund (the “Company”) in response to the comments of the Staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) with respect to the Company’s Registration Statement on Form 10 filed on April 27, 2023 (the “Registration Statement”), as set forth in your letter dated May 25, 2023 addressed to David Van Steenis, Chief Financial Officer of the Company (the “Comment Letter”). The Company is concurrently filing Amendment No. 1 to the Registration Statement (“Amendment No. 1”), which includes revisions to reflect responses to the Staff’s comments. For your convenience, your comments have been reproduced in bold below followed by the responses in regular type. Unless otherwise indicated, page references in the Staff’s comments refer to the Registration Statement, and page references in the responses refer to Amendment No. 1. All capitalized terms not otherwise defined herein have the meanings set forth in the Amendment No. 1. * * * * * * * Form 10-12G filed April 27, 2023 Item 1. Business Investment Objectives and Strategy, page 4 1. We note your disclosure that you will primarily focus on investment-grade tenants. Please clarify how you determine a tenant is “investment-grade” if it is not rated by an agency. Additionally, we note, on page 8, you rely on the parent company’s credit rating. Please advise, to the extent a company is a subsidiary, if the parent company has provided guarantees for its subsidiaries. To the extent it has not, please advise why you believe it is appropriate to use the parent company’s credit rating or revise. U.S. Securities and Exchange Commission June 12, 2023 Page 2 Response: The Company focuses its business on securing necessity-based retail properties that are leased to national tenants which are backed by an investment-grade rated entity. In this regard, the Company defines an “investment-grade” tenant as a tenant which (i) is a parent entity that enters into a lease directly with the Operating Partnership, (ii) is backed directly by its parent entity through a lease guarantee, or (iii) is publicly disclosed as a significant subsidiary of a parent entity, and, in each such case, the parent entity carries a credit rating of at least BBB- issued by Standard & Poor’s, Baa3 issued by Moody’s, or NAIC2 issued by the National Association of Insurance Commissioners. The Company focuses its business on securing tenants meeting the investment-grade standard above, and such tenants comprise the vast majority of its lessees. Approximately 85.6% of the annual base rent of the Company as of March 31, 2023 is from tenants meeting the foregoing standard of “investment-grade”. In further response to the Staff’s comment, the Company has revised the Registration Statement to clarify the disclosures regarding the references to “investment-grade” tenants. I refer you to page 4 of Amendment No. 1 for the revised disclosures. With respect to the Staff’s comment regarding parent company credit rating disclosures in the Registration Statement, the Company’s leases are either entered into directly with the parent company, are guaranteed by the parent company, or the lessee is a significant subsidiary critical to the operations of the parent company. In the latter case, the Company has disclosed in the Registration Statement situations where the leases are entered into with a wholly owned subsidiary of the parent to identify this distinction. See page 9 of the Registration Statement for these disclosures. The Company believes the nature of these tenants’ operations and the fact that they are significant subsidiaries and critical to the operations of the parent entity are key drivers of the creditworthiness of the parent entity itself. For these reasons, the Company believes it is appropriate to refer to the parent’s credit rating in these disclosures. That said, in further response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement to clarify that not all of the Company’s leases are guaranteed directly by the lessee’s parent entity which has the credit rating. I refer you to page 9 of Amendment No. 1 for the revised disclosures. 2. Please disclose the average age of the properties in your portfolio. Response: The average age of the properties in the Company’s portfolio is 17.5 years. Please see the revised disclosures on page 1 and page 8 of Amendment No. 1 in response to the Staff’s comment. 3. We note that you focus on net leases that obligate the tenant to pay not only their rent, but also the costs of property taxes, insurance and property maintenance, often including repairs and replacements. Please revise to clarify the percentage of properties, broken down by each tenant, that are triple net leased. It may be helpful to include an additional column in your tenant summary to include the type of lease. U.S. Securities and Exchange Commission June 12, 2023 Page 3 Response: In response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement as you requested. In this regard, the Company has included new columns in the tenant table beginning on page 8 of Amendment No. 1 in the section captioned “Real Estate Investments” clarifying the properties that are triple net leased and double net leased, broken down by tenant. Also, the Company has included an additional column in the table beginning on page 86 of Amendment No. 1 in “Item 3. Properties,” disclosing the type of lease applicable to each such property. I refer you to page v of Amendment No. 1 for additional revised disclosures in response to the Staff’s comment. Clearly-defined aggregation strategy . . ., page 7 4. Please revise to separately discuss your redemption plan. Additionally, in this new section, please clarify that affiliates may seek to have their shares repurchased. Please disclose if they are subject to the same limitations as the common shareholders. Please similarly revise your disclosure on page 121. Response: In response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement as you requested. I refer you to page 8 and page 130 of Amendment No. 1 for the revised disclosures. Real Estate Investments, page 7 5. Please add a footnote to the table to clarify how your rental disclosures take into account tenant concessions and abatements. Please make similar revisions to your disclosure on page 80. Response: In response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement as you requested. In this regard, the Company has added a footnote to the tables on pages 9, 10, 11 and 12 of Amendment No. 1 in the section captioned “Real Estate Investments” clarifying the treatment of tenant concessions and abatements. Also, the Company has included on page 93 a footnote in the table beginning on page 86 of Amendment No. 1 in “Item 3. Properties” containing similar revisions. Stable distributions paid monthly that are covered by cash flow from operations, page 7 6. We note that it is your intent to pay distributions out of cash flow from operations, subject to REIT qualification requirements. Please clarify whether you have paid distributions from other sources, and, if so, please disclose the sources used. Further, please revise your disclosure on page 107 to quantify the amount paid from each source. Additionally, please add a risk factor to disclose the risk that distributions have been paid and may in the future be paid from sources other than cash flow from operations. Response: Since the Company’s formation in January 2019, the Company has paid dividends and distributions to the holders of its Common