UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172020
OR
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o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-54376
STRATEGIC REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
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Maryland | | | 90-0413866 |
(State or Other Jurisdiction of Incorporation or Organization) | | | (I.R.S. Employer Identification No.) |
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66 Bovet Road, Suite 100
P.O. Box 5049 | | | |
San Mateo, California, 94402 | (650) 343-9300California | | | 94402 |
(Address of Principal Executive Offices; Zip Code)Offices) | | | (Registrant’s Telephone Number, Including AreaZip Code) |
(650) 343-9300
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
None | | None | | None |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No ¨☐
Indicate by check mark whether the registrant is a large accelerated filed,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. (Check one):
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Large accelerated filer | ¨☐ | Accelerated filer | ¨☐ |
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Non-accelerated filer | ¨ (Do not check if a smaller reporting company) ý | Smaller reporting company | ý☒ |
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| | Emerging growth company | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý
As of November 1, 2017,August 5, 2020, there were 11,012,72610,739,814 shares of the registrant’s common stock issued and outstanding.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I
FINANCIAL INFORMATION
The accompanying interim unaudited condensed consolidated financial statements as of and for the ninethree and six months ended SeptemberJune 30, 2017,2020, have been prepared by Strategic Realty Trust, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016,2019, as filed with the SEC on March 24, 201718, 2020 (the “2016“2019 Annual Report on Form 10-K”). The interim unaudited condensed consolidated financial statements herein should also be read in conjunction with the Notes to Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q. The results of operations for the ninethree and six months ended SeptemberJune 30, 2017,2020, are not necessarily indicative of the operating results expected for the full year. The information furnished in the Company’s accompanying unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of operations, equity, and cash flows reflects all adjustments that, in management’s opinion, are necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENDSEDCONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
(unaudited)
| | | September 30, | | December 31, | June 30, | | December 31, |
| 2017 | | 2016 | 2020 | | 2019 |
ASSETS | | | | | | |
Investments in real estate | | | | | | |
Land | $ | 16,451 |
| | $ | 15,510 |
| $ | 13,791 |
| | $ | 13,536 |
|
Building and improvements | 36,649 |
| | 47,810 |
| 23,765 |
| | 23,732 |
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Tenant improvements | 1,599 |
| | 2,307 |
| 1,615 |
| | 1,264 |
|
| 54,699 |
| | 65,627 |
| 39,171 |
| | 38,532 |
|
Accumulated depreciation | (3,840 | ) | | (8,163 | ) | (3,787 | ) | | (3,308 | ) |
Investments in real estate, net | 50,859 |
| | 57,464 |
| 35,384 |
| | 35,224 |
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Properties under development and development costs | | | | | | |
Land | 25,851 |
| | 25,851 |
| 25,851 |
| | 25,851 |
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Buildings | 589 |
| | 601 |
| 546 |
| | 554 |
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Development costs | 8,346 |
| | 4,377 |
| 25,277 |
| | 20,813 |
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Properties under development and development costs | 34,786 |
| | 30,829 |
| 51,674 |
| | 47,218 |
|
Cash and cash equivalents | 3,645 |
| | 3,130 |
| |
Restricted cash | 4,180 |
| | 4,728 |
| |
Cash, cash equivalents and restricted cash | | 5,091 |
| | 7,241 |
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Prepaid expenses and other assets, net | 250 |
| | 1,070 |
| 125 |
| | 114 |
|
Tenant receivables, net of $5 and $38 bad debt reserve | 763 |
| | 1,269 |
| |
Investments in unconsolidated joint ventures | 2,739 |
| | 4,761 |
| |
Tenant receivables, net of $279 and $14 bad debt reserve | | 825 |
| | 727 |
|
Lease intangibles, net | 2,642 |
| | 3,825 |
| 1,363 |
| | 1,321 |
|
Assets held for sale | 24,668 |
| | 24,157 |
| — |
| | 9,216 |
|
Deferred financing costs, net | 1,164 |
| | 264 |
| — |
| | 105 |
|
TOTAL ASSETS (1) | $ | 125,696 |
| | $ | 131,497 |
| $ | 94,462 |
| | $ | 101,166 |
|
LIABILITIES AND EQUITY | | | | | | |
LIABILITIES | | | | | | |
Notes payable, net | $ | 45,473 |
| | $ | 54,304 |
| $ | 37,129 |
| | $ | 33,927 |
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Accounts payable and accrued expenses | 2,612 |
| | 2,955 |
| 1,770 |
| | 2,404 |
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Amounts due to affiliates | 2,538 |
| | 111 |
| 68 |
| | 140 |
|
Other liabilities | 548 |
| | 461 |
| 165 |
| | 180 |
|
Liabilities related to assets held for sale | 20,445 |
| | 22,182 |
| — |
| | 8,939 |
|
Below-market lease liabilities, net | 819 |
| | 3,049 |
| 266 |
| | 296 |
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Deferred gain on sale of properties to unconsolidated joint venture | 668 |
| | 1,202 |
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TOTAL LIABILITIES (1) | 73,103 |
| | 84,264 |
| 39,398 |
| | 45,886 |
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Commitments and contingencies (Note 13) |
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Commitments and contingencies (Note 12) | |
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EQUITY | | | | | | |
Stockholders’ equity | | | | | | |
Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding | — |
| | — |
| — |
| | — |
|
Common stock, $0.01 par value; 400,000,000 shares authorized; 11,012,726 and 10,938,245 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 111 |
| | 111 |
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Common stock, $0.01 par value; 400,000,000 shares authorized; 10,739,814 and 10,759,721 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | | 110 |
| | 110 |
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Additional paid-in capital | 96,283 |
| | 96,032 |
| 94,602 |
| | 94,719 |
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Accumulated deficit | (44,985 | ) | | (50,676 | ) | (40,668 | ) | | (40,571 | ) |
Total stockholders’ equity | 51,409 |
| | 45,467 |
| 54,044 |
| | 54,258 |
|
Non-controlling interests | 1,184 |
| | 1,766 |
| 1,020 |
| | 1,022 |
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TOTAL EQUITY | 52,593 |
| | 47,233 |
| 55,064 |
| | 55,280 |
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TOTAL LIABILITIES AND EQUITY | $ | 125,696 |
| | $ | 131,497 |
| $ | 94,462 |
| | $ | 101,166 |
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(1) | As of SeptemberJune 30, 2017,2020 and December 31, 2016,2019, includes approximately $36.9$52.1 million and $32.8$49.4 million, respectively, of assets related to consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities and approximately $19.6$21.1 million and $19.9$18.5 million, respectively, of liabilities of consolidated variable interest entities for which creditors do not have recourse to the general credit of the Company. Refer to Note 5.4. “Variable Interest Entities”. |
See accompanying notes to condensed consolidated financial statements.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share amounts)
(unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 | | 2020 | | 2019 |
Revenue: | | | | | | | | | | | | | | |
Rental and reimbursements | $ | 2,219 |
| | $ | 2,647 |
| | $ | 7,084 |
| | $ | 7,837 |
| $ | 654 |
| | $ | 939 |
| | $ | 1,461 |
| | $ | 1,883 |
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Expense: | | | | | | | | | | | | | | |
Operating and maintenance | 848 |
| | 949 |
| | 2,554 |
|
| 2,787 |
| 359 |
| | 586 |
| | 809 |
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| 856 |
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General and administrative | 483 |
| | 623 |
| | 1,478 |
|
| 1,691 |
| 443 |
| | 396 |
| | 848 |
|
| 795 |
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Depreciation and amortization | 653 |
| | 907 |
| | 2,439 |
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| 2,628 |
| 301 |
| | 378 |
| | 602 |
|
| 755 |
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Transaction expense | — |
| | 165 |
| | 85 |
|
| 445 |
| |
Interest expense | 449 |
| | 550 |
| | 1,505 |
|
| 1,660 |
| 66 |
| | 130 |
| | 237 |
|
| 319 |
|
| 2,433 |
| | 3,194 |
| | 8,061 |
| | 9,211 |
| 1,169 |
| | 1,490 |
| | 2,496 |
| | 2,725 |
|
Operating loss | (214 | ) | | (547 | ) | | (977 | ) | | (1,374 | ) | (515 | ) | | (551 | ) | | (1,035 | ) | | (842 | ) |
| | | | | | | | | | | | | | |
Other income (loss): | | | | | | | | | | | | | | |
Equity in income (loss) of unconsolidated joint ventures | (19 | ) | | 16 |
| | (24 | ) | | 318 |
| |
Equity in loss of unconsolidated joint ventures | | — |
| | (15 | ) | | — |
| | (35 | ) |
Net gain on disposal of real estate | — |
| | — |
| | 9,131 |
| | 614 |
| — |
| | 13 |
| | 947 |
| | 13 |
|
Loss on extinguishment of debt | — |
| | — |
| | (80 | ) | | (966 | ) | |
Income (loss) before income taxes | (233 | ) | | (531 | ) | | 8,050 |
| | (1,408 | ) | |
Loss before income taxes | | (515 | ) | | (553 | ) | | (88 | ) | | (864 | ) |
Income taxes | 3 |
| | (19 | ) | | (99 | ) |
| (153 | ) | (9 | ) | | (44 | ) | | (11 | ) | | (44 | ) |
Net income (loss) | (230 | ) |
| (550 | ) | | 7,951 |
| | (1,561 | ) | |
Net income (loss) attributable to non-controlling interests | (13 | ) | | (21 | ) | | 293 |
| | (58 | ) | |
Net income (loss) attributable to common stockholders | $ | (217 | ) | | $ | (529 | ) | | $ | 7,658 |
| | $ | (1,503 | ) | |
Net loss | | (524 | ) |
| (597 | ) | | (99 | ) | | (908 | ) |
Net loss attributable to non-controlling interests | | (10 | ) | | (12 | ) | | (2 | ) | | (19) |
Net loss attributable to common stockholders | | $ | (514 | ) | | $ | (585 | ) | | $ | (97 | ) | | $ | (889 | ) |
| | | | | | | | | | | | | | |
Earnings (loss) per common share - basic and diluted | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | 0.70 |
| | $ | (0.14 | ) | |
Loss per common share - basic and diluted | | $ | (0.05 | ) | | $ | (0.05 | ) | | $ | (0.01 | ) | | $ | (0.08 | ) |
| | | | | | | | | | | | | | |
Weighted average shares outstanding used to calculate earnings (loss) per common share - basic and diluted | 10,885,095 |
| | 11,007,864 |
| | 10,909,141 |
| | 11,017,654 |
| |
Weighted average shares outstanding used to calculate loss per common share - basic and diluted | | 10,739,729 |
| | 10,839,065 |
| | 10,749,464 |
| | 10,850,842 |
|
See accompanying notes to condensed consolidated financial statements.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF EQUITY
(in thousands, except shares)
(unaudited)
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| Number of Shares | | Par Value | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
BALANCE — December 31, 2016 | 10,938,245 |
| | $ | 111 |
| | $ | 96,032 |
| | $ | (50,676 | ) | | $ | 45,467 |
| | $ | 1,766 |
| | $ | 47,233 |
|
Conversion of OP units to common shares | 162,409 |
| | — |
| | 809 |
| | — |
| | 809 |
| | (809 | ) | | — |
|
Redemption of common shares | (87,928 | ) | | — |
| | (558 | ) | | — |
| | (558 | ) | | — |
| | (558 | ) |
Quarterly distributions | — |
| | — |
| | — |
| | (1,967 | ) | | (1,967 | ) | | (66 | ) | | (2,033 | ) |
Net income | — |
| | — |
| | — |
| | 7,658 |
| | 7,658 |
| | 293 |
| | 7,951 |
|
BALANCE — September 30, 2017 | 11,012,726 |
| | $ | 111 |
| | $ | 96,283 |
| | $ | (44,985 | ) | | $ | 51,409 |
| | $ | 1,184 |
| | $ | 52,593 |
|
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Six Months Ended June 30, 2020 and 2019 |
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| Number of Shares | | Par Value | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
BALANCE — December 31, 2019 | 10,759,721 |
| | $ | 110 |
| | $ | 94,719 |
| | $ | (40,571 | ) | | $ | 54,258 |
| | $ | 1,022 |
| | $ | 55,280 |
|
Redemption of common shares | (19,907 | ) | | — |
| | (117 | ) | | — |
| | (117 | ) | | — |
| | (117 | ) |
Net loss | — |
| | — |
| | — |
| | (97 | ) | | (97 | ) | | (2 | ) | | (99 | ) |
BALANCE — June 30, 2020 | 10,739,814 |
| | $ | 110 |
| | $ | 94,602 |
| | $ | (40,668 | ) | | $ | 54,044 |
| | $ | 1,020 |
| | $ | 55,064 |
|
| | | | | | | | | | | | | |
BALANCE — December 31, 2018 | 10,863,299 |
| | $ | 110 |
| | $ | 95,336 |
| | $ | (38,546 | ) | | $ | 56,900 |
| | $ | 1,170 |
| | $ | 58,070 |
|
Redemption of common shares | (62,158 | ) | | — |
| | (375 | ) | | — |
| | (375 | ) | | — |
| | (375 | ) |
Quarterly distributions | — |
| | — |
| | — |
| | (1,299 | ) | | (1,299 | ) | | (28 | ) | | (1,327 | ) |
Net loss | — |
| | — |
| | — |
| | (889 | ) | | (889 | ) | | (19 | ) | | (908 | ) |
BALANCE — June 30, 2019 | 10,801,141 |
| | $ | 110 |
| | $ | 94,961 |
| | $ | (40,734 | ) | | $ | 54,337 |
| | $ | 1,123 |
| | $ | 55,460 |
|
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| | | | | | | | | | | | | |
Three Months Ended June 30, 2020 and 2019 |
| | | | | | | | | | | | | |
| Number of Shares | | Par Value | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
BALANCE — March 31, 2020 | 10,739,814 |
| | $ | 110 |
| | $ | 94,602 |
| | $ | (40,154 | ) | | $ | 54,558 |
| | $ | 1,030 |
| | $ | 55,588 |
|
Net loss | — |
| | — |
| | — |
| | (514 | ) | | (514 | ) | | (10 | ) | | (524 | ) |
BALANCE — June 30, 2020 | 10,739,814 |
| | $ | 110 |
| | $ | 94,602 |
| | $ | (40,668 | ) | | $ | 54,044 |
| | $ | 1,020 |
| | $ | 55,064 |
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BALANCE — March 31, 2019 | 10,842,444 |
| | $ | 110 |
| | $ | 95,210 |
| | $ | (39,501 | ) | | $ | 55,819 |
| | $ | 1,149 |
| | $ | 56,968 |
|
Redemption of common shares | (41,303 | ) | | — |
| | (249 | ) | | — |
| | (249 | ) | | — |
| | (249 | ) |
Quarterly distributions | — |
| | — |
| | — |
| | (648 | ) | | (648 | ) | | (14 | ) | | (662 | ) |
Net loss | — |
| | — |
| | — |
| | (585 | ) | | (585 | ) | | (12 | ) | | (597 | ) |
BALANCE — June 30, 2019 | 10,801,141 |
| | $ | 110 |
| | $ | 94,961 |
| | $ | (40,734 | ) | | $ | 54,337 |
| | $ | 1,123 |
| | $ | 55,460 |
|
See accompanying notes to condensed consolidated financial statements.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
| 2017 | | 2016 | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | |
Net income (loss) | $ | 7,951 |
| | $ | (1,561 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Net loss | | $ | (99 | ) | | $ | (908 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | |
Net gain on disposal of real estate | (9,131 | ) | | (614 | ) | (947 | ) | | (13 | ) |
Loss on extinguishment of debt | 80 |
| | 966 |
| |
Equity in income (loss) of unconsolidated joint ventures | 24 |
| | (318 | ) | |
Equity in loss of unconsolidated joint ventures | | — |
| | 35 |
|
Straight-line rent | (179 | ) | | (102 | ) | (50 | ) | | (50 | ) |
Amortization of deferred costs | 404 |
| | 381 |
| 237 |
| | 315 |
|
Depreciation and amortization | 2,439 |
| | 2,628 |
| 602 |
| | 755 |
|
Amortization of above and below-market leases | (129 | ) | | (147 | ) | (26 | ) | | (10 | ) |
Bad debt expense | 20 |
| | 23 |
| |
Provision for losses on tenant receivable | | 318 |
| | 309 |
|
Changes in operating assets and liabilities: | | | | | | |
Prepaid expenses and other assets | 803 |
| | (290 | ) | (11 | ) | | (2 | ) |
Tenant receivables | 288 |
| | 462 |
| (361 | ) | | 63 |
|
Accounts payable and accrued expenses | (118 | ) | | 533 |
| (116 | ) | | (82 | ) |
Amounts due to affiliates | (73 | ) | | (47 | ) | (72 | ) | | (18 | ) |
Other liabilities | 87 |
| | (117 | ) | (15 | ) | | (153 | ) |
Net change in restricted cash for operational expenditures | 131 |
| | (554 | ) | |
Net cash provided by operating activities | 2,597 |
| | 1,243 |
| |
Net cash provided by (used in) operating activities | | (540 | ) | | 241 |
|
| | | | | | |
Cash flows from investing activities: | | | | | | |
Net proceeds from the sale of real estate | 32,398 |
| | 8,737 |
| |
Acquisition of real estate | (17,812 | ) | | (10,225 | ) | |
Proceeds from the sale of real estate | | 9,920 |
| | 13 |
|
Investment in properties under development and development costs | (3,810 | ) | | (28,538 | ) | (4,779 | ) | | (1,674 | ) |
Improvements, capital expenditures, and leasing costs | (1,110 | ) | | (289 | ) | (404 | ) | | (328 | ) |
Investments in unconsolidated joint ventures | | — |
| | (38 | ) |
Distributions from unconsolidated joint ventures | 1,998 |
| | 1,223 |
| — |
| | 33 |
|
Net change in restricted cash from investments in consolidated variable interest entities | 8 |
| | (3,458 | ) | |
Net change in restricted cash for capital expenditures | 409 |
| | 981 |
| |
Net cash provided by (used in) investing activities | 12,081 |
| | (31,569 | ) | 4,737 |
| | (1,994 | ) |
| | | | | | |
Cash flows from financing activities: | | | | | | |
Redemption of common shares | (558 | ) | | (466 | ) | (117 | ) | | (375 | ) |
Quarterly distributions | (2,038 | ) | | (2,058 | ) | (220 | ) | | (1,331 | ) |
Proceeds from notes payable | 29,700 |
| | 38,400 |
| 2,922 |
| | 14,811 |
|
Repayment of notes payable | (41,999 | ) | | (8,823 | ) | (8,926 | ) | | (10,250 | ) |
Loan proceeds from an affiliate | 2,500 |
| | — |
| |
Payment of penalties associated with early repayment of notes payable | (1 | ) | | (839 | ) | |
Payment of loan fees from investments in consolidated variable interest entities | (453 | ) | | (719 | ) | — |
| | (443 | ) |
Payment of loan fees and financing costs | (1,314 | ) | | (69 | ) | (6 | ) | | — |
|
Net cash provided by (used in) financing activities | (14,163 | ) | | 25,426 |
| (6,347 | ) | | 2,412 |
|
| | | | | | |
Net increase (decrease) in cash and cash equivalents | 515 |
| | (4,900 | ) | |
Cash and cash equivalents – beginning of period | 3,130 |
| | 8,793 |
| |
Cash and cash equivalents – end of period | $ | 3,645 |
| | $ | 3,893 |
| |
Net increase (decrease) in cash, cash equivalents and restricted cash | | (2,150 | ) | | 659 |
|
Cash, cash equivalents and restricted cash – beginning of period | | 7,241 |
| | 3,347 |
|
Cash, cash equivalents and restricted cash – end of period | | $ | 5,091 |
| | $ | 4,006 |
|
| | | | | | |
Supplemental disclosure of non-cash investing and financing activities and other cash flow information: | | | | | | |
Distributions declared but not paid | $ | 676 |
| | $ | 684 |
| $ | — |
| | $ | 662 |
|
Change in accrued liabilities capitalized to investment in development | (225 | ) | | 346 |
| (501 | ) | | 128 |
|
Change to accrued mortgage note payable interest capitalized to investment in development | 5 |
| | 159 |
| 25 |
| | (11 | ) |
Amortization of deferred loan fees capitalized to investment in development | 367 |
| | 443 |
| 153 |
| | 245 |
|
Changes in capital improvements, accrued but not paid | | 178 |
| | — |
|
Cash paid for interest, net of amounts capitalized | 1,110 |
| | 1,121 |
| 5 |
| | 29 |
|
See accompanying notes to condensed consolidated financial statements.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BUSINESS
Strategic Realty Trust, Inc. (the “Company”) was formed on September 18, 2008, as a Maryland corporation. Effective August 22, 2013, the Company changed its name from TNP Strategic Retail Trust, Inc. to Strategic Realty Trust, Inc. The Company believes it qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and has elected REIT status beginning with the taxable year ended December 31, 2009, the year in which the Company began material operations.
