UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR l5(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):

May 20, 2020

RW Holdings NNN REIT, Inc.

(Exact name of registrant as specified in its charter)

3090 Bristol Street, Suite 550, Costa Mesa, CA 92626

(Address of principal executive offices)

(Zip Code)

855-742-4862

(Registrant's telephone number, including area code)

None

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Securities registered pursuant to Section 12(b) of the Act:

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Letter to Stockholders

RW Holdings NNN REIT, Inc. (the “Company”) previously announced on May 8, 2020 that due to the impacts of the novel coronavirus (COVID-19) pandemic on the Company’s real estate properties, the board of directors of the Company (the “Board”) authorized the engagement of Cushman & Wakefield Western, Inc. (“Cushman & Wakefield”), an independent third-party real estate advisory and consulting firm, to perform an independent valuation of the Company’s real estate assets and real estate related liabilities associated with the Company’s properties for the purpose of assisting the Board in updating the Company’s estimated net asset value (“NAV”) per share to reflect the impact of the COVID-19 pandemic. On May 22, 2020, the Company sent a letter to its stockholders announcing an estimated per share NAV of the Company's Class C and Class S common stock of $7.00. A copy of the letter is attached hereto as Exhibit 99.1 and incorporated herein by reference. The determination of the updated per share NAV is discussed in greater detail below.

In connection with its plan to update the estimated NAV per share, the Board approved the temporary suspension, effective as of the close of business on May 7, 2020, of the primary offering portion of the Company’s public offering of shares of Class C common stock (the “Registered Primary Offering”), which is registered with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), and the primary offering portion of the Company’s offering of shares of Class S common stock, which it offers exclusively to non-U.S. Persons pursuant to an exemption from the registration requirements of the Securities Act under and in accordance with Regulation S promulgated thereunder (the “Regulation S Primary Offering” and, together with the Registered Primary Offering, the “Primary Offerings”). The Company expects to reopen the Primary Offerings shortly after it holds an investor conference call on May 28, 2020 to discuss the new NAV per share.

 

Commencing with the Company’s next distribution payment on May 26, 2020, the per share purchase price pursuant to the Company’s distribution reinvestment plans for the Class C and Class S common stock will be based on the new NAV of $7.00 per share. The Company will not repurchase any shares pursuant to repurchase requests made during May 2020, since the Primary Offerings have been closed since May 7, 2020 and the Company does not have sufficient liquidity to fund stock repurchases in the absence of receiving proceeds from the Primary Offerings. Repurchase requests submitted during May 2020 will need to be resubmitted during June 2020 and future share repurchases, if any, will be processed at a repurchase price based on the $7.00 per share NAV.

Daily Distributions Declared

On May 20, 2020, the Board authorized distributions based on daily record dates for the period from May 22, 2020 through June 30, 2020 at a rate of $0.0009589 per share per day on the outstanding shares of the Company’s Class C and Class S common stock. The Company will pay distributions for May 2020 on June 25, 2020, and the distributions for June 2020 will be paid on July 27, 2020. The daily distribution rate of $0.0009589 per share of Class C and Class S common stock represents an annualized rate of return for the month of June, if paid each day for a 365-day period, equal to 5.0% based on a $7.00 NAV per share of Class C and Class S common stock.

Determination of Estimated Per Share NAV

Overview

On May 20, 2020, the audit committee of the Company's Board recommended, and the Board unanimously approved and established, an estimated per share NAV of the Company’s Class C and Class S common stock of $7.00 based on an estimated market value of the Company's assets less the estimated market value of the Company's liabilities, divided by the number of fully-diluted shares of Class C and Class S common stock outstanding as of April 30, 2020. There have been no material changes between April 30, 2020 and the date of this filing that would impact the overall estimated per share NAV. The estimated per share NAV as of April 30, 2020 will first appear on investor dashboards on May 23, 2020. This is the fourth time that the Board has determined an estimated per share NAV of the Company's common stock. The Board previously determined an estimated per share NAV of the Company’s common stock of $10.27 as of December 31, 2019, $10.16 as of December 31, 2018 and $10.05 as of December 31, 2017. The Company intends to continue to publish an updated estimated per share NAV on at least an annual basis.