Shares, and the Operating Partnership has paid distributions to the holders of its OP Units, only out of cash flow from operations and not from any other sources. In this regard, the Company has revised its disclosures on page 7 of U.S. Securities and Exchange Commission June 12, 2023 Page 4 Amendment No. 1 to provide further clarification on this matter, as you requested. Additionally, the Company has revised its disclosures on page 116 of Amendment No. 1 under the heading “Distributions” to clarify the source of distributions paid from inception, as you requested. Finally, please see the revised disclosure on page 33 of Amendment No. 1 for the additional risk factor regarding the sources of distributions, as you requested. Identified Trust Properties, page 11 7. Please clarify how the purchase price for the properties was determined. If the price was not determined by independent appraisers, please add risk factor disclosure to address the risk. Further, please clarify, if the value of a property decreases prior to your determination to purchase it, will the overall purchase price be revised to reflect the decrease in value. Please file the agreement in accordance with Item 601(b)(10) of Regulation S-K. Response: The purchase price for the Identified Trust Properties was determined by the Trustee based on several factors the Trustee deemed to be relevant for achieving the purpose of the acquisition transactions and the investment goals of investors. In this regard, the Trustee primarily utilized an income-based approach by performing a discounted cash flow analysis of each of the Identified Trust Properties to provide an indication of the value of the properties. This analysis included projecting anticipated cash flows pursuant to in-place leases and a residual value for each of the properties, and then discounting those anticipated cash flows and the residual value back to the present value using a discount rate based on market factors and an anticipated weighted average cost of capital. Along with this analysis, the Trustee also employed a market-based approach to use as part of the purchase price determination, which involved researching and analyzing market data of similarly situated properties, reviewing recent transactions involving similar properties, and considering other asset-specific details, such as property location, building size, tenancy, lease rates, lease terms, and various other property characteristics and metrics the Trustee deemed relevant. Next, the Trustee evaluated the aggregate price for the properties that would need to be paid in order for the investors in the relevant DSTs subject to the acquisition transactions to achieve a full return of capital, and considered whether that price was sufficient to support the discounted cash flow and market-based analyses used to provide the indication of value described above. After applying the foregoing approaches, the Trustee then aggregated the values of the properties resulting from these analyses, which the Trustee used as the basis for the purchase price for the Identified Trust Properties. Upon determining the purchase price for the properties as described above, the Trustee then engaged a nationally-recognized independent third party professional valuation firm to perform an independent valuation of the properties and produce a restricted appraisal report indicating a range of the high and low fair values of the subject properties. This independent valuation was used by the Trustee at the time of the identification of the properties to confirm and support the purchase price determined by the Trustee through the application of the valuation analyses described above. In this regard, the Company has revised its disclosures on page 12 of Amendment No. 1 to provide further clarification on this matter, as you requested. Moreover, the purchase price was determined by the Trustee through the application of the valuation analyses U.S. Securities and Exchange Commission June 12, 2023 Page 5 and other considerations described above. The purchase price was not determined by an independent appraiser, but rather the purchase price determined by the Trustee was confirmed and supported by the independent third-party valuation obtained by the Trustee. As a result, the Company has revised its disclosures on page 27 of Amendment No. 1 to add appropriate risk factor disclosure in this regard, as you requested. The value of any Identified Trust Property may fluctuate after the Company identifies the property and before the Company determines to purchase it, as well as after the Company determines to purchase the property but before the completion of the purchase. If the value of a property decreases prior to the Company’s determination to purchase the property, the purchase price is not likely to be revised, unless in the event of a significant tenant vacating a property, a material credit downgrade of a tenant, or another similar material adverse change. In this regard, the Company has revised its disclosures on page 13 of Amendment No. 1 to provide further clarification on this matter, as you requested. The Company acknowledges the Staff’s comment with respect to filing the agreement in accordance with Item 601(b)(10) of Regulation S-K. The Company previously filed a copy of the form of Agreement and Plan of Merger by and among an ExchangeRight net leased portfolio DST and the Operating Partnership, attached as Exhibit 10.3 to the Registration Statement, as well as a copy of the form of Interest Assignment Agreement between ExchangeRight, the Operating Partnership, and the ExchangeRight master lessee entity, attached as Exhibit 10.4 to the Registration Statement. These are the forms of agreements pursuant to which the Company will acquire the Identified Trust Properties. Item 1.A Risk Factors Risk Factors Summary, page 16 8. We note that your summary risk factors are now six pages in length. Please revise to limit to two pages and disclose only the principal factors that make an investment in the registrant or offering speculative or risky, as required by Item 105(b) of Regulation S-K. Response: In response to the Staff’s comment, the Company has revised its disclosures in the Registration Statement as you requested. I refer you to pages 18 - 19 of Amendment No. 1 under the caption “Risk Factors Summary” for the revised disclosure, which limits the summary risk factors to two pages and discloses only the principal factors that, in the Company’s determination, make an investment in the Company speculative or risky, as per Item 105(b) of Regulation S-K. We are subject to risks associated with the current interest rate environment . . ., page 22 9. Please revise to quantify the amount of your floating rate debt outstanding. Response: As of March 31, 2023, the Company had $26.9 million of floating rate debt outstanding, which is related to a mortgage loan entered into on February 9, 2023. Concurrent with the closing of this mortgage loan, the Company entered into an interest rate swap agreement which effectively converted this floating rate debt to fixed rate debt through its maturity date. In this regard, the Company has revised its disclosures on page 21 of Amendment No. 1, as you requested. U.S. Securities and Exchange Commission June 12, 2023 Page 6 We are subject to risks related to tenant concentration, and an adverse development . . ., page 25 10. Given the significant amount of current in-place net rents and current net ope