Since the Company’s inception, its business has been managed by an external advisor. The Company has no direct employees and all management and administrative personnel responsible for conducting the Company’s business are employed by its advisor. Currently, the Company is externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed every year.year through 2020. The current term of the Advisory Agreement terminates on August 10, 2018.9, 2021. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.
Substantially all of the Company’s business is conducted through Strategic Realty Operating Partnership, L.P. (the “OP”). During the Company’s initial public offering (“Offering”), as the Company accepted subscriptions for shares of its common stock, it transferred substantially all of the net proceeds of the Offering to the OP as a capital contribution. The Company is the sole general partner of the OP. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company owned 97.7%98.0% and 96.3%98.0%, respectively, of the limited partnership interests in the OP.
The Company’s principal demand for funds has been for the acquisition of real estate assets, the payment of operating expenses, interest on outstanding indebtedness, the payment of distributions to stockholders, and investments in unconsolidated joint ventures as well as development of properties. Substantially all of the proceeds of the completed Offering have been used to fund investments in real properties and other real estate-related assets, for payment of operating expenses, for payment of interest, for payment of various fees and expenses, such as acquisition fees and management fees, and for payment of distributions to stockholders. The Company’s available capital resources, cash and cash equivalents on hand and sources of liquidity are currently limited. The Company expects its future cash needs will be funded using cash from operations, future asset sales, debt financing and the proceeds to the Company from any sale of equity that it may conduct in the future.
The Company invests in and manages a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate.assets. The Company has invested directly, and indirectly through joint ventures, in a portfolio of income-producing retail properties located throughout the United States, with a focus on grocery anchored multi-tenant retail centers, including neighborhood, community and lifestyle shopping centers, multi-tenant shopping centers and free standing single-tenant retail properties. During the first quarter of 2016, the Company invested, through joint ventures, in two significant retail projects under development.
As of SeptemberJune 30, 2017,2020, in addition to the development projects, the Company’s portfolio of properties was comprised of 127 properties including 3 properties held for sale, with approximately 425,00043,000 rentable square feet of retail space located in five states.2 states, as well as an improved land parcel. As of SeptemberJune 30, 2017,2020, the rentable space at the Company’s retail properties was 97%79% leased.
COVID-19 Pandemic
Currently, one of the most significant risks and uncertainties facing the Company, the retail industry, the real estate industry and the economy generally is the potential adverse effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic. The Company continues to monitor the impact of the COVID-19 pandemic on all aspects of its business, including how the pandemic is impacting its tenants and business partners. Many of the Company’s tenants have requested rent deferral or rent abatement as a result of the pandemic. During the three months ended June 30, 2020, some of the tenants, that had requested rent relief, resumed paying full or partial rent. As such, the Company is unable to predict the full impact that the pandemic will have on its financial condition, results of operations and cash flows. The full extent to which the COVID-19 pandemic impacts the Company’s operations and those of its tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Refer to Note 5, “Leases” for additional information.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q10-K and Regulation S-X.
The interim unaudited condensed consolidated financial statements include the accounts of the Company, the OP, their direct and indirect owned subsidiaries, and the accounts of joint ventures that are determined to be variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s condensed consolidated financial position, results of operations and cash flows have been included.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company evaluates the need to consolidate joint ventures and variable interest entities based on standards set forth in ASC Topic 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a joint venture or a variable interest entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners/members, as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary. As of SeptemberJune 30, 20172020 and December 31, 2016, the Company held ownership interests in two unconsolidated joint ventures. Refer to Note 4, “Investments in Unconsolidated Joint Ventures” for additional information. As of September 30, 2017 and December 31, 2016,2019, the Company held variable interests in two variable interest entities and consolidated those entities. Refer to Note 5,4. “Variable Interest Entities” for additional information.
InvestmentsCash, Cash Equivalents and Restricted Cash
Cash and cash equivalents represent current bank accounts and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit. The Company limits cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk in Real Estatecash.
In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”) that clarifies the frameworkRestricted cash includes escrow accounts for determining whether an integrated set of assetsreal property taxes, insurance, capital expenditures and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assetstenant improvements, debt service and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. leasing costs held by lenders.
The Company elected to early adopt ASU 2017-01 for the reporting period beginning January 1, 2017. Asfollowing table provides a resultreconciliation of adopting ASU 2017-01, the Company’s acquisitions of properties beginning January 1, 2017, were evaluated under the new guidance. The acquisitions occurring during 2017 were determined to be asset acquisitions, as they did not meet the revised definition of a business.
Evaluation of business combination or asset acquisition:
The Company evaluates each acquisition of real estate to determine if the integrated set of assetscash, cash equivalents, and activities acquired meet the definition of a business and need to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
• Substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets; or
• The integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e. revenue generated before and after the transaction).
An acquired process is considered substantive if:
• The process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce), that is skilled, knowledgeable, and experienced in performing the process;
• The process cannot be replaced without significant cost, effort, or delay; or
• The process is considered unique or scarce.
Generally, the Company expects that acquisitions of real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets), or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
In asset acquisitions, the purchase consideration, including acquisition costs, is allocated to the individual assets acquired and liabilities assumedrestricted cash reported on a relative fair value basis. As a result, asset acquisitions do not result in the recognition of goodwill or a bargain purchase gain.
Depreciation and amortization is computed using a straight-line method over the estimated useful lives of the assets as follows:
|
| |
| Years |
Buildings and improvements | 5 - 30 years |
Tenant improvements | 1 - 36 years |
Tenant improvement costs recorded as capital assets are depreciated over the tenant’s remaining lease term, which the Company has determined approximates the useful life of the improvement. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements that improve or extend the useful lives of
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
assets are capitalized. Acquisition costs related to asset acquisitions are capitalized in the condensed consolidated balance sheets.
For acquisitions of real estate priorsheets that sum to the adoption of ASU 2017-01, which were generally accounted for as business combinations, the Company recognized the assets acquired (including the intangible value of acquired above- or below-market leases, acquired in-place leases and other intangible assets or liabilities) at fair value astotal of the acquisition date. Acquisition costs related to the business combinations were expensed as incurred.
Reclassifications
Certain prior periodsame such amounts have been reclassified to conform with current period’s presentation. The reclassifications had no effectshown on the Company’scondensed consolidated financial condition, resultsstatement of operations, or cash flows.flows (amounts in thousands):
|
| | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Cash and cash equivalents | $ | 4,295 |
| | $ | 6,119 |
|
Restricted cash | 796 |
| | 1,122 |
|
Total cash, cash equivalents, and restricted cash | $ | 5,091 |
| | $ | 7,241 |
|
Recent Accounting Pronouncements
The FASB issued the following ASUs, which could have potential impact to the Company’s condensed consolidated financial statements:
In November 2016,August 2018, the FASB issued ASU No. 2016-18, Restricted Cash, which amends (2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 230), Statement of Cash Flows (“820. ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explains the change during the reporting period in the total of cash, cash equivalents, andrestricted cash or restricted cash equivalents. ASU 2016-182018-13 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-18 will require adoption using a retrospective transition method. The adoption will not have a material effect on the Company’s condensed consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810), Interests Held through related Parties That Are under Common Control (“ASU 2016-17”). ASU 2016-17 changes how a reporting entity that is a single decision maker of a variable interest entity should treat indirect interest in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. ASU 2016-17 is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted, including adoption in an interim period. ASU 2016-17 will require adoption using the retrospective transition method beginning with the fiscal year in which the amendments in ASU No. 2015-02 were initially applied.2019. The Company adopted ASU 2016-17 beginning2018-13 effective January 1, 2017.2020. The adoption of ASU 2016-17 had no impact on the Company’s condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-15 will require adoption on a retrospective basis. The application of ASU 2016-15 is2018-13 did not expected to have an impact on the Company’s condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 requires a financial asset, measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 iswas effective for fiscal years beginning after December 15, 2019, with adoption permitted for fiscal years beginning after December 15, 2018. Adjustments resulting from adopting ASU 2016-13 shall be applied through a cumulative-effect adjustment to retained earnings. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates (“ASU 2019-10”). ASU 2019-10 extended the mandatory effective date for smaller reporting companies to beginning after December 15, 2022. The adoption of ASU 2016-13 willFinancial Instruments - Credit Losses is not expected to have an effectimpact on the Company’s condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”).ASU 2016-02 requires entities to recognize lease assets and lease liabilities on the condensed consolidated balance sheet and disclose key information about leasing arrangements. The guidance retains a distinction between finance leases and operating leases. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous guidance. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial position. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. The amendments in this guidance are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. The Company believes that the adoption of ASU 2016-02 will not change the accounting for operating leases on its condensed consolidated balance sheets. The Company expects that certain non-lease components will need to be accounted for separately from the lease components, with the lease components continuing to be recognized on a straight-line
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
basis over the term of the lease and certain non-lease components being accounted for under the new revenue recognition guidance in ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) discussed below.
In May 2014, the FASB issued ASU 2014-09. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers(Topic 606): Deferral of the Effective Date, which effectively defers the adoption of ASU 2014-09 to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2016. Companies may apply either a full retrospective or a modified retrospective approach to adopt this guidance. In 2016, the FASB issued ASU No. 2016-08, ASU No. 2016-09 and ASU No. 2016-12, which provide interpretive clarifications on the new guidance in Topic 606. The Company’s revenues are primarily generated through leasing arrangements. As such, management believes the Company’s revenue from leasing arrangements falls out of the scope of this standard and does not expect the adoption of ASU 2014-09 to have a significant impact on its financial statements. The Company believes, that its revenue stream from non-lease components, which is comprised of common area maintenance reimbursements, may be impacted by the adoption of ASU 2014-09.
3. REAL ESTATE INVESTMENTS
Acquisition of Properties
On January 4, 2017, the Company purchased certain property located in the Hayes Valley neighborhood at 388 Fulton Street in San Francisco, California (“388 Fulton”). The seller was not affiliated with the Company or the Advisor. 388 Fulton is comprised of two leased commercial condominiums with an aggregate of 3,110 square feet of retail space. The aggregate purchase price of 388 Fulton was approximately $4.2 million, subject to customary closing costs and proration adjustments. The Company drew down $4.0 million on its line of credit to fund this acquisition.
On January 11, 2017, the Company purchased certain property located in the Silver Lake neighborhood of Los Angeles, California (“Silver Lake”). The seller was not affiliated with the Company or the Advisor. Silver Lake is comprised of two boutique retail buildings totaling approximately 10,497 square feet of retail space. The aggregate purchase price of Silver Lake was approximately $13.3 million subject to customary closing costs and proration adjustments. The Company drew down $11.0 million on its line of credit to fund this acquisition.
The Company evaluated the above transactions under the new framework pursuant to ASU 2017-01, which the Company early-adopted effective January 1, 2017. Acquisitions that do not meet the definition of a business are accounted for as asset acquisitions. Refer to Note 2. “Summary of Significant Accounting Policies” for further details. Accordingly, the Company accounted for the purchases of Silver Lake and 388 Fulton as asset acquisitions and allocated the total cash consideration to the individual assets and liabilities acquired on a relative fair value basis.
For the nine months ended September 30, 2017, the Company incurred $0.3 million, respectively, of acquisition-related costs. These costs were capitalized and allocated to land and buildings acquired on a relative fair value basis. The Company did not incur acquisition-related costs during the three months ended September 30, 2017.
2017 Sale of Properties
On April 17, 2017,February 10, 2020, the Company consummated the disposition of Woodland WestTopaz Marketplace, located in Arlington, Texas,Hesperia, California, for a sales price of approximately $14.6$10.5 million in cash. The Company used the net proceeds from the sale of Woodland West Marketplace to repay $13.7 million of the outstanding balance on its line of credit.credit in its entirety. The disposition of Topaz Marketplace resulted in a gain of approximately $0.9 million, which was included in the Company’s condensed consolidated statement of operations. The Company retained a residual land parcel, that is an improved drive-thru pad.
Since the sale of thethis property diddoes not represent a strategic shift that will have a major effect on the Company’s operations and financial results, and itsthe results of operations of this property were not reported as discontinued operations onin the Company’s condensed consolidated financial statements. The disposition of Woodland West Marketplace resulted in a gain of $2.5 million, which was included on the Company’s condensed consolidated statement of operations.
On January 6, 2017, the Company consummated the disposition of Pinehurst Square East, located in Bismarck, North Dakota, for a sales price of approximately $19.2 million in cash. The Company used the net proceeds from the sale of Pinehurst Square Eastthis property to repay $18.4 million of the outstanding balance on its line of credit. The sale of the property did not represent a strategic shift that will have a major effect on the Company’s operations and financial results and its results of operations were not reported as discontinued operations on the Company’s condensed consolidated financial statements. The disposition of Pinehurst Square East resulted in a gain of $6.1 million, which was included on the Company’s condensed consolidated statement of operations.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes net operating income (loss) related to Pinehurst Square East and Woodland West Marketplace, that is included in the Company’s condensed consolidated statements of operations include net operating income for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019, related to Topaz Marketplace as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Operating Income | $ | — |
| | $ | 99 |
| | $ | 52 |
| | $ | 181 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| Pinehurst Square East | | Woodland West Marketplace | | Pinehurst Square East | | Woodland West Marketplace | | Pinehurst Square East | | Woodland West Marketplace | | Pinehurst Square East | | Woodland West Marketplace |
Operating income (loss) | $ | 4 |
| | $ | (4 | ) | | $ | 234 |
| | $ | (73 | ) | | $ | 20 |
| | $ | 188 |
| | $ | 697 |
| | $ | (160 | ) |
Pro Forma Financial Information
The pro forma financial information below is based upon the Company’s historical condensed consolidated statements of operations for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, adjusted to give effect to the above sale transactionstransaction as if theyit had been completed at the beginning of 20172020 and 2016,2019, respectively. The pro forma financial information is presented for information purposes only, and may not be indicative of what actual results of operations would have been had the transaction occurred at the beginning of 20172020 and 2016,2019, respectively, nor does it purport to represent results of operations for future periods (amounts in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| (Pro Forma) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Rental and reimbursement revenues | $ | 654 |
| | $ | 700 |
| | $ | 1,343 |
| | $ | 1,426 |
|
Net loss | (522 | ) | | (697 | ) | | (149 | ) | | (142 | ) |
Net loss attributable to common stockholders | (513 | ) | | (664 | ) | | (147 | ) | | (120 | ) |
| | | | | | | |
Net loss per share, attributable to common shares - basic and diluted | $ | (0.05 | ) | | $ | (0.06 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) |
|
| | | | | | | | | | | | | | | |
| (Pro Forma) |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Rental and reimbursement revenues | $ | 2,221 |
| | $ | 1,767 |
| | $ | 6,587 |
| | $ | 5,177 |
|
Net income (loss) | (230 | ) | | (712 | ) | | 7,743 |
| | 6,501 |
|
Net income (loss) attributable to common stockholders | (212 | ) | | (903 | ) | | 7,457 |
| | 6,260 |
|
| | | | | | | |
Net income (loss) per share, attributable to common shares - basic and diluted | $ | (0.02 | ) | | $ | (0.08 | ) | | $ | 0.68 |
| | $ | 0.57 |
|
Assets Held for Sale and Liabilities Related to Assets Held for Sale
At September 30, 2017, Cochran Bypass,Assets and liabilities related to Shops at Turkey Creek, located in Chester, SC, Florissant Marketplace, located in Florissant, MO, and Morningside Marketplace, located in Fontana, CA,Knoxville, Tennessee, were previously classified as held for sale, as the Company was in contract to sell the property. The buyer canceled the contract due to the uncertainty related to COVID-19. As a result, as of March 31, 2020, Shops at Turkey Creek no longer met certain criteria to be classified as held for sale. As such, all related assets, net of depreciation and liabilities were recorded within the relevant categories in the condensed consolidated balance sheet. Since
Additionally, as of March 31, 2020, the sale of these properties does not represent a strategic shift that will have a major effect on the Company’s operations and financial results, the results of operations of these properties were not reported as discontinued operations on the Company’s financial statements. The Company intends to use the net proceeds from the sale of these properties to retire the outstanding debt associated with these properties, with the remainderresidual land parcel at Topaz Marketplace, located in Hesperia, California, no longer met certain criteria to be added to working capital. The Company anticipatesclassified as held for sale. As such, the sales of these three properties will occur within one year from September 30, 2017. The Company’s condensed consolidated statements of operations include net operating income of approximately $0.3 million, $0.4 million, $0.1 million, and $48 thousand for the three and nine months ended September 30, 2017 and 2016, respectively,value related to the assets held for sale.parcel was recorded within the relevant line item in the condensed consolidated balance sheet.