Process

The audit committee of the Board, composed solely of three of the Company’s non-employee directors, is responsible for the oversight of the valuation process used to determine the estimated per share NAV of the Company’s common stock, including oversight of the valuation processes and methodologies used to determine the estimated per share NAV, the consistency of the valuation methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. In determining the estimated per share NAV of the Company’s Class C and Class S common stock, the audit committee and the Board considered information and analysis, including valuation materials that were provided by Cushman & Wakefield and information provided by management. Cushman & Wakefield is an independent third-party real estate advisory and consulting firm that was engaged by the Company to develop an estimate of the fair value of the Company. Cushman & Wakefield developed an opinion of fair value of the real estate assets and real estate related liabilities associated with the Company’s properties. The valuation was performed in accordance with the provisions of the Institute for Portfolio Alternatives Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs.

Cushman & Wakefield's scope of work was conducted in conformity with the requirements of the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. Several members of the Cushman & Wakefield engagement team who certified the methodologies and assumptions applied by the Company hold a Member of Appraisal Institute (“MAI”) designation. Other than (i) its engagement as described herein, (ii) its previous engagements with the Company in connection with the determination of the estimated per share NAV of the Company’s common stock as of December 31, 2017, December 31, 2018 and December 31, 2019, (iii) its previous engagement with BRIX REIT, Inc. (“BRIX REIT”), a REIT advised by the Company, in connection with the determination of the estimated per share NAV of BRIX REIT’s common stock as of March 31, 2020, and (iv) its previous engagements with Rich Uncles Real Estate Investment Trust I (“REIT I”) in connection with the determination of the estimated per share NAV of REIT I’s common stock as of December 31, 2017 and December 31, 2018, Cushman & Wakefield does not have any direct interests in any transaction with the Company or its affiliates and has not performed any services for the Company or its affiliates other than Asset Allocation services pursuant to Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business (ASU No. 2017-01) and Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations (ASC Topic 805) and the real estate financial advisor services they provided on behalf of REIT I in connection with REIT I’s merger with the Company on December 31, 2019.

The materials provided by Cushman & Wakefield included a range of NAVs of the Company’s shares, and the audit committee of the Board believes that the use of the “Valuation Methodology,” as discussed below, as the primary or sole indicator of value has become widely accepted as a best practice in the valuation of non-listed REIT shares, and therefore the audit committee and the Board determined to use the Valuation Methodology in establishing the estimated per share NAV. This Valuation Methodology is consistent with the Net Asset Value Calculation and Valuation Procedures adopted by the Board, including a majority of the independent directors. Based on these considerations, the audit committee recommended that the Board establish an estimated value of the Company’s Class C and Class S common stock, as of April 30, 2020, of $7.00 per share, which estimated value was within the $7.00 to $9.30 per share valuation range calculated by Cushman & Wakefield using the Valuation Methodology. The audit committee recommended that the Board use the low end of the valuation range given the continued uncertainty regarding the impact of the COVID-19 pandemic on the economy, whether various state and county government authorities’ ongoing efforts to reopen businesses will be successful, consumer confidence regarding the safety of visiting retail establishments and returning to office environments and the impact on the Company’s real estate properties. The Board unanimously agreed to accept the recommendation of the audit committee and approved $7.00 as the estimated per share NAV of the Company’s Class C and Class S common stock. The Board is ultimately and solely responsible for the establishment of the per share estimated value.