At December 31, 2016, Pinehurst Square East, located in Bismarck, North Dakota, and Woodland West Marketplace, located in Arlington, Texas,There were no assets classified as held for sale in the condensed consolidated balance sheet. As previously disclosed, the Company consummated the disposition of Pinehurst Square East on January 6, 2017 and Woodland West Marketplace on April 17, 2017.at June 30, 2020.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The major classes of assets and liabilities related to assets held for sale included in the condensed consolidated balance sheets are as follows (amounts in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
ASSETS | | | |
Investments in real estate | | | |
Land | $ | 5,932 |
| | $ | 5,718 |
|
Building and improvements | 20,767 |
| | 20,261 |
|
Tenant improvements | 1,861 |
| | 1,283 |
|
| 28,560 |
| | 27,262 |
|
Accumulated depreciation | (6,043 | ) | | (4,257 | ) |
Investments in real estate, net | 22,517 |
| | 23,005 |
|
Tenant receivables, net | 370 |
| | 135 |
|
Lease intangibles, net | 1,781 |
| | 1,017 |
|
Assets held for sale | $ | 24,668 |
| | $ | 24,157 |
|
LIABILITIES | | | |
Notes payable | $ | 18,298 |
| | $ | 21,783 |
|
Below-market lease intangibles, net | 2,147 |
| | 399 |
|
Liabilities related to assets held for sale | $ | 20,445 |
| | $ | 22,182 |
|
Amounts above are being presented at their carrying value, which the Company believes to be lower than their estimated fair value less costs to sell.
4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The following table summarizes the Company’s investments in unconsolidated joint ventures as of September 30, 2017, and December 31, 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | Ownership Interest | | Investment |
Joint Venture | | Date of Investment | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
SGO Retail Acquisitions Venture, LLC | | 3/11/2015 | | 19 | % | | 19 | % | | $ | 1,007 |
| | $ | 3,052 |
|
SGO MN Retail Acquisitions Venture, LLC | | 9/30/2015 | | 10 | % | | 10 | % | | 1,732 |
| | 1,709 |
|
Total | | | | | | | | $ | 2,739 |
| | $ | 4,761 |
|
The Company’s off-balance sheet arrangements consist primarily of investments in the joint ventures as set forth in the table above. The joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint ventures’ debts are secured by a first mortgage, are without recourse to the joint venture members, and do not represent a liability of the members other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. As of September 30, 2017 and December 31, 2016, the Company has provided carve-out guarantees in connection with the two aforementioned unconsolidated joint ventures; in connection with those carve-out guarantees, the Company has certain rights of recovery from the joint venture members.
5. VARIABLE INTEREST ENTITIES
The Company has variable interests in, and is the primary beneficiary of, variable interest entities (“VIEs”) through its investments in (i) the Sunset & Gardner Joint Venture (formerly known as Gelson’s Joint VentureVenture) and (ii) the 3032 Wilshire Joint Venture (both as defined below).Venture. The Company has consolidated the accounts of these variable interest entities.
Gelson’s Joint Venture
On January 7, 2016,Through June 30, 2020, post the initial capital contributions, the Company through wholly-owned subsidiaries, entered intomade additional capital contributions totaling approximately $6.8 million and $7.0 million to the Limited Liability Company Agreement of Sunset & Gardner Investors, LLC (the “Gelson’s Joint Venture Agreement”) to form a joint venture (the” Gelson’s Joint Venture”) with Sunset & Gardner LA, LLC (“S&G LA” and together with the Company, the “Gelson’s Members”), a subsidiary of Cadence Capital Investments, LLC (“Cadence”).
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Gelson’s Joint Venture Agreement provides for the ownership and operation of certain real property by the Gelson’s Joint Venture, in which the Company owns a 100% capital interest and a 50% profits interest. In exchange for ownership in the Gelson’s Joint Venture, the Company contributed cash in an amount up to $7.0 million in initial capital contributions and has agreed to contribute $0.7 million in subsequent capital contributions to the Gelson’s Joint Venture. In May 2016, the Company made an additional capital contribution of $0.2 million to the Gelson’s Joint Venture. In January 2017 and July 2017, the Company made two additional capital contributions of $0.8 million and $1.3 million, respectively, to the Gelson’s Joint Venture. S&G LA contributed its rights to acquire the real property, its interest under a 20-year lease with Gelson’s Markets (the “Gelson’s Lease”) and agreed to provide certain management and development services.
On January 28, 2016, the Gelson’s Joint Venture used the capital contributions of the Company, together with the proceeds of a loan in the amount of $10.7 million, to purchase property located at the corner of Sunset Boulevard and Gardner in Hollywood, California for a build-to-suit grocery store for Gelson’s Markets (the “Gelson’s Property”) from a third party seller, for a total purchase price of approximately $13.0 million. The Gelson’s Joint Venture intends to proceed with obtaining all required governmental approvals and entitlements to replace the existing improvements on the property with a build-to-suit grocery store for Gelson’s Markets with an expected size of approximately 38,000 square feet. Gelson’s Markets was founded in 1951 and is recognized as one of the nation’s premier supermarket chains. Gelson’s Markets currently has 24 locations throughout Southern California.
Pursuant to the Gelson’s Joint Venture Agreement, S&G LA manages and conducts the day-to-day operations and affairs of the Gelson’s Joint Venture, subject to certain major decisions set forth in the Gelson’s Joint Venture Agreement that require the consent of all the Gelson’s Members. Income, losses and distributions are generally allocated based on the Gelson’s Members’ respective capital and profits interests. Additionally, in certain circumstances described in the Gelson’s Joint Venture Agreement, the Company may be required to make additional capital contributions to the Joint Venture, in proportion to the Gelson’s Members’ respective ownership interests. Until the Company has received back its capital contribution and specified preferred returns, all distributions go to the Company; thereafter, the Gelson’s Joint Venture will distribute the profits 50% to the Company and 50% to S&G LA.
3032 Wilshire Joint Venture,
On December 21, 2015, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of 3032 Wilshire Investors, LLC (the “Wilshire Joint Venture Agreement”) to form a joint venture (the “Wilshire Joint Venture”) with 3032 Wilshire SM, LLC, a subsidiary of Cadence (together with the Company, the “Wilshire Members”).
On December 14, 2015 and January 5, 2016, the Company paid deposits in the amounts of $0.5 million and $0.1 million, respectively, toward the acquisition of certain property located at 3032 Wilshire Boulevard and 1210 Berkeley Street in Santa Monica, California (the “Wilshire Property”). The Wilshire Joint Venture is in the process of redeveloping and repositioning, and intends to re-lease the Wilshire Property. On March 7, 2016, the Company contributed $5.7 million to the Wilshire Joint Venture. In May 2016, the Company made an additional capital contribution of $0.3 million to the Wilshire Joint Venture. In January 2017, February 2017 and August 2017, the Company made three additional contributions of $0.3 million, $0.6 million and $0.7 million, respectively, to the Wilshire Joint Venture. The Wilshire Joint Venture Agreement provides for the ownership and operation of certain real property by the Wilshire Joint Venture, in which the Company owns a 100% capital interest and a 50% profits interest.
On March 8, 2016, the Wilshire Joint Venture used the deposits and capital contribution of the Company, together with the proceeds of a loan in the amount of $8.5 million, to acquire the Wilshire Property from a third-party seller, for a total purchase price of $13.5 million. The Wilshire Joint Venture is repositioning, and intends to re-lease the existing improvements on the property.
Pursuant to the Wilshire Joint Venture Agreement, 3032 Wilshire SM manages and conducts the day-to-day operations and affairs of the Wilshire Joint Venture, subject to certain major decisions set forth in the Wilshire Joint Venture Agreement that require the consent of all the Wilshire Members. Income, losses and distributions are generally allocated based on the Wilshire Members’ respective capital and profits interests. Additionally, in certain circumstances described in the Wilshire Joint Venture Agreement, the Company may be required to make additional capital contributions to the Wilshire Joint Venture, in proportion to the Wilshire Members’ respective ownership interests. Until the Company has received back its capital contribution and specified preferred returns, all distributions go to the Company; thereafter, the Wilshire Joint Venture will distribute the profits 50% to the Company and 50% to 3032 Wilshire SM.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
respectively.
The following reflects the aggregate assets and liabilities of the Gelson’sSunset & Gardner Joint Venture and the Wilshire Joint Venture, which were consolidated by the Company, as of SeptemberJune 30, 20172020 and December 31, 20162019 (amounts in thousands):
| | | | | | | June 30, | | December 31, |
| September 30, 2017 | | December 31, 2016 | 2020 | | 2019 |
ASSETS | | | | | | |
Properties under development and development costs: | | | | | | |
Land | $ | 25,851 |
| | $ | 25,851 |
| $ | 25,851 |
| | $ | 25,851 |
|
Buildings | 589 |
| | 601 |
| 546 |
| | 554 |
|
Development costs | 8,346 |
| | 4,377 |
| 25,277 |
| | 20,813 |
|
Properties under development and development costs | 34,786 |
| | 30,829 |
| 51,674 |
| | 47,218 |
|
Restricted cash | 1,658 |
| | 1,666 |
| |
Cash and cash equivalents | 458 |
| | 334 |
| |
Cash, cash equivalents and restricted cash | | 330 |
| | 2,154 |
|
Prepaid expenses and other assets, net | 12 |
| | 14 |
| 45 |
| | 7 |
|
Tenant receivables, net | — |
| | 1 |
| |
Lease intangibles, net | | 73 |
| | 4 |
|
TOTAL ASSETS (1) | $ | 36,914 |
| | $ | 32,844 |
| $ | 52,122 |
| | $ | 49,383 |
|
| | | | | | |
LIABILITIES | | | | | | |
Notes payable, net (2) | $ | 19,016 |
| | $ | 19,103 |
| $ | 19,788 |
| | $ | 16,713 |
|
Accounts payable and accrued expenses | 586 |
| | 806 |
| 1,276 |
| | 1,702 |
|
Amounts due to affiliates | 9 |
| | 9 |
| 61 |
| | 111 |
|
Other liabilities | 9 |
| | 27 |
| 25 |
| | 5 |
|
TOTAL LIABILITIES | $ | 19,620 |
| | $ | 19,945 |
| $ | 21,150 |
| | $ | 18,531 |
|
| |
(1) | The assets of the Gelson’sSunset & Gardner Joint Venture and Wilshire Joint Venture can be used only to settle obligations of the respective consolidated joint ventures. |
| |
(2) | As of SeptemberJune 30, 20172020 and December 31, 2016,2019, includes reclassification of approximately $0.2$0.3 million and $0.1$0.5 million, respectively, of deferred financing costs, net, as a contra-liability. The creditors of the consolidated joint ventures do not have recourse to the general credit of the Company. The notes payable of the consolidated joint ventures areWilshire Joint Venture is partially guaranteed by the Company, refer to Note 7, “Notes Payable, Net”. The notes payable of the Sunset & Gardner Joint Venture is not guaranteed by the Company. |
6. FUTURE MINIMUM RENTAL INCOME5. LEASES
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of SeptemberJune 30, 2017,2020, the leases at the Company’s properties, excluding properties classified as held for sale, have remaining terms (excluding options to extend) of up to 1414.3 years with a weighted-average remaining term (excluding options to extend) of approximately 57.7 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying condensed consolidated balance sheets and totaled approximately $0.3$0.1 million as of September 30, 2017 and $0.2 million as of June 30, 2020 and December 31, 2016.2019, respectively.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presents the components of income from real estate operations for the three and six months ended June 30, 2020 and 2019 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Lease income - operating leases | $ | 553 |
| | $ | 719 |
| | $ | 1,189 |
| | $ | 1,421 |
|
Variable lease income (1) | 101 |
| | 220 |
| | 272 |
| | 462 |
|
Rental and reimbursements income | $ | 654 |
| | $ | 939 |
| | $ | 1,461 |
| | $ | 1,883 |
|
| |
(1) | Primarily includes tenant reimbursements for real estate taxes, insurance and common area maintenance. |
During the three and six months ended June 30, 2020, certain of the Company’s tenants requested rent relief as a result of the COVID-19 pandemic. These tenants account for approximately 95% of the Company’s annualized rents. Not all tenant requests resulted in modified agreements nor did the Company forgo its contractual rights under its lease agreements. To date only a small percent of the requests for rent relief resulted in modified agreements, however the Company is reviewing requests on a case by case basis and continues to monitor and communicate with its commercial tenants to assess their needs and ability to make either full or partial rent payments.
As of SeptemberJune 30, 2017,2020, approximately $0.4 million of rental income due and payable was outstanding. The Company collected approximately $45 thousand, or 12%, of the outstanding balance in July 2020. Additionally, approximately $50 thousand of rental income earned and recognized during the three months ended June 30, 2020, was deferred and is expected to be collected in future periods.
As of June 30, 2020, the future minimum rental income from the Company’s properties under non-cancelable operating leases, excluding properties classified as held for sale, was as follows (amounts in thousands):
|
| | | |
Remainder of 2020 | $ | 1,002 |
|
2021 | 2,036 |
|
2022 | 2,053 |
|
2023 | 2,078 |
|
2024 | 2,031 |
|
Thereafter | 7,062 |
|
Total | $ | 16,262 |
|
|
| | | |
Remainder of 2017 | $ | 828 |
|
2018 | 3,134 |
|
2019 | 3,110 |
|
2020 | 2,953 |
|
2021 | 2,603 |
|
Thereafter | 13,915 |
|
Total | $ | 26,543 |
|
7.6. LEASE INTANGIBLES AND BELOW-MARKET LEASE LIABILITIES, NET
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company’s acquired lease intangibles and below-market lease liabilities, were as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| Lease Intangibles | | Below-Market Lease Liabilities |
| June 30, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 |
Cost | $ | 2,119 |
| | $ | 2,084 |
| | $ | (449 | ) | | $ | (492 | ) |
Accumulated amortization | (756 | ) | | (763 | ) | | 183 |
| | 196 |
|
Total | $ | 1,363 |
| | $ | 1,321 |
| | $ | (266 | ) | | $ | (296 | ) |
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | |
| Lease Intangibles | | Below-Market Lease Liabilities |
| September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
Cost | $ | 3,780 |
| | $ | 7,000 |
| | $ | (1,029 | ) | | $ | (3,904 | ) |
Accumulated amortization | (1,138 | ) | | (3,175 | ) | | 210 |
| | 855 |
|
Total | $ | 2,642 |
| | $ | 3,825 |
| | $ | (819 | ) | | $ | (3,049 | ) |
The Company’s amortization of lease intangibles and below-market lease liabilities for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, were as follows (amounts in thousands):
| | | Lease Intangibles | | Below-Market Lease Liabilities | Lease Intangibles | | Below-Market Lease Liabilities |
| Three Months Ended September 30, | | Three Months Ended September 30, | Three Months Ended June 30, | | Three Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 | | 2020 | | 2019 |
Amortization | $ | (164 | ) | | $ | (248 | ) | | $ | 40 |
| | $ | 74 |
| $ | (62 | ) | | $ | (90 | ) | | $ | 15 |
| | $ | 16 |
|
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Lease Intangibles | | Below-Market Lease Liabilities | Lease Intangibles | | Below-Market Lease Liabilities |
| Nine Months Ended September 30, | | Nine Months Ended September 30, | Six Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 | | 2020 | | 2019 |
Amortization | $ | (761 | ) | | $ | (734 | ) | | $ | 176 |
| | $ | 214 |
| $ | (126 | ) | | $ | (178 | ) | | $ | 30 |
| | $ | 32 |
|
8.7. NOTES PAYABLE, NET
Multi-Property Secured Financing
On December 24, 2019, the Company entered into a Loan Agreement (the “SRT Loan Agreement”) with PFP Holding Company, LLC (the “SRT Lender”) for a non-recourse secured loan (the “SRT Loan”).
The SRT Loan is secured by first deeds of trust on the Company’s five San Francisco assets (Fulton Shops, 8 Octavia, 400 Grove, 450 Hayes and 388 Fulton Street) as well as the Company’s Silverlake Collection located in Los Angeles. Proceeds from the SRT Loan were used by the Company to pay down the Company’s credit facility and in connection with such payment, the properties referenced above were released from liens related to that credit facility. The SRT Loan matures on January 9, 2023. The Company has an option to extend the term of the loan for two additional twelve-month periods, subject to the satisfaction of certain covenants and conditions contained in the SRT Loan Agreement. The Company has the right to prepay the SRT Loan in whole at any time or in part from time to time, subject to the payment of yield maintenance payments if such prepayment occurs in the first 18 months of the loan term, calculated through the 18th monthly payment date, as well as certain expenses, costs or liabilities potentially incurred by the SRT Lender as a result of the prepayment and subject to certain other conditions contained in the loan documents. Individual properties may be released from the SRT Loan collateral in connection with bona fide third-party sales, subject to compliance with certain covenants and conditions contained in the SRT Loan Agreement. Any prepayment or repayment on or before the first 12 months of the loan term in connection with a bona fide third-party sale of a property securing the SRT Loan shall only require the payment of yield maintenance payments calculated through the 12th monthly payment date.
As of SeptemberJune 30, 20172020, the SRT Loan had a principal balance of approximately $18.0 million. The SRT Loan is a floating LIBOR rate loan which bears interest at 30-day LIBOR (with a floor of 1.50%) plus 2.80%. The default rate is equal to 5% above the rate that otherwise would be in effect. Monthly payments are interest-only with the entire principal balance and December 31, 2016,all outstanding interest due at maturity.
Pursuant to the SRT Loan, the Company must comply with certain matters contained in the loan documents including but not limited to, (i) requirements to deliver audited and unaudited financial statements, SEC filings, tax returns, pro forma budgets, and quarterly compliance certificates, and (ii) minimum limits on the Company’s notes payable,liquidity and tangible net excluding secured term loans balances which have been classifiedworth. The SRT Loan contains customary covenants, including, without limitation, covenants with respect to maintenance of properties and insurance, compliance with laws and environmental matters, covenants limiting or prohibiting the creation of liens, and transactions with affiliates. At June 30, 2020, the Company was in compliance with the covenants in effect as held for sale, consistedof that date.
In connection with the SRT Loan, the Company executed customary non-recourse carveout and environmental guaranties, together with limited additional assurances with regard to the condominium structures of the following (amountsSan Francisco assets.
Line of Credit
On February 10, 2020, the Company used proceeds from the sale of Topaz Marketplace to repay the line of credit in thousands):its entirety. The line of credit expired of its own accord on February 15, 2020, with no balance outstanding. As part of the payoff, Shops at Turkey Creek was released from the line of credit.
|
| | | | | | | | | | |
| Principal Balance | | Interest Rates At |
| September 30, 2017 | | December 31, 2016 | | September 30, 2017 |
Line of credit (1) | $ | 20,968 |
| | $ | 11,150 |
| | 3.81 | % |
Secured term loan | 5,525 |
| | 24,277 |
| | 5.10 | % |
Mortgage loans secured by properties under development (2) | 19,200 |
| | 19,200 |
| | 9.5% - 10.0% |
|
Deferred financing costs, net (3) | (220 | ) | | (323 | ) | | n/a |
|
| $ | 45,473 |
| | $ | 54,304 |
| | |
|
| |
(1) | The Company’s line of credit is a revolving credit facility with an initial maximum aggregate commitment of $30.0 million (the “Facility Amount”). Effective February 15, 2017, the Company’s line of credit was refinanced to increase |
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company’s line of credit was a revolving credit facility with an initial maximum aggregate commitment of $30.0 million. Effective February 15, 2017, the Company’s line of credit was refinanced to increase the maximum aggregate commitment under the credit facility from $30.0 million to $60.0 million. Effective November 7, 2019, the Company elected to permanently reduce the maximum aggregate commitment under its line of credit from $60.0 million to $30.0 million. All other terms of the credit facility remained the same. Effective January 8, 2020, the Company elected to permanently reduce the maximum aggregate commitment under its line of credit from $30.0 million to $10.5 million. Other than changes to the line of credit’s maximum aggregate commitment, all other terms of the credit facility remained the same throughout the life of the credit facility. The credit facility maturesmatured on February 15, 2020. 2020.
Each loan made pursuant to the Key Bank credit facility will bewas either a LIBOR rate loan or a base rate loan, at the election of the Company, plus an applicable margin, as defined. Monthly payments arewere interest only with the entire principal balance and all outstanding interest due at maturity. The Company will paypaid the lender an unused commitment fee, quarterly in arrears, which will accruewas accrued at 0.30% per annum, if the usage under the the Company’s line of credit iswas less than or equal to 50% of the line of credit amount, and 0.20% per annum if the usage under the Company’s line of credit iswas greater than 50% of the line of credit amount. The Company iswas providing a guaranty of all of its obligations under the Company’s line of creditcredit.
Loans Secured by Properties Under Development
On May 7, 2019, the Company refinanced and all otherrepaid its financing from Loan Oak Fund, LLC with a new construction loan documents.from ReadyCap Commercial, LLC (the “Lender”) (the “Wilshire Construction Loan”). As of SeptemberJune 30, 2017,2020, the Wilshire Construction Loan had a principal balance of approximately $11.4 million, with future funding availability up to a total of approximately $13.9 million, and bears an interest rate of 1-month LIBOR plus an interest margin of 4.25% per annum, payable monthly. The Wilshire Loan is scheduled to mature on May 10, 2022, with options to extend for two additional twelve-month periods, subject to certain conditions as stated in the loan agreement. The Wilshire Construction Loan is secured by a first Deed of Trust on the Wilshire Property. The Company executed a guaranty that guaranties that the loan interest reserve amounts are kept in compliance with the terms of the loan agreement. The Lender also required that a principal in the upstream owner of the Company’s linejoint venture partner in the Wilshire Joint Venture (the “Guarantor”), guarantees performance of creditborrower’s obligations under the loan agreement with respect to the completion of capital improvements to the property. The Company executed an Indemnity Agreement in favor of the Guarantor against liability under that completion guaranty except to the extent caused by gross negligence or willful misconduct, as well as for liabilities incurred under the Environmental Indemnity Agreement executed by the Guarantor in favor of the Lender. The Company used working capital funds of approximately $3.1 million to repay the difference between the Wilshire Construction Loan initial advance and the prior loan, to pay transaction costs, as well as to fund certain required interest and construction reserves.
On October 29, 2018, the Company entered into a loan agreement with Lone Oak Fund, LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan has a principal balance of approximately $8.7 million, and bears an interest rate of 6.9% per annum. The Sunset & Gardner Loan was scheduled to mature on October 31, 2019. The Company extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of 6.5% per annum. The new maturity date is October 31, 2020. The Company negotiated an additional one year extension with the lender. Refer to footnote 13, “Subsequent Events” for additional information. The Sunset & Gardner Loan is secured by Topaz Marketplace, 8 Octavia Street, 400 Grove Street,a first Deed of Trust on the Fulton Shops, 450 Hayes, 388 Fulton, and Silver Lake. For information regarding recent draws under the Company’s line of credit, see “– Recent Financing Transactions The Company’s Line of Credit” below.
| |
(2) | Comprised of $10.7 million and $8.5 million associated with the Company’s investment in the Gelson’s Joint Venture and the Wilshire Joint Venture, respectively. |
| |
(3) | Reclassification of deferred financing costs, net of accumulated amortization, as a contra-liability. |
During the three months ended September 30, 2017 and 2016, the Company incurred and expensed approximately $0.4 million and $0.6 million, respectively, of interest costs, which included the amortization of deferred financing costs of approximately $0.1 million for each period. Also during both the three months ended September 30, 2017 and 2016, the Company incurred and capitalized approximately $0.8 million of interest expense related to the variable interest entities, which included the amortization of deferred financing costs of approximately $0.1 million and $0.2 million, respectively, for each period.
During the nine months ended September 30, 2017 and 2016, the Company incurred and expensed approximately $1.5 million and $1.7 million, respectively, of interest costs, which included the amortization of deferred financing costs of approximately $0.4 million for both periods. Also during the nine months ended September 30, 2017 and 2016, the Company incurred and capitalized approximately $2.5 million and $2.0 million, respectively, of interest expense related to the variable interest entities, which included the amortization of deferred financing costs of approximately $0.4 million for both periods.
As of both September 30, 2017 and December 31, 2016, interest expense payable was approximately $0.4 million, including an amount related to the variable interest entities of approximately $0.2 million.Sunset & Gardner Property.
The following is a schedule of future principal payments for all of the Company’s notes payable outstanding as of SeptemberJune 30, 20172020 (amounts in thousands):
|
| | | |
Remainder of 2017 | $ | 354 |
|
2018 | 20,661 |
|
2019 | 3,710 |
|
2020 | 20,968 |
|
Total (1) | $ | 45,693 |
|
|
| | | |
Remainder of 2020 | $ | 8,700 |
|
2021 | — |
|
2022 | 11,417 |
|
2023 | 18,000 |
|
Total (1) | $ | 38,117 |
|
| |
(1) | Total future principal payments reflect actual amounts due to creditors, and excludes reclassification of $0.2$1.0 million deferred financing costs, net. |
Recent Financing Transactions
Line of Credit
During the ninethree months ended SeptemberJune 30, 20172020, the Company incurred and 2016,expensed approximately $66 thousand of interest costs, which consisted of amortization of deferred financing costs. During the following transactions occurred under the Company’s line of credit:
Ninethree months ended SeptemberJune 30, 2017:
On January 4, 2017,2019, the Company drew $4.0incurred and expensed approximately $0.1 million of interest costs, which primarily consisted of amortization of deferred financing costs. Also during the three months ended June 30, 2020 and 2019, the Company incurred and capitalized approximately $0.6 million and used$0.8 million, respectively, of interest expense related to the proceeds to acquire 388 Fulton.variable interest entities, which
On January 6, 2017, the Company consummated the disposition of Pinehurst Square East, located in Bismarck, North Dakota, for a sales price of approximately $19.2 million in cash, $18.4 million of which was used to pay down the Company’s line of credit.
On January 11, 2017, the Company drew $11.0 million and used the proceeds to acquire Silver Lake.
On January 27, 2017, the Company drew $1.0 million and used the proceeds for working capital.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
On February 28, 2017,included amortization of deferred financing costs of approximately $80 thousand and $0.2 million, respectively, for each period.
During the six months ended June 30, 2020, the Company drew $9.8incurred and expensed approximately $0.2 million of interest costs, which consisted of amortization of deferred financing costs. During the six months ended June 30, 2019, the Company incurred and expensed approximately $0.3 million of interest costs, which primarily consisted of amortization of deferred financing costs. Also during the six months ended June 30, 2020 and 2019, the Company incurred and capitalized approximately $1.2 million and used the proceeds to pay off the mortgage loan$1.4 million, respectively, of interest expense related to Woodland West Marketplace.
On February 28, 2017, the Company drew $0.6variable interest entities which included amortization of deferred financing costs of approximately $0.2 million and used$0.2 million, respectively, for each period.
As of both June 30, 2020 and December 31, 2019, interest expense payable was approximately $0.2 million, including an amount related to the proceeds to pay certain costs for the refinancing of the Company’s line of credit.
On March 29, 2017, the Company drew $1.0 million and used the proceeds for working capital.
On April 17, 2017, the Company consummated the disposition of Woodland West Marketplace, located in Arlington, Texas, for a sales pricevariable interest entities of approximately $14.6$0.1 million, in cash, $13.7 million of which was used to pay down the Company’s line of credit.
On June 28, 2017, the Company drew $1.3 million and used the proceeds for working capital.
On August 22, 2017, the Company drew $1.0 million and used the proceeds for working capital.
Nine months ended September 30, 2016:
On March 7, 2016, the Company drew $6.0 million and used the proceeds to invest in the Wilshire Joint Venture.
On April 4, 2016, the Company consummated the disposition of Bloomingdale Hills, located in Riverside, Florida, for a sales price of approximately $9.2 million in cash, $3.0 million of which was used to pay down the line of credit.
On June 9, 2016, the Company drew $7.5 million and used the majority of the proceeds to acquire 8 Octavia and 400 Grove.
On July 25, 2016, the Company drew $4.7 million and used the majority of the proceeds to acquire the Fulton Shops.
On September 29, 2016, the Company drew $1.0 million and used the proceeds for working capital.
Mortgage Loans Secured by Properties Under Development
In connection with the Company’s investment in the Wilshire Joint Venture and the acquisition of the Wilshire Property, the Company has consolidated borrowings of $8.5 million (the “Wilshire Loan”). The Wilshire Loan bears interest at a rate of 10.0% per annum, payable monthly, commencing on April 1, 2016. The loan was scheduled to mature on March 7, 2017, with an option for two additional six-month periods, subject to certain conditions as stated in the loan agreement. All conditions to extensions were met, and on March 7, 2017, the Company exercised the option to extend the loan until September 7, 2017. On August 29, 2017, the Company exercised the remaining option to extend the loan for an additional six months. The new maturity date is March 7, 2018. The loan is secured by, among other things, a lien on the Wilshire development project and other collateral as defined in the loan agreement.
In connection with the Company’s investment in the Gelson’s Joint Venture and the acquisition of the Gelson’s Property, the Company has consolidated borrowings of $10.7 million (the “Gelson’s Loan”). The Gelson’s Loan bears interest at a rate of 9.5% per annum, payable monthly, commencing on April 1, 2016. The loan was scheduled to mature on January 27, 2017, with an option to extend for an additional six-month period, subject to certain conditions as stated in the loan agreement. Those conditions were not met, but the Company negotiated a six month extension of the term on January 27, 2017 to mature on July 27, 2017. The Company negotiated a nine month extension of the term on July 27, 2017. The new maturity date is April 27, 2018. The loan is secured by, among other things, a lien on the Gelson’s development project and other joint venture collateral as defined in the loan agreement.each period.
9.8. FAIR VALUE DISCLOSURES
Certain financial assets and liabilities are measured at fair value on a recurring basis. The Company determines fair value using the following hierarchy:
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3: prices or valuation techniques where little or no market data is available for inputs that are significant to the fair value measurement.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company believes the total carrying values reflected on its condensed consolidated balance sheets for cash, and cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, and amounts due to affiliates, mortgage loan and construction loan secured by properties under development, and the Company’s multi-property secured financing, reasonably approximateapproximated their fair values due to their short-term nature.
The fair value of the Company’s notes payable is estimated using a present value technique based on contractual cash flowstheir nature, terms, and management’s observations ofinterest rates that approximate current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. The Company significantly reduces the amount of judgment and subjectivity in its fair value determination through the use of cash flow inputs that are based on contractual obligations. Discount rates are determined by observing interest rates published by independent market participants for comparable instruments. The Company classifies these inputs as Level 2 inputs.
The following table provides the carrying values and fair values of the Company’s notes payable as of Septemberat June 30, 2017 and December 31, 2016 (amounts in thousands):2020.
|
| | | | | | | | | | | | | | | |
| Carrying Value (1) | | Fair Value (1) (2) |
| September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
Notes payable, net | $ | 45,473 |
| | $ | 54,304 |
| | $ | 45,530 |
| | $ | 54,781 |
|
| |
(1) | The carrying value of the Company’s notes payable represents the outstanding principal as of September 30, 2017, and December 31, 2016. The carrying values and fair values of the notes payable include the reclassification of deferred financing costs, net, of approximately $0.2 million and $0.3 million, respectively, as a contra-liability, as of September 30, 2017 and December 31, 2016. |
| |
(2) | The estimated fair value of the notes payable is based upon the indicative market prices of the Company’s notes payable based on prevailing market interest rates. |
As part of the Company’s ongoing evaluation of the Company’s real estate portfolio, the Company estimates the fair value of its investments in real estate by obtaining outside independent appraisals on all of the operating properties. The appraised values are compared with the carrying values of its real estate portfolio to determine if there are indications of impairment.
For both the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company did not record any impairment losses.
10.9. EQUITY
Common Units of the OP
During the three months ended September 30, 2017, certain holders of Common Units of the OP elected to convert their common units of the OP into the Company’s common shares on a one-for-one basis. As a result, 162,409 common units were converted to common shares for an aggregate basis of approximately $0.8 million.
Share Redemption Program
On April 1, 2015, the Company’s board of directors approved the reinstatement of the share redemption program (which had been suspended since January 15, 2013) and adopted anthe Amended and Restated Share Redemption Program (the “SRP”). The SRP was subsequently amended on August 7, 2015 and August 10, 2016.
On October 5, 2016, the board of directors approved, pursuant to Section 3(a) ofUnder the SRP, an additional $0.5 million of funds availableonly shares submitted for the redemption of sharesrepurchase in connection with the death or “qualifying disability” (as defined in the SRP) of a stockholder.
On August 2, 2017,stockholder are eligible for repurchase by the boardCompany. Under the current SRP, as amended to date, the number of directorsshares to be redeemed is limited to the lesser of (i) a total of $3.8 million for redemptions sought upon a stockholder’s death and a total of $1.2 million for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the Company approved,weighted-average number of shares of the Company’s common stock outstanding during the prior calendar year. Share repurchases pursuant to Section 3(a)the SRP are made at the sole discretion of the Company. The Company reserves the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time subject to the notice requirements in the SRP.
The redemption price for shares that are redeemed is 100% of the Company’s most recent estimated net asset value per share as of the applicable redemption date. A redemption request must be made within one year after the stockholder’s death or qualifying disability.
The SRP an additional $1.0 millionprovides that any request to redeem less than $5,000 worth of shares will be treated as a request to redeem all of the stockholder’s shares. If the Company cannot honor all redemption requests received in a given quarter, all requests, including death and qualifying disability redemptions, will be honored on a pro rata basis. If the Company does not completely satisfy a redemption request in one quarter, it will treat the unsatisfied portion as a request for redemption in the next quarter when funds are available for redemption, unless the redemption of shares in connection withrequest is withdrawn. The Company may increase or decrease the death of a stockholder.amount
The following table summarizes share redemption activity during the three and nine months ended September 30, 2017 and 2016 (amounts in thousands, except shares):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Shares of common stock redeemed | 18,233 |
| | 33,054 |
| | 87,928 |
| | 71,922 |
|
Purchase price | $ | 114 |
| | $ | 210 |
| | $ | 558 |
| | $ | 466 |
|
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Cumulatively,of funding available for redemptions under the SRP on ten business days’ notice to stockholders. Shares submitted for redemption during any quarter will be redeemed on the penultimate business day of such quarter. The record date for quarterly distributions has historically been and is expected to continue to be the last business day of each quarter; therefore, shares that are redeemed during any quarter are expected to be redeemed prior to the record date and thus would not be eligible to receive the distribution declared for such quarter.
In order to preserve cash in light of the uncertainty relating to the duration of shelter-in-place orders and the economic impact of COVID-19 on the Company, by unanimous written consent executed on April 21, 2020, the board of directors approved the suspension of the SRP, which offered redemption opportunities only in connection with a stockholder’s death or qualifying disability.
Under the SRP, the board of directors may amend, suspend, or terminate the SRP with 30 days’ notice to the Company’s stockholders. The Current Report on Form 8-K, filed on April 21, 2020 with the SEC, served as such required notice and therefore the suspension of the SRP became effective on May 21, 2020. The SRP will remain suspended and no further redemptions will be made until the board of directors approves the resumption of the SRP. During the suspension, the Company will continue to accept death and qualifying disability redemption filings from stockholders, but will not take any action with regard to those requests until the board of directors has elected to lift the suspension and provided the terms and conditions for any continuation of the SRP.
The following table summarizes share redemption activity during the three and six months ended June 30, 2020 and 2019 (amounts in thousands, except shares):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Shares of common stock redeemed | — |
| | 41,303 |
| | 19,907 |
| | 62,158 |
|
Purchase price | $ | — |
| | $ | 249 |
| | $ | 117 |
| | $ | 375 |
|
As stated above, cumulatively, through SeptemberJune 30, 2017,2020, pursuant to the Original Share Redemption Program and the Amended and Restated SRP, the Company has redeemed 563,122878,458 shares sold in the Offering and/or its dividend reinvestment plan for $4.3$6.2 million.
Quarterly Distributions
In order to qualify as a REIT, the Company is required to distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its stockholders. Some or all of the Company’s distributions have been paid, and in the future may continue to be paid from sources other than cash flows from operations.
Under the terms of the amended Key Bank credit facility, the Company may pay distributions to its investors so long as the total amount paid does not exceed 100% of the cumulative Adjusted Funds From Operations plus up to an additional $2.0 million of the Company’s net proceeds from property dispositions, as defined in the amended Company’s line of credit; provided, however, that the Company is not restricted from making any distributions necessary in order to maintain its status as a REIT. The Company’s board of directors evaluates the Company’s ability to make quarterly distributions based on the Company’s operational cash needs.
In light of the COVID-19 pandemic, its impact on the economy and the related future uncertainty, on March 27, 2020, the board of directors of the Company voted to suspend the payment of any dividend for the quarter ending March 31, 2020, and to reconsider future dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to the Company. Dividend payments were not reinstated as of June 30, 2020.