Valuation Methodology

In preparing its valuation materials and in reaching its conclusions as to the reasonableness of the methodologies and assumptions used by the Company to value its assets, Cushman & Wakefield, among other things:

Cushman & Wakefield utilized two approaches in valuing the Company’s real estate assets that are commonly used in the commercial real estate industry. The following is a summary of the NAV Methodology and the valuation approaches used by Cushman & Wakefield:

NAV Methodology - The NAV Methodology determines the value of the Company by determining the estimated market value of the Company's entity level assets, including real estate assets, and subtracting the market value of its entity level liabilities, including its debt. The materials provided by Cushman & Wakefield to estimate the value of the real estate assets were prepared using discrete estimations of "as is" market valuations for each of the properties in the Company's portfolio using the income capitalization approach as the primary indicator of value and the sales comparison approach as a secondary approach to value, as discussed in greater detail below. Cushman & Wakefield also estimated the fair value of the Company's real estate related debt. Cushman & Wakefield then added the non-real estate related assets and subtracted non-real estate related liabilities. The resulting amount, which is the estimated NAV of the portfolio, is divided by the number of fully-diluted shares of Class C and Class S common stock outstanding to determine the estimated per share NAV.

Determination of Estimated Market Value of the Company’s Real Estate Assets Under the NAV Methodology

Income Capitalization Approach - The income capitalization approach first determines the income-producing capacity of a property by using contract rents on existing leases and by estimating market rent from rental activity at competing properties for the vacant space. Deductions are then made for vacancy and collection loss and operating expenses. The net operating income (“NOI”) developed in Cushman & Wakefield's analysis is the balance of potential income remaining after vacancy and collection loss and operating expenses. This NOI was then capitalized at an appropriate rate to derive an estimate of value (the “Direct Capitalization Method”) or discounted by an appropriate yield rate over a typical projection period in a discounted cash flow analysis. Thus, two key steps were involved: (1) estimating the NOI applicable to the subject property and (2) choosing appropriate capitalization rates and discount rates.

 

The following summarizes the range of capitalization rates Cushman & Wakefield used to arrive at the estimated market values of the Company’s properties valued using the Direct Capitalization Method:

 

The capitalization rate was weighted based on NOI. An increase in the selected capitalization rate of 0.25% would result in a decrease in NAV of approximately $10,849,000. A decrease in the selected capitalization rate of 0.25% would result in an increase in NAV of approximately $11,540,000.

Sales Comparison Approach - The sales comparison approach estimates value based on what other purchasers and sellers in the market have agreed to as the price for comparable improved properties. This approach is based upon the principle of substitution, which states that the limits of prices, rents, and rates tend to be set by the prevailing prices, rents, and rates of equally desirable substitutes. This approach was utilized on two properties which are vacant and were assumed to be purchased by owner-users.

Utilizing the NAV Methodology, including use of the two approaches to value the Company’s real estate assets noted above, and dividing by the 27.6 million fully-diluted shares of the Company's Class C and Class S common stock outstanding on April 30, 2020, Cushman & Wakefield determined a valuation range of $7.00 to $9.30 per share.

Cushman & Wakefield prepared and provided to the Company a report containing, among other information, the range of net asset values for the Company's Class C and Class S common stock as of April 30, 2020 (the “Valuation Report”). On May 20, 2020, the audit committee of the Board and all of the other members of the Board conferred with management regarding the methodologies and assumptions used in the Valuation Report. On May 20, 2020, the audit committee of the Board recommended, and the Board unanimously approved, an estimated per share NAV of the Company's Class C and Class S common stock, as of April 30, 2020, of $7.00. The audit committee recommended that the Board use the low end of the valuation range given the continued uncertainty regarding the impact of the COVID-19 pandemic on the economy, whether various state and county government authorities’ ongoing efforts to reopen businesses will be successful, consumer confidence regarding the safety of visiting retail establishments and returning to office environments and the impact on the Company’s real estate properties.

The table below sets forth the calculation of the Company's estimated per share NAV as of April 30, 2020 and December 31, 2019:

(a) Fully-diluted shares outstanding as of April 30, 2020 and December 31, 2019 includes 3,569,893 shares that would result from conversion of 657,949.5 units of Class M limited partnership interests of RW Holdings NNN REIT Operating Partnership, LP (“Class M OP Units”) and 56,029 units of Class P limited partnership interests of RW Holdings NNN REIT Operating Partnership, LP (“Class P OP Units”) assuming a conversion ratio of five shares of the Company’s Class C common stock for each Class M OP Unit and Class P OP Unit outstanding.