The following tablestable set forth the quarterly distributions declared to the Company’s common stockholders and Common Unit holders for the nine months ended September 30, 2017, and the year ended December 31, 20162019 (amounts in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | |
| Distribution Record Date | | Distribution Payable Date | | Distribution Per Share of Common Stock / Common Unit | | Total Common Stockholders Distribution | | Total Common Unit Holders Distribution | | Total Distribution |
First Quarter 2019 | 3/31/2019 | | 4/30/2019 | | $ | 0.06 |
| | $ | 651 |
| | $ | 14 |
| | $ | 665 |
|
Second Quarter 2019 | 6/30/2019 | | 7/31/2019 | | 0.06 |
| | 648 |
| | 14 |
| | 662 |
|
Third Quarter 2019 | 9/30/2019 | | 10/31/2019 | | 0.06 |
| | 646 |
| | 13 |
| | 659 |
|
Fourth Quarter 2019 | 12/31/2019 | | 1/31/2020 | | 0.02 |
| | 215 |
| | 5 |
| | 220 |
|
Total | | | | | | | $ | 2,160 |
| | $ | 46 |
| | $ | 2,206 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Distribution Record Date | | Distribution Payable Date | | Distribution Per Share of Common Stock / Common Unit | | Total Common Stockholders Distribution | | Total Common Unit Holders Distribution | | Total Distribution |
First Quarter 2017 | 3/31/2017 | | 4/28/2017 | | $ | 0.06 |
| | $ | 655 |
| | $ | 25 |
| | $ | 680 |
|
Second Quarter 2017 | 6/30/2017 | �� | 7/31/2017 | | 0.06 |
| | 652 |
| | 25 |
| | 677 |
|
Third Quarter 2017 | 9/30/2017 | | 10/31/2017 | | 0.06 |
| | 660 |
| | 16 |
| | 676 |
|
Total | | | | | | | $ | 1,967 |
| | $ | 66 |
| | $ | 2,033 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Distribution Record Date | | Distribution Payable Date | | Distribution Per Share of Common Stock / Common Unit | | Total Common Stockholders Distribution | | Total Common Unit Holders Distribution | | Total Distribution |
First Quarter 2016 | 3/31/2016 | | 4/29/2016 | | $ | 0.06 |
| | $ | 660 |
| | $ | 26 |
| | $ | 686 |
|
Second Quarter 2016 | 7/7/2016 | | 7/29/2016 | | 0.06 |
| | 661 |
| | 25 |
| | 686 |
|
Third Quarter 2016 | 9/30/2016 | | 10/31/2016 | | 0.06 |
| | 659 |
| | 25 |
| | 684 |
|
Fourth Quarter 2016 | 12/30/2016 | | 1/31/2017 | | 0.06 |
| | 656 |
| | 25 |
| | 681 |
|
Total | | | | | | | $ | 2,636 |
| | $ | 101 |
| | $ | 2,737 |
|
16
11.STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. EARNINGS PER SHARE
Earnings per share (“EPS”)EPS is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of potentially dilutive securities outstanding during the period. The effect of non-vested shares, if dilutive, is computed using the treasury stock method. The Company applies the two-class method for determining EPS as its outstanding shares of non-vested restricted stock are considered participating securities as dividend payments are not forfeited even if the underlying award does not vest. There was no unvested stock as of SeptemberJune 30, 2017.2020. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in income (loss) attributable to common stockholders in the Company’s computation of EPS.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the computation of the Company’s basic and diluted earnings (loss) per share for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (amounts in thousands, except shares and per share amounts):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 | | 2020 | | 2019 |
Numerator - basic and diluted | | | | | | | | | | | | | | |
Net income (loss) | $ | (230 | ) | | $ | (550 | ) | | $ | 7,951 |
| | $ | (1,561 | ) | |
Net income (loss) attributable to non-controlling interests | (13 | ) | | (21 | ) | | 293 |
| | (58 | ) | |
Net income (loss) attributable to common shares | $ | (217 | ) | | $ | (529 | ) | | $ | 7,658 |
| | $ | (1,503 | ) | |
Net loss | | $ | (524 | ) | | $ | (597 | ) | | $ | (99 | ) | | $ | (908 | ) |
Net loss attributable to non-controlling interests | | (10 | ) | | (12 | ) | | (2 | ) | | (19 | ) |
Net loss attributable to common shares | | $ | (514 | ) | | $ | (585 | ) | | $ | (97 | ) | | $ | (889 | ) |
Denominator - basic and diluted | | | | | | | | | | | | | | |
Basic weighted average common shares | 10,885,095 |
| | 11,007,864 |
| | 10,909,141 |
| | 11,017,654 |
| 10,739,729 |
| | 10,839,065 |
| | 10,749,464 |
| | 10,850,842 |
|
Common Units (1) | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Diluted weighted average common shares | 10,885,095 |
| | 11,007,864 |
| | 10,909,141 |
| | 11,017,654 |
| 10,739,729 |
| | 10,839,065 |
| | 10,749,464 |
| | 10,850,842 |
|
Earnings (loss) per common share - basic and diluted | | | | | | | | |
Net earnings (loss) attributable to common shares | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | 0.70 |
| | $ | (0.14 | ) | |
Loss per common share - basic and diluted | | | | | | | | |
Net loss attributable to common shares | | $ | (0.05 | ) | | $ | (0.05 | ) | | $ | (0.01 | ) | | $ | (0.08 | ) |
| |
(1) | The effect of 259,899217,475 convertible Common Units pursuant to the redemption rights outlined in the Company’s registration statement on Form S-11 have not been included as they would not be dilutive. |
12.11. RELATED PARTY TRANSACTIONS
On August 7, 2013, the Company entered into the Advisory Agreement with the Advisor. On July 25, 2017, the Advisory Agreement with the Advisor, waswhich has been renewed for an additional twelve months, beginning onsuccessive terms with a current expiration date of August 10, 2017.9, 2021. The Advisor manages the Company’s business as the Company’s external advisor pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company will pay the Advisor specified fees for services related to the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services.
On March 11, 2015, the Company, through a wholly-owned subsidiary, entered into the Limited Liability Company Agreement of SGO Retail Acquisitions Venture, LLC to form the SGO Joint Venture. On September 30, 2015, the Company, through wholly-owned subsidiaries, entered into the Limited Liability Company Agreement of SGO MN Retail Acquisitions Venture, LLC to form the SGO MN Joint Venture. For additional information regarding the SGO Joint Venture and the SGO MN Joint Venture, refer to Note 4. “Investments in Unconsolidated Joint Ventures.”
On September 27, 2017, the Company, through the OP, entered into a $2.5 million working capital short-term loan (the “Bridge Loan”) with Glenborough Property Partners, LLC, an affiliate of the Advisor. The Bridge Loan is scheduled to mature on March 31, 2018, at which point the outstanding balance of the principal and all accrued and unpaid interest will be due and payable. The Bridge loan incurs interest at an adjustable rate equal to the KeyBank prime rate. Interest is payable monthly in arrears. The Company has the right to prepay the Bridge Loan at any time in whole or in part without premium or penalty. There are no other loan fees or financing coordination fees paid or payable in connection with this loan. During the three months ended September 30, 2017, the Company incurred $1 thousand of interest expense related to the Bridge Loan.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Summary of Related Party Fees
The following table sets forth the Advisor related party costs incurred and payable by the Company for the periods presented (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Incurred | | Payable as of |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | June 30, | | December 31, |
Expensed | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Asset management fees | | $ | 156 |
| | $ | 160 |
| | $ | 324 |
| | $ | 317 |
| | $ | — |
| | $ | — |
|
Reimbursement of operating expenses | | 6 |
| | 11 |
| | 12 |
| | 22 |
| | — |
| | — |
|
Property management fees | | 15 |
| | 36 |
| | 36 |
| | 66 |
| | 7 |
| | 7 |
|
Disposition fees | | — |
| | — |
| | 157 |
| | — |
| | — |
| | — |
|
Total | | $ | 177 |
| | $ | 207 |
| | $ | 529 |
| | $ | 405 |
| | $ | 7 |
| | $ | 7 |
|
| | | | | | | | | | | | |
Capitalized | | | | | | | | | | | | |
Acquisition fees | | $ | 3 |
| | $ | 36 |
| | $ | 9 |
| | $ | 42 |
| | $ | — |
| | $ | — |
|
Leasing fees | | 61 |
| | — |
| | 100 |
| | — |
| | — |
| | — |
|
Legal leasing fees | | 20 |
| | — |
| | 27 |
| | — |
| | — |
| | — |
|
Construction management fees | | 62 |
| | — |
| | 128 |
| | — |
| | 61 |
| | 111 |
|
Financing coordination fees | | — |
| | 70 |
| | — |
| | 70 |
| | — |
| | 22 |
|
Total | | $ | 146 |
| | $ | 106 |
| | $ | 264 |
| | $ | 112 |
| | $ | 61 |
| | $ | 133 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Incurred | | Payable as of | | Payable as of |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | September 30, | | December 31, |
Expensed | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Acquisition fees | | $ | — |
| | $ | 46 |
| | $ | — |
| | $ | 104 |
| | $ | — |
| | $ | 80 |
|
Asset management fees | | 232 |
| | 227 |
| | 667 |
| | 673 |
| | — |
| | — |
|
Reimbursement of operating expenses | | 73 |
| | 49 |
| | 173 |
| | 146 |
| | — |
| | — |
|
Property management fees | | 81 |
| | 99 |
| | 280 |
| | 319 |
| | 37 |
| | 2 |
|
Disposition fees | | — |
| | — |
| | 430 |
| | 115 |
| | — |
| | 29 |
|
Total | | $ | 386 |
| | $ | 421 |
| | $ | 1,550 |
| | $ | 1,357 |
| | $ | 37 |
| | $ | 111 |
|
| | | | | | | | | | | | |
Capitalized | | | | | | | | | | | | |
Acquisition fees | | $ | — |
| | $ | — |
| | $ | 194 |
| | $ | 273 |
| | $ | — |
| | $ | — |
|
Leasing fees | | 80 |
| | 49 |
| | 145 |
| | 152 |
| | — |
| | — |
|
Legal leasing fees | | 35 |
| | 12 |
| | 86 |
| | 45 |
| | — |
| | — |
|
Construction management fees | | 19 |
| | — |
| | 19 |
| | 2 |
| | — |
| | — |
|
Financing coordination fees | | 107 |
| | — |
| | 814 |
| | — |
| | — |
| | — |
|
Total | | $ | 241 |
| | $ | 61 |
| | $ | 1,258 |
| | $ | 472 |
| | $ | — |
| | $ | — |
|
Acquisition Fees
Under the Advisory Agreement, the Advisor is entitled to receive an acquisition fee equal to 1% of (1) the cost of each investment acquired directly by the Company or (2) the Company’s allocable cost of an investment acquired pursuant to a joint venture, in each case including purchase price, acquisition expenses and any debt attributable to such investments. An acquisition fee is capitalized by the Company when the related transaction does not qualify as a business combination; otherwise an acquisition fee is expensed.
Origination Fees
Under the Advisory Agreement, the Advisor is entitled to receive an origination fee equal to 1% of the amount funded by the Company to acquire or originate real estate-related loans, including any acquisition expenses related to such investment and any debt used to fund the acquisition or origination of the real estate-related loans. The Company will not pay an origination fee to the Advisor with respect to any transaction pursuant to which it is required to pay the Advisor an acquisition fee.
Financing Coordination Fees
Under the Advisory Agreement, the Advisor is entitled to receive a financing coordination fee equal to 1% of the amount made available and/or outstanding under any (1) financing obtained or assumed, directly or indirectly, by the Company or the OP and used to acquire or originate investments, or (2) the refinancing of any financing obtained or assumed, directly or indirectly, by the Company or the OP.
Asset Management Fees
Under the Advisory Agreement, the Advisor is entitled to receive an asset management fee equal to a monthly fee of one-twelfth (1/12th) of 0.6% of the higher of (1) aggregate cost on a GAAP basis (before non-cash reserves and depreciation) of all investments the Company owns, including any debt attributable to such investments, or (2) the fair market value of the Company’s investments (before non-cash reserves and depreciation) if the board of directors has authorized the estimate of a fair market value of the Company’s investments; provided, however, that the asset management fee will not be less than $250,000 in the aggregate during any one calendar year.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Reimbursement of Operating Expenses
The Company reimburses the Advisor for all expenses paid or incurred by the Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s total operating expenses (including the asset management fee described below)above) at the end of the four preceding fiscal quarters exceeded the greater of (1) 2% of its average invested assets (as defined in the Company’s Articles of Amendment and Restatement (the “Charter”)); or (2) 25% of its net income (as defined in the Charter) determined without reduction for any additions to depreciation, bad debts or other similar non-cash expenses and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Guideline”). The Advisor is required to reimburse the Company quarterly for any amounts by which total operating expenses exceed the 2%/25% Guideline in the previous expense year that the independent directors do not approve. The Company will not reimburse the Advisor for any of its personnel costs or other overhead costs except for customary reimbursements for personnel costs under property management agreements entered into between the OP and the Advisor or its affiliates. Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Guideline if a majority of the independent directors determine that such excess expenses are justified based on unusual and non-recurring factors. Pursuant to an amendment to the Advisory Agreement entered on August 2, 2018, the board of directors, including a majority of the independent directors identified certain unusual and non-recurring factors that would justify reimbursement to the Advisor of amounts in excess of the 2%/25% Guidelines and confirmed that the Advisor would not be obligated to reimburse the Company for these excess amounts to the extent the excess was caused by such factors.
For the three and nine months ended SeptemberJune 30, 20172020 and 2016,2019, the Company’s total operating expenses (as defined in the Charter) did not exceed the 2%/25% Guideline.
Property Management Fees
Under the property management agreements between the Company and Glenborough, Glenborough is entitled to receive property management fees calculated at a maximum of up to 4% of the properties’ gross revenue. The property management agreements with Glenborough have been renewed for an additional twelve12 months, beginning on August 10, 2017.2019. Property management agreements with Glenborough automatically renew every year, unless expressly terminated.
Disposition Fees
Under the Advisory Agreement, if the Advisor or its affiliates provide a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a real property, the Advisor or its affiliates may be paid disposition fees up to 50% of a customary and competitive real estate commission, but not to exceed 3% of the contract sales price of each property sold.
Leasing Fees
Under the property management agreements, Glenborough is entitled to receive a separate fee for the leases of new tenants, and for expansions, extensions and renewals of existing tenants in an amount not to exceed the fee customarily charged by similarly situated parties rendering similar services in the same geographic area for similar properties.
Legal Leasing Fees
Under the property management agreements, Glenborough is entitled to receive a market-based legal leasing fee for the negotiation and production of new leases, renewals, and amendments.
Construction Management Fees
In connection with the construction or repair in or about a property, the property manager is responsible for coordinating and facilitating the planning and the performance of all construction and is entitled to receive a fee equal to 5% of the hard costs for the project in question.
Related-Party Fees Paid by the Unconsolidated Joint Ventures
The unconsolidated joint ventures are party to certain agreements with Glenborough for services related to the investment of funds and management of the joint ventures’ investments, as well as the day-to-day management, operation and maintenance of the properties owned by the joint ventures. The joint ventures pay fees to Glenborough for these services. For the three months ended September 30, 2017 and 2016, the SGO Joint Venture recognized related party fees and reimbursements of $58 thousand and $0.1 million, respectively. For the nine months ended September 30, 2017 and 2016, the SGO Joint Venture recognized related party fees and reimbursements of $0.2 million and $0.4 million, respectively. For the three months ended September 30, 2017 and 2016, the SGO MN Joint Venture recognized related party fees and reimbursements of $0.2 million and $0.3 million, respectively. For the nine months ended September 30, 2017 and 2016, the SGO MN Joint Venture recognized related party fees and reimbursements of $0.5 million and $0.8 million, respectively. The related-party amounts consist of property management, asset management, leasing commission, legal leasing, construction management fees and salary reimbursements.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13.12. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments, management of the daily operations of the Company’s real estate and real estate-related investment portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services to the Company, the Company will be required to obtain such services from other sources.
STRATEGIC REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its condensed consolidated financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
14.13. SUBSEQUENT EVENTS
Distributions
On September 6, 2017,July 31, 2020, the Company’s boardCompany extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of directors declared a third quarter distribution in the amount of $0.067.3% per share/unit to common stockholders and holders of common units of record as of September 30, 2017.annum. The distribution was paid on new maturity date is October 31, 2017.2021.
Sale of Held for Sale PropertiesThe Company evaluates subsequent events up until the date the condensed consolidated financial statements are issued.
On October 31, 2017, the Borrowers under the Amended and Restated Credit Facility borrowed $26.0 million under that facility, and used the proceeds to repay the existing secured financing that encumbered the following properties: The Shops at Turkey Creek, Morningside Marketplace, Florissant Marketplace, Ensenada Square and Cochran Bypass. The total amount of the repayment was $25.4 million, which included a payment of yield maintenance due upon prepayment of $1.4 million. In connection with that borrowing, the Borrower added the following property as additional collateral security under the terms of the Amended and Restated Credit Facility: The Shops at Turkey Creek, Morningside Marketplace, Florissant Marketplace and Ensenada Square.
On October 31, 2017, the Company consummated the disposition of Cochran Bypass for a sales price of approximately $2.5 million in cash. The net proceeds from the sale of Cochran Bypass were used to repay a portion of the outstanding balance under the Company’s line of credit.
On November 1, 2017, the Company, through an indirect subsidiary, sold an approximately 76,900 square foot retail property located in Fontana, California (“Morningside Marketplace”) to an unrelated third party for $12.7 million. The proceeds were used to pay down amounts outstanding under the Company’s line of credit.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016,2019, as filed with the Securities and Exchange Commission, or SEC, on March 24, 2017,18, 2020, which we refer to herein as our “2016“2019 Annual Report on Form 10-K.”
As used herein, the terms “we,” “our,” “us,” and “Company” refer to Strategic Realty Trust, Inc., formerly TNP Strategic Retail Trust, Inc., and, as required by context, Strategic Realty Operating Partnership, L.P., formerly TNP Strategic Retail Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership” or “OP”, and to their respective subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock.
Special Note Regarding Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements 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”). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
The potential adverse effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic, or any future pandemic, epidemic or outbreak of infectious disease, on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets.
Our executive officers and certain other key real estate professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor. As a result, they face conflicts of interest, including conflicts created by our advisor’s compensation arrangements with us and conflicts in allocating time among us and other programs and business activities.
We are uncertain of our sources for funding our future capital needs. If we cannot obtain debt or equity financing on acceptable terms, our ability to continue to acquire real properties or other real estate-related assets, fund or expand our operations and pay distributions to our stockholders will be adversely affected.
We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our financial obligations, including debt service and our ability to pay distributions to our stockholders.
A significant portion of our assets are concentrated in one state and in urban retail properties, any adverse economic, real estate or business conditions in this geographic area or in the urban retail market could affect our operating results and our ability to pay distributions to our stockholders.
Our current and future investments in real estate and other real estate-related investments may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our properties could decrease. Such events would
make it more difficult for us to meet our debt service obligations and limit our ability to pay distributions to our stockholders.
Certain of our debt obligations have variable interest rates with interest and related payments that vary with the movement of LIBOR or other indices. Increases in these indices could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our 20162019 Annual Report on Form 10-K. Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon on any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Moreover, you should interpret many of the risks identified in this Quarterly Report, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, and the risks described in Part I, Item 1A of our 20162019 Annual Report on Form 10-K, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report on Form 10-Q will be achieved.
Overview
We are a Maryland corporation that was formed on September 18, 2008, to invest in and manage a portfolio of income-producing retail properties, located in the United States, real estate-owning entities and real estate-related assets, including the investment in or origination of mortgage, mezzanine, bridge and other loans related to commercial real estate. During the first quarter of 2016, we also invested, through joint ventures, in two significant retail projects under development. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with the taxable year ended December 31, 2009, and we have operated and intend to continue to operate in such a manner. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner. We also own a majority of the outstanding limited partner interests in the operating partnership.
Since our inception, our business has been managed by an external advisor. We do not have direct employees and all management and administrative personnel responsible for conducting our business are employed by our advisor. Currently we are externally managed and advised by SRT Advisor, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement with the Advisor (the “Advisory Agreement”) initially executed on August 10, 2013, and subsequently renewed every year.year through 2020. The current term of the Advisory Agreement terminates on August 10, 2018.9, 2021. The Advisor is an affiliate of Glenborough, LLC (together with its affiliates, “Glenborough”), a privately held full-service real estate investment and management company focused on the acquisition, management and leasing of commercial properties.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has caused state and local governments to institute quarantines, shelter-in-place rules and restrictions on travel, the types of business that may continue to operate, and the types of construction projects that may continue. California, where the majority of our properties are located, declared a state of emergency on March 4, 2020 and instituted a shelter-in-place order on March 19, 2020 to reduce the spread of COVID-19. On May 7, 2020, California moved into Stage 2 of its four-stage reopening roadmap, permitting certain sectors of the economy to reopen provided that there were significant safety measures in place. On June 12, 2020, California permitted businesses such as movie theaters, restaurants, wineries, bars, zoos, museums, gyms, fitness centers, hotels, cardrooms, racetracks, and campgrounds to re-open. On July 13, 2020, California re-instituted a state-wide closure on many types of businesses that were previously permitted to re-open such as indoor dining, bars, movie theaters, and museums.
COVID-19 and the efforts to contain its spread have significantly impacted the global economy, the U.S. economy, the economies of the local markets throughout California in which our properties are predominately located, and the broader financial markets. Nearly every industry has been impacted directly or indirectly, and the U.S. retail market has come under severe pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel and shelter-in-place or stay-at-home orders. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed, lifted or reinstated, businesses of tenants that have closed, either voluntarily or by mandate, will reopen or when customers will re-engage with tenants as they have in the past. Due to this uncertainty, some of our tenants are experiencing hardships, as they are unable to operate at full capacity.
We believe that there is a reasonable risk that the COVID-19 outbreak could negatively impact our financial condition and results of operations, including but not limited to, declines in real estate rental revenues, the inability to sell certain properties at a favorable price, and a decrease in construction and leasing activity. The majority of our tenants have recently requested rent deferral or rent abatement as a result of the pandemic. These tenants account for approximately 95% of our annualized rents. To date only a small percent of the requests for rent relief resulted in modified agreements, however we are reviewing requests on a case by case basis and are continuing to monitor and communicate with our commercial tenants to assess their needs and ability to make either full or partial rent payments. In most cases, it is in our best interest to help our tenants remain in business and reopen when shelter-in-place orders or other mandated closures are lifted. If these tenants fail, finding replacement tenants may be costly and time-consuming. In addition, while the majority of our properties are fully leased as of June 30, 2020, we expect that the effects of the COVID-19 pandemic may impact our ability to lease up available commercial space at certain properties. For example, potential tenant interest in the Wilshire Property has slowed in light of the COVID-19 pandemic. As of June 30, 2020, we had approximately 8,900 square feet of vacant commercial space and no commercial lease expirations scheduled for the remainder of 2020.
ITEM 2. PROPERTIESTo mitigate the impact of COVID-19 on our operations and liquidity, we have taken a number of proactive measures, which include the following:
Our Advisor has been able to transition all employees and operations to a remote work environment, beginning on March 16, 2020, and we have been fortunate that our operations have continued successfully during these difficult times.
We are in constant communication with our tenants and are assisting tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020.
We believe we have adequate cash and cash equivalents to service our debts and pay for our ongoing general and administrative expenses for the foreseeable future. As of June 30, 2020, we have approximately $4.3 million in cash and cash equivalents. In addition, we have approximately $0.8 million of restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs). Furthermore, the Shops at Turkey Creek remain unencumbered by debt and is available for financing to provide us funds if needed.
We fully paid off the revolving line of credit with the SRT Loan (as defined below) from PFP Holding Company, LLC (the “SRT Lender”). The SRT Loan is secured by six of our core urban properties in Los Angeles and San Francisco. The SRT Loan does not have the sort of restrictive covenants and ongoing debt coverage ratios that could trigger a default caused by tenants not paying rent or seeking rent relief (unlike the former line of credit).
We remain in compliance with all the terms of the Wilshire Construction Loan (as defined below), which matures on May 10, 2022 with the options to extend for two additional twelve-month periods, subject to certain conditions. Similarly, we remain in compliance with the Sunset & Gardner Loan (as defined below), which matures on October 31, 2020. On July 31, 2020, we negotiated an extension to the maturity date of the Sunset & Gardner Loan. Refer to the Subsequent Events section for additional information.
To further preserve cash and liquidity, we suspended our Amended and Restated Share Redemption Program (the “SRP”), such suspension to be effective on May 21, 2020. The SRP will remain suspended and no further redemptions will be made unless and until our board of directors (the “Board”) approves the resumption of the SRP. During the suspension, we will continue to accept death and qualifying disability redemption filings from stockholders, but will not take any action with regard to those requests until the Board has elected to lift the suspension and provided the terms and conditions for any continuation of the program. In addition, on March 27, 2020, the board of directors decided to suspend the payment of any dividend for the quarters ending March 31, 2020, and will reconsider future dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to us. Dividend payments were not reinstated as of June 30, 2020.
Given the uncertainty of the COVID-19 pandemic’s near and potential long-term impact on our business, the full extent of the financial impact cannot be reasonably estimated at this time. However, there are those who believe that, as more tools are developed to fight COVID-19 - increased testing, enhanced monitoring, data analysis and identification of effective therapeutics-the country can, anchored by advice of healthcare specialists, incrementally foster economic activity in the near term and at some point with a vaccine and time, the country should return to a more normal state as with other pandemics in the past.
Property Portfolio
As of SeptemberJune 30, 2017,2020, our property portfolio included 127 retail properties, including 3 properties held for sale,excluding a land parcel, which we refer to as “our properties” or “our portfolio,” comprising an aggregate of approximately 425,00043,000 square feet of single- and multi-tenant, commercial retail space located in fivetwo states. We purchased our properties for an aggregate purchase price of approximately $94.8$39.6 million. As of SeptemberJune 30, 2017 and December 31, 2016, there was2020 approximately $23.9 million and approximately $33.8 million of indebtedness on our properties, respectively. As of September 30, 2017 and December 31, 2016, approximately 97% and 91%79% of our portfolio was leased (based on rentable square footage), respectively, with a weighted-average remaining lease term of approximately five7.7 years. As of December 31, 2019, approximately 90% of our portfolio was leased (based on rentable square footage), with a weighted-average remaining lease term of approximately 6.8 years.
| | (dollars in thousands) | (dollars in thousands) | | Rentable Square Feet (1) | | Percent Leased (2) | | Effective Rent (3) (Sq. Foot) | | Anchor Tenant | | Date Acquired | | Original Purchase Price (4) | | Debt (5) | | Rentable Square Feet | | Percent Leased (2) | | Effective Rent (3) (per Sq. Foot) | | Date Acquired | | Original Purchase Price (4) | | Debt (5) |
Property Name(1) | | Location | | | Location | |
Topaz Marketplace | | Hesperia, CA | | 50,699 |
| | 83 | % | | $ | 22.30 |
| | n/a | | 9/23/2011 | | 13,500 |
| | — |
| |
Ensenada Square | | Arlington, TX | | 62,628 |
| | 100 | % | | 7.52 |
| | Kroger | | 2/27/2012 | | 5,025 |
| | 2,901 |
| |
Shops at Turkey Creek | | Knoxville, TN | | 16,324 |
| | 100 | % | | 27.71 |
| | n/a | | 3/12/2012 | | 4,300 |
| | 2,624 |
| | Knoxville, TN | | 16,324 |
| | 61 | % | | $ | 30.59 |
| | 3/12/2012 | | $ | 4,300 |
| | $ | — |
|
400 Grove Street | | San Francisco, CA | | 2,000 |
| | 100 | % | | 60.00 |
| | n/a | | 6/14/2016 | | 2,890 |
| | — |
| | San Francisco, CA | | 2,000 |
| | 100 | % | | 63.04 |
| | 6/14/2016 | | 2,890 |
| | 1,450 |
|
8 Octavia Street | | San Francisco, CA | | 3,640 |
| | 47 | % | | 32.00 |
| | n/a | | 6/14/2016 | | 2,740 |
| | — |
| | San Francisco, CA | | 3,640 |
| | 47 | % | | 61.56 |
| | 6/14/2016 | | 2,740 |
| | 1,500 |
|
Fulton Shops | | San Francisco, CA | | 3,758 |
| | 100 | % | | 55.91 |
| | n/a | | 7/27/2016 | | 4,595 |
| | — |
| | San Francisco, CA | | 3,758 |
| | 84 | % | | 63.63 |
| | 7/27/2016 | | 4,595 |
| | 2,200 |
|
450 Hayes | | San Francisco, CA | | 3,724 |
| | 100 | % | | 89.82 |
| | n/a | | 12/22/2016 | | 8,020 |
| | — |
| | San Francisco, CA | | 3,724 |
| | 100 | % | | 93.08 |
| | 12/22/2016 | | 7,567 |
| | 3,650 |
|
388 Fulton | | San Fancisco, CA | | 3,110 |
| | 100 | % | | 63.05 |
| | n/a | | 1/4/2017 | | 4,500 |
| | — |
| | San Francisco, CA | | 3,110 |
| | 100 | % | | 68.13 |
| | 1/4/2017 | | 4,195 |
| | 2,300 |
|
Silver Lake | | Los Angeles, CA | | 10,497 |
| | 100 | % | | 62.96 |
| | n/a | | 1/11/2017 | | 13,300 |
| | — |
| | Los Angeles, CA | | 10,497 |
| | 100 | % | | 68.80 |
| | 1/11/2017 | | 13,300 |
| | 6,900 |
|
| | 156,380 |
| | | | | | $ | 58,870 |
| | $ | 5,525 |
| | 43,053 |
| | | | | | $ | 39,587 |
| | $ | 18,000 |
|
| | | | | | | | | | | |
Properties Held for Sale | | | | | | | | | | | |
Cochran Bypass | | Chester, SC | | 45,817 |
| | 100 | % | | 5.11 |
| | Bi-Lo Store | | 7/14/2011 | | $ | 2,585 |
| | $ | 1,465 |
| |
Florissant Marketplace | | Florissant, MO | | 146,257 |
| | 98 | % | | 9.90 |
| | Schnuck's | | 5/16/2012 | | 15,250 |
| | 8,588 |
| |
Morningside Marketplace | | Fontana, CA | | 76,923 |
| | 100 | % | | 16.24 |
| | Ralph's | | 1/9/2012 | | 18,050 |
| | 8,365 |
| |
| | 268,997 |
| | | | | | 35,885 |
| | 18,418 |
| |
| | 425,377 |
| | | | | | $ | 94,755 |
| | $ | 23,943 |
| |
| |
(1) | Square feet includes improvements made on ground leasesList of properties does not include a residual parcel at the property.Topaz Marketplace as of June 30, 2020. |
| |
(2) | Percentage is based on leased rentable square feet of each property as of SeptemberJune 30, 2017.2020. |
| |
(3) | Effective rent per square foot is calculated by dividing the annualized September 2017June 2020 contractual base rent by the total square feet occupied at the property. The contractual base rent does not include other items such as tenant concessions (e.g., free rent), percentage rent, and expense recoveries. |
| |
(4) | The purchase price for Shops at Turkey Creek includes the issuance of common units in our operating partnership to the sellers. |
| |
(5) | Debt represents the outstanding balance as of SeptemberJune 30, 2017,2020, and excludes reclassification of approximately $36 thousand$0.7 million deferred financing costs, net, as a contra-liability. For more information on our financing, refer to Note 8.7. “Notes Payable, Net” to our interim unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. As of September 30, 2017, our line of credit principal balance of $21.0 million was secured by Topaz Marketplace, 8 Octavia Street, 400 Grove Street, the Fulton Shops, 450 Hayes, 388 Fulton, and Silver Lake. For information regarding recent draws under the Key Bank credit facility, see “– Recent Financing Transactions - Our Line of Credit.” |
Properties Under Development
As of SeptemberJune 30, 2017,2020, we had two properties under development. The properties are identified in the following table (dollar amounts in thousands):
|
| | | | | | | | | | | |
Properties Under Development | | Location | | Estimated Completion Date | | Estimated Expected Square Feet | | Debt |
Wilshire Property | | Santa Monica, CA | | May, 2018 | | 12,500 |
| | $ | 8,500 |
|
Gelson’s Property | | Hollywood, CA | | July, 2018 | | 37,000 |
| | 10,700 |
|
Total | | | | | | 49,500 |
| | $ | 19,200 |
|
Portfolio Investments
As of September 30, 2017, our portfolio included:
Investments in two consolidated joint ventures, which own property under development in the Los Angeles, California area that are expected to comprise 49,500 square feet upon completion.
Investments in two unconsolidated joint ventures, which own, in aggregate, 8 retail centers, comprising an aggregate of approximately 599,000 square feet and located in four states.
Twelve retail properties, including 3 properties held for sale, comprising an aggregate of approximately 425,000 square feet of single- and multi-tenant, commercial retail space located in five states. |
| | | | | | | | | | | |
Properties Under Development | | Location | | Estimated Completion Date | | Estimated Expected Square Feet | | Debt |
Wilshire Property | | Santa Monica, CA | | November, 2020 | | 12,500 |
| | $ | 11,417 |
|
Sunset & Gardner Property | | Hollywood, CA | | December, 2022 | | 100,000 |
| | 8,700 |
|
Total | | | | | | 112,500 |
| | $ | 20,117 |
|
Results of Operations
Comparison of the three and ninesix months ended SeptemberJune 30, 2017,2020, versus the three and ninesix months ended SeptemberJune 30, 2016.2019.
The following table provides summary information about our results of operations for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (amounts in thousands):
| | | Three Months Ended September 30, | | | | | Three Months Ended June 30, | | | | |
| 2017 | | 2016 | | $ Change | | % Change | 2020 | | 2019 | | $ Change | | % Change |
Rental revenue and reimbursements | $ | 2,219 |
| | $ | 2,647 |
| | $ | (428 | ) | | (16.2 | )% | $ | 654 |
| | $ | 939 |
| | $ | (285 | ) | | (30.4 | )% |
Operating and maintenance expenses | 848 |
| | 949 |
| | (101 | ) | | (10.6 | )% | 359 |
| | 586 |
| | (227 | ) | | (38.7 | )% |
General and administrative expenses | 483 |
| | 623 |
| | (140 | ) | | (22.5 | )% | 443 |
| | 396 |
| | 47 |
| | 11.9 | % |
Depreciation and amortization expenses | 653 |
| | 907 |
| | (254 | ) | | (28.0 | )% | 301 |
| | 378 |
| | (77 | ) | | (20.4 | )% |
Transaction expense | — |
| | 165 |
| | (165 | ) | | (100.0 | )% | |
Interest expense | 449 |
| | 550 |
| | (101 | ) | | (18.4 | )% | 66 |
| | 130 |
| | (64 | ) | | (49.2 | )% |
Operating loss | (214 | ) | | (547 | ) | | 333 |
| | (60.9 | )% | (515 | ) | | (551 | ) | | 36 |
| | (6.5 | )% |
Other income (loss), net | (19 | ) | | 16 |
| | (35 | ) | | (218.8 | )% | |
Other loss, net | | — |
| | (2 | ) | | 2 |
| | (100.0 | )% |
Income taxes | 3 |
| | (19 | ) | | 22 |
| | (115.8 | )% | (9 | ) | | (44 | ) | | 35 |
| | (79.5 | )% |
Net income (loss) | $ | (230 | ) | | $ | (550 | ) | | $ | 320 |
| | (58.2 | )% | |
Net loss | | $ | (524 | ) | | $ | (597 | ) | | $ | 73 |
| | (12.2 | )% |
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | Six Months Ended June 30, | | | | |
| 2017 | | 2016 | | $ Change | | % Change | 2020 | | 2019 | | $ Change | | % Change |
Rental revenue and reimbursements | $ | 7,084 |
| | $ | 7,837 |
| | $ | (753 | ) | | (9.6 | )% | $ | 1,461 |
| | $ | 1,883 |
| | $ | (422 | ) | | (22.4 | )% |
Operating and maintenance expenses | 2,554 |
| | 2,787 |
| | (233 | ) | | (8.4 | )% | 809 |
| | 856 |
| | (47 | ) | | (5.5 | )% |
General and administrative expenses | 1,478 |
| | 1,691 |
| | (213 | ) | | (12.6 | )% | 848 |
| | 795 |
| | 53 |
| | 6.7 | % |
Depreciation and amortization expenses | 2,439 |
| | 2,628 |
| | (189 | ) | | (7.2 | )% | 602 |
| | 755 |
| | (153 | ) | | (20.3 | )% |
Transaction expense | 85 |
| | 445 |
| | (360 | ) | | (80.9 | )% | |
Interest expense | 1,505 |
| | 1,660 |
| | (155 | ) | | (9.3 | )% | 237 |
| | 319 |
| | (82 | ) | | (25.7 | )% |
Operating loss | (977 | ) | | (1,374 | ) | | 397 |
| | (28.9 | )% | (1,035 | ) | | (842 | ) | | (193 | ) | | 22.9 | % |
Other income (loss), net | 9,027 |
| | (34 | ) | | 9,061 |
| | (26,650.0 | )% | 947 |
| | (22 | ) | | 969 |
| | (4,404.5 | )% |
Income taxes | (99 | ) | | (153 | ) | | 54 |
| | (35.3 | )% | (11 | ) | | (44 | ) | | 33 |
| | (75.0 | )% |
Net income (loss) | $ | 7,951 |
| | $ | (1,561 | ) | | $ | 9,512 |
| | (609.4 | )% | |
Net loss | | $ | (99 | ) | | $ | (908 | ) | | $ | 809 |
| | (89.1 | )% |
Our results of operations for the three and ninesix months ended SeptemberJune 30, 2017,2020, are not necessarily indicative of those expected in future periods.
Revenue
The decrease in revenue during the three and six months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016,2019, was primarily due to the sales of Pinehurst Square East in Januarya significant portion of 2017 and Woodland WestTopaz Marketplace in April 2017. The decreases were partially offset byFebruary 2020 as well as rent concessions provided to our tenants as a full quarterresult of revenue from the acquisition of Fulton Shops in July 2016 and acquisitions of 450 Hayes in December 2016, and 388 Fulton and Silver Lake during the first quarter of 2017.
The decrease in revenue during the nine months ended September 30, 2017, compared to the same period in 2016, was primarily due to the sales of Bloomingdale Hills in April 2016, Pinehurst Square East in January of 2017 and Woodland West Marketplace in April 2017. The decreases were partially offset by a full quarter of revenue from acquisitions of 8 Octavia, and 400 Grove in June 2016, acquisitions of Fulton Shops in July 2016 and 450 Hayes in December 2016, and 388 Fulton and Silver Lake during the first quarter of 2017.COVID-19 pandemic.
Operating and maintenance expenses
Operating and maintenance expenses decreased during the three and six months ended SeptemberJune 30, 2017,2020, when compared to the same period in 2016 due2019, consistent with the sale of Topaz Marketplace. Lower management fees and lower bad debt reserves also contributed to sales of Pinehurst Square Eastthe decrease in January of 2017 and Woodland West Marketplace in April 2017.