Exclusions from Estimated NAV

The estimated share value approved by the Board does not reflect any “portfolio premium,” nor does it reflect an enterprise value of the Company, which may include a premium or discount to NAV for:

Limitations of the Estimated NAV

As with any valuation methodology, the NAV Methodology used by the Board in reaching an estimate of the value of the Company's shares is based upon a number of estimates, assumptions, judgments and opinions that may, or may not, prove to be correct. The use of different valuation methods, estimates, assumptions, judgments or opinions may have resulted in significantly different estimates of the value of the Company's shares. In addition, the Board’s estimate of share value is not based on the book values of the Company's real estate, as determined by generally accepted accounting principles, as the Company's book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.

Furthermore, in reaching an estimate of the value of the Company's shares, the Board did not include a discount for debt that may include a prepayment obligation or a provision precluding assumption of the debt by a third party. In addition, selling costs were not considered by Cushman & Wakefield in the valuation of the properties. Other costs that are likely to be incurred in connection with an appropriate exit strategy, whether that strategy involves a listing of the Company's shares of common stock on a national securities exchange, a merger of the Company, or a sale of the Company's portfolio, were also not included in the Board’s estimate of the value of the Company's shares.

As a result, there can be no assurance that:

Furthermore, the estimated value of the Company's shares was calculated as of a particular point in time. The value of the Company's shares will fluctuate over time as a result of, among other things, developments related to individual assets and responses to the real estate and capital markets.

Additional Information Regarding Engagement of Cushman & Wakefield

Cushman & Wakefield was selected by the Board to estimate the fair value of the real estate assets and real estate related liabilities associated with the Company’s properties. Cushman & Wakefield's valuation materials provided to the Company do not constitute a recommendation to purchase or sell any shares of the Company's common stock or other securities. The estimated value of the Company's common stock may vary depending on numerous factors that generally impact the price of securities, the financial condition of the Company and the state of the real estate industry more generally, such as changes in economic or market conditions, changes in interest rates, changes in the supply of and demand for commercial real estate properties and changes in tenants' financial condition.

In connection with its review, while Cushman & Wakefield reviewed the information supplied or otherwise made available to it by the Company for reasonableness, Cushman & Wakefield assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to it by any other party, and did not undertake any duty or responsibility to verify independently any of such information. With respect to financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Cushman & Wakefield, Cushman & Wakefield assumed that such forecasts and other information and data were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of management of the Company, and relied upon the Company to advise Cushman & Wakefield promptly if any information previously provided became inaccurate or was required to be updated during the period of its review.

In preparing its valuation materials, Cushman & Wakefield did not, and was not requested to, solicit third party indications of interest for the Company in connection with possible purchases of the Company's securities or the acquisition of all or any part of the Company.

In performing its analyses, Cushman & Wakefield made numerous assumptions with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond Cushman & Wakefield's control and the control of the Company. The analyses performed by Cushman & Wakefield are not necessarily indicative of actual values, trading values or actual future results of the Company's common stock that might be achieved, all of which may be significantly more or less favorable than suggested by such analyses. The analyses do not reflect the prices at which properties may actually be sold, and such estimates are inherently subject to uncertainty. The Board considered other factors in establishing the estimated value of the Company's common stock in addition to the materials prepared by Cushman & Wakefield. Consequently, the analyses contained in the Cushman & Wakefield materials should not be viewed as being determinative of the Board’s estimate of the value of the Company’s common stock.

 

Cushman & Wakefield's materials were necessarily based upon market, economic, financial and other circumstances and conditions existing as of April 30, 2020, and any material change in such circumstances and conditions may have affected Cushman & Wakefield's analysis, but Cushman & Wakefield does not have, and has disclaimed, any obligation to update, revise or reaffirm its materials as of any date subsequent to April 30, 2020.

For services rendered in connection with and upon the delivery of its valuation materials, the Company paid Cushman & Wakefield a customary fee. The compensation Cushman & Wakefield received was based on the scope of work and was not contingent on an action or event resulting from analyses, opinions, or conclusions in its valuation materials or from its use. In addition, Cushman & Wakefield's compensation for completing the valuation was not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the Company, the amount of the estimated value, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of the valuation materials. The Company also agreed to reimburse Cushman & Wakefield for its expenses incurred in connection with its services and will indemnify Cushman & Wakefield against certain liabilities arising out of its engagement.

Offering Price

Class C Common Stock

Commencing on the reopening of the Registered Primary Offering, the offering price for shares of the Company's Class C common stock will be $7.00 per share.

Class S Common Stock (Class S Offering)

Commencing on the reopening of the Regulation S Primary Offering, the offering price for shares of the Company’s Class S common stock offered exclusively to non-U.S. persons pursuant to an exemption from the registration requirements of the Securities Act under and in accordance with Regulation S of the Securities Act will be $7.00 per share, plus the amount of any applicable upfront commissions and fees.

Distribution Reinvestment Plan

Pursuant to the terms of the Company's distribution reinvestment plan currently in effect (the “DRIP”), distributions (excluding those the Board designates as ineligible for reinvestment through the DRIP) will be reinvested in shares of the Company’s Class C and Class S common stock at a price equal to the most recently disclosed estimated per share NAV, as determined by the Board. Accordingly, commencing with the Company’s next distribution payment on May 26, 2020, shares of the Company's Class C and Class S common stock issued pursuant to the DRIP will be issued for $7.00 per share.

A participant may terminate participation in the DRIP at any time by delivering a written notice to the administrator. To be effective for any monthly distribution, such termination notice must be received by the Company at least ten (10) business days prior to the last day of the month to which the distribution relates. Any termination should be provided by written notice.

Stockholders who presently participate in the DRIP do not need to take any action to continue their participation in the DRIP.

Share Repurchase Program

In accordance with the Company's share repurchase program for its Class C common stock, the per share repurchase price will depend on the length of time the redeeming stockholder has held such shares as follows: less than one year from the purchase date, 97% of the most recently published NAV; after at least one year but less than two years from the purchase date, 98% of the most recently published NAV; after at least two years but less than three years from the purchase date, 99% of the most recently published NAV; and after three years from the purchase date, 100% of the most recently published NAV. The Company will not repurchase any shares pursuant to repurchase requests made during May 2020 since the Primary Offerings have been closed since May 7, 2020 and the Company does not have sufficient liquidity to fund stock repurchases in the absence of receiving proceeds from the Primary Offerings. Repurchase requests submitted during May 2020 will need to be resubmitted during June 2020 and future share repurchases, if any, will be processed at a repurchase price based on the $7.00 per share NAV.

 

Shares of Class S common stock are not eligible for repurchase unless they have been held for at least one year. After this holding period has been met, shares of Class S common stock can be redeemed at the most recently published NAV per share. The Company will not repurchase any shares pursuant to repurchase requests made during May 2020 since the Primary Offerings have been closed since May 7, 2020 and the Company does not have sufficient liquidity to fund stock repurchases in the absence of receiving proceeds from the Primary Offerings. Repurchase requests submitted during May 2020 will need to be resubmitted during June 2020 and future share repurchases, if any, will be processed using the $7.00 per share NAV.

Forward-Looking Statements

Certain statements contained in this Current Report on Form 8-K, other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, statements related to the Company's expectations regarding the performance of its business and the estimated per share NAV of the Company's common stock. Cushman & Wakefield relied on forward-looking information, some of which was provided by or on behalf of the Company, in preparing its valuation materials. Therefore, neither such statements nor Cushman & Wakefield's valuation materials are intended to, nor shall they, serve as a guarantee of the Company's performance in future periods. These forward-looking statements can be identified by the use of words such as “believes,” “potential,” “may,” “will,” “should,” “intends,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties, including those described under the section entitled “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 and the Company’s prospectus dated December 23, 2019 and related supplements, filed with the SEC. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Current Report on Form 8-K and in the Company’s other filings with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. Actual events may cause the valuation and returns on the Company’s investments to be less than that used for purposes of the Company’s estimated per share NAV.

(d) Exhibits

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.