The decreases were mostly offset by acquisitions of Fulton Shops in July 2016 and 450 Hayes in December 2016, and 388 Fulton and Silver Lake during the first quarter of 2017.
Operatingoperating and maintenance expenses decreased during the nine months ended September 30, 2017, when compared to the same period in 2016 due to sales of Bloomingdale Hills in April 2016, Pinehurst Square East in January of 2017 and Woodland West Marketplace in April 2017. The decreases were mostly offset by acquisitions of 8 Octavia, 400 Grove in June 2016, acquisitions of Fulton Shops in July 2016 and 450 Hayes in December 2016, and 388 Fulton and Silver Lake during the first quarter of 2017.expenses.
General and administrative expenses
General and administrative expenses decreasedincreased during the three and six months ended SeptemberJune 30, 2017,2020, compared to the same period in 20162019 primarily due to decreasedincreased legal fees.
General and administrative expenses decreased duringfees related to a previous contract to sell Shops at Turkey Creek. The buyer canceled the nine months ended September 30, 2017, comparedcontract due to the same period in 2016 primarily dueuncertainty related to decreased legal fees and decreased investor relations costs.COVID-19.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased during the three and ninesix months ended SeptemberJune 30, 20172020, compared to the same period in 2016,2019, primarily due to the classification of Cochran Bypass, Florissant Marketplace, and MorningsideTopaz Marketplace as held for sale during the third quarter of 2017.
Transaction expense
There was no purchase or sale activity during the three months ended September, 30, 2017, which resulted2019, and subsequent sale in lower transaction fees when compared toFebruary 2020.
Interest expense
Interest expense decreased during the three and six months ended SeptemberJune 30, 2016.
The decrease in transaction fees during the nine months ended September 30, 2017, as2020, compared to the same period in 2016 was primarily2019, due to our adoption of Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”)decreases in interest rates as of January 1, 2017. As part of adopting ASU 2017-01, acquisitions of 388 Fulton and Silver Lake during the first quarter of 2017 were classifiedwell as asset acquisitions and the related acquisition costs were capitalized.
Interest expense
Interest expense has decreased in 2017 over 2016 due to changesdecreases in debt balances as a result of using the proceeds from property acquisitions and dispositionsdisposition activities and the resulting fluctuationsto repay debt. Additionally, decreased deferred loan fees amortization also contributed to a decrease in debt balances from related proceeds and repayments of debt.interest expense.
Other income (loss), net
Other income,loss, net fromfor the three months ended SeptemberJune 30, 2017,2019, primarily consisted of equity in loss resulting from our investment in unconsolidated joint ventures. There was no other income or loss during the three months ended June 30, 2020.
Other income (loss), net for the six months ended June 30, 2020, consisted of gain on sale of Topaz Marketplace. Other income (loss), net for the six months ended June 30, 2019, primarily consisted of equity in loss resulting from our investment in unconsolidated joint ventures.
Other income, net fromIncome Taxes
Income taxes for the ninethree and six months ended SeptemberJune 30, 2017, primarily2020 and 2019, consisted of approximately $9.1 million related to the gain on sales of Pinehurst Square East in January 2017 and Woodland West Marketplace in April 2017, as well as the recognition of deferred gain resulting from the first quarter of 2017 sale by the SGO Retail Acquisitions Venture, LLC (“SGO Joint Venture”) of Aurora Commons.
Income taxes
In addition to various state tax payments, we have incurred federal tax due to our election to treat one of our subsidiaries as a taxable REIT subsidiary (“TRS”). In general, a TRS may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Internal Revenue Code. A TRS is subject to federal and state income taxes. For the nine months ended September 30, 2016, income taxes increased due to the income taxes on our share of the gain from the sale of certain SGO MN Retail Acquisitions Venture, LLC (“SGO MN Joint Venture”) properties, partially offset by the 2016 reversal of an over accrual of estimated alternative minimum state/federal taxes, which was accrued and included in expenses as of December 31, 2015. The over accrual was determined to be immaterial and was the result of finalizing, in 2016, the calculation of taxes owed for 2015.payments.
Liquidity and Capital Resources
Since our inception, our principal demand for funds has been for the acquisition of real estate, the payment of operating expenses and interest on our outstanding indebtedness, the payment of distributions to our stockholders and investments in unconsolidated joint ventures and development properties. On February 7, 2013, we ceased offering shares of our common
stock in our primary offering and under our distribution reinvestment plan. As a result of the termination of our initial public offering, offering proceeds from the sale of our securities are not currently available to fund our cash needs. We have used and expect to continue to use debt financing, net sales proceeds and cash flow from operations to fund our cash needs.
As of SeptemberJune 30, 2017,2020, our cash and cash equivalents were approximately $3.6$4.3 million and ourwe had $0.8 million of restricted cash (funds held by the lenders for property taxes, insurance, tenant improvements, leasing commissions, capital expenditures, rollover reserves and other financing needs) was approximately $4.2 million. For properties with lender reserves, we may draw upon such reserves to fund the specific needs for which the funds were established..
Our aggregate borrowings, secured and unsecured, are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, as amended, which we refer to as our “charter,” we are prohibited from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with an explanation for such excess. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, our borrowings excluding secured term loans balances which have been classified as held for sale, were approximately 89.2%66.0% and 105.2%75.1%, respectively, of the carrying value of our net assets.
The following table summarizes, for the periods indicated, selected items in our condensed consolidated statements of cash flows (amounts in thousands):
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | | |
| 2017 | | 2016 | | $ Change | 2020 | | 2019 | | $ Change |
Net cash provided by (used in): | | | | | | | | | | |
Operating activities | $ | 2,597 |
| | $ | 1,243 |
| | $ | 1,354 |
| $ | (540 | ) | | $ | 241 |
| | $ | (781 | ) |
Investing activities | 12,081 |
| | (31,569 | ) | | 43,650 |
| 4,737 |
| | (1,994 | ) | | 6,731 |
|
Financing activities | (14,163 | ) | | 25,426 |
| | (39,589 | ) | (6,347 | ) | | 2,412 |
| | (8,759 | ) |
Net increase (decrease) in cash and cash equivalents | $ | 515 |
| | $ | (4,900 | ) | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | (2,150 | ) | | $ | 659 |
| | |
Cash Flows from Operating Activities
The increasedecrease in cash flows from operating activities was primarily due to a decreaselower operating income during the six months ended June 30, 2020 as compared to the same period in deposit2019, which resulted from sale of Topaz Marketplace during the three months ended March 31, 2020, as well as increased accounts receivable and rent deferral balances resulting from the closing of the acquisitions of 388 Fulton and Silver Lake during the first quarter of 2017.COVID-19 pandemic.
Cash Flows from Investing Activities
The change in cashCash flows fromprovided by investing activities wasduring the six months ended June 30, 2020 primarily due to the netconsisted of approximately $9.9 million of proceeds from the dispositionsale of Pinehurst Square East and Woodland West Marketplace of approximately $32.4 million,Topaz Marketplace. These were partially offset by our aggregate $17.8additional $4.8 million acquisition of 388 Fultoninvestment in the Wilshire and Silver Lake in January 2017. Sunset and Gardner Joint Ventures.
Cash flows fromused in investing activities during the ninesix months ended SeptemberJune 30, 2016,2019, primarily consisted of our aggregate $28.5additional $1.7 million investmentsinvestment in the Wilshire and Gelson'sSunset and Gardner Joint Ventures.
Cash Flows from Financing Activities
The change in cashCash flows fromused by financing activities during the ninesix months ended SeptemberJune 30, 2017, was2020, primarily due to an increase in pay down of debtconsisted of approximately $33.2$8.9 million in connection with the pay down of a portionrepayments of our line of credit as a resultcredit. This was partially offset by approximately $2.9 million from construction loan proceeds.
Cash flows provided by financing activities during the six months ended June 30, 2019, primarily consisted of the dispositionsapproximately $14.8 million from construction loan proceeds and draws on our line of Pinehurst Square Eastcredit. This was partially offset by repayment of our debt balances of approximately $10.3 million, our quarterly dividend payments of approximately $1.3 million, and Woodland West Marketplace.redemptions of our common stock of approximately $0.4 million.
Short-term Liquidity and Capital Resources
Our principal short-term demand for funds is for the payment of operating expenses, the payment of principal and interest on our outstanding indebtedness and distributions. To date, our cash needs for operations have been covered from cash provided by property operations, the sales of properties and the sale of shares of our common stock. Due to the termination of our initial public offering on February 7, 2013, weWe may fund our short-term operating cash needs from operations, from the sales of properties and from debt.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demand for funds will be for real estate and real estate-related investments and the payment of acquisition-related expenses, operating expenses, distributions to stockholders, future redemptions of shares and
interest and principal payments on current and future indebtedness. Generally, we intend to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations, debt and sales of properties. Until the termination of our initial public offering on February 7, 2013, our cash needs for acquisitions were satisfied from the net proceeds of the public offering and from debt financings. On a long-term basis, we expect that substantially all cash generated from operations will be used to pay distributions to our stockholders after satisfying our operating expenses including interest and principal payments. We may consider future public offerings or private placements of equity. Refer to Note 8.7. “Notes Payable, Net” to our interim unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the maturity dates and terms of our outstanding indebtedness.
Recent Financing Transactions
Line of Credit
During the three and nine months ended September 30, 2017 and 2016, the following transactions occurred under our credit line:
Nine months ended September 30, 2017:Multi-Property Secured Financing
On January 4, 2017,December 24,2019, we drew $4.0 millionentered into a Loan Agreement (the “SRT Loan Agreement”) with PFP Holding Company, LLC (the “SRT Lender”) for a non-recourse secured loan (the “SRT Loan”).
The SRT Loan is secured by first deeds of trust on our five San Francisco assets (Fulton Shops, 8 Octavia, 400 Grove, 450 Hayes and used the proceeds to acquire 388 Fulton.
On January 6, 2017, we consummated the disposition of Pinehurst Square East,Fulton Street) as well as our Silverlake Collection located in Bismarck, North Dakota, for a sales price of approximately $19.2 million in cash, $18.4 million of which wasLos Angeles. Proceeds from the SRT Loan were used by us to pay down our line of credit.
On January 11, 2017, we drew $11.0 millioncredit facility and usedin connection with such payment, the proceeds to acquire Silver Lake.
On January 27, 2017, we drew $1.0 million and used the proceeds for working capital.
On February 28, 2017, we drew $9.8 million and used the proceeds to pay off the mortgage loanproperties referenced above were released from liens related to Woodland West Marketplace.that credit facility. The SRT Loan matures on January 9, 2023. We have an option to extend the term of the loan for two additional twelve-month periods, subject to the satisfaction of certain covenants and conditions contained in the SRT Loan Agreement. We have the right to prepay the SRT Loan in whole at any time or in part from time to time, subject to the payment of yield maintenance payments if such prepayment occurs in the first 18 months of the loan term, calculated through the 18th monthly payment date, as well as certain expenses, costs or liabilities potentially incurred by the SRT Lender as a result of the prepayment and subject to certain other conditions contained in the loan documents. Individual properties may be released from the SRT Loan collateral in connection with bona fide third-party sales, subject to compliance with certain covenants and conditions contained in the SRT Loan Agreement. Any prepayment or repayment on or before the first 12 months
On February 28, 2017, we drew $0.6 million and used
of the proceeds to pay certain costs forloan term in connection with a bona fide third-party sale of a property securing the refinancingSRT Loan shall only require the payment of our lineyield maintenance payments calculated through the 12th monthly payment date.
As of credit.
On March 29, 2017, we drew $1.0 million and usedJune 30, 2020, the proceeds for working capital.
On April 17, 2017, we consummated the disposition of Woodland West Marketplace, located in Arlington, Texas, forSRT Loan had a sales priceprincipal balance of approximately $14.6 million$18.0 million. The SRT Loan is a floating LIBOR rate loan which bears interest at 30-day LIBOR (with a floor of 1.50%) plus 2.80%. The default rate is equal to 5% above the rate that otherwise would be in cash, $13.7 million of which was usedeffect. Monthly payments are interest-only with the entire principal balance and all outstanding interest due at maturity.
Pursuant to pay down our line of credit.
On June 28, 2017,the SRT Loan, we drew $1.3 million and used the proceeds for working capital.
On August 22, 2017, we drew $1.0 million and used the proceeds for working capital.
Nine months ended September 30, 2016:
On March 7, 2016, we drew $6.0 million and used the proceeds to investmust comply with certain matters contained in the Wilshire Joint Venture.loan documents including but not limited to, (i) requirements to deliver audited and unaudited financial statements, SEC filings, tax returns, pro forma budgets, and quarterly compliance certificates, and (ii) minimum limits on our liquidity and tangible net worth. The SRT Loan contains customary covenants, including, without limitation, covenants with respect to maintenance of properties and insurance, compliance with laws and environmental matters, covenants limiting or prohibiting the creation of liens, and transactions with affiliates.
On April 4, 2016,In connection with the SRT Loan, we consummatedexecuted customary non-recourse carveout and environmental guaranties, together with limited additional assurances with regard to the disposition of Bloomingdale Hills, located in Riverside, Florida, for a sales price of approximately $9.2 million in cash, $3.0 million of which was used to pay down the line of credit.
On June 9, 2016, we drew $7.5 million and used the majoritycondominium structures of the proceeds to acquire 8 Octavia and 400 Grove.San Francisco assets.
On July 25, 2016, we drew $4.7 million and used the majority of the proceeds to acquire the Fulton Shops.
On September 29, 2016, we drew $1.0 million and used the proceeds for working capital.
Mortgage Loans Secured by Properties Under Development
In connectionOn May 7, 2019, we refinanced and repaid our financing with our investment inLoan Oak Fund, LLC with a new construction loan from ReadyCap Commercial, LLC (the “Lender”) (the “Wilshire Construction Loan”). As of June 30, 2020, the Wilshire Joint VentureConstruction Loan had a principal balance of approximately $11.4 million, with future funding availability up to a total of approximately $13.9 million, and the acquisition of the Wilshire Property, we have consolidated borrowings of $8.5 million (the “Wilshire Loan”). The Wilshire Loan bears an interest at a rate of 10.0%1-month LIBOR plus an interest margin of 4.25% per annum, payable monthly, commencing on April 1, 2016.monthly. The loan wasWilshire Construction Loan is scheduled to mature on March 7, 2017,May 10, 2022, with an optionoptions to extend for two additional six-monthtwelve-month periods, subject to certain conditions as stated in the loan agreement. All conditions to extensions were met, andThe Wilshire Construction Loan is secured by a first Deed of Trust on March 7, 2017, we exercised the option to extendproperty. We executed a guaranty that guaranties that the loan until September 7, 2017. On August 29, 2017, we exercisedinterest reserve amounts are kept in compliance with the remaining option to extendterms of the loan agreement. The Lender also required that a principal in the upstream owner of our joint venture partner in the Wilshire Joint Venture (the “Guarantor”), guarantees performance of borrower’s obligations under the loan agreement with respect to the completion of capital improvements to the property. We executed an Indemnity Agreement in favor of the Guarantor against liability under that completion guaranty except to the extent caused by gross negligence or willful misconduct, as well as for liabilities incurred under the Environmental Indemnity Agreement executed by the Guarantor in favor of the Lender. We used working capital funds of approximately $3.1 million to repay the difference between the Wilshire Construction Loan initial advance and the prior loan, to pay transaction costs, as well as to fund certain required interest and construction reserves.
On October 29, 2018, we entered into a loan agreement with Lone Oak Fund, LLC (the “Sunset & Gardner Loan”). The Sunset & Gardner Loan has a principal balance of approximately $8.7 million, and bears an interest rate of 6.9% per annum. The Sunset & Gardner Loan was scheduled to mature on October 31, 2019. We extended the Sunset & Gardner Loan for an additional six months.twelve-month period under the same terms, with an interest rate of 6.5% per annum. The new maturity date is March 7, 2018.October 31, 2020. We negotiated an additional one year extension with the lender. Refer to the Subsequent Events section for additional information. The loanSunset & Gardner Loan is secured by among other things, a lienfirst Deed of Trust on the Wilshire development project and other collateral as definedproperty.
Line of Credit
On February 10, 2020, we used proceeds from the sale of Topaz Marketplace to repay the line of credit in the loan agreement.
In connectionits entirety. The line of credit expired of its own accord on February 15, 2020, with our investment in the Gelson’s Joint Venture and the acquisitionno balance outstanding. As part of the Gelson’s Property,payoff, Shops at Turkey Creek was released from the line of credit.
Effective January 8, 2020, we have consolidated borrowingselected to permanently reduce the maximum aggregate commitment under its line of $10.7credit from $30.0 million (the “Gelson’s Loan”). The Gelson’s Loan bears interest at a rate of 9.5% per annum,
payable monthly, commencing on April 1, 2016. The loan was scheduled to mature on January 27, 2017, with an option to extend for an additional six-month period, subject to certain conditions as stated in the loan agreement. Those conditions were not met, but we negotiated a six month extension$10.5 million. All other terms of the term on January 27, 2017 to mature on July 27, 2017. The new maturity date is April 27, 2018. The loan is secured by, among other things, a lien oncredit facility remained the Gelson’s development project and other joint venture collateral as defined in the loan agreement.
Interim Financial Information
The financial information as of and for the period ended September 30, 2017, included in this Quarterly Report on Form 10-Q is unaudited, but includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the three and nine months ended September 30, 2017. These interim unaudited condensed consolidated financial statements do not include all disclosures required by GAAP for complete consolidated financial statements. Interim results of operations are not necessarily indicative of the results to be expected for the full year; and such results may be less favorable. Our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2016 Annual Report on Form 10-K.same.
Guidelines on Total Operating Expenses
We reimburse our Advisor for some expenses paid or incurred by our Advisor in connection with the services provided to us, except that we will not reimburse our Advisor for any amount by which our total operating expenses at the end of the four preceding fiscal quarters exceed the greater of (1) 2% of our average invested assets, as defined in our charter; and (2) 25% of our net income, as defined in our charter, or the “2%/25% Guidelines” unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, our total operating expenses did not exceed the 2%/25% Guidelines.
On August 2, 2018, we entered into the Sixth Amendment to the Advisory Agreement. The Advisory Agreement Amendment provides that the Advisor shall not be required to reimburse to us any operating expenses incurred during a given period that exceed the applicable limit on “Total Operating Expenses” (as defined in the Advisory Agreement) to the extent that such excess operating expenses are incurred as a result of certain unusual and non-recurring factors approved by our board of directors, including some related to the execution of our investment strategy as directed by our board of directors. These provisions were also included in the Eighth Amendment to the Advisory Agreement entered into July 30, 2020.
Inflation
The majority of our leases at our properties contain inflation protection provisions applicable to reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance. We expect to include similar provisions in our future tenant leases designed to protect us from the impact of inflation. Due to the generally long-term nature of these leases, annual rent increases, as well as rents received from acquired leases, may not be sufficient to cover inflation and rent may be below market rates.
REIT Compliance
To qualify as a REIT for tax purposes, we are required to annually distribute at least 90% of our REIT taxable income, subject to certain adjustments, to our stockholders. We must also meet certain asset and income tests, as well as other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
Quarterly Distributions
As set forth above, in order to qualify as a REIT, we are required to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders.
Under the terms of the Key Bank credit facility, we may pay distributions to our stockholders so long as the total amount paid does not exceed certain thresholds specified in the Key Bank credit facility; provided, however, that we are not restricted from making any distributions necessary in order to maintain our status as a REIT. Our board of directors will continue to evaluate the amount of future quarterly distributions based on our operational cash needs.
Some or all of our distributions have been paid, and in the future may continue to be paid, from sources other than cash flows from operations.
In light of the COVID-19 pandemic, its impact on the economy and the related future uncertainty, on March 27, 2020, our board of directors decided to suspend the payment of any dividend for the quarters ending March 31, 2020, and to reconsider future dividend payments on a quarter by quarter basis as more information becomes available on the impact of COVID-19 and related impact to the Company. Dividend payments were not reinstated as of June 30, 2020
The following tablestable set forth the quarterly distributions declared to our common stockholders and common unitCommon Unit holders for the nine months ended September 30, 2017, and the year ended December 31, 20162019 (amounts in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | |
| Distribution Record Date | | Distribution Payable Date | | Distribution Per Share of Common Stock / Common Unit | | Total Common Stockholders Distribution | | Total Common Unit Holders Distribution | | Total Distribution |
First Quarter 2017 | 3/31/2017 | | 4/28/2017 | | $ | 0.06 |
| | $ | 655 |
| | $ | 25 |
| | $ | 680 |
|
Second Quarter 2017 | 6/30/2017 | | 7/31/2017 | | 0.06 |
| | 652 |
| | 25 |
| | 677 |
|
Third Quarter 2017 | 9/30/2017 | | 10/31/2017 | | 0.06 |
| | 660 |
| | 16 |
| | 676 |
|
Total | | | | | | | $ | 1,967 |
| | $ | 66 |
| | $ | 2,033 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Distribution Record Date | | Distribution Payable Date | | Distribution Per Share of Common Stock / Common Unit | | Total Common Stockholders Distribution | | Total Common Unit Holders Distribution | | Total Distribution |
First Quarter 2019 | 3/31/2019 | | 4/30/2019 | | $ | 0.06 |
| | $ | 651 |
| | $ | 14 |
| | $ | 665 |
|
Second Quarter 2019 | 6/30/2019 | | 7/31/2019 | | 0.06 |
| | 648 |
| | 14 |
| | 662 |
|
Third Quarter 2019 | 9/30/2019 | | 10/31/2019 | | 0.06 |
| | 646 |
| | 13 |
| | 659 |
|
Fourth Quarter 2019 | 12/31/2019 | | 1/31/2020 | | 0.02 |
| | 215 |
| | 5 |
| | 220 |
|
Total | | | | | | | $ | 2,160 |
| | $ | 46 |
| | $ | 2,206 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Distribution Record Date | | Distribution Payable Date | | Distribution Per Share of Common Stock / Common Unit | | Total Common Stockholders Distribution | | Total Common Unit Holders Distribution | | Total Distribution |
First Quarter 2016 | 3/31/2016 | | 4/29/2016 | | $ | 0.06 |
| | $ | 660 |
| | $ | 26 |
| | $ | 686 |
|
Second Quarter 2016 | 7/7/2016 | | 7/29/2016 | | 0.06 |
| | 661 |
| | 25 |
| | 686 |
|
Third Quarter 2016 | 9/30/2016 | | 10/31/2016 | | 0.06 |
| | 659 |
| | 25 |
| | 684 |
|
Fourth Quarter 2016 | 12/30/2016 | | 1/31/2017 | | 0.06 |
| | 656 |
| | 25 |
| | 681 |
|
Total | | | | | | | $ | 2,636 |
| | $ | 101 |
| | $ | 2,737 |
|
Funds From Operations
Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of a real estate company’s operating performance. The National Association of Real Estate Investment Trusts, or “NAREIT”, an industry trade group, has promulgated this supplemental performance measure and defines FFO as net income, computed in accordance with GAAP, plus real estate related depreciation and amortization and excluding extraordinary items and gains and losses on the sale of real estate, and after adjustments for unconsolidated joint ventures (adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.) It is important to note that not only is FFO not equivalent to our net income or loss as determined under GAAP, it also does not represent cash flows from operating activities in accordance with GAAP. FFO should not be considered an alternative to net income as an indication of our performance, nor is FFO necessarily indicative of cash flow as a measure of liquidity or our ability to fund cash needs, including the payment of distributions.
We consider FFO to be a meaningful, additional measure of operating performance and one that is an appropriate supplemental disclosure for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.
Our calculation of FFO attributable to common shares and Common Units and the reconciliation of net income (loss) to FFO is as follows (amounts in thousands, except shares and per share amounts):
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
FFO | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) (1) | | $ | (230 | ) | | $ | (550 | ) | | $ | 7,951 |
| | $ | (1,561 | ) | |
Net loss | | | $ | (524 | ) | | $ | (597 | ) | | $ | (99 | ) | | $ | (908 | ) |
Adjustments: | | | | | | | | | | | | | | | | |
Gain on disposal of assets | | — |
| | — |
| | (9,131 | ) | | (614 | ) | | — |
| | (13 | ) | | (947 | ) | | (13 | ) |
Adjustment to reflect FFO of unconsolidated joint ventures | | 97 |
| | 184 |
| | 309 |
| | 360 |
| | — |
| | 100 |
| | — |
| | 178 |
|
Depreciation of real estate | | 503 |
| | 680 |
| | 1,725 |
| | 1,962 |
| | 241 |
| | 299 |
| | 481 |
| | 598 |
|
Amortization of in-place leases and other intangibles | | 150 |
| | 227 |
| | 714 |
| | 666 |
| |
Amortization of in-place leases and leasing costs | | | 60 |
| | 79 |
| | 121 |
| | 157 |
|
FFO attributable to common shares and Common Units(1) | | $ | 520 |
| | $ | 541 |
| | $ | 1,568 |
| | $ | 813 |
| | $ | (223 | ) | | $ | (132 | ) | | $ | (444 | ) | | $ | 12 |
|
| | | | | | | | | | | | | | | | |
FFO per share and Common Unit(1) | | $ | 0.05 |
| | $ | 0.05 |
| | $ | 0.14 |
| | $ | 0.07 |
| | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | (0.04 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | |
Weighted average common shares and units outstanding(1) | | 11,290,377 |
| | 11,430,172 |
| | 11,325,712 |
| | 11,445,981 |
| | 10,957,204 |
| | 11,074,259 |
| | 10,966,939 |
| | 11,086,036 |
|
| |
(1) | Our common units have the right to convert a unit into common stock for a one-to-one conversion. Therefore, we are including the related non-controlling interest income/loss attributable to common units in the computation of FFO and including the common units together with weighted average shares outstanding for the computation of FFO per share and common unit. |
Related Party Transactions and Agreements
We are currently party to the Advisory Agreement, pursuant to which the Advisor manages our business in exchange for specified fees paid for services related to the investment of funds in real estate and real estate-related investments, management of our investments and for other services. Refer to Note 12.11. “Related Party Transactions” to our interim unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the Advisory Agreement and other related party transactions, agreements and fees.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist primarily of carve-out guarantees in connection with our previous investments in unconsolidated joint ventures and areas described in Note 4. “Investments in Unconsolidated Joint Ventures” in the notes to the interim unaudited condensed consolidated financial statements in this Quarterlyour 2019 Annual Report on Form 10-Q. Our joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint ventures’ debts are secured by a first mortgage, are without recourse to the joint venture partners, and10-K. These carve-out guarantees do not represent a liability of the partners other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations. As of September 30, 2017, weWe have provided carve-out guarantees in connection with our two unconsolidated joint ventures; in connection with those carve-out guarantees we haveretained certain rights of recovery from our joint venture partners. in connection with these carve-out guarantees.
Critical Accounting Policies
Our interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. Other than the critical accounting policy discussed below, aA discussion of additional accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 20162019 Annual Report on Form 10-K.
Investments in Real Estate
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”) that clarifies the framework for
determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions.
We elected to early adopt ASU 2017-01 for the reporting period beginning January 1, 2017. As a result of adopting ASU 2017-01, our acquisitions of properties beginning January 1, 2017 were evaluated under the new guidance. The acquisitions occurring during 2017 were determined to be asset acquisitions, as they did not meet the definition of a business.
Evaluation of business combination or asset acquisition:
We evaluate each acquisition of real estate to determine if the integrated set of assets and activities acquired meet the definition of a business and need to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:
• Substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets; or
• The integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e. revenue generated before and after the transaction).
An acquired process is considered substantive if:
• The process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce), that is skilled, knowledgeable, and experienced in performing the process;
• The process cannot be replaced without significant cost, effort, or delay; or
• The process is considered unique or scarce.
Generally, we expect that acquisitions of real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets), or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.
In asset acquisitions, the purchase consideration, including acquisition costs, is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. As a result, asset acquisitions do not result in the recognition of goodwill or a bargain purchase gain.
Depreciation and amortization is computed using a straight-line method over the estimated useful lives of the assets as follows:
|
| |
| Years |
Buildings and improvements | 5 - 30 years |
Tenant improvements | 1 - 36 years |
Tenant improvement costs recorded as capital assets are depreciated over the tenant’s remaining lease term, which we determined approximates the useful life of the improvement. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements that improve or extend the useful lives of assets are capitalized. Acquisition costs related to asset acquisitions are capitalized in the condensed consolidated balance sheets.
For acquisitions of real estate prior to the adoption of ASU 2017-01, which were generally accounted for as business combinations, we recognized the assets acquired (including the intangible value of acquired above- or below-market leases, acquired in-place leases and other intangible assets or liabilities) at fair value as of the acquisition date. Acquisition costs related to the business combinations were expensed as incurred.
Subsequent Events
Distributions
On September 6, 2017, our boardJuly 31, 2020, we extended the Sunset & Gardner Loan for an additional twelve-month period under the same terms, with an interest rate of directors declared a third quarter distribution in the amount of $0.067.3% per share/unit to common stockholders and holders of common units of record as of September 30, 2017.annum. The distribution was paid onnew maturity date is October 31, 2017.2021.
Sale of Held for Sale Properties
On October 31, 2017,We evaluate subsequent events up until the Borrowers underdate the Amended and Restated Credit Facility borrowed $26.0 million under that facility, and used the proceeds to repay the existing secured financing that encumbered the following properties: The Shops at Turkey Creek, Morningside Marketplace, Florissant Marketplace, Ensenada Square and Cochran Bypass. The total amount of the repayment was $25.4 million, which included a payment of yield maintenance due upon prepayment of $1.4 million. In connection with that borrowing, the Borrower added the following property as additional collateral security under the terms of the Amended and Restated Credit Facility: The Shops at Turkey Creek, Morningside Marketplace, Florissant Marketplace and Ensenada Square.
On October 31, 2017, we, through an indirect subsidiary, consummated the disposition of Cochran Bypass for a sales price of approximately $2.5 million in cash. The net proceeds from the sale of Cochran Bypass were used to repay a portion of the outstanding balance under our line of credit.
On November 1, 2017, we, through an indirect subsidiary, sold an approximately 76,900 square foot retail property located in Fontana, California (“Morningside Marketplace”) to an unrelated third party for $12.7 million. The proceeds were used to pay down amounts outstanding under our line of credit.condensed consolidated financial statements are issued.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted as permitted under rules applicable to smaller reporting companies.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 2017,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Omitted as permitted under rules applicable to smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period covered by this Quarterly Report on Form 10-Q, we did not issue any equity securities that were not registered under the Securities Act of 1933, as amended.
Share Redemption Program
On April 1, 2015, our board of directors approved the reinstatement of the share redemption program (which had been suspended since January 15, 2013) and adopted an Amended and Restated Share Redemption Program (the “SRP”). Under the SRP, only shares submitted for repurchase in connection with the death or “qualifying disability” (as defined in the SRP) of a stockholder are eligible for repurchase by us. TheUnder the current SRP, as amended to date, the number of shares to be redeemed is limited to the lesser of (i) a total of $2.0$3.5 million for redemptions sought upon a stockholder’s death and a total of $1.0 million for redemptions sought upon a stockholder’s qualifying disability, and (ii) 5% of the weighted-average number of shares of our common stock outstanding during the prior calendar year. Share repurchases pursuant to the SRP are made at our sole discretion. We reserve the right to reject any redemption request for any reason or no reason or to amend or terminate the share redemption program at any time subject to the notice requirements in the SRP.
The redemption price for shares that are redeemed is 100% of our most recent estimated net asset value per share as of the applicable redemption date. A redemption request must be made within one year after the stockholder’s death or disability, unless such death or disability occurred between January 15, 2013 and April 1, 2015, when the share redemption program was suspended. Redemption requests due to the death or disability of a Company stockholder that occurred during such time period, were required to be submitted on or before April 1, 2016.qualifying disability.
The SRP provides that any request to redeem less than $5 thousand$5,000 worth of shares will be treated as a request to redeem all of the stockholder’s shares. If we cannot honor all redemption requests received in a given quarter, all requests, including death and qualifying disability redemptions, will be honored on a pro rata basis. If we do not completely satisfy a redemption request in one quarter, we will treat the unsatisfied portion as a request for redemption in the next quarter when funds are available for redemption, unless the request is withdrawn. We may increase or decrease the amount of funding available for redemptions under the SRP on ten business days’ notice to stockholders. Shares submitted for redemption during any quarter will be redeemed on the penultimate business day of such quarter. The record date for quarterly distributions has historically been and is expected to continue to be the last business day of each quarter; therefore, shares that are redeemed during any quarter are expected to be redeemed prior to the record date and thus would not be eligible to receive the distribution declared for such quarter.
The other material terms of the SRP are consistent with the terms of the share redemption program that was in effect immediately prior to January 15, 2013.
On October 5, 2016,August 8, 2019, our board of directors approved pursuant to Section 3(a) of SRP, an additional $0.5$0.3 million of funds available for the redemption of shares in connection with the death of a stockholder.
On August 2, 2017, our board of directors approved, pursuant to Section 3(a) of the SRP, an additional $1.0stockholder and $0.2 million of funds available for the redemption of shares in connection with the deathqualifying disability of a stockholder.
In order to preserve cash in light of the uncertainty relating to the duration of shelter-in-place orders and the economic impact of COVID-19 on the Company, by unanimous written consent executed on April 21, 2020, the Board approved the suspension of the SRP, which offered redemption opportunities only in connection with a stockholder’s death or qualifying disability.
Under the SRP, the Board may amend, suspend, or terminate the SRP with 30 days’ notice to our stockholders. The Current Report on Form 8-K, filed on April 21, 2020 with the SEC, served as such required notice and therefore the suspension of the SRP became effective on May 21, 2020. The SRP will remain suspended and no further redemptions will be made until the board of directors approves the resumption of the SRP. During the suspension, we will continue to accept death and qualifying disability redemption filings from stockholders, but will not take any action with regard to those requests until the board of directors has elected to lift the suspension and provided the terms and conditions for any continuation of the SRP.
During the nine monthsquarter ended SeptemberJune 30, 2017,2020, we redeemed shares as follows:
|
| | | | | | | | | | | | | | |
Period | | Total Number of Shares Redeemed (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | | Approximate Dollar Value of Shares That May Yet be Redeemed Under the Program (2) |
January 2017 | | — |
| | $ | — |
| | — |
| | $ | 915,158 |
|
February 2017 | | — |
| | — |
| | — |
| | 915,158 |
|
March 2017 | | 31,875 |
| | 6.36 |
| | 31,875 |
| | 712,431 |
|
April 2017 | | — |
| | — |
| | — |
| | 712,431 |
|
May 2017 | | — |
| | — |
| | — |
| | 712,431 |
|
June 2017 | | 37,820 |
| | 6.36 |
| | 37,820 |
| | 471,900 |
|
July 2017 | | — |
| | — |
| | — |
| | 471,900 |
|
August 2017 | | — |
| | — |
| | — |
| | 1,471,900 |
|
September 2017 | | 18,233 |
| | 6.27 |
| | 18,233 |
| | 1,357,581 |
|
Total | | 87,928 |
| | |
| | 87,928 |
| | |
| |
(1) | All of our purchases of equity securities during the nine months ended September 30, 2017, were made pursuant to the SRP. |
| |
(2) | We currently limit the dollar value and number of shares that may yet be repurchased under the SRP as described above. |
did not redeem shares. Cumulatively, through SeptemberJune 30, 2017, the Company has2020, we have redeemed 563,122878,458 shares for $4.3$6.2 million. We had no unfulfilled redemption requests during the quarter ended June 30, 2020.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
As of the three months ended SeptemberJune 30, 2017,2020, all items required to be disclosed under Form 8-K were reported under Form 8-K.
ITEM 6. EXHIBITS
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 13, 2017.August 7, 2020.
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| | |
| Strategic Realty Trust, Inc. |
| |
| By: | /s/ Andrew Batinovich |
| | Andrew Batinovich |
| | Chief Executive Officer, Corporate Secretary and Director (Principal Executive Officer) |
| | |
| By: | /s/ Terri GarnickM. Bradley Kettmann |
| | Terri GarnickM. Bradley Kettmann |
| | Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the ninesix months ended SeptemberJune 30, 20172020 (and are numbered in accordance with Item 601 of Regulation S-K).
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| | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit No. | | Description | | Filed Herewith | | Form/File No. | | Filing Date |
| | | | | | | | |
| | Articles of Amendment and Restatement of TNP Strategic Retail Trust, Inc. | | | | S-11/ No. 333-154975 | | 7/10/2009 |
| | | | | | | | |
| | Articles of Amendment, dated August 22, 2013 | | | | 8-K | | 8/26/2013 |
| | | | | | | | |
| | Articles Supplementary, dated November 1, 2013 | | | | 8-K | | 11/4/2013 |
| | | | | | | | |
| | Articles Supplementary, dated January 22, 2014 | | | | 8-K | | 1/28/2014 |
| | | | | | | | |
| | Third Amended and Restated BylawsDescription of Strategic Realty Trust, Inc. Registrant’s Securities | | | | 8-K10-K | | 1/28/20143/18/2020 |
| | | | | | | | |
| | The Purchase and Sale Agreement by and between TNP SRT Portfolio II, LLC and Baseline Property, LLC, dated September 14, 2017.
| | X | | | | |
| | | | | | | | |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
| | | | | | | | |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
| | | | | | | | |
| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
| | | | | | | | |
| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | |
| | | | | | | | |
| | Strategic Realty Trust, Inc. Amended and Restated Share Redemption Program Adopted August 26, 2016 | | | | 8-K | | 8/30/2016 |
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101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | X | | | | |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | X | | | | |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | X | | | | |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | |
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104.1 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